According to Fundsquire Australia, 20% of start-up businesses fail within their first year of operating, whilst around 60% fail after 3 years. There are various reasons why these companies and start-ups go out of business, with reasons often including the non existent market for their products and services, the lack of cash flow through the business and the poor management. Once this occurs, businesses have to go through a series of processes to legally liquidate their assets and distribute it within their shareholders, which is often referred to as “winding up a company”.
What does winding up a company mean?
Essentially, winding up generally refers to the process of liquidating the final assets of a company and ceasing business operations; selling off stock, paying off creditors, and distributing any remaining assets to partners and shareholders. This term is very similar to liquidation, however, winding up a business is a common option if the business does not meet the voluntary deregistration requirements, which involves having assets worth $1000 or more.
What is the process of winding up a company?
Step 1: Company directors must make a declaration of solvency
The first step is ensuring that the majority of directors make a Declaration of Solvency (Form 520), which means that they firmly believe the company will be able to pay off any outstanding debts in full within the next 12 months of the winding up commencement. This form must be made and lodged with ASIC, and completed prior to the date on the notice of meeting; sent to members in order for them to consider the resolution of the company winding up. If the directors make a false declaration of solvency, it will be considered an offence under the Corporations Act 2001, and penalties may apply.
Step 2: Company members must pass a special resolution
Once the declaration has been launched, members must then pass on a special resolution to wind up the company. There must be at least 21 days of written notice of the meeting in order to vote on the special resolution, and there must be at least 75% of members within the company to be in favour of the resolution for it to be passed. There must also be a liquidator(s) appointed, and once the special resolution is passed, the winding up begins. Lodgement of Form 205, the Notification of Resolution will set out the text of the resolution that was passed by the directors.
Step 3: Notice of special resolution must be published on the Published Notices website
This is published on ASIC’s Published Notices website by close of business of the business day following the liquidator has been appointed. There is also an appropriate fee that is payable before the notice could be published, which is often completed through the website.
Step 4: Liquidator winds up company’s affairs
When the liquidator begins winding up the company, they must lodge (with ASIC) a detailed list of receipts and payments for the administration, located as Form 5602: Annual Administration Return. At any point in time, if the liquidator believes the company is unable to pay their debts in full within the first 12 months, they must either organise a meeting with creditors, appoint a voluntary administrator, or apply to the court for the company to be wound up in insolvency.
Step 5: Liquidator finishes winding up company and lodges final documents
If the company has completed winding up before July 1st the following year, Form 523: Notification of final meeting convened by liquidators must be lodged within seven days of the final meeting. It must also include an account of how the winding was conducted. In addition, Form 5603: End of administration return and Form 5011: Copy of minutes of meeting must also be lodged.
However, if the winding up is completed after July 1st, a final meeting by the liquidator is not required. Instead Form 5603 must be lodged within a month of winding up, and the company will be deregistered within three months after forms have been lodged.
Is winding up the same thing as bankruptcy?
Winding up a company and considering bankruptcy are two different concepts, however winding up is an end result of bankruptcy. Bankruptcy is considered a legal proceeding involving various creditors attempting to access a company’s assets, in order for it to be liquidated to pay off debts. In addition, once the winding up process has begun, a company can no longer pursue business as usual, as the only action they can attempt is to finish off the liquidation process and distribute all of its assets, then causing the company to be dissolved.
Is winding up the same concept as dissolution?
These are both steps in closing a business, but are completely different concepts. Winding up occurs before the dissolution process. Dissolution refers to when the company formally ceases operation, and documentation is prepared to officially end the business as a legal entity.
In conclusion, the winding up process of a company is a fundamental aspect a business has to go through if they wish to cease operations. This process can be lengthy and complicated, and this is why Legal Kitz is here to help. We offer a FREE 30-minute consultation for all your legal matters. Book here now for your free consultation.