Debt recovery: the steps to winding up a corporation

Similar to bankruptcy proceedings against individuals, winding up proceedings are those brought against debtors that are companies. Winding up proceedings will generally only be brought against a company where the debt is in excess of $10,000, however the statutory minimum debt is only $2,000 (s459E Corporations Act).

The process of corporate insolvency, where a judgment debt exists, is usually by the issue and service of a Statutory Demand for payment. It will set out details of the judgment including the amount, additional interest, the date of the judgment and the jurisdiction. The Statutory Demand is issued pursuant to Section 459E of the Corporations Act 2001 (Cth).

The Statutory Demand requires:

• Payment within 21 days OR
• The filing and service of an application under 459G, 459H of the Corporations Act disputing the debt.

The Statutory Demand is not considered to be a means of enforcing a debt by the Court, however, on many occasions, a company will tend to comply with the requirements of a Statutory Demand as the consequences of not complying is presumed insolvency.

The Statutory Demand must be served on the registered office of the company and the company has 21 days to comply with the Demand by either paying the debt, entering into an arrangement that is satisfactory to the creditor or by making an application to the Court to set aside the Demand on the basis that there is a genuine dispute as to the existence of the debt.

If the debtor fails to comply with the Statutory Demand, the creditor can proceed to issue an Originating Process in the Supreme Court or the Federal Court seeking to wind up the company and appoint a liquidator.

The Originating Process must state that the debtor owes in excess of $2000 and must comply with prescribed Court rules. An affidavit by the creditor must accompany the Originating Process, verifying that the debt remains outstanding. Once filed, a hearing date is allocated.

All the relevant documents – the Originating Process, Affidavit of Service of Statutory Demand, Consent of Liquidator and Affidavit in Support of the Originating Process – must be served on the debtor within seven days of filing in Court.

The hearing must be advertised in a local newspaper.

A liquidator must fill out the Consent To Act As Liquidator paperwork, confirming there is no conflict, and attach a fee schedule.

At the hearing, the creditor must prove certain facts, including that the debt still remains outstanding and the service of the Statutory Demand and Originating Process. If the Court is satisfied with the creditor’s evidence, the Court will make orders for the winding up of the company and appoint a liquidator to manage the affairs of the judgment debtor.

After a winding up order is made, notice must be given to ASIC and a copy of the order lodged with ASIC and the liquidator.

Once an order is made to appoint a liquidator, the creditor has no entitlement to pursue the debt against the debtor. A Proof of Debt is lodged with the liquidator and the creditor will be paid a dividend if the liquidator is able to realise assets for the benefit of all creditors.

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!