Corporate and M&A
Corporate Insolvency / Winding up Companies
Winding up proceedings
If a company is unable to pay its debts a Court has the power to wind up the company and appoint a liquidator who thereafter turns the company's assets into cash and distributes the cash in accordance with the Corporations Act amongst creditors. Like employee's entitlements, the creditor who obtains the appointment of the liquidator and the liquidator take priority in relation to their costs.
Essentially the process of winding up a company is similar to bankruptcy proceedings against individuals. Briefly, the process is as follow:-
- A creditor must be owed a debt of at least $2000. In winding up proceedings a court judgment is not necessary; however a creditor in those circumstances must swear an affidavit confirming there is no genuine dispute in relation to the debt.
- The creditor serves a Creditor's Statutory Demand on the registered office of the debtor company, which requires the debtor company to either pay the debt or take steps to set aside the Creditor's Statutory Demand within the period of 21 days from service. Where the debtor company fails to comply within the 21 day period, the law presumes the debtor company to be insolvent
- Thereafter a creditor may commence winding up proceedings in the Supreme Court by filing an Originating Process. If the Court is satisfied all procedures required have been completed and the company is insolvent a liquidator can be appointed. A creditor may also nominate the liquidator of their choice to be appointed.
There is no filing fee for a Creditor's Statutory Demand and therefore, is often a quick inexpensive step taken by creditors to recover overdue accounts from a company.
Company administrationWhere directors of a company believe the company is insolvent or likely to become insolvent, an Administrator who is a registered liquidator can be appointed.
When an Administrator is appointed, the powers of the directors immediately ceases and the administrator takes complete control of the company's business, property and affairs and can also exercise any power that the company or any of its officers would normally exercise.
A certain period of time is allowed to enable the administrator to investigate the company's affairs and to propose an arrangement to creditors. The objective of the process is to enable the company to continue running to maximise the chances of either the company continuing in existence or if that is not possible, to at least provide a better return for the creditors of the company than would result from the immediate winding up of the company. The Administrator will call a meeting of creditors and make a recommendation to the creditors as to whether the company should execute a Deed of Company Arrangement, be wound up or the administration end. The creditors of the company vote on the resolutions and determine the immediate options and the future of the company. The resolution of the majority binds all creditors.
If the creditors agree to the proposals for a Deed of Company Arrangement, the Deed is executed and provides that the creditors take payments (often made personally by the directors) in full satisfaction of the debts outstanding from the company.
The Administrator continues to control the company until the Deed is executed. Once the Deed is executed, control generally reverts back to the directors although often the Deed limits the powers of the directors and provides that certain activities require the approval of the Administrator, until the provisions of the Deed have been carried out and the external Administration of the company is brought to an end.
Director's duties
Generally although there are some exceptions, Directors owe their duties to the Company and not the shareholders of the company.
Directors have a duty of care to manage and carry out the business of the Company in the best interests of the company.
Directors can rely on a rule commonly known as the "Business Judgment Rule" to establish they have acted with due diligence and proper care. The Directors also have a duty of good faith, a duty commonly referred to as a "fiduciary duty". This duty is imposed by the Corporations Act.
The Corporations Act also imposes a duty on Directors to prevent the company incurring debts whilst the company is insolvent. Under the Corporations Act, if an unsecured creditor suffers a loss because the debt was incurred, the Company's liquidator can take steps to recover from the Director an amount equal to the loss.
Mareva Injunction
Where a creditor has a right to commence proceedings and has evidence to show a debtor is disposing of assets so as to attempt to defeat creditors claims and to prevent recovery of a judgment debt once obtained from the Court, a creditor can make an application to the Court for a "Mareva" injunction to restrain the debtor from dealing with their assets.
For any queries in relation to recovery of outstanding debts from a company or corporation or insolvency, please contact Rockliffs on 02 9299 4912 or email us at lawyers@rockliffs.com.au
Warning
The information above is a basic summary. The legal processes can be very technical. You should seek the assistance from a lawyer with detailed knowledge of the processes.
