This article was written by Nancy Wang Principal Solicitor at W & G Lawyers.
Most small and family businesses in Queensland are run through a company owned by the same people who manage it, and it is easy to think of the company as simply “us”. The law does not see it that way. Under the Corporations Act 2001 (Cth), a company is a separate legal person, and there are several ways in which it could cease to exist, or in which its owners could lose control of it, sometimes without realising it is happening. This article explains, in general terms, how a company may be deregistered and how control may pass to an administrator, a liquidator or a receiver.
Three ways a company can be deregistered
The first is voluntary. A company may apply to ASIC to be deregistered if all of its members agree, it has stopped trading, its assets are worth less than $1,000, it has no outstanding debts and it is not involved in any court proceedings. This is the orderly way to close a company that has finished its work.
The second is ASIC’s own power to strike a company off the register, and this is the one that tends to catch business owners by surprise. ASIC may deregister a company if its annual review fee has remained unpaid for at least 12 months, or if the company appears to have stopped lodging documents and ASIC has no reason to believe it is still trading. A company can be trading, employing staff and even owning property, and still be struck off because its annual statements were going to an old address or an inbox nobody checks.
Before it acts, ASIC must give notice to the company and its directors and publish the proposed deregistration. Deregistration may then follow about two months later unless the problem is fixed in the meantime, usually by paying the overdue fees or lodging the missing documents. A notice of this kind should be treated as urgent.
The third route is deregistration at the end of a winding up, once a liquidator has finished dealing with the company’s affairs.
What deregistration means
A deregistered company ceases to exist. It can no longer own property, sign contracts, hold a lease, run a bank account, or sue or be sued. Property the company owned generally passes to ASIC, and property it held as trustee generally passes to the Commonwealth. For a family business whose company is the trustee of a family trust, this could mean the trust’s assets are suddenly in the hands of the government.
There are personal risks too. Anyone who keeps signing contracts in the name of a company that no longer exists may find they have made themselves personally responsible. The former directors must keep the company’s records for three years, and deregistration does not remove personal liabilities the directors already had, for example under a personal guarantee or a tax director penalty notice.
Can a deregistered company be brought back?
Often, yes, but it takes time and money. ASIC may reinstate a company itself if satisfied that it should not have been deregistered, commonly where the company was still trading and the missing fees and documents are brought up to date. Otherwise an application to the court is generally needed. The court may reinstate a company on the application of a person affected by the deregistration, such as a former director or shareholder, a creditor or someone who needs to bring a claim against the company, if it considers it just to do so. A reinstated company is treated as though it had never been deregistered. Even so, reinstatement is discretionary and can be costly, and it is a far worse position than simply paying the annual review fee on time.
Voluntary administration: when the directors step aside
Voluntary administration is usually the first insolvency process a director encounters. It is most often started by the directors themselves, by resolving that the company is insolvent or likely to become insolvent and appointing an independent administrator, although a secured lender or a liquidator may also be able to appoint one. Directors have a strong incentive to act, because a director who allows a company to keep incurring debts it cannot pay may become personally liable for them.
From the moment of appointment, the administrator takes control of the company’s business, property and affairs. The directors remain in office in name, but generally cannot exercise any of their powers without the administrator’s written approval. Shareholders are similarly affected: shares generally cannot be transferred during the administration without the administrator’s consent, and shareholders have no vote on what happens to the company.
In return, the company receives temporary protection. Most legal proceedings and enforcement action against the company are paused, and a director’s personal guarantee of company debts generally cannot be enforced during the administration without the court’s permission. One important exception: a lender holding security over all or substantially all of the company’s assets may be able to enforce it within a short window after the appointment, which is why a bank’s security document often decides what happens next.
Administration is designed to be short. Within a matter of weeks the creditors meet and decide whether the company should enter a deed of company arrangement, be returned to its directors or be wound up. A deed of company arrangement binds the shareholders as well as the creditors, and in some cases it could result in shareholders’ shares being transferred to a new owner without their agreement, particularly where the shares have no remaining value.
There is one process in which directors keep control. Small business restructuring, introduced in 2021 for companies with total liabilities under $1 million, allows the directors to continue running the business while a restructuring practitioner helps them put a plan to creditors. It is worth asking about early, because a company that waits too long may no longer qualify.
Liquidation: when the company is wound up
Liquidation brings the company’s life to an end. The most common trigger is a creditor’s statutory demand, a formal demand for payment of a debt of at least $4,000. If the company does not pay, reach an agreement or apply to the court to set the demand aside within 21 days, it is presumed to be insolvent and the creditor may apply to have it wound up. The 21-day period is strict and generally cannot be extended. A statutory demand left unanswered in a drawer could, in practical terms, be the end of the company.
A company can also be wound up for reasons unrelated to insolvency, for example where the directors have been acting in their own interests rather than the members’, where the company’s affairs are being run in a way that is oppressive or unfair to a shareholder, or where it is “just and equitable” to do so. That last ground is sometimes used where two equal owners have fallen out so badly that the company cannot function, although courts tend to regard winding up a solvent company as a last resort and may prefer one owner buying the other out where that is realistic.
Once a liquidator is appointed, the directors’ powers cease and the liquidator takes over the company entirely, with power to sell its assets, investigate the directors’ conduct and distribute whatever is recovered to creditors. Shareholders come last and receive something only if every creditor has been paid in full, which is unusual. The liquidator may also pursue directors personally, for example for allowing the company to trade while insolvent, and must report suspected misconduct to ASIC.
Receivership: when a lender takes over
Receivership is different. It is not a process run for the benefit of all creditors; it is one secured lender enforcing its security. Most business loans are secured by a general security agreement over all of the company’s assets, and that document will usually allow the lender, if the company defaults, to appoint a receiver without going to court. A court may also appoint a receiver in some circumstances, including in a dispute between shareholders.
The receiver’s job is to take control of the secured assets, which may include running the business, and to sell them to repay the lender. A receiver must take reasonable care to sell for market value or the best price reasonably obtainable, and must pay certain employee entitlements ahead of the lender out of some categories of assets. Once the lender has been repaid, the receiver retires.
Unlike an administrator or liquidator, a receiver does not formally suspend the directors’ powers. The directors remain in office and keep whatever powers the appointment does not cover, but in practice that may be very little, because the receiver’s authority over the secured assets takes priority. Receivership often runs alongside administration or liquidation, and it is frequently the lender, rather than the directors, who decides which process the company enters.
Losing control while the company is still solvent
A director or shareholder can lose control of a company that is perfectly healthy. In a proprietary company the shareholders may generally remove a director by ordinary resolution, so a minority shareholder who is also a director could be voted off the board by the majority unless the constitution or a shareholders’ agreement provides otherwise.
The majority’s power is not unlimited. Where a company’s affairs are conducted in a way that is oppressive or unfairly prejudicial to a shareholder, the court may make a wide range of orders, including requiring one side to buy the other’s shares at a fair value, or winding the company up. A founder could be compelled to sell the company he or she built, or a majority compelled to buy out a minority.
Personal circumstances matter too. A director who becomes bankrupt is automatically disqualified from managing companies, and the bankrupt’s shares pass to the trustee in bankruptcy. ASIC may also disqualify a person who has been a director of two or more companies that went into liquidation within seven years leaving creditors substantially unpaid. A shareholder may also be required to sell under a shareholders’ agreement, or if a lender enforces security over the shares themselves.
Practical steps for company owners
A few simple habits could prevent most of the problems described above:
- Keep the company’s registered office and contact details current with ASIC, pay the annual review fee when the annual statement arrives, and diarise the review date yourself rather than relying entirely on your accountant.
- Treat any statutory demand, or any ASIC notice about deregistration, as urgent. The time limits are short and generally not extended.
- Read the bank’s security documents before signing, so you know what the lender could do if the company defaults.
- If the company is struggling to pay its debts as they fall due, seek advice immediately. Appointing an administrator or entering small business restructuring while options remain may be far better than having a lender or creditor make the decision for you.
- If the company has more than one shareholder, put a shareholders’ agreement in place dealing with removal of directors, deadlock, exit and valuation. A dispute is far cheaper to resolve under an agreement than through the courts.
How W & G Lawyers can help
Whether you have received a notice from ASIC, a statutory demand or a letter from a lender, or you are in a dispute with a fellow shareholder, the earlier you seek advice the more options you are likely to have. Our commercial and litigation team can assist with reinstating a deregistered company, responding to creditors, dealing with administrators, liquidators and receivers, and protecting your position as a director or shareholder.
References
- Corporations Act 2001 (Cth), Chapter 5A (deregistration and reinstatement: ss 601AA, 601AB, 601AD, 601AH), Part 5.3A (voluntary administration), Part 5.3B (small business restructuring), Part 5.4 (winding up in insolvency, including statutory demands: ss 459Eโ459G), s 461 (other grounds for winding up), Part 5.2 (receivers), ss 232โ233 (oppression) and Part 2D.6 (disqualification of directors)
- ASIC, When ASIC initiates a company’s deregistration
- ASIC, Deregistered company property
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This article is general information only and does not constitute legal advice under Australian law. For advice specific to your situation, please contact W & G Lawyers. For further details, please click here to view our disclaimer.