Involuntary winding up is when a company is subject to a compulsory winding up by the court. Creditors typically instigate this process however bodies such as ASIC and APRA can also do so.
The Corporations Act 2001 (Cth) enables creditors to apply to the court for a winding up order in respect of an insolvent company. The company must owe the creditor a debt that must be unpaid at the time of lodging the application for winding up.
The most common method to establish insolvency is when a creditor serves a statutory demand on a company. The demand requires the company to pay the debt within 21 days otherwise, the creditor can apply to the court to wind up the company.
There are some instances when a creditor can challenge a statutory demand, such as where there is a genuine dispute between the parties in respect of the debt owed.
If there are no grounds for challenge and the debt is not paid within 21 days, a creditor can make an application to the court. If the court makes an order to wind up the company, a liquidator will be appointed. The liquidator will then go through the process of winding up the company and distributing the assets to creditors.
The liquidator will distribute funds to unsecured creditors as a dividend after paying the fees and costs of the liquidation and other priority creditors (for example, employees). The order of distribution is generally as follows:
- The liquidators’ fees and other costs and expenses of the liquidation;
- Employee wages and superannuation;
- Employee leave of absence (including annual leave, sick leave and long service leave);
- Employee retrenchment pay; and
- Unsecured creditors.
Each category for distribution must be paid in full before any payments are made to the next. If a category cannot be paid in full, the available funds are paid on a pro rata basis (and the next categories do not receive any funds). Once all proceeds are distributed, the company is deregistered.
A liquidator may need to commence court proceedings to enforce a company’s entitlement to assets. For example, if there has been an uncommercial transaction where the property of the company has been transferred.
Who Can be a Liquidator?
Individuals connected with the company cannot be appointed as liquidators of the company, such as:
- A debtor or creditor of the company (over $5,000); or
- An auditor, officer or employee of the company (unless they have leave of the court).
The courts are particularly concerned with the appearance of independence. Notwithstanding the restriction of appointment, certain connections do not disqualify the appointment of a liquidator to a voluntary winding up if the creditors resolve that a liquidator should not be disqualified.
Liquidators have a duty to all creditors to act honestly, avoid any conflict of interest and to act impartially. They have a high standard to exercise a reasonable duty of care and skill in performing their role. You can read more about liquidators in our article, “What is a Liquidator?”
If you require advice in respect of liquidation of a company, get in touch with our insolvency lawyers on 1300 544 755.