Winding up is the process of dissolving your company, after which your company will cease to exist. This involves finalising outstanding debts, paying creditors, and informing ASIC of the company’s dissolution. The process of winding up is available for:
- Solvent companies: those able to pay when they become due and payable, and
- Insolvent companies: those unable to pay its debts when they fall due.
Winding up a solvent company
This process of winding up your business is available to solvent companies who are able to pay all of their debts within a 12-month period.
5 step process:
- Declaration of solvency – this involves the majority of directors lodging Form 520 Declaration of solvency with ASIC. By listing all assets and liabilities, directors can assure that all company debts can be fully repaid within 12 months of the members’ special resolution.
- Special resolution – once the directors have made a declaration of solvency, a members meeting must be conducted. At least 75% of members must vote to pass a special resolution to wind up the company. Upon the passing of this resolution, the company must submit Form 205 Notification of Resolution and a liquidator be appointed. Once the liquidator has assumed control of the company, Form 505 Notification of appointment or cessation of an external administrator must then be lodged with ASIC.
- Notice of the special resolution – the company must publish their notice of the resolution to wind up the company on ASIC’s website within one business day of the liquidators appointment.
- Process of winding up – the liquidator begins winding up the company. The directors no longer have any power and the company merely exists for the purpose of winding up. Form 5602 Annual Administration Return must be lodged with ASIC to show the progress of the administration. If the liquidator realises that the company will be unable to pay their debts within 12 months, they can either
- (1) convene a creditors meeting,
- (2) nominate a voluntary administrator, or
- (3) ask the court to make a winding up order based on grounds of insolvent trading.
- Final Form 5603 End of Administration return – the liquidator must lodge Form 5603 within a period of one month after the completion of winding up. The company can then be deregistered three months after the form is lodged.
Winding up an insolvent company
Being aware of your company’s financial position is key. Financial strain may cause your company to become insolvent and unable to pay debts when they fall due. If this happens, the two most common forms of external insolvency administration include liquidation and voluntary administration.
Voluntary administration attempts to resolve the company’s insolvent position by appointing an administrator. The role of the administrator is to investigate company affairs, disburse funds to creditors and shift the company to solvency. If reviving the company is not feasible, they will assess the next best available options.
This process involves a registered liquidator taking control of an insolvent company to allow the business affairs to be properly wound up in an orderly way. Voluntary liquidation occurs when shareholders resolve or creditors vote to liquidate the company. Liquidators are tasked with protecting, collecting and selling company assets. Their role also involves investigating the financial affairs of the business and reporting to creditors.
What happens if I don’t wind up my insolvent business?
Following the application of creditors, shareholders, directors and ASIC, the court can make a winding up order in instances where insolvent companies have not been voluntarily wound up. The court administers the insolvency process by allowing for a systematic appointment of a liquidator to wind up the company. The expected outcome is that the liquidator will finalise distributions to creditors and apply to ASIC to deregister the company.
A person is declared bankrupt where they are unable to pay their debts. A director’s personal bankruptcy is not usually related to the solvent state of the company. However, insolvent trading can cause a director of that company to be held personally liable for the company’s debts. In this instance, the directors insolvent trading can result in the liquidation of the company extending into personal bankruptcy. Bankruptcy disqualifies you from continuing as a company director for the period of the bankruptcy, which is usually 3 years and 1 day.
Winding up is the process of distributing assets, paying creditors and ceasing business activities. If you need any assistance with winding up your business, our commercial lawyers are here to help. Just call us at 1300 337 997 or complete the form on this page.