In spite of valid cases for companies to voluntarily deregister, or for ASIC to step in for failure to pay annual fees, there can be significant consequences for deregistered companies that own valuable property or continue carrying on operations.

We have seen a number of interesting examples, which don’t even leave the local kebab shop unscathed. In that case, the shop owner (with a poor grasp of English) was advised to deregister his company to save on fees, only to later realise that the company owned his shop!

In other instances:

  • An insurer declined to pay an income protection insurance claim in respect of the director of a company which had been voluntarily deregistered, since the company owned the policy but had ceased to exist.
  • The directors of a company signed a contract to sell a commercial property without realising that the company had been deregistered for non-payment of ASIC fees some two years earlier.

How can a company be deregistered?

It is relatively easy to voluntarily deregister a company if all company members agree to the deregistration, and if the company:

  • is not carrying on business;
  • has assets worth less than $1,000;
  • has paid all ASIC fees and penalties;
  • has no outstanding liabilities; and
  • is not a party to any legal proceedings.

Rightly or wrongly, the simplicity of the process creates the ideal circumstances for some companies to be deregistered even if they don’t meet these criteria. Of particular interest to the ATO are unpaid tax debts owed by the company.

Quite often a dormant company is voluntarily deregistered on the grounds of cost. It’s believed that this terminates the company’s existence and all outstanding liabilities. What’s often overlooked, however, is the ability of the courts to order reinstatement if:

  • an application for reinstatement is made to the court by either a person aggrieved by the deregistration or a former liquidator of the company; and
  • the court is satisfied that it is just to reinstate the company’s registration.

The courts have shown a willingness to regard the Commissioner of Taxation as a “person aggrieved” where there is a question of outstanding tax.

The courts have also found that it may be just to reinstate companies even after lengthy delays. The purpose of these reinstatement applications is to allow the Commissioner to immediately wind-up the company. This requires the appointment of a liquidator to carry out investigations with the intended aim of proceeding against directors for outstanding tax debts.

It is generally held that it is in the public interest to pursue this option, because it allows the proper application of tax law. Even if a company has no assets with which to pay outstanding tax liabilities, the courts have shown a willingness to order reinstatement in appropriate circumstances. It is, therefore, possible that a previously defunct company could be found to have traded while insolvent, exposing the directors to personal liability.

Before a company is deregistered, directors and shareholders need to ensure the relevant criteria is satisfied and not expect that deregistration will absolve them from liability.

Why Reinstatement Isn’t Always Easy

ASIC does have the power under the Corporations Act 2001 to administratively reinstate a company, but will only do so if:

  • the company should not have been deregistered, in which case ASIC requires evidence that the company was carrying on business at the time of deregistration: or
  • there was an administrative defect by ASIC in the deregistration.

Assuming that ASIC was not at fault, a company must be shown to have been carrying on a business, or have been in operation at the time it was deregistered. It can sometimes be difficult to provide the documentary evidence that ASIC may require.

According to ASIC: “We will not be reversing the effects of valid decisions made in good faith and after proper inquiries, even though the decision may later prove to have been contrary to fact.”

If a company was voluntarily deregistered or if the company was no longer active when it was deregistered, ASIC may not be able or willing to reinstate the company’s registration.

ASIC will also not reinstate a company where there have been any dealings with the property of the deregistered company that give rise to third party rights. If third parties have become involved, reinstatement will generally need to proceed through the courts.

Fortunately, in each of the above cases, we were successful in having the companies administratively reinstated. It takes time (up to 2 months) and, if you are unsuccessful, the consequences can be significant, including tax and stamp duty to pay, loss of a claim or failure of a contract.

You also need to consider whether it is worthwhile making an application for the administrative reinstatement of the company. To have ASIC reinstate a company, all unpaid fees plus penalties must be paid first. These can be considerable.

It’s important to understand that, if ASIC refuses an administrative reinstatement, you are left with a potentially expensive application to the Supreme Court.

The effect of a reinstatement is to treat the company as never having been deregistered. The question remains: do you really want to go through a reinstatement? It’s much easier to keep records up to date, pay annual fees when due and/or thoroughly examine the company’s position before you apply for a voluntary deregistration

This article is courtesy of ASIC.