Winding up refers to the process of dissolving a company by selling its stock and assets in order to pay off creditors. Usually, a liquidator is appointed to manage the winding up process.
A creditor is entitled to apply to the court to wind up the debtor company under section 459P of the Corporations Act 2001 (Cth) (the Corporations Act), on the basis that they are presumed to be insolvent as a result of not responding to a statutory demand.
Meaning of Insolvency
Failure to respond to a statutory demand means that a debtor company is automatically presumed to be insolvent whether or not they actually are. Pursuant to section 95A(1) of the Corporations Act, a company is solvent if the company can pay all its debts when they become due and payable. Accordingly, a company that fails to respond to a statutory demand has not paid its debts when due, and as a result, are presumed to be insolvent.
Filing a Winding Up Application
The preliminary step in filing an application to wind up a debtor company is to ascertain whether the statutory demand was effectively and properly served. Next, a creditor must also conduct an ASIC search on the company’s records to confirm whether no other winding up application exists or whether the company is already in liquidation.
To commence proceedings, the creditor must file an originating process, supported by an affidavit, in the Federal Court or Supreme Court, which includes a copy of the statutory demand and the accompanying affidavit verifying the debt.
An application must be filed within 3 months of the non-compliance date, which is dependent on when the statutory demand was served.
Wind Up Notice
If the application is successful, the debtor company will receive a wind up notice. This notice requires the debtor to appear in court in order to determine whether the business is solvent and able to repay its debts. If a debtor company ignores a wind up notice, their business will be wound up.
Disputing a Wind Up Notice
A debtor company may be able to avoid their company being wound up by disputing the wind up notice. In Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37, the court decided that a debtor company may dispute the wind up notice on the basis that it is not insolvent. To do so, the debtor company must provide evidence of its financial position. The court will consider whether the company is able to pay their debts that are currently due, and also its capacity to pay any debts that may become due in the future.
Next Steps
Applying for the winding up of a company or disputing a winding up notice is difficult to navigate.
If you have been served with a statutory demand, or wish to issue a statutory demand, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870; visit our Website; Like our Facebook Page.
This article is written by Belinda Kotvas and settled by Damin Murdock. This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.