This article outlines, broadly, the process one might undertake to overturn the winding-up of their company after it has been ordered, and general advice as to how to reduce your risk of finding yourself in that position in the first place.
- Ensure your ASIC records up to date
- Engage a lawyer as soon as you receive, or become aware of, a demand
- Act promptly if a winding-up order is made
- Be frank in your disclosure to the liquidator
So, you’re facing the unpleasant surprise of a liquidator telling you that the judge has ordered that your company be wound up. What’s next? Can you prevent the winding up?
The good news is that the court has the power to order that a wind-up be terminated. The not-so-good-news is that it’s much more difficult to prove that a wind-up should be terminated than it is to prevent the court from making a wind-up order in the first place. The main reason for this, is that you have to prove that the company is actually solvent and there are good reasons for overturning the winding up order.
An application to terminate a winding up can be made pursuant to section 482 of the Corporations Act 2001, or alternatively pursuant to the relevant Court Rules (see for example Rule 46.08 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and rule 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW)). The standard of proof for solvency is slightly lower in an application under the Rules, but is only possible if you did not attend the court hearing at which a winding up order was granted and have a reasonable explanation for that failure to appear (the Court must be persuaded that it would be unjust to allow the order to stand).
To prove solvency, you have to show that the company can pay all its debts when they’re due. However, the court tests this by undertaking a ‘cash-flow assessment’ rather than a ‘balance sheet assessment’. It will also involve (at a minimum) upfront payment of the petitioning creditor’s debt and legal fees as well as the liquidator’s fees for the period they are appointed.
When undertaking a cash-flow assessment, the court will require evidence of the company’s previous income and future income predictions. The most persuasive evidence in this regard is typically prepared by a specialist insolvency accountant at the expense of the company trying to prove solvency. If the evidence shows that the company is making a profit, or at least breaking even, and is predicted to continue in this manner, the company will likely be determined solvent. If the application is brought under the relevant Court rules, primary evidence from the Company’s books and records or affidavit evidence from the Company accountant may be sufficient to satisfy the lower standard of proof mentioned above.
There is a common misunderstanding that the court will simply undertake a ‘balance sheet assessment’, i.e. compare the net assets of the company to the amount owing to creditors. This is not the case. A company can be both asset-rich, yet insolvent. This is especially so, where a company is not trading or trading only in a limited capacity, and the assets are incapable of being promptly realised in order to pay creditors.
Further, the court will in most cases not take into consideration a director, shareholder or other third party’s intention to financially support a company where it is relied on as evidence of solvency. That is particularly the case when such a party is not under a contractual obligation to provide funding and failed to provide that financial support to prevent the making of the wind-up order in the first place.
Solvency is not the only aspect that a court will take into consideration when determining whether to terminate a wind-up. Courts will also look to see whether it is in the public interest to terminate the wind-up. Instances where a company is solvent, but it is still within the public interest to wind-up the company include:
- where the directors of the company have failed to comply with their duties
- where the nature of the business (or the conduct leading to the winding up order) is considered not in the public interest
- where the company is not meeting its tax obligations
- where the conduct of the company is contrary to commercial morality
The role of the liquidator
The court appoints a liquidator to sell off the assets of the company in order to pay the creditors out of these funds. The liquidator is acting as an officer of the court and has no personal interest in the company, save the fact that they will be paid a fee for their work. The liquidator goes about the liquidation process in accordance with his or her statutory obligations and the conduct rules that bind all insolvency practitioners.
It is important to retain a positive relationship with the liquidator, both because they are an officer of the Court, and their consent (or otherwise) can be a major factor as to whether the application is successful. The liquidator will also be asked to provide evidence as to the solvency of the company, so providing as much information as possible can be beneficial.
It should be noted that when determining solvency, the liquidator’s fees are included in the calculation of the company’s debt. With this in mind, an application to terminate the wind-up should be brought as early as possible to reduce the amount of fees that have been incurred by the liquidator.
Could this all have been avoided?
The best approach is to seek legal advice as early as possible after receiving a statutory demand or winding up application. Ensure that you keep your ASIC records up to date - the most common trap that companies fall into is failing to promptly lodge the relevant form, so a statutory demand will be sent to an address at which the company no longer resides. As we have stated above, if the order was made without the company’s representative being present, it is easier to have the wind-up terminated.
It is also important to note that the company must be represented by a lawyer. A director or shareholder cannot self-represent a company at a winding up application, a rule which is closely observed by the registrars and associate judges who oversee the applications.
Whilst it is possible to have a wind-up order terminated, it is difficult to prove. A company must prove that it is solvent, rather than just having to pay the creditor who issued the statutory demand. Acting promptly and having an experienced insolvency lawyer advising you in the application is crucial, and gathering the evidence in order to do this can be a costly exercise. Delaying the disclosure and court application will only further increase the cost and reduce the likelihood of success – and unless you are using a lawyer who provides certainty on the quantum of their fees, will likely increase your own legal fees.
The team at Aptum has a wealth of experience in representing both liquidators and companies in these sorts of termination applications, which places us in a unique position to understand the most effective and efficient path to resolution. We encourage you to reach out to us if you are in this position, or at any stage of an insolvency matter.