Company liquidation

If you’re considering applying to wind up a company, first you must establish that it’s insolvent. You may decide to pursue winding up after the company goes into voluntary administration. If there’s no way for the Administrator to return the company to solvency, the creditors may vote to liquidate. Or, even if the company isn’t in administration, the shareholders may vote to liquidate. 

Directors or shareholders may also take legal action to wind up the company by applying to a court for orders to commence the process and appoint a Liquidator. This is known as a court-ordered liquidation. 

If you’re a creditor, you can take legal action against a company with a statutory demand. If the demand isn’t satisfied, you can apply to a court to wind up the company for non-payment of its debts. 

A statutory demand is a formal legal notice requiring the company to pay its debt to the creditor within 21 days. If the company fails to do this, it’s presumed insolvent, and the creditor can start the legal process with a winding up action. 

A statutory demand is serious because of the presumption of insolvency. The directors risk significant fines and criminal charges if the company trades while insolvent. They may also be barred from holding company director positions in the future. 

If you’re served with a statutory demand, you may wish to challenge it in some circumstances. There are specific reasons why a court will consider setting aside a demand, including:

• You dispute whether the debt exists
• You dispute the amount of the debt
• The debt is less than the statutory minimum
• It would cause you significant injustice  
• You have a claim against the person or company that has served the demand on you

You may also challenge the demand if it doesn’t meet legal requirements for its form and content. The demand must:

• Correctly use key company information
• Give details of the debts
• Clearly identify how much money is demanded
• Identify the creditor  

If you wish to dispute the demand, you must apply to a court to set it aside. You’ll need to give proof of your reasons, such as an affidavit. You will also need to provide any relevant supporting documents. 

You must act before the demand’s 21-day deadline. Once this deadline passes, your company may be presumed insolvent and a court can no longer hear an application to set aside the demand.  

Because of the time frame and the potentially severe consequences, we recommend you seek our urgent legal advice if you’re served with a statutory demand.

The company is presumed insolvent after the 21-day period has passed without the demand being settled or challenged. At that point, the creditor has three months to apply to a court to wind up the company. The insolvency presumption lasts for this three-month period. 

There’s also a six-month period for the matter to be determined. This period commences with the start of the winding up proceedings. A creditor can apply to a court to extend this time, but must show good reasons why. 

An application for substitution allows a new party to be included in a legal action that someone else started. A creditor substitution may happen when the original creditor assigns the debt to the new creditor after starting the proceedings. 

In a winding up, if the debtor company pays its debt to the creditor who started the legal action (the applicant), the applicant may ask a court’s permission to withdraw from the action. A court can allow this and substitute a new creditor as the applicant. Then, the legal action can continue.  

You can apply to a court for creditor substitution as part of the main winding up proceedings (before any final orders). This is called an interlocutory application. Usually, you would need an affidavit supporting your application and any relevant documents to help the court decide.

We recommend that you seek our legal advice before applying for a creditor substitution order. 

or information about Deeds of Company Arrangement (DOCAs), please see our Voluntary Administration page. 

An insolvent trading accusation is serious because the penalties are severe. 

An accusation can be formal, for example, as the basis for a creditor’s legal action against your company. Or, your company may be presumed insolvent if there’s a statutory demand and the 21-day period has passed without the debt being settled, or the demand being challenged. 

In these situations, you’ll need our urgent legal advice. We will assess your circumstances, advise what evidence we need, and work out whether you can defend the claim. For example, defences may include:

• You had reasonable grounds to believe the company was solvent
• You relied on competent advice
• You took reasonable steps to prevent insolvent trading

The critical first step is to contact us as soon as possible.

If you’re informally accused of insolvent trading (for example, in a telephone conversation with a creditor), make notes about what was said and keep copies of any documents, including emails and text messages. Store them in a safe place. Usually, the accusation arises because the creditor is seeking payment of a debt. Consider whether there is a debt owing and whether your company can pay it. If it can’t, you should seek our urgent legal advice so we can help you assess whether your company is solvent. 

Directors are liable if a company trades while insolvent, and the potential penalties are significant. While there are some defences that the directors may rely on, the legal expectations of directors and their knowledge of the company’s financial activities are high.

Penalties may include:

• Fines against the directors of up to $200,000 each
• Legal action by creditors or the Australian Securities and Investment Commission (ASIC) to recover debts on behalf of the creditors
• Up to five years imprisonment for a director in some cases and additional fines
• Director disqualification from managing a company
• Company fines of up to $1 million per offence

Contact us for advice if you or your company is facing penalties for insolvent trading.

Outstanding employee entitlements are given priority in a liquidation. Employees who are owed unpaid wages and entitlements are considered creditors under company liquidation laws. 

The Australian Government’s Fair Entitlements Guarantee (FEG) scheme is a safety net. It’s considered a last resort for employees who have no other way of recovering money owing to them, for example if liquidation funds won’t cover the debt. 

The FEG may cover:

• Unpaid wages
• Unpaid annual leave
• Unpaid long service leave
• Payment in lieu of notice
• Redundancy pay

Employees must satisfy eligibility requirements. They must also claim within 12 months of the end of employment or from the insolvency date. FEG payment amounts are capped. For example, employees can claim a maximum of 13 weeks’ unpaid wages, up to a maximum dollar value. Employees must claim directly from the Liquidator for any amounts above this threshold.

The FEG doesn’t cover unpaid superannuation guarantee payments. If you wish to claim unpaid superannuation, you must contact the Australian Taxation Office.

Often, employee payments from Liquidator distributions and the FEG will often be less than 100 cents in the dollar.  

If the company is in voluntary administration and there is a DOCA, employee entitlements are often the top priority in the line of creditors. Please see our Voluntary Administration page for more information.