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Court Ordered Liquidation – Is this Really the End?

Court Ordered Liquidation – Is this Really the End?

The appointment of a Liquidator by the Court is a common conclusion to the process of debt recovery action initiated by one or more creditors. The preceding events typically encompass:

  • Service of a Creditors Statutory Demand (CSD) on the debtor company;
  • The failure to comply with (ordinarily, pay the sum demanded) in the CSD and hence a “presumption of insolvency”; and
  • An application to the Court for the company to be wound up on that presumption.

The appointment of a Court Liquidator is an appropriate process for an insolvent company that is devoid of restructuring options and/or competent and motivated management. The Liquidator completes an investigation into the company’s affairs; realises assets and reports to creditors and ASIC. Ordinarily, the business has ceased to trade prior to the appointment of the Liquidator and there are no or insufficient realisations to enable a dividend to creditors. The company is subsequently deregistered by ASIC.

On occasions, however, Court Liquidation is consequential rather than desired, the result more so of managerial oversight or breakdown, including failure to:

  • pay due attention to the payment of tax and other liabilities;
  • follow due process when liability is contested or its quantum is challenged; or
  • maintain proper and up to date company details on public registers (i.e. ASIC) – most commonly resulting in the non-receipt of important statutory and legal notices.

In many instances, the above coincides with the debtor company:

  •  being solvent; and/or
  •  having recapitalisation, restructuring and/or turnaround options at its disposal; and/or
  • continuing to operate as a going concern.

In those circumstances, does the company face the same prospect of “a death by a thousand cuts?” The short answer is, “NO”. Fortunately, the corporations act gives life to the adage “when life gives you lemons, make lemonade”.

So what are some of the options available to directors and members in this scenario?

a) Apply to the Court for a Stay/Termination of the Liquidation pursuant to Section 482 of the Corporations Act 2001 (“the Act”)

This application is open to a Liquidator; Deed Administrator; Creditor or Contributory (Member) of the debtor company. It is more likely to be made by a Contributory or Liquidator. Some key elements for the Court to consider, included in what are commonly referred to as the “Warbler Factors” (in reference to the judgement in Re Warbler Pty Limited (1982) 6 ACLR 526), are:

  • The nature and extent of the creditors and whether all debts have been or will be discharged;
  • The attitude of creditors, contributories and the liquidator to the application;
  • The current trading position and demonstration of the company’s solvency; and
  • The general background and circumstances which led to the winding-up order and whether the company’s conduct was contrary to “commercial morality” or the “public interest”.

Ordinarily, the Court will direct the Liquidator provide a report with respect to any one or more of the Warbler Factors. One significant factor is the Solvency of the company. In order to prepare such a report and attest to the company’s Solvency (which generally is its ability to pay its debts “as and when they fall due”), a Liquidator will require information which includes (but is not limited to) evidence of compliance with taxation lodgement obligations and up to date financial and management accounts. In addition, funding arrangements and cash flow statements will be required as the Court places considerable focus on a company’s ability to meet its debts as and when they fall due after control of the company is returned to the directors.
Practically, exercising this option will require all liabilities of the company to be discharged in full. There are some cases in which the Courts have been prepared to accept undertakings given in respect of debt subordination arrangements, for example, an undertaking by a shareholder in respect of the capitalisation of working capital loans made to a company; or forbearance offered by a Bank.

b) Appoint an Administrator under Section 436B of the Act

Whereas an isolated Section 482 application is predicated on the Solvency of a company, the appointment of an Administrator by an incumbent Liquidator pursuant to Section 482 of the Act is made in light of the principals enshrined and outcomes contemplated in Part 5.3A of the Act.

Ordinarily, it is the incumbent Liquidator who will seek appointment as Administrator (albeit, conceivably, an appointment is open to any Registered Liquidator). In the case of appointing the incumbent, the appointment must be approved by resolution of creditors or with leave of the Court.

This appointment opens up the prospect of recapitalising; restructuring and/or turning around the business of the company. Practically, it will lead to a proposal for the Company to execute a Deed of Company Arrangement (“DOCA”). The DOCA lays the foundations for achieving the objectives of Part 5.3A of the Act – maximising the chances of the company, or as much as possible of its business, continuing in existence and if that is not possible, a better return for the company’s creditors and members than would result from an immediate winding up of the company. Therefore its terms and effect are of great importance. Typically, it will include reorganisation of asset holdings; business structure and/or operations and debt obligations.

The appointment of an Administrator pursuant to Section 436B of the Act and any subsequent resolution for the Company to execute a DOCA does not automatically terminate the existing Liquidation of the Company. Rather, following (albeit, conceivably also available prior to) the implementation of the all the steps and matters contemplated by the DOCA, the Deed Administrator (usually, for the sake of expedience) or a Contributory will apply to the Court under Section 482 of the Act for an Order terminating the original winding up. The Court will again consider the “Warbler Factors” previously referenced, as well as the Administrator’s report pursuant to Section 439A of the Act.

Liquidation is a legal process with serious and far reaching implications for stakeholders, not least Directors and Members. In a fast paced commercial environment, it is easy or convenient to overlook those matters subordinate to core business activity. The fact of the matter is, compliance, regulatory and legal risks exist and when left unmanaged, leave the business susceptible to adversity, such as Liquidation – in circumstances where it could be avoided.

It is vital that Directors seek out the assistance of appropriately qualified and registered insolvency professionals at the onset of any challenging financial circumstances or pressure from creditors. Doing so ensures the early detection and diagnosis, whilst significantly expanding and preserving the extent of remedies available.

SV Partners is a specialist accounting and expert advisory firm that provides professional corporate and personal insolvency accounting, turnaround strategy and forensic advisory services to accountants, financial institutions, corporations, financial and legal advisors, and their clients.

Article written by Fabian Micheletto, Director SV Partners Victoria.

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