What is a winding up application and what happens to my company?

A winding up application is a court proceeding that asks the court to order that a company be wound up (put into liquidation) and a liquidator appointed. ASIC calls this a court liquidation: “a liquidation that starts as a result of court order, made after an application to the court, usually by a creditor of the company.”

It is more serious than a statutory demand. A statutory demand is a warning with a 21-day deadline. A winding up application is the court case that can follow it, and it has a hearing date.

Who can apply

Most applications are made by a creditor the company owes money to. ASIC notes that directors, shareholders and ASIC can also make a winding-up application.

The most common kind of application is a winding up in insolvency based on a company’s failure to comply with a statutory demand. The Federal Court’s guide also refers to applications to wind up a company on other grounds under section 461 of the Corporations Act 2001. This guide focuses on the insolvency route.

How it relates to a statutory demand

If a company does not comply with a statutory demand within 21 days, it is presumed to be insolvent. The Federal Court explains that the creditor who served the demand may rely on that presumption in a winding up application made within three months of the date of non-compliance.

That presumption is why the 21-day response window matters so much. Once it has passed, the company has to prove it is solvent, rather than the creditor having to prove it is not.

The court process in outline

The Federal Court’s information sheet sets out the steps a creditor takes when the application is based on an unmet statutory demand. Other courts with jurisdiction under the Corporations Act may have different procedures.

Before filing

• The creditor obtains a current ASIC company extract.
• It files an originating process (Form 2) and a supporting affidavit (Form 59). The affidavit covers service of the demand, the company’s failure to comply and whether the debt is still owed.

Before the hearing

• The creditor notifies ASIC of the application (Form 519).
• It obtains the written consent of a registered liquidator to act if the company is wound up.
• It serves the originating process on the company within 14 days of filing, and at least 5 days before the hearing.
• It publishes a notice of the application on ASIC’s Published Notices website at least 7 days before the hearing.

Because notices are published, suppliers, lenders and customers may see that an application has been made.

At the hearing

In the Federal Court, these applications are usually heard by a Judicial Registrar. The company may appear to ask for an adjournment or to oppose the orders. The Federal Court says the company should file and serve a notice of appearance or a notice of its grounds of opposition, preferably supported by an affidavit.

The court may adjourn or dismiss the application, make interim orders, or order that the company be wound up. If orders are made unopposed, the court usually orders the company to pay the applicant’s costs.

The court can also appoint a provisional liquidator while the application is pending. ASIC describes this as a registered liquidator appointed by the court to preserve the company’s assets until the court decides the winding-up application.

What happens if the court winds up the company

If a winding up order is made, the liquidator is notified, the order is lodged with ASIC and it is served on the company. From then on:

• The liquidator takes control. ASIC says directors cannot use their powers after a liquidator has been appointed.
• Directors must cooperate. Directors must give the liquidator the company’s books, records and information, and complete a report on the company’s activities and property. ASIC says this report is due within 10 business days in a court liquidation. Failing to meet these obligations can lead to fines or imprisonment.
• The liquidator investigates and sells. According to ASIC, the liquidator protects and sells the company’s assets, investigates its affairs, including possible unfair preferences and insolvent trading, and distributes funds to creditors in the order the law requires.
• Most legal action against the company stops. Unsecured creditors cannot start or continue legal action against the company without the court’s permission.
• The company ends. ASIC explains that once the liquidation is complete, the company is deregistered three months after the relevant form is lodged.

Personal guarantees that directors gave for company debts are separate promises. Ask your lawyer how any guarantees you have signed could be affected.

Step by step

1. Find the hearing date. It is on the originating process. Put it in every director’s calendar.
2. Speak to a lawyer today. Ask whether the company can oppose the application or seek an adjournment, and what must be filed and served before the hearing.
3. Speak to a registered liquidator. ASIC recommends that directors who suspect their company is insolvent contact a registered liquidator, accountant or lawyer immediately. Ask what options are still open, such as voluntary administration or, for eligible companies with liabilities of no more than $1 million, small business restructuring, and how they would interact with the court application.
4. Contact the creditor, through your lawyer. If the debt can be paid or settled, your lawyer can negotiate with the creditor and explain how the application would then be dealt with in court.
5. Secure the company’s records. Keep books, bank records and contracts together and up to date. A liquidator will need them if an order is made.
6. Stop and think before new debt. Do not take on new credit to buy time without advice. If the company is insolvent, directors have a duty to prevent insolvent trading.
7. Use free support. The Small Business Debt Helpline (1800 413 828) offers free help from financial counsellors for small business owners in financial difficulty.

Important things to know

• Do not ignore the hearing. If the company does not appear or oppose the application, the court can make winding up orders at the hearing.
• Time is short. Service can be as little as 5 days before the hearing, so act on the day you receive the documents.
• Only a registered liquidator can act as an external administrator. ASIC explains that only registered liquidators can act as external administrators of companies. You can check a practitioner’s registration on ASIC’s professional registers.
• Borrowing is rarely the fix on its own. Refinancing to pay one creditor may not solve an underlying insolvency. Read when borrowing is not the answer and get advice first.
• Tax debts can follow directors. If the company also owes tax or super, read about director penalty notices and speak with your registered tax agent.