The Dangers of Doing Nothing with an Insolvent Company

It’s a little known fact that the most popular course of action to deal with a company in financial distress is to do nothing at all! Throughout COVID, companies were abandoned by the thousands. Directors just walked away, and the number of monthly formal insolvency appointments dropped by 50%. In some cases, that was a result of procrastination or pure inaction, but in others it is an actual strategy.

If you walk away, the company will either end up being wound up by a creditor through the courts or being deregistered by ASIC for inactivity.

Court liquidations dropped to next to nothing over the COVID pandemic period because Government COVID restrictions raised the debt threshold to $20,000 and extended the notice period from 1 to 6 months. So, creditors simply backed off. Before COVID, the ATO were one of the largest instigators of court wind ups but when the pandemic hit, the ATO simply stopped action in an effort to ease the pressure on business.

So that leaves deregistration. In 2020 of the 147,790 companies removed from the ASIC database, only 4,943 (3%) were formal company insolvencies (mainly Liquidations, Voluntary Administrations and Receiverships). They may have been voluntary deregistrations (a simple closure of a company with no assets or liabilities) or ASIC enforced removals where the annual fee has not been paid for 12 months.

So, doing nothing happens a lot, but why is it dangerous?

1. ASIC enforced deregistration does not protect the directors from receiving Director Penalty Notices (DPN) like liquidation can. In fact, if the director of a deregistered company receives a DPN, it will take ASIC longer than the 21-day notice period on the DPN, to reactivate the company.
2. If the company has assets, and is then deregistered by ASIC, the property “vests” in ASIC. Meaning only ASIC can deal with the company’s property.

Whilst liquidation comes with a price tag, it is a much more final ending for the company. In all but the simplest of situations, the cost of liquidation can be money well spent.