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Insolvent trading and Liquidation
Corporate Law (MLL221)
Deakin University
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WINDING UP
Aims
- Ensure creditors (particularly unsecured creditors) share equally and fairly in the distribution of an insolvent company’s insufficient assets
- Hopelessly insolvent companies cease trading for the good of the wider business community
- Investigation into the insolvent company’s affairs prior to the commencement of the winding up for purpose of discovering the reasons for the insolvency
Members voluntary winding up
- S 491(1): A company may be wound up voluntarily if members so resolve by special resolution
- S 491(2): It must lodge a printed copy of the resolution with ASIC within seven days and give notice in the Gazette within twenty-one days
- S 490: It may not resolve to wind up voluntarily if application has been lodged with the court for winding up in insolvency, or if the court has ordered such winding up
- S 494: To proceed as a members’ voluntary winding up, the majority of directors must make a declaration of solvency
- S 494(2): The declaration states that after an inquiry into the affairs of the company and that at a meeting of directors they formed the opinion that the company will be able to pay its debts in full within a period of 12 months after commencement of winding up. It must be accompanied by a statement of company property and amounts expected to be realised, liabilities and estimated expenses of winding up
- S 494(4): Heavy penalties apply for an opinion arrived at without reasonable grounds
- S 494(5): there is a presumption there were no reasonable grounds if the company ultimately fails to discharge its debts. Such resumption may be rebutted by contrary evidence
- S 496(1): The members in general meeting appoint a liquidator. a. If the liquidator comes to believe the company will not be able to pay or provide for its debts in accordance with the declaration of solvency, he or she must i. apply for the company to be wound up in insolvency, ii. appoint an administrator or iii. call a meeting of creditors and put a statement of assets and liabilities before it. In the latter case the liquidator must indicate to the creditors their right to appoint another liquidator. In such a case the winding up continues as a creditors’ voluntary winding up.
- Summary: a.(1) Solvency statement i. S 494 Directors declare in writing they believe company will be able to pay its debts in full within 12 months b.(2) Members resolution i. S 491 Members in general meeting pass a special resolution that company be wound up c. (3) Liquidator i. S 495(1) Members in general meeting appoint liquidator ii. Liquidator’s function:
- Realise assets by selling assets/business
- Distribute proceeds a. Creditors b. Surplus (if any) to members d.(4) Business ceases i. After resolution to wind up: 1. Company stops business (except to extent liquidator believes necessary) 2. Share transfers are void (unless approved by liquidator or court)
e.(5) Directors power cease i. S 495(2) From time of liquidator’s appointment, director’s lose their powers except to extent liquidator otherwise approves f. (6) Deregistration i. When winding up completed, company is normally deregistered
Creditor’s Voluntary Winding Up
- (1) Members resolution a. S 491 Members in general meeting pass special resolution to wind up where directors have not made solvency statement
- (2) OR Creditors vote a. S 446 Creditors of company under administration or subject to deed of company arrangement vote to wind up
- (3) Liquidator a. S 496(5) and 499(1): appointment of liquidator – creditor gets preference of choice
- (4) Business ceases
- (5) Directors power cease
- (6) Deregistration
Compulsory Winding Up in Insolvency
(1) Insolvent company a. S 95A: unable to pay all its debts as and when they are due b. S 459E: Creditor may make statutory demand i. Way to prove insolvency ii. Creditor with debt of over $2000 (statutory minimum, s 9) may serve SD, company is presumed insolvent if not paid in 21 days (S 459F(2)(b). iii. Must be in writing, in the prescribed form, set out the amount owed, signed by the creditor.
(2) Application to court a. Application made to court for company to be wound up in insolvency may be made by: i. Company (members or director’s resolution) ii. Creditor iii. Contributor iv. Director v. Liquidator/Provisional vi. ASIC b. S 461 (Grounds): i. Not commenced w/in 1 year of incorporation ii. No members iii. Oppression of members/ directors act in own interests iv. Just and equitable to do so
(3) Provisional liquidator a. Court may appoint provisional liquidator if necessary to protect company assets before order made
(4) Application determined a. Application must be approved or dismissed within 6 months
(5) Court makes winding up order
(6) Liquidator a. Funtions i. Take possession of company’s assets
An unfair loan is voidable in winding up regardless of the date on which it was made iv. S 588FDA: Unreasonable director-related transactions
Was the transaction entered into within 4 years of winding up?
Transaction involve director or relative?
Would a reasonable person have not entered into it?
If yes then voidable v. and others... e. S 556(1) Priority for Distribution of funds i. Secured creditors ii. Expenses of the winding up (including liquidator’s remuneration) iii. Unpaid wages, unpaid superannuation and employee entitlements iv. Unsecured creditors v. Members (but only if there is a surplus after all creditors have been paid)
(7) Business ceases
(8) Directors power cease
(9) Deregistration
Insolvent trading and Liquidation
Course: Corporate Law (MLL221)
University: Deakin University
