Deregistration vs. Members Voluntary Liquidation for corporate streamlining

New financial year resolution: clean up corporate structures

It’s that time of year again when we reacquaint ourselves with our clients’ structures and examine why they are still carrying dormant or excessive entities. As we forge ahead into a new financial year, now is the time to start streamlining - particularly while these structures are front of mind and there is plenty of time before the next year-end procedure.

BDO’s Business Restructuring team provides advice on corporate streamline queries, with one query that is asked the most: Should I close entities by deregistering them or wind them up as a solvent company by way of a Members Voluntary Liquidation?

Why should I streamline my corporate structure?

Financial benefits	Tax benefits	Compliance benefits
Reduction in compliance costs Time and money spent on consolidation and internal audit, public audit, tax compliance, statutory filing fees and legal charges. Savings in management time Reduction in time spent in maintaining entities or carrying out activities which add no value and can often result in head count reduction. Acquisition/sales costs Following acquisition, elimination of unnecessary entities will save on annual ‘carrying costs’. Prior to disposal, the elimination of non-core entities may reduce transaction costs.	Tax losses/tax neutral business transfers Potential to create tax losses and deductibles and consolidate businesses where the transfer of assets may be tax neutral. Release intercompany balances Opportunity to release intercompany balances and reserves in a potentially tax efficient manner. Opportunity to realise tax planning opportunities In our experience we have helped clients drive significant (unanticipated) tax planning opportunities during the early stages of an entity rationalisation project.	Improved transparency and corporate governance Simplified structures provide more effective and efficient control and risk management frameworks. This enhances board, investor and financier confidence and improves perception. Reduced number of regulators A rationalised structure may reduce compliance with multiple laws in different regions. Reduced compliance requirements now and in the future The successful implementation of the program will help to reduce compliance requirements in multiple jurisdictions and enable the legal entity structure to remain manageable in the future. Risk management Staff turnover can lead to a loss of corporate memory increasing risks for directors who have little or no knowledge of the trading history of entities over which they are appointed.

 

Deregistration

The directors and shareholders can undertake a deregistration process without the need for a winding-up, provided that all members agree, and that the company:

• Is not carrying on business
• Has assets that are worth less than AU$1,000 (including cash and related party loans)
• Has no outstanding liabilities (including employee entitlements)
• Is not a party to legal proceedings
• Has paid all fees and penalties payable under the Corporations Act 2001.

We only recommend deregistration if the directors and members are certain that there is no possibility of a creditor claim being made against the company. It is important to note that it is a statutory offence for directors to authorise deregistration without properly addressing and resolving all potential creditor claims (contingent or otherwise).

If any creditor is identified or arises following deregistration, the company could be reinstated with a nominated Liquidator appointed by the Court.

This option can be quick and present cost savings when compared to a Member’s Voluntary Liquidation. However, it can also present risks that may not be palatable for stakeholders.

Members’ Voluntary Liquidation (MVL)

Alternatively, the directors and shareholders of a company may proceed with an MVL.

We should probably say also:

In terms of optimal corporate governance, and surety with regards to directors’ compliance with their duties under the Corporations Act 2001, we typically prefer to recommend an MVL over deregistration.

An MVL provides greater certainty that a company cannot be reinstated by a creditor after the affairs have been fully wrapped up. Trading to support an orderly winding down of the operations is possible, and the company can still own assets which the liquidator can realise during the liquidation process.
The benefits of an MVL rather than deregistration include:

• From a tax perspective, the shareholders dispose of their interests in the company, and when the liquidator pays their distributions, there may be advantages that may not be realised when the company is deregistered.
• A liquidator can adjudicate on and deal with any potential creditor claims. Any creditors who do not submit a claim in the provided timeframe are automatically omitted from the distribution process. It is particularly difficult for creditors to have the company reinstated if they failed to partake in this distribution process
• An MVL concludes with a deregistration, and the process provides more certainty that the company will remain deregistered than ‘straight’ deregistration. A liquidator can resolve all outstanding matters of the company including the settlement of creditors’ claims
• Clearance from the Australian Taxation Office and other statutory bodies is sought in an MVL to confirm that all such debts have been satisfied and no further claim can arise
• The appointed liquidator is an independent party that completes the wind-down, who will provide comfort to all stakeholders that the deregistration has occurred with due process.

It is important to remember that the individual circumstances of a company can place more or less weight on each option.

If you would like support assessing your circumstances or to discuss this comparison further, reach out to your local BDO Business Restructuring adviser.