In Short
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Definition: A members’ voluntary winding up is a process where solvent companies choose to close, finalise affairs, pay debts, and distribute remaining assets to shareholders.
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Key Steps: Directors declare solvency, shareholders pass a special resolution, and a liquidator is appointed to manage the winding-up process.
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Solvency Requirement: This procedure is only available to companies that can pay their debts in full within 12 months.
Tips for Businesses
Before initiating a members’ voluntary winding up, ensure your company is solvent and can settle all debts within a year. Accurate financial records are essential. Engage a qualified liquidator to guide you through the process and ensure compliance with legal obligations. Consult with legal professionals to navigate the winding-up procedure effectively.
Table of Contents
- What is a Voluntary Winding up?
- What is a Members’ Voluntary Winding Up?
- Process of a Members’ Voluntary Winding Up
- Process Once the Liquidator Takes Over
- Declaration of Solvency
- Directors’ Duties and the Declaration of Solvency
- Tax Considerations for an Australian Private Company
- Differences Between a Creditors’ and a Members’ Winding Up
- Key Takeaways
- Frequently Asked Questions
For Australian private companies, a members’ voluntary winding up can effectively close operations and distribute the remaining assets to shareholders.
Winding up a company is the process of bringing the company to an end. If your company is solvent, then it can enter into liquidation through a members’ voluntary winding up. This article will explain what a members’ voluntary winding up is and the process for this. Additionally, this article will discuss the differences between a creditors’ and a members’ winding up.
What is a Voluntary Winding up?
Winding up a company voluntarily may occur for a variety of reasons, including if:
- you have sold the business the company operated;
- it has stopped trading; or
- the members have no desire to continue with the business.
Generally, the process of winding up a company involves:
- finalising outstanding company matters;
- paying off outstanding debts;
- selling off any assets; and
- bringing an end to the company’s existence.
A member’s voluntary winding up may be an option if your company is unable to meet the requirements for voluntary administration or voluntary deregistration.
What is a Members’ Voluntary Winding Up?
Members, or ‘shareholders’, are the owners of the company. A members’ voluntary winding up is a process for closing down a solvent company in Australia. It’s initiated by the shareholders when they decide the company is no longer needed or if they wish to regain their initial investment. Company members can only initiate a members’ voluntary winding up if the company is solvent. To initiate this process, the members must pass a special resolution d to give effect to a members’ voluntary winding up.
A liquidator will then need to be appointed, whose job is to settle the company’s affairs, pay any debts, sell assets, distribute remaining funds to shareholders, and ultimately deregister the company.
Continue reading this article below the formProcess of a Members’ Voluntary Winding Up
The members of a solvent company can decide to wind up the company by following the process below:
| 1 | the directors of the company must meet. A majority of the company’s directors must declare solvency and attach to that declaration a current statement of affairs of the company in the prescribed ASIC Form 520 (described below). The directors must also resolve to convene a meeting of shareholders to consider a resolution to wind up the company; |
| 2 | the ASIC Form 520 must be lodged prior to issuing the notice of the members’ meeting; |
| 3 | before the member’s meeting is held, the proposed liquidator must consent in writing to act as liquidator, if so appointed at the meeting; |
| 4 | for Australian private companies, the liquidator must obtain a tax clearance from the Australian Taxation Office (ATO) before finalising the liquidation and distributing the remaining assets to shareholders. |
| 5 | a liquidator is appointed, and a notice of appointment is lodged with ASIC within 14 days by using an ASIC Form 505; |
| 6 | a liquidator is appointed and a notice of appointment is lodged with ASIC within 14 days by using an ASIC Form 505; and |
| 7 | the directors of the company must meet. A majority of the directors of the company must make a declaration of solvency and attach to that declaration a current statement of affairs of the company in the prescribed ASIC Form 520 (described below). The directors must also resolve to convene a meeting of shareholders to consider a resolution to wind up the company; |
Process Once the Liquidator Takes Over
Once a liquidator is appointed to a company, the powers of the directors of the company cease. In addition, the company must cease carrying on its business. However, a business may continue operating insofar as the liquidator determines it is beneficial for the winding up of that business. Furthermore, the liquidator will commence winding up your company’s affairs. The liquidator will undertake to:
- take steps to confirm the liabilities of the company;
- correspond with the tax authorities to lodge tax returns and obtain final tax clearance;
- distribute any remaining assets of the company to shareholders; and
- arrange for a final meeting of shareholders to be held to finalise the liquidation and lodge minutes of the final meeting with ASIC.
If at any point during the winding up, the liquidator believes that the company will be unable to pay its debts in full within 12 months of the commencement of winding up, they must either:
- convene a creditors meeting;
- appoint a voluntary administrator; or
- apply to the court for the company to be wound up in insolvency.
Declaration of Solvency
The statutory declaration of solvency is one of the key aspects of the members’ voluntary winding-up process. As such, knowing what you must do when you lodge the declaration is important.
As stated above, a declaration of solvency requires that a majority of the directors look into the company’s affairs and finances and decide that the company will be able to pay its debts in full within 12 months after the commencement of the winding up.
In considering whether the company is solvent, directors will need to consider several factors. These include the business’s current liabilities, which are presently due, as well as those that are due in the future. In addition, directors will need to consider any claims that may fall due in the future. These claims could relate to certain unforeseen future events.
Notably, the declaration will be ineffective unless:
- it is made at the meeting of directors;
- it is lodged with ASIC using the relevant form before issuing the notice of meeting to members; and
- the special resolution of shareholders resolving to wind up the company passes within 5 weeks of making the declaration.
Directors’ Duties and the Declaration of Solvency
As a company director, you must make sure that you provide an accurate and honest opinion in your declaration and are able to support your opinion. A director who makes a declaration of solvency without having reasonable grounds for his or her opinion that the company will be able to pay its debts in full within the period stated in the declaration is guilty of an offence.
Further, if the company does become insolvent and you continue to trade, you may breach your director’s duty not to trade while insolvent, which can have significant fines and potential personal liability for the company’s debts incurred while trading while insolvent.
Tax Considerations for an Australian Private Company
When undertaking a members’ voluntary winding up, Australian private companies should be aware of potential tax implications:
- The disposal of company assets may trigger CGT events. However, small business CGT concessions may apply if certain conditions are met.
- If the company has outstanding loans to shareholders or related parties, these need to be addressed before winding up to avoid adverse tax consequences.
- Any remaining franking credits can be distributed to shareholders as part of the final distribution, potentially resulting in tax refunds.
Differences Between a Creditors’ and a Members’ Winding Up
The process of a members’ voluntary winding up is less complex than the process of a creditors’ voluntary winding up. Under a creditors’ voluntary winding up, the liquidator will have to conduct a more thorough investigation into the company’s assets and liabilities.
One of the key differences between a members’ voluntary winding up and a creditors’ voluntary winding up is the solvency of the company. A members’ voluntary winding up is only an option if the company is solvent. If the company is insolvent, it must be wound up through a creditors’ voluntary winding up or another insolvency procedure.
A further difference is that a members’ voluntary winding up usually does not involve the creditors, because the company is still in a position to pay its creditors in full. However, a creditors’ voluntary winding up involves the creditors and members.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Key Takeaways
You may wish to wind up your company if the company is no longer trading. Likewise, you may want to wind up your company if you have recently sold the business’s assets. You can wind up your company via a members’ voluntary winding up, provided that the company is solvent. To do this, you’ll need to follow the prescribed process under the Corporations Act and with ASIC.
If you need help understanding what a members’ voluntary winding up is and how to wind up your company, contact our experienced liquidation lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If your company does not meet the requirements for voluntary deregistration, you may choose to undertake a members’ voluntary winding up. This means the company’s affairs are finalised and closed off, assets liquidated, and the company moves toward ceasing to exist. Importantly, your company must be solvent in order to undertake a members’ voluntary winding up.
The members’ voluntary winding up process is simpler, the company is solvent and creditors are not involved in the process.
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