Winding up application: a complete guide for company directors
Being served with a winding up application is the most serious legal action a creditor can take. If you do not act, the application starts a series of events that will halt your ability to trade, and will ultimately lead to liquidation, which means the end for your business. You must act quickly once the application has been served, as you only have seven days before the company’s financial situation becomes public knowledge. The court sets a hearing date to decide whether a winding up order should be granted, and if so, the liquidation process begins. To understand your options, and hopefully to prevent the liquidation of your company, you should get advice from a registered insolvency practitioner.
Winding up applications on ‘just and equitable grounds’
Presenting a winding up application on ‘just and equitable grounds’ refers to a different type of application than those presented by creditors claiming insolvency. If there is a shareholder dispute – for example, a deadlock on decisions in the boardroom or a shareholder who believes the company is being mismanaged – they may be able to take action using this type of petition.
Why have you received a winding up application?
A Winding up application can be issued to limited company or limited liability partnership so that a creditor can recover a debt. It usually follows a series of unsuccessful attempts to recoup money using the standard methods of collection. Your company may have made genuine efforts to negotiate a repayment plan, but events can take matters out of your hands. Your financial situation may be hindered due to late-paying customers, or you have lost a key contract or client. Some creditors may issue a winding up application simply to make their debtor pay quickly. If you have unexpectedly received an application to wind up your company and suspect that this is the case, we can advise your next steps to deal with the situation.
When a creditor issues a winding up application, part of the legal process involves advertising the application on ASIC’s Insolvency Notices website, which means that your bank, customers and other creditors may become aware of the situation. Once this happens, your chances of avoiding compulsory liquidation are low. The bank, to protect their own interests, will likely freeze your accounts, making trade impossible without specific authorisation to transfer money or assets. We have a strong record of helping businesses like yours to postpone or avoid a winding-up process and subsequent liquidation. We may even be able to get the business operating successfully again. We deal with companies ranging from large international firms to smaller businesses and start-ups.
To find out if we can help you, arrange a free consultation with a Financial Distress Solutions specialist at one of our 7 offices across Australia, or call our director hotline for immediate advice from a registered insolvency practitioner on 1300 747 577. You can access further resources covering winding up applications from our website.
When would a creditor issue winding up applications?
If a creditor has unsuccessfully tried to recover a debt through standard channels, and the debt is not in dispute, they can issue a winding up application to close down your company. They must first prove that the debt exists, usually through a 21-day statutory demand for payment issued before the winding up application. Failing to pay the statutory demand makes the debt exist in law, and allows the creditor to take winding up action. Alternatively, holding an unmet County Court Judgement (CCJ) against your company confirms the legal existence of the debt.
Who might seek to wind up your company?
The ATO, suppliers, and banks commonly use this procedure, with the ATO especially known to issue petitions to recover debt quickly. Your creditor may believe you have deliberately avoided payment, or that you have a poor repayment history and are unlikely to concede to their requests. One of the downsides for creditors is the significant cost of issuing an application, so your creditor will probably regard this as a last resort. Once the application has been served, the court hearing will take place even if you pay the petitioning creditor in full. This means that once they learn of the situation, other creditors can step in and use the petition to recover their own debts. Although the ramifications are serious and you have limited time to act, we are experienced in dealing with this situation and may be able to help you avoid the worst. The issue of a winding up application is a very technical process which must be carried out to the letter; hence there may be grounds to adjourn the application or have it dismissed from court.
What are the ramifications of winding up applications for the company?
A winding up application is a very serious statement of intent by a creditor – they want to shut down your company to recover debts owed. It is the strongest action a creditor can take against your business, and is the usual next step after a statutory demand for payment has been unsuccessful. Often it is no fault of the directors that this situation has occurred; it is simply a series of unfortunate circumstances that have culminated in a crisis. When an application has been issued and served on your company, the court sets a date for the hearing, and a decision is made on whether to grant a winding-up order. If granted, the liquidator will be appointed to forcibly wind up the company and liquidate any assets to pay creditors. They will also investigate the conduct of directors for up to three years before the insolvency date. All company assets will be professionally valued so they can be sold at a liquidation auction, with the proceeds distributed equitably between creditor groups.
Process of issuing a winding up application
There is a specific process a creditor must follow when issuing a winding up application, otherwise the document may be able to be challenged; so it is worth hiring professional assistance to check its validity. Not all courts have the jurisdiction to grant a winding up order, so your creditor must also present their application at the correct court, and pay a considerable amount beforehand. Hence many winding up applications are issued for much larger debts than the minimum amount.
This timeline of events provides an insight into how the system works:
Winding up timeline
1. A creditor makes several unsuccessful attempts to recover their debt, and issues a 21-day statutory demand for payment (unless they already hold a CCJ against you)
2. If not paid, and a repayment plan is not agreed to, the creditor will hire a solicitor to complete the application for winding up your company
3. The application is filed with the Court, and served at your company’s registered address by a process server
4. A date is set for the court hearing, usually 8-10 weeks following the issue of the application
5. You may be able to seek an adjournment of the hearing, however you must attend Court and explain your reasons.
6. If your company does not take action, a winding up order will be granted by the court and the matter is taken out of your hands
7. The liquidator will investigate director conduct relating to company operation, potentially exposing you to personal liability and accusations of misconduct, insolvent trading or other serious allegations
What can you do about a wind up application?
Whether your company survives will depend on your responsiveness to the application. You have four main options for avoiding liquidation and dissolution:
1) Undertake informal negotiations or Voluntary Administration (VA) to formulate a Deed of Company Arrangement.
2) Gain an adjournment or dismissal of the application by the court after proving your company needs more time to repay the creditor, or by disputing the validity or accuracy of the debt. Seek specialist legal advice to explore this. We have a range of expert insolvency lawyers who can assist.
3) Satisfy the creditor’s payment demand. Asset financing may be a last resort fundraising method to consider if the company has valuable assets that could be used as leverage.
If you cannot raise the funds needed to repay the debt or agree on a repayment plan, you will need to involve a registered insolvency practitioner to assist. If you do not respond or file a defence, it is highly likely the court will grant the winding up order.
Option 1: Formal/informal negotiations. Creditors are often positive about the involvement of insolvency professionals in formal and informal negotiations, so it can help to avoid the closure of a business. A voluntary administration (VA) is the common procedure used to avoid liquidation in these circumstances. You will need access to funds to propose a Deed of Company Arrangement and your company must be able to reasonably forecast cash flow and profit levels, and the business must be deemed viable in the long-term despite the seriousness of its current situation.
Option 2: Adjournment for more time to pay. You may be able to persuade the court that your company could pay in full if given more time, whereby the hearing is adjourned. You also may believe there are grounds to argue that the winding up application is not valid, or that details about the debt are inaccurate. If legitimate, you may be able to apply for the application to be dismissed, but this process is complex and would need the guidance of a specialist insolvency lawyer. Once it is served, an affidavit must be filed at court by the process server or creditor to verify that the correct procedure was carried out.
Option 3: Pay the debt in full. If your company is eligible for alternative funding such as invoice factoring or asset-based lending, you could access a cash lump sum that would clear the debt in full. There are certain aspects that need consideration if you pay the debt in full or in installments, however, and these involve protecting both your own and the creditor’s interests.
Dismissing the winding up application from court
By paying the debt in full, or arranging an installment plan, you may feel that the company is safe from further action in relation to the winding up application. However, other creditors could still come forward to ‘take control’ of the application and recover their own debt by winding up your company in a process called called ‘substitution.’ Hence it is vital to have the petition withdrawn from the court record. This protects both you and the petitioner: if another creditor successfully uses the application to wind up the company, any payment would need to be returned in full to the liquidator. It’s never an easy decision for creditors to issue a winding up application. It’s a very serious matter that costs a great deal of money.
More about defending a winding up application in court
Deciding to argue against the winding up application in court can be expensive, but on the flipside it can enable you to keep trading and plan for growth in the long-run. Apart from the legal fees for a solicitor/barrister to represent your company in court, you may need to cover the costs of the petitioning party. The creditor may have paid significant fees just to reach this stage. If you successfully argue against the application, their fees may be added to your original debt amount before the application is dismissed from court.
With the help of an insolvency professional, negotiations for a VA or the sale of some of your business assets could resolve the situation without further issue; your business may even overcome its current financial distress and become profitable again.
If the winding up order is granted
What are the main areas of concern for directors? Even though directors have limited liability, in certain circumstances you and other directors may be held personally liable for some or all of the company’s debts. Company insolvency is one of these instances. You may face severe personal financial penalties if a liquidator decides to pursue you for repayment of monies loaned from the company.
Common areas of concern for directors include:
- Personal guarantees to lenders in relation to company borrowing – these are commonly requested to reduce the lender’s exposure to risk, and are likely to be called in if the company becomes insolvent.
- An overdrawn director’s loan account – the liquidator will require repayment of the ‘loan’ as it is an asset of the company, so that creditors receive maximum returns.
- Director misconduct and insolvent trading – under insolvency law, a company must cease to trade as soon as directors are aware that it is insolvent, or is likely to be insolvent in the near future. You may be held personally liable for any additional debt incurred from the date of insolvency if you do not stop trading. Note: safe harbour provisions may allow some companies to continue trading under certain circumstances.
- Fraudulent activity – eg attempting to defraud company creditors by deliberately avoiding repayment of debt.
The liquidator will also look for ‘antecedent transactions’ which are transactions made when the company was already insolvent, or that later caused the company to enter insolvency. The two most common types of antecedent transaction are:
1) Preferential payments: where a creditor has been placed in a more favourable position following the payment. For example, when a lender is paid ahead of other creditors because the director has provided them with a personal guarantee which they fear will be called upon.
2) Transactions at an undervalue: this is when an asset has been sold at considerably less than its true market value, for instance if ownership of property is gifted to a family member or another director.
Financial Distress Solutions can help if a winding up application has been issued against your company. However you need to act quickly to avoid liquidation. Doing nothing will mean the end of your business. Call our insolvency experts for a free, confidential consultation on 1300 747 577. We have 7 offices around the country, and can help you determine the best course of action.