From time to time the Court may place a company into liquidation without the company’s directors even being aware that any proceedings were on foot. Alternatively the directors may have been aware that “something” was happening, but have assumed they had more time to deal with the creditor’s claim than in fact was the case.
Such windings up usually occur when the petitioning creditor bases its application on an expired Statutory Demand (s459) without first obtaining a judgment. This is often the case when the debt is relatively small. The creditor’s approach is perfectly valid and effective where there is no dispute regarding the existence or quantum of the debt.
The first that the directors know of the winding up is when the liquidators contact them to pass on the unwelcome news of the Order having been made.
Typically the first reaction of the company is an offer to immediately pay the petitioning creditor’s claim and costs. Quite often funds are held by the company to accomplish this. The directors will normally protest to the liquidator (often loudly and emphatically) that the company is solvent and should not be in liquidation. The assumption of the director is that payment of the petitioning creditor’s claim and costs will automatically cause the liquidator and the winding up process to go away. Unfortunately for the company it is not as simple as that.
The eventual solution that the company desires is an Order from the Court under section 482 terminating the winding up. The company may also seek an interim Order under the same section seeking a temporary stay of the winding up.
Before terminating a winding up the Court will want to be entirely satisfied that the company is solvent and will usually expect a report from the liquidator in regard to solvency and any other relevant fact or matter (s432(2)). At the very least the Court will expect material to be filed by the company demonstrating solvency together with an affidavit from the liquidator commenting on the company’s material. If the company is not shown to be solvent the winding up will not be terminated. When considering solvency all debts and obligation need to be considered including accrued staff entitlements, unremitted PAYG with-holding and GST.
In the absence of a very prompt application for a temporary stay of the winding up, the liquidator must take sufficient steps to protect the assets of the company, notwithstanding that it is intended that an application for termination is to be made. The degree to which the liquidator becomes involved with the affairs of the company will depend on the circumstances and the liquidator’s preliminary assessment of the likelihood of the termination application being successful. Liquidators will not place any obstacle in the way of a solvent company obtaining a termination order but will insist on protecting the status quo in the interim. Further they will expect that the application will proceed without undue delay. Refusing to co-operate with the liquidator is likely to cause more difficulties than it is intended to avoid.
Occasionally the liquidator finds that the company is in fact insolvent but nevertheless has a business worth protecting. In such circumstances the Court is unlikely to grant an Order terminating the winding up. However the liquidator (but not the company) may appoint an administrator under section 436B with a view to the company proposing a Deed of Company Arrangement to creditors. Should creditors accept the proposal and provided the company becomes solvent as a result of that Deed, the Court will then normally terminate the winding up.
The bottom line is that the Court will not terminate a winding up without a full review of the company assets and liabilities and any other relevant matters.
