Companies are usually wound up when they are no longer needed or when they become insolvent.
There are two main ways in which a company may be wound up, compulsory and voluntary.
- Compulsory – upon application to the Court
- Voluntary – by resolution of directors, shareholders etc.
If a winding up order has been made the company only exists for the purposes of winding up. The disposing of, or transfer of, any property after the winding up order are void, unless approved by the court.
Civil proceedings cannot be commenced or continued against a company in liquidation or in the process of winding up except by leave of the court.
The liquidator can take control of the company’s property but the company remains the legal owner of the assets.
The directors of the company cease to have any power over the company.
How to wind up a company on the grounds of insolvency?
A court with sufficient jurisdiction has the power to make an order to wind up a company if it is insolvent.
The following entities can make an application to wind up a company:
- The company
• A creditor
• A liquidator
Other reasons to wind up a company
The court may also make an order to wind up a company for other reasons such as: the shareholders pass a special resolution resolving to wind up, or a company is improperly managed, or ASIC decides that the company should be wound up or it is otherwise just equitable to do so.
Statutory demands to pay debts
Creditors may use statutory demands to require a company to pay debts. If a company fails to pay the debt after service of a statutory demand, or fails to have the statutory demand set aside within 21 days after the statutory demand is served, the creditor can apply to the court to have a liquidator appointed to have the company wound up.
If the company succeeds to have the statutory demands set aside then it would be entitled to recover its legal costs. However, if the company fails to make an application to set aside the statutory demand they cannot later contest demand without leave of the court.
There is a presumption that when a company fails to comply with a statutory demand then it must be insolvent. This can only be reversed by providing evidence of the company’s solvency. This can be done by showing “fullest and best” evidence of the company’s financial position.
Opposing a winding up application
A company can oppose a winding up application if:
- the company is solvent.
• the creditors have a better prospect of recovering their debts without the company being wound up.
• a voluntary liquidation is in progress.
• the court takes into account the view of creditors and whether they oppose the winding up order.
Insolvency is a very technical area of law and directors have a duty to act in the best interest of their company. If directors of a company receive a creditor’s statutory demand notice it is important that they immediately obtain legal advice. A lawyer should always prepare a creditor’s statutory demand notice to reduce the likelihood of it being set aside.