Members Voluntary Liquidation -v- Deregistration

We receive a lot of calls from Public Accountants and company directors enquiring about Members Voluntary Liquidations (“MVL”).  In most of the cases we do ourselves out of a job and instead recommend Company Deregistration. It’s a big cost difference.  For an MVL our standard fee of $4,400 is cheap compared to others (try $12,000 for the Big4) but that’s a long way from the Deregistration cost of $36!!  So in what circumstances is an MVL appropriate and when is a Company Deregistration acceptable.  Let me explain.

Firstly, what is a Deregistration?

A Deregistration is essentially a simple application using Form 6010 Application for Voluntary Deregistration of a Company.  The main consequences of deregistration are that the company ceases to exist as a separate legal entity and any undistributed property of the company “vests” in the regulator. That is, after deregistration, the regulator will be the party who deals with any assets of the company. For this reason, all assets of the company should be transferred prior to the Deregistration application being lodged.  Once the Application is lodged, the proposed Deregistration is publicised on the Insolvency Notices Website and, assuming there are no objections lodged, they strike the company off the Company Register three months later.

An application for deregistration can only be made when all of the following conditions are met:

• all the members of the company agree to the Deregistration; and
• the company is not carrying on business; and
• the company’s assets are worth less than $1000; and
• the company has paid all fees and penalties payable under the Corporations Act; and
• the company has no outstanding liabilities; and
• the company is not a party to any legal proceedings.

The legislation relating to the Deregistration of a company is liberal in that an applicant does not require any specific qualifications. The applicant must be the company, a director of the company, a member of the company or a liquidator of the company.

So, what is a Members Voluntary Liquidation?

A Members’ Voluntary Liquidation is a process detailed in the Corporations Act 2001 which allows a solvent company’s affairs to be wound-up.  The directors and shareholders appoint the liquidator to sell the assets of the company, to pay all creditors and then distribute any surplus assets to the shareholders. In practice, we usually recommend that the affairs of a company be wound down by the directors prior to liquidation so as to save on liquidator’s fees.  An MVL is a much more thorough winding up of the affairs of a company, in particular, because the liquidator calls for Proofs of Debt – any creditor who doesn’t respond is barred from claiming later.

So MVL or Deregistration?

Clearly, given the costs outlined above, if you need to finalise the affairs of a company then you should choose Deregistration if you can – it’s a lot cheaper.   The key is in the following questions:

• Does the company have material assets that need to be sold and distributed?
• Do you want a high level of assurance that a company cannot be reinstated?
• Did the company operate in a high-risk industry, for example, where public liability claims sometimes arise?
• Will any tax free dividends be lost by the Deregistration of the company?

If you answered yes to any of the above, then MVL is the way to go.  If not, then you can choose the low cost Deregistration.

Note in the last dot point above I underlined “tax free dividends”.  In brief that is referring to Capital Gains that are pre-CGT legislation or where you have the capital gains tax concession for small business.  I’ll elaborate more on those in another blog.