Quite often we have clients referred to us to sell their business.
The sale can be for a variety of reasons. They may be retiring, unwell, looking to downsize operations or may have been approached by a larger Company. Whatever the reason, it is common that the purchaser only wants the ‘good’ and not the ‘bad’ while our client (the seller) wants the good and to dispense with the bad.
In most cases, the savvy purchase of a business involves the stripping of assets while minimising the potential risks and liabilities. This generally leaves the seller in a predicament: lower the sale price to include some transfer of risk or deal with the remaining risk and accept the higher sale price.
For example, let’s take a manufacturing business who was approached to be purchased by a larger Company. The larger Company did not want to purchase the shares in the manufacturing business but rather strip it of its clients, staff, equipment and lease but leave any potential liability with the seller.
In this case the Seller chose to accept a higher sale price and bare the risk rather than a lower sale price and transfer some risk.
The Seller received a nice bank cheque and a shell company while the Purchaser received the assets with minimal risk.
While this example is very common it presents some serious issues that need to be considered, such as:
- What about the remaining potential liabilities of the Company such as product warranties or defective goods?
- How should the Company distribute and account for the purchase price?
- Will the Company continue to trade? If so, how?
- Are there any liabilities which have not been transferred and need to be dealt with?
Usually these questions of post-sale risk are not asked nor are they dealt with appropriately and inadequate consideration of these risks can result in potential liabilities for Directors and Advisors.
It is common for the Company to declare dividends and be deregistered as a way to ‘finalise the life of the Company’.
The option to simply deregister the company may not provide the best option when it comes to minimising the risk to the Director and Advisors. A better option may be to wind the Company up by way of a Members Voluntary Winding Up (or Liquidation).
Deregistration
Under Section 601AA of the Corporations Act Cth (2001) Deregistration is only available if certain provisions are complied with and the relevant facts are declared to be true by the Director.
This may present some issues for the Director if they are not entirely aware of all the dealings of the Company or if they sign a declaration that is found to be false.
While there are some cases where deregistration is appropriate, a deregistered company can be more easily reinstated, if it is that the Directors and Officers are also reinstated and deemed to have held that position throughout the period that the company was deregistered.
Further to this, as the paperwork for deregistration is usually compiled by the Company’s Accountant, it places greater risk on the Accountant, increasing their required duty of care.
This presents a real risk to Directors and Office Holders, as well as the Company Advisors, such as Accountants.
Members Voluntary Winding Up
One option which may minimise the risk for Directors, Officers and Advisors, may be to wind up the company by way of a Members Voluntary Winding Up (or Liquidation).
A Members Voluntary Winding Up or Liquidation (MVL) is when a Company is wound up under Section 491 of the Corporations Act by a special resolution (75% of members entitled to vote who attend the members meeting).
An MVL is only available to a company which is solvent.
An MVL has some particular advantages to a Deregistration which include:
- An MVL significantly reduces the risk to a Company’s Offices and Directors;
- The external appointment under an MVL means there is less risk on the Company’s advisors such as the Accountants
- Assets, such as trademarks or patents are not forgotten and never vest in ASIC because a distribution is made
- The liquidator controls the Company. This releases the Directors from the day to day management of the Company
- Directors representations are estimates and are not hard declarations as in a deregistration
- The due diligence process takes longer and is a more thorough process compared to a deregistration which makes it harder for a party to reinstate the company in the future
- There is a transfer of risk from the Company Advisor/Accountant to the Liquidator as appointed.
In essence there are some crucial considerations for Directors and Company Accountants when ‘winding up’ or shutting down a company. These particular considerations result from the Duties owed by the Directors of the Company but also from the Duty of Care owed to the Company and its Directors by the Company’s Accountant and other advisors.
In the case of Metzke v Sali [2010 VSCA 267] the Accountants were held to be negligent and breached their retainer by not adequately advising their clients in a timely manner and in accordance with their knowledge of the company’s circumstances.
This case highlights that a retained Advisor such as an Accountant, owes a duty of care to the Company (their client). The Advisor needs to carefully consider their qualification to advise, their existing knowledge of the company and how that may impact upon their impartiality and the potential liability which may exist if certain actions are taken or are not taken.
While each case is different, careful consideration needs to be given to the known and potentially unknown liabilities of the Company, Directors, Officers and Advisors so that an appropriate shutting down process can be implemented to provide the best protection possible.
If you have a client or know a Director who is ‘shutting down’ their company or ‘winding it up’, we strongly advise that they speak to us so that they can be advised with regards to the best options to protect them, as well as their Advisors from potential or current liabilities.
If you or your clients’ need advice regarding the ‘shutting down’ or ‘winding up’ of a Company please call 02 9688 6023 or email jfrank@franklaw.com.au
This is not legal advice.
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