If you’re thinking about tidying your corporate structure, now is the time to do it.
Amid fears of global economic downturn in 2023, Australia’s inflation problem is intensifying. Yet, according to a recent survey by JPMorgan, Australian business leaders are cautiously optimistic about the economy. In times of economic uncertainty, it is prudent that directors consider restructuring to improve efficiencies, keep pace with market conditions and minimise costs by closing dormant or inactive entities.
In this article, we outline how solvent Australian companies can wind up entities they no longer require – either by voluntary deregistration or Members’ Voluntary Liquidation (MVL).
A company may reach the end of its corporate life cycle for many reasons. For example, when a company becomes insolvent, has been acquired (and the business absorbed by the acquirer) or when a company becomes obsolete due to the closure of a business unit.
It is important that corporate entities consider closing a company if the entity has ceased to trade and its commercial purpose is redundant. In other circumstances, it may be appropriate to consolidate business operations by using divisions instead of subsidiaries. In short, directors should:
- know when it is appropriate to exercise corporate restructuring and streamlining
- know that they are subject to the legal obligations for a company until it ceases as a separate legal entity
- be aware of the statutory winding up options that are available (deregistration or MVL)
- be familiar with the legislative requirements for proceeding with deregistration or MVL.
Consider your corporate structure
There is no one-size-fits-all solution and officeholders should seek legal, accounting and tax advice for the most suitable approach for their business. Mid to large-sized entities are often complex because they comprise a network of subsidiaries and related businesses that are beneficial for tax and legal reasons. Corporate groups may choose to isolate certain business units to an individual entity, or may consider it beneficial to set up entities to own certain assets used by the group in carrying on its business, such as intellectual property or real estate.
Group structures can become unwieldy during periods of rapid growth. As the group expands, each entity may implement separate systems and processes. This can create gaps and risk management can become poorly delineated. Not only does this increase regulatory and administrative costs, but it can expose the entire group to liability risk.
Voluntary deregistration or MVL?
Winding up is one way of dissolving a corporate legal entity. This is a form of external administration where a liquidator assumes control of a company’s affairs to discharge its liabilities so it can be deregistered. However, if your company meets certain criteria, it can:
- apply for voluntary deregistration under section 601AA of the Corporations Act 2001 (Cth) (Corporations Act)
- apply to be voluntarily wound up by its members (MVL) under section 491 of the Corporations Act and placed into liquidation if it does not meet the requirements for voluntary deregistration.
We provide a comparative table outlining the process for voluntary deregistration and MVL, as prescribed by the Corporations Act.
Voluntary deregistration vs Members’ Voluntary Liquidation
[If you cannot access the table from above, click here]