As a business owner, you hope that your business will never go into liquidation. However, due to circumstances beyond your control, your business may enter liquidation. Liquidation occurs when you bring your company to an end, and your business ceases to trade. You may decide to wind up your business or you may be forced to wind up your business. Businesses often enter into liquidation if they are insolvent; they cannot pay their debts. It is important that you, as a business owner, know the two principal ways your company may be wound up. This article will discuss liquidation in further depth and the two main ways a company can be wound up, voluntary and court-ordered winding-up.
Liquidation Overview
As we have mentioned, you will typically see a company enter liquidation once it is deemed insolvent. Insolvency is simply where a company cannot pay all its debts, when they fall due and payable. During the liquidation process, a third party, the liquidator, will step in and take control of your company. The liquidator will wind up your company’s affairs with the goal of settling your business’s outstanding debts.
Likewise, even if your company is solvent, you may decide to enter a voluntary winding-up process. You may do so as a way of closing down your company. However, the Australian Securities and Investments Commission (ASIC) does allow you to deregister your company; without completing the winding-up process. ASIC affords you this leniency as the eligibility criteria to rely on the voluntary winding-up process is quite strict. As such, your business likely will not meet one or all of the requirements. The requirements your business must meet to rely on the voluntary winding-up process include that your:
- company’s assets are worth less than $1,000; or
- company has no outstanding liabilities, such as unpaid employee entitlements.
Naturally, your company’s assets are likely worth more than $1,000. In addition, your company likely has debts of some amount. Given your business likely does not meet the requirements, you will need to enter a voluntary winding-up process. You will need to do this if you plan to close down your company.
If your company has become insolvent, your creditors will be prioritised when your debts are settled. As such, your shareholders will only be paid once your creditors have been paid. It is worth noting though, that secured creditors will be ahead of unsecured creditors in terms of receiving any payout. It is likely then that not all of your shareholders will be fully paid.
Voluntary Winding-Up
If you have decided to close down your company, this marks the start of the voluntary winding-up process. You then need to complete several steps before the voluntary winding-up process can validly commence.
1. Lodge a Declaration of Solvency
You must lodge a Declaration of Solvency form with ASIC. This form is an integral component of the voluntary winding-up process. By submitting this form to ASIC, you and possibly your fellow company directors, agree your company can pay all its existing debts within 12 months. As such, you are certifying that you are running a solvent company. The 12-month period commences from the date of the winding-up.
It is crucial that you submit the declaration of solvency form. By submitting the form, you ensure that the winding-up of your company is considered voluntary. Naturally, you and, if applicable, your fellow company directors must adhere to a number of strict requirements when submitting the form.
For a declaration of solvency form to be effective, it must:
- be made at a meeting of your company directors;
- you and your directors agree your company will be able to pay all its debts in 12 months;
- you and your directors agree if the declaration is not made at the meeting, it will have no effect; and
- include a statement of affairs of your company, which includes your company’s:
- property and what will be the value of the property if sold;
- total liabilities; and
- the estimated expense of the winding-up process.
It is important that you and your fellow directors make truthful declarations as part of submitting the form. You must not make any false declarations regarding your company’s ability to pay back all its outstanding debts within 12 months. Otherwise, you will be guilty of an offence under the law. You will face fines and other related penalties.
You must also make sure the declaration is made before you notify your shareholders of the special resolution meeting. A special resolution meeting between you and your shareholders is required to properly wind-up your company.
2. Consent of the Liquidator
Before you hold the above-mentioned special resolution meeting, you need to obtain the consent of the liquidator. Simply put, you need to obtain written consent from a liquidator that they agree to run the winding-up. Further, you need to confirm that they will act as liquidators if appointed.
3. Shareholders Must Pass a Special Resolution
Once you have validly lodged the declaration of solvency, your shareholders must pass a special resolution by way of a meeting. This is required to formally wind up your company. For this resolution to be valid, several requirements must be met including:
- all your company shareholders must receive notification of the special resolution meeting, 21 days before the meeting is to be held;
- 75% of your company shareholders must vote in favour of the winding-up; and
- your shareholders must appoint a liquidator so the winding-up process can commence.
The date the resolution is passed by your shareholders is the day the winding-up period is considered to have begun.
4. Publication of the Notice of the Special Resolution
Once your shareholders have passed the special resolution, you must then publish a notice of the resolution to wind up your company on ASIC’s notices website. You must do this by the close of the business day, after the meeting was held.
5. Liquidator Commences the Winding-Up
Once steps one to four have been completed, the liquidator will commence winding-up your company.
Continue reading this article below the formCourt-Ordered winding-up(Creditor Application)
If your company’s creditors are owed money, they can take steps to wind up your company. Your creditors will likely take these steps if you have been issued with a statutory demand by your creditors and you fail to comply with the demand.
For your creditors’ statutory demand to be effective, it must meet numerous strict requirements. If your creditors’ demand does not meet these requirements, the court may set aside the demand. When issuing a demand, your creditors must ensure that:
- the amount you owe them is clearly specified;
- the debt must be over $4,000;
- the demand states you have 21 days, from the date your company was served with the demand, to pay the debt;
- the demand is in writing;
- the demand is in the correct form, form 509H;
- an affected creditor signs the demand, or someone who has the authority to sign for the creditor;
- if the debt you owe is not a judgment debt, then your creditors must attach an affidavit verifying the debt is payable; and
- you are served with the demand in accordance with the relevant service requirements.
Non-Compliance With a Statutory Demand
If you fail to comply with the statutory demand before the 21-day period elapses, your company is automatically presumed to be insolvent. Your creditors may rely on this presumption of insolvency to commence winding-up proceedings.
Court-Ordered Winding-Up Procedure
Once your company is presumed to be insolvent, your creditors have a three-month window. In this three-month window, they may rely upon this presumption of insolvency to make an application to the court to wind up your company. This is known as the Originating Process. For your creditors to correctly initiate the origination process, they need to follow a series of steps.
1. Conduct an ASIC Company Search
Your creditors must undertake an ASIC company search to ensure that there are no other pending winding-up proceedings. This search must be performed no earlier than seven days before your creditors file the winding-up application.
2. Lodge an Application in Compliance With Corporations Form 2
Subsequently, your creditors must lodge an application in accordance with Corporations Form 2. Crucially, your creditors must have attached a copy of the statutory demand. Depending on the circumstances, they also may need to attach a copy of the accompanying affidavit verifying the debt.
3. Submit the Appropriate Affidavit
Your creditors’ application must also include an affidavit stating the following:
- how and when your company was served with the statutory demand;
- your company failed to comply with the statutory demand;
- you still owe your creditors the debt/debts that the statutory demand refers to; and
- your creditors must annex a copy of the ASIC extract.
4. Service of the Originating Process Documents and Supporting Affidavits
Once your creditors’ application has been filed with the courts, your creditors must serve the Originating Process and supporting affidavits. Your creditors must do this within 14 days of the filing and at least five days before the hearing.
5. Lodge Notice With ASIC
Your creditors must lodge the Corporations Regulations Form 519 with ASIC no later than 10:30 am on the next business day after filing the Originating Process.
6. Creditors Must Obtain Liquidator’s Consent
Your creditors must obtain the consent of the liquidator. The liquidator must consent to act in their capacity as liquidator for the winding-up of your company. Once your creditors have obtained consent from the liquidator, they need to file a consent to act as a liquidator form. This form needs to be filed by your creditors before the court hears their application.
7. Court Hearing for Winding-Up Application
Your creditors will usually attend court for the hearing of the winding-up application. Unless the application is opposed, the courts will usually grant a Winding-Up order.
8. Creditors Must Notify the Liquidator
Once your creditors have received the Winding-Up order, they should notify the liquidator. Your creditors should notify the liquidator no later than one day after the order has been made.
9. Creditors Must Notify ASIC
Within two days of the court issuing the Winding-Up order, your creditors should lodge a notice with ASIC. This notice should inform ASIC the court has made a Winding-Up order.
Court’s Powers Regarding Winding-Up Applications
Your creditors, as mentioned, can make an application to the court, asking the court to order your company to be wound up. However, there is no guarantee the court will grant your creditors’ application. The courts have a broad discretion as to whether they will allow a winding-up application to proceed. The court may also:
- dismiss your creditors’ application with or without costs;
- adjourn the hearing conditionally or unconditionally; or
- substitute your creditor(s).
The latter action often occurs when the entity that owes money pays out the initial creditor’s debt. In this instance, the court may decide to switch out, or substitute, the creditor(s) in the matter. The incumbent creditor, who is still owed money by the entity, assumes the role of Applicant for the winding-up matter. The Applicant is the party in a matter, seeking some form of redress. The court may exercise its power in this respect so the matter may continue.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
Liquidation occurs when you bring your company to an end, your company’s assets are sold off and your business ceases to trade. You may wind-up your business either voluntarily or due to a court order sought by your company’s creditors. If you wish to wind-up your company voluntarily, there are numerous steps you need to take. You must also fulfil all requirements for voluntarily winding-up your company. If you owe your company’s creditors significant sums, they may seek a court order, which will compel you to wind up your company. However, they can only seek this order if you do not pay the debts you owe them. Your debts will be outlined in the statutory demand they will have sent you.
If your business has been experiencing financial difficulties we may be able to provide you with legal advice such that your business does not have to go into liquidation so contact our experienced insolvency lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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