Applications for winding up are usually presented in Australia under section 459Q of the Corporations Act 2001 (Cth) (the Act).
A pre-requisite for filing an application for winding up is that the debtor company must have failed to comply with a creditor’s statutory demand that has been served on it under the Act. This failure to comply raises a presumption that the debtor company is insolvent (section 459C(2)(a) of the Act) which the court is entitled to rely on to wind up the company in insolvency. Once that presumption has been raised the onus is on the debtor company to disprove the presumption by showing that the company is solvent. If it cannot do that at the hearing, it will be wound up.
A creditor’s statutory demand maybe issued for a minimum amount owing of $4000. A judgment for the amount owing obtained from a court is normally used as the basis for issuing a creditor’s statutory demand, although a statutory demand should also be considered for non-disputed debts.
Filing an application for winding up means filing a Form 2 Originating Application, with several other prescribed affidavits to support it, in the Supreme Court, under rule 2.2(3) of Schedule 1A to the Uniform Civil Procedure Rules 1999 (Qld) (UCPR). Upon filing, the court allocates a hearing date for the application for winding up to be heard, endorses this on the application, and returns the documents to the creditor to be served on the debtor company.
Service of the application for winding up usually occurs by sending the application and the supporting affidavits by prepaid post to the registered office of the company (section 109X(1)(a) of the Act). Service is deemed to have occurred on the fourth working day after it is posted unless there is evidence to the contrary. Service must occur at least five days before the hearing (rule 2.7 of Schedule 1A UCPR), or the hearing will need to be adjourned to a later date.
Once the application for winding up has been served on the debtor company, and at least five days has elapsed, the hearing of the application can proceed. If the debtor company does not arrange to be represented at the hearing, the court will order that the debtor company be wound up and a registered liquidator (who has given their consent) be appointed as liquidator of the company.
Not later than the day after the winding up order is made (rule 5.11 of Schedule 1A UCPR), the creditor who filed the application for winding up must inform the liquidator of their appointment to administer the debtor company’s financial affairs. The liquidator will distribute the debtor company’s divisible assets amongst its creditors after investigating the company’s financial circumstances. Once that process of investigation, recovery and distribution of assets is completed, the liquidator will de-register the company. Upon de-registration the company will cease to be a legal entity.
Liquidation of the debtor company may also have the effect of exposing the company’s directors to a variety of claims. Creditors holding personal guarantees given by company directors to secure payment of their debt may seek to enforce those guarantees by suing the directors personally. The liquidator may pursue the directors for repayment of money the company loaned to them. Claims can also be made to overturn “uncommercial transactions” by the directors leading up to the liquidation, and also for insolvent trading by the directors.
The alternative to failing to attend the hearing of the application for winding up, is for the debtor company to arrange to be represented at the hearing and to oppose the application for winding up. If the debtor company intends to do this, it must file a Form 4 Notice of Appearance and a supporting affidavit under rule 2.9(1)(a) of Schedule 1A UCPR and serve that on the applicant creditor 3 days before the hearing (rule 2.9(1)(b)). Common grounds relied on to oppose the application for winding up are:
- the amount claimed is not owed by the debtor company because no debt was owed to the applicant creditor, the debt was paid, or the judgment relied on is being set aside, and establishing this is material to proving the company is solvent;
- the debtor company is able to rebut the presumption of insolvency because it can pay its debts and is not insolvent;
- the debtor company is able to prove it is solvent and there is a genuine dispute about the debt claimed; and
- there is a defect in the material or non-compliance with the procedures required to obtain a winding up order.
If the debtor company’s opposition to the application for winding up is successful, the application may be dismissed by the court.
Important considerations
Because failure to respond to an application for winding up has such serious consequences for your company, the creditor issuing it must have strictly complied with all legal formalities under the Act for filing and serving the application. Some of these considerations are set out below.
How was the application for winding up served?
How your company received the application is extremely important. You should make a note of how and when your company received it and keep copies of all documents and written communications you received with it.
Are the creditor’s details correct?
Do you know the person or company who has sent your company the application for winding up? Compare the details on the application with previous documents you have received from them. Do they make sense or is there some confusion?
Are your company’s details correct?
Has the person or company who sent your company the application for winding up correctly described your details in the application? This is very important; particularly in relation to your company’s name and Australian Company Number (ACN).
Were you aware there was a judgment or creditor’s statutory demand issued against your company?
The documents accompanying an application for winding up will include a copy of the creditor’s statutory demand and the judgment relied on. The judgment will have a court heading on it describing the court it was issued from, a claim number, and the parties concerned with that claim. Are you familiar with those court proceedings, or is that the first time you became aware of them? Is this the first time you saw the creditor’s statutory demand? If not, what were the circumstances in which your company received it?
Does your company owe the creditor money?
If you are not familiar with the court proceedings or judgment, check your company’s records to see if you have ever had any contact with the person or company who issued the application for winding up and the creditor’s statutory demand. Situations have arisen where the wrong company has been sued for a debt because they have a similar name or ACN to the actual debtor.
If your company has dealt with the creditor before, according to your own records and understanding, did your company still owe them any money? If there was a balance owing to the creditor, was there another reason your company had not paid it? Did they owe your company a similar or larger amount of money?
Is the amount claimed overstated?
Check your company’s records to confirm whether the amount being claimed by the creditor in their judgment for the claim amount is the same as the balance you thought was owing. Has the creditor claimed in excess of what you thought was owing?
Your company may have these options
As you can see, there are many important considerations to be examined before deciding how to respond to an application for winding up. Investigating these considerations and gathering information to identify any errors in the application takes time. We therefore urge you to consider those matters as soon as possible as they will determine your company’s options to respond to the application for winding up.
In broad terms, your company’s options are:
Pay the claimed amount
To pay the amount claimed in the application for winding up before the hearing.
Settle the amount
To arrange with the creditor who filed the application to pay off the amount claimed and adjourn the hearing while that occurs.
Apply for an adjournment
To apply to the Court to adjourn the hearing of the application for winding up.
Apply for a dismissal
To apply to the court to dismiss the application for winding up.
If the information in the application for winding up is completely accurate, the first two options are the appropriate ones for you to consider. If your company does not have the financial means to pay the full amount claimed, and the creditor will not agree to an informal arrangement to settle that amount, several formal options may be available to your company under the Act to achieve that outcome. The Act has “safe harbour” provisions, the voluntary administration process, and trading through corporate cashflow difficulties under a deed of company arrangement as options that may avoid your company being placed into liquidation.
It may well be that your company intends opposing the application for winding up on some of the grounds described above but requires more time to prepare its case. It may also need more time to negotiate an outcome with the creditor or is awaiting the outcome of court proceedings related to the creditor’s debt. In those situations, your company may be able to obtain an adjournment of the hearing date from the court. An application for an adjournment will need to be supported by affidavit evidence prepared by a lawyer experienced in insolvency law. If this is not done correctly and an adjournment is refused your company could be wound up at the first hearing date.
Similarly, if your company intends opposing the application for winding up on any of the grounds set out above, it is essential that your company engages an experienced insolvency lawyer to help have the application dismissed.
The most persuasive grounds a company can rely on to have an application for winding up dismissed is to prove to the court that it is solvent. Liquidation is a legal process for the administration and winding up of a company’s affairs. Therefore, if your company wishes to continue to trade and is not insolvent, this needs to be demonstrated to the court.
Balance sheet solvency is not enough, i.e. an excess of assets over liabilities. The test of solvency is for a company to be able to demonstrate that it is able to pay its debts as and when they fall due. Sufficient assets to cover those debts may not be enough to prove solvency to a court if those assets cannot be readily sold to pay creditors. To prove solvency the court needs to be shown, by affidavit evidence, all relevant material with respect to the company’s financial affairs so that it can make its judgment based on the actual facts and circumstances of the company’s financial position.
Insolvency is a technical and complex area of law and you should seriously consider obtaining legal advice if you believe that there may be grounds for your company to oppose an application for winding up. Doing this may well be the difference between achieving a just outcome for your company and its members and a winding up order being made against it placing it into liquidation.
If you have recently received an application for winding up and need help to urgently assess its ramifications for your company, one of our experienced team of solicitors will be happy to help you. Contact Gibbs Wright Litigation Lawyers today for a confidential initial consultation to explore your options and legal rights.
