Applications to wind up a company in insolvency

Applications to wind up a company in insolvency

If a company is presumed to be insolvent under section 459C of the Corporations Act 2001 (Cth) (Act) a creditor can apply to the Federal or Supreme Court to wind up the company. Applications are made under section 459P of the Act and the Court has the power to wind up a company in insolvency under section 459A. This mean that a liquidator is compulsorily appointed.

Who can make a winding up application?

The most common party to file an application to wind up an insolvent company under section 459P of the Act are its creditors. A creditor in these circumstances is, as discussed by Young J in National Australia Bank Ltd v Market Holdings Pty Ltd [2000] NSWSC 1009 (and referring to Crossman J in Re North Bucks Furniture Depositories Ltd [1939] 2 All ER 549) includes every person who has a right to prove in a winding up. However, when a creditor makes an application is made under section 459P(1)(b), they must have a valid debt that is capable of being enforced (e.g. a judgment debt).

Section 459P(1) of the Act also outlines various other parties that can make an application to the Court, including:

  1. The company;
  2. A contributory;
  3. A director;
  4. A liquidator or provisional liquidator of the company;
  5. ASIC; and
  6. An agency prescribed by the Corporation Regulations (i.e. Australian Prudential Regulation Authority (APRA)).

When can a winding up application be made?

Pursuant to section 459C(2) of the Act, an application to wind up a company in insolvency must be done within 3 months of the date that a company is presumed to be insolvent.

The most common presumed insolvency event under section 459C is that a company has failed to comply with a statutory demand. In this instance, the creditor company must make an application under section 459P of the Act within 3 months after the expiry of the 21 day period to comply with the statutory demand (subject to an application being brought to set aside or extend time for compliance with a statutory demand).

How is winding up application made?

An application to wind up an insolvent company is made by filing in the Federal Court an originating process supported by affidavits. Pursuant to section 465A (b) of the Act, once the application has been filed and accepted by the registry, the applicant has 14 days to serve the application on the respondent company.
Pursuant to section 459Q of the Act, there are special rules that govern applications that are based on a company’s failure to comply with a statutory demand. This type of application must:

  1. Set out the particulars of service of the demand on the company and the failure to comply with the demand;
  2. Must have attached to it:
    1. A copy of the demand; and
    2. If the demand has been varied by an order under subsection 459H(4) – a copy of the order; and
  3. Unless the debt, or each of the debts, to which the demand related is a judgment debt – must be accompanied by an affidavit that:
    1. Verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and
    2. Complies with the rules.

This means you will need a lawyer to prepare your application.

How do you oppose a winding up application?

If your company has been served with an application for the company to be wound up and have received notice of a hearing date, a director or the company’s legal representative can appear at the hearing, either to either support or oppose the application.

If a company wants to oppose the application, pursuant to section 465C of the Act, they must file and serve on the applicant:

  1. A notice of grounds which the person opposes the application; and
  2. An affidavit verifying the matters stated in the notice.

If a company does not file and serve these documents, it will require leave from the Court to oppose the application. Leave is normally granted where there is no prejudice to the applicant.

One of the most common grounds to oppose an application to wind up a company is to prove that the company is in fact solvent. If a company can prove solvency and that there is a genuine dispute about the debt, a winding up application order will not be made. On the other hand, if the company can’t prove that it is solvent, it is unable to rely upon the ground of a genuine dispute to the validity of the creditor’s debt.

Regarding applications that are based on a company’s failure to comply with a statutory demand, a respondent company can’t oppose the application on the following grounds without the leave of the Court:

  1. On a ground that was relied on for the purposes of an application by a company to set aside a statutory demand; or
  2. That the company could have relied on a ground for the purposes of an application to set-aside a statutory demand, but no application was made.

The Court will not allow leave unless it is satisfied that the grounds mentioned above are material to proving that a company is in fact solvent.

Further, an affidavit accompanying a notice of grounds of opposition may also include the reasons why a debt was not paid and, if a company is able to pay a debt, the Court may be minded to adjourn the application to allow this to occur.

What may happen at hearing?

The hearing of winding up applications are usually before Registrars who have wide discretionary powers to deal with an application in the following ways:

  1. Grant order under section 459A to wind up the company ;
  2. Dismiss the application;
  3. Adjourn the application; or
  4. Make an interim order.

If there is a significant contest (such as actual solvency) the case will be referred to a judge.

What happens if a company is wound up?

If your company is wound up the Court will appoint a liquidator that has been nominated by the creditor (applicant). The liquidator must consent to be appointed, by way of filing a written Consent of Liquidator to Act. Once the order has been made and the liquidator appointed, an applicant has two business days to lodge the order with ASIC along with name and address of the appointed liquidator.

The applicant must also serve a copy of the sealed order on the liquidator and the company, along with ASIC Form 519 (Notification of court action relating to winding up application).

The liquidator will then proceed to wind up the company.

Key takeaways

If a company is presumed to be insolvent then a creditor can make an application under section 459P of the Act to have the company wound up in insolvency. However, if a company can prove at hearing that it is in fact solvent and that there is a genuine dispute about the debt, a Court will not to make an order under section 459A to appoint a liquidator.

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