There can be a second chance for companies in liquidation.
With the rise of insolvency activity in recent times, the use of statutory demands by creditors has become an increasingly prevalent practice. Companies who fail to comply with the requirements of a statutory demand, whether intentionally or not, open themselves up to the presumption of insolvency. In today’s high-pressure business environment, the likelihood of a missed demand or the inability to respond within the prescribed timeframe has grown significantly and is no longer a rare occurrence. This may result in business owners finding themselves at the unfortunate end of a winding up order – meaning their company has been placed into liquidation.
Whilst liquidation is a seemingly terminal event that typically marks the end of the corporate existence of a company, in certain circumstances it may be appropriate for a company to exit the liquidation process and continue to trade to see another day. In these circumstances, a second chance and lifeline may be provided to businesses that may otherwise be lost. For advisors, understanding these options is essential to providing comprehensive advice to clients who may be navigating the precarious circumstances of liquidation.
The case of Company X
Consider the case of Company X, a recent file that came across our desks. Company X operated as a land holding entity with minimal to no liabilities towards the start of 2020, simply owning the premises from which its related entities traded. At the onset of the COVID-19 pandemic, operations of the broader group ceased and the directors of Company X left the country for an extended period, leaving the company and its related entities unmonitored. Fast forward to 2024 and with no corporate supervision, Company X found itself wound up in respect of an unanswered statutory demand for unpaid land tax.
After we initially got in contact with the directors of Company X, including gaining an understanding of the company’s financial position, it was clear that Company X had the capacity to discharge the outstanding land tax liabilities. The directors were left asking an important question: how could the company escape the seemingly irreversible path of liquidation?
The two main methods through which a company may exit the liquidation process includes:
the liquidator appointing a voluntary administrator, with the view of a Deed of Company Arrangement (DOCA) being proposed; or
the court ordering a stay or termination of the liquidation.
Appointment of a voluntary administrator
A liquidator owes a primary fiduciary duty to creditors of the company, acting in their best interests. Accordingly, the decision to appoint a voluntary administrator will ordinarily occur where the liquidator believes that creditors will receive a greater return under an eventual DOCA, opposed to that of a liquidation.
A DOCA may only be proposed as part of a voluntary administration and serves to be a binding agreement between a company and its creditors, allowing the company to restructure its debts and continue trading, all whilst offering creditors a better return than liquidation would alternatively provide. Practically, a DOCA offers a pragmatic solution to creditors while giving the company a fresh start.
Circumstances that may necessitate the appointment of a voluntary administrator may include:
directors electing to contribute funds to revive the company and continue trading; or
the need for ongoing trade to facilitate the sale of the company’s business and assets as a going concern.
Should the proposed DOCA be accepted at the conclusion of the voluntary administration, control of the company returns to its directors, with the company bound by the terms of the DOCA.
Termination of a liquidation by the Court
A liquidation may also be stayed or terminated by an order of the court¹. The decision to stay or terminate a liquidation is discretionary and there are no prescribed reasons as to why orders should be made. However, several factors have been established as being relevant when the court considers whether to stay or terminate the liquidation.
This includes:
The views of the creditors, contributories and liquidator;
The company’s trading position and overall solvency;
Should the director(s) have failed to discharge their statutory duties satisfactorily, an explanation should be provided detailing the circumstances;
The overall background and events leading to the winding up should be outlined;
The nature of the company’s business should be outlined, along with an assessment as to whether its conduct was inconsistent with principles of commercial morality or the public interest.
These factors are not intended to be exhaustive, and the individual circumstances of the company should be considered and put forward by an applicant. Amongst the factors above, the main consideration for the court remains the solvency of the company.
The circumstances of Company X
Having regard to the circumstances of Company X and the options noted above, the directors elected to proceed with an application for the termination of the liquidation. This application was made on the basis that the company maintained sufficient assets to discharge its liabilities and the order for winding up the company should not have been made.
Whilst this matter is ongoing, a successful outcome here would see the creditors of Company X paid in full, the liquidation terminated, and control of the company returned to its directors.
Key takeaways
The above options serve to be alternatives to what is otherwise considered to be the end of the road for the company and its business. For accountants and lawyer, understanding these options are vital in understanding the liquidation process and advising clients who may think they have arrived at a dead end.
If you have questions about liquidation and your options, don’t hesitate to get in touch with any of our expert staff members.
¹ Corporations Act 2001 (Cth) s 482(1)
