March 1, 2017

I am in Liquidation. How?

Let’s face it, it does happen.  Sometimes, a winding up application “slips through to the keeper” and that keeper is usually an Associate Justice or Registrar who orders the winding up of the entity usually on the grounds of insolvency.  Directors are often left baffled as to why it has occurred given that they believe their corporation is solvent and able to pay its debts as and when they fall due.

As insolvency practitioners, we are at times faced with the situation where a corporate entity is wound up and we are appointed, only to discover that upon our assessment of its financial circumstances, the winding up could have been avoided, if:

  1. The corporation’s details on the ASIC database were up to date; and/or
  2. The directors had taken steps to deal with the petitioning creditor directly or through their lawyers before the return date in the hearing in the Federal Court or Supreme Court.

Corporations Act provision

Section 482(1) of the Corporations Act 2001 allows the court to make an order staying or terminating a winding up.

There are many established authorities in this area of the law.  This article is not intended to explore these authorities in detail but seeks to highlight the key issues.

What do you do if this happens to you?

In most situations, an application to the court is usually made by:

  1. The liquidator;
  2. A creditor; or
  3. A shareholder of the company.

The liquidator is still duly bound to conduct investigations into the company’s financial circumstances, business, property and affairs.  This is why officers of the company must still comply with their obligations to deliver all the company’s books and records and provide the appointed liquidators with a Report as to Affairs (statement of assets and liabilities).

On the making of the application, the court will usually require the liquidator to give a report on the company’s solvency.  This report is usually the key ingredient to influencing the court’s decision on whether to stay or terminate a winding up.

The courts will consider a number of factors, including:

  1. The attitude and interest of creditors;
  2. The liquidator;
  3. The company’s shareholders;
  4. The public interest;
  5. The company’s trading position and solvency; and
  6. Any explanation for any non-compliance with statutory duties and the circumstances leading to the winding up.

In a recent winding up undertaken by SVP Victoria we were required to deal with this issue.

The facts

  • The company XYZ Pty Ltd held commercial property which was tenanted.
  • The ATO conducted an audit of its affairs and determined that it was liable for various taxes and an assessment was raised.
  • The company failed to remit the taxes levied pursuant to the various assessment demands for payment and the ATO subsequently issued a Form 509, Creditors Statutory Demand for Payment of Debt (which was not complied with) and then an Originating Process (the “winding up application”).
  • Surprisingly during the above period, the company’s registered office (being the accountant’s office) was in receipt of all correspondence from the ATO but did not alert the officers of the Statutory Demand and winding up application.  The accountant stated they had a very plausible excuse for not passing on the paperwork.
  • The winding up order was made and we were appointed official liquidators.
  • The property owned by the company in its own right was sold prior to the winding up order and was awaiting settlement.  The property was not subject to any encumbrances.

What occurred next?

  • Upon notifying the officers and accountants of the winding up order, we received all information/reports/financial statements required to make an assessment of the company and its business, property, affairs and financial circumstances.
  • We also determined that the company’s only real asset, the property, was sold at arm’s length and the price obtained was at fair market value.
  • The company’s directors agreed for us to make the relevant application under Section 482 upon the payment of all debts and costs of the liquidation.  A report was prepared and was filed with the court by the liquidators taking into account all of the relevant factors outlined above.  Known creditors and shareholders were all put on notice of the Section 482 application.  There were no objections.
  • At the hearing of the application, the court made orders that:
  1. The winding up of XYZ Pty Ltd be terminated pursuant to Section 482 of the Corporations Act with effect from (a date being two weeks from the date of order to give the liquidators time to prepare for finalization);
  2. The liquidators send a sealed copy of the order to each director and shareholder;
  3. Fixed the liquidator’s remuneration; 
  4. The liquidators lodge a sealed copy of the order on ASIC; and
  5. The legal costs of the application be costs in the winding up.

In this example, the Court proceedings were conducted without defence leading to an order for winding up. The clear message is that accountants and other advisors should ensure that appropriate systems are in place to deal with incoming mail, especially correspondence such as Statutory Demands and winding up applications relating to clients.  By being noted as the Registered Office on the ASIC’s database, it is your responsibility to ensure that all communications received are forwarded to clients in a timely manner. Any failure may result in a claim against your professional indemnity insurances.


Article written by Michael Carrafa, Executive Director, Victoria

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