Wind Up Proceedings Pitfalls to Avoid

Wind Up Proceedings Pitfalls to Avoid

If you are a creditor who is owed money by a company, despite the legitimacy of your claim, it is often the recovery process that proves the most costly, complicated and frustrating. Options for recovery can be thwarted by a debtor ignoring demands which leaves the creditor in the unfortunate position of having to expend further costs to chase the debt. After exhausting other options of recovery, a creditor may apply to have the debtor company wound up in liquidation pursuant to the Corporations Act 2001 (Cth) (“the Act”). However, this process is quite complex and requires strict compliance with various legislative instruments and timeframes. It is therefore important to understand these requirements in order to ensure your recovery process is as smooth and stress free as possible.

Consequences of Issuing a Defective Statutory Demand

The most common way a wind-up application is made by a creditor is on the basis that a company failed to comply with a statutory demand.[1] A statutory demand is a technical document that requires strict adherence to the legislation and procedural conditions.[2] For example, the demand must be in the prescribed form,[3] be signed by or on behalf of the creditor, and requires payment within 21 days after effective service on the company.[4] A company’s failure to comply with a statutory demand triggers a presumption of insolvency and provides a basis for a creditor to file an application to wind up the debtor company.[5]

Importantly, a statutory demand can be set aside by the company within 21 days after the demand is served.[6] The grounds for setting aside a demand include a genuine dispute with respect to the debt amount and or the company has an offsetting claim.[7] Additionally, a statutory demand can be set aside because of a defect in the demand itself.[8] Although the defect must be significant enough to cause substantial injustice, it is an important point to note for creditors. Examples of substantial injustice warranting the setting aside of a demand include misidentification of parties, a significant error in the debt amount and incorrect interest calculations.[9]

The repercussions of a demand being set aside is that the demand has no effect,[10] and consequently, a creditor cannot rely on a company’s failure to respond to demand as the basis for a wind-up application. Furthermore, the court may order the creditor pay the company’s costs of having to bring the application to set aside the defective demand.[11]

It is therefore crucial to adhere to all requirements to ensure you are not left in the position of having to:

  1. issue a new statutory demand;
  2. wait another 21 days after service for the company to respond; and
  3. make an application to wind up the company based on the presumption of insolvency.

For these reasons, it is prudent to engage independent legal advisers to assist in the preparation and service of statutory demands to ensure all requirements, important timeframes and service obligations are met to ensure time and money is not wasted on avoidable errors. Once legal advice is obtained and a validly executed statutory demand is served on the debtor company, the creditor is able to apply to have the company wound up in liquidation.

The next step – winding up application 

If the statutory demand is not complied with, or a suitable arrangement is entered into by the parties, or it is not set aside, then the debtor company will be presumed to be insolvent.[12] This presumption of insolvency, creates the basis for an application to wind up the company.[13]

An application to wind up a company is made pursuant to section 459P of the Act and is commenced by filing an originating process attaching the statutory demand and supporting affidavit.[14] On face value, the legislative sections pertaining to an application seem complex, and despite a plethora of information sheets online, the process can be quite daunting for creditors.

For example, the Act sets out prescribed forms to be used, ASIC searches to be undertaken, notices to be lodged, methods for service and critical timeframes that must be adhered to.[15] Further, after the application is filed, the creditor must take certain steps before the hearing date, including notifying ASIC of the application by no later than 10:30am on the next business day after filing the application.[16] The creditor must also obtain the consent of a person to act as liquidator if the wind up order is granted.[17]

If the application is not opposed by the company,[18] and the application is granted, the creditor’s obligations do not end here. After the hearing, the creditor must (among other things) lodge a notice with ASIC outlining the order and details of the appointed liquidator and serve a copy of the order on the company (and any other party that the court may direct).[19]

How we can help you

JHK Legal’s insolvency team can assist in pre and post recovery, including advising on prospects of successful recovery, assisting with issuing valid statutory demands and filing an application to wind up the company. If you consider this advice relevant to your circumstances, please call us on 07 3859 4500 to discuss how we may be able to assist.

Written by Sabrina Austin,
Lawyer.

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[1] Corporations Act 2001 (Cth) ss 459C(2)(a), 459F, 459P(1)(b).

[2] Ibid s 459E.

[3] Corporations Regulations 2001 (Cth) sch 2.

[4] Corporations Act 2001 (Cth) ss 109X, 459E(2).

[5] Ibid s 459C(2)(a).

[6] Ibid s 459G(a),(2).

[7] Ibid s 459H.

[8] Ibid s 459J(1)(a).

[9] David Grant & Co v Westpac Banking Corporation (1995) 184 CLR 265 at p 270; Global Cement (North Qld) P/L v Benchmark Debtor Finance Pty Ltd [2007] QSC 143, [16].

[10] Corporations Act 2001 (Cth) s 459K.

[11] Spencer Constructions Pty Ltd v G & Aldridge Pty Ltd 147 ALR 444.

[12] Corporations Act 2001 (Cth) ss 459C(2)(a), 459F, 459P(1)(b).

[13] Ibid.

[14] Corporations Act 2001 (Cth) s 459E(3).

[15] Ibid part 5.4B.

[16] Ibid s 470(1)(a).

[17] Federal Court (Corporations) Rules 2000 (Cth) r 5.5(3).

[18] Corporations Act 2001 (Cth) ss 459S, 465C

[19] Ibid s 465A.

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