Getting your company out of liquidation

Where a court has ordered the winding-up of a company, a shareholder may be able to have the winding up terminated under section 482 of the Corporations Act 2001.

Relevant factors

The power of the court to terminate a winding-up is discretionary. Relevant factors to be considered, which are not exhaustive, include the following:

• The applicant has the onus of establishing the termination is appropriate, even where the liquidator does not oppose or consents to the application.
• Notice of the application must be served on all shareholders, directors and creditors of the company. Notice must also be given to the liquidator and to ASIC.
• The nature and extent of creditors (both existing and future) must be shown and the material must disclose whether all debts have been or will be paid.

  There is no absolute rule that a winding-up cannot be terminated unless all debts are paid.

  It may be possible to obtain a termination where, for example, related creditors agree to postpone or write off their debts.

  How the funding will be provided to the company will be relevant. For example, will the funding be an injection of shareholder funds or a loan to the company on deferred payment terms?

  The court will be concerned that the interests of future creditors are not put at risk. For example, if the proposal is that the principal shareholder/creditor will pay out all other creditors and seek recovery of the debt by instalments, the court is unlikely to permit the company to start trading again and incur additional debts as recovery by the new creditors may be prejudiced by the existing debt. If the principal shareholder/creditor capitalises its debt, the court may take a different view.

• The position of employees will need to be protected.
• The attitude and interests of the creditors, shareholders, directors and liquidator is a relevant consideration.
• The current trading position and general solvency of the company should be demonstrated.

  The evidence needs to indicate solvency of the company and make out an arguable case of solvency.

  It is not sufficient to rely upon the unsubstantiated assertions of a shareholder or director.

  Sometimes an external accountant may be able to verify financial facts sufficiently to express an opinion that the company is solvent or, at least, to put before the court critically assessed information that assists in coming to such a conclusion.

  The availability of future working capital may need to be addressed.

• The general background and circumstances that led to the winding-up order need to be explained.
• The nature of the business carried on by the company should be detailed. Whether or not the conduct of the company was in any way contrary to ‘commercial morality’ or the ‘public interest’ will be relevant.

  For example, was there any lack of diligence in the company’s previous corporate governance or any failure to lodge statutory returns with ASIC or the ATO?

  The ATO ordinarily requires overdue lodgements to be brought up to date to enable taxation obligations to be assessed and for the taxation obligations to be paid either before the hearing of the application or as a requirement of the order.

  Less weight is likely to be placed on a past history of overdue payments to the ATO and late lodgements where the company’s taxation affairs have been regularised and the evidence makes out an arguable case of solvency.

• The remuneration, costs and expenses of the liquidator will have to be paid, or appropriate arrangements made for payment pending determination of the amounts properly payable to the liquidator.

  If the business continued to trade during the liquidation, issues relevant to the liquidation trade on will need to be addressed.

Failure to appear on winding-up application

It is not uncommon for  a company  to fail to appear on a winding-up application where, for example, the company failed to update the ASIC records for its registered office and the court documents served at the registered office were not brought to the attention of the company.

If a winding up order is made in the absence of the company, the court can terminate the winding up under Rule 39.05(a) of the Federal Court Rules or similar provisions in court rules of the states (where applicable).

Rule 39.05(a)

Under Rule 39.05(a), the court will normally set aside a winding-up order if:

1. the order was made in the absence of the company;
2. the evidence shows a satisfactory explanation for the non-appearance;
3. the application seeking the termination of the winding-up is brought promptly by the company;
4. notice is given to ASIC, the liquidator, the person who sought to have the company wound up and to any creditor who appeared at the hearing;
5. there is consent, or at least no opposition, to the setting aside; and
6. the liquidator shows there is nothing in its investigations to date showing a reason for the company to be stopped from trading.

The position in relation to the creditors (both existing and future) will need to be shown and whether or not all debts have been or will be paid.

In relation to the sixth point, it needs to be established that ‘the evidence indicates solvency of the company’. There must be ‘sufficient indication’ of solvency making out an arguable case of solvency.

The court might order the termination of the winding up under Rule 39.05(a), even if all of the factors in the list are not satisfied or if there are doubts concerning some of the factors.

The factors listed in relation to Rule 39.05(a) are not exhaustive and prudently the relevant factors under section 482 should also be addressed.

Where a company fails to appear on a winding-up application the termination order will usually be sought under Rule 39.05(a) (or an equivalent provision under court rules in the state) and, as a fall-back, under section 482.

Comments

Essentially, the threshold issue for the court is that it must be satisfied that the state of affairs that required that the company be wound up no longer exists. Where the winding-up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent. This is usually the most significant consideration.

It has been said in some cases, an order terminating the winding-up would usually be made if all the creditors are paid out, the liquidator’s costs and expenses are covered, and the members agree.

However, it is necessary to do more than merely establish that the state of affairs that required the company to be wound up no longer exists. The interests of future creditors and ‘commercial morality’ need to be considered as part of the broader considerations relevant to the court’s discretion.

Once satisfied that the state of affairs that originally required the winding-up no longer exists, the court will then consider whether it is reasonable to entrust the affairs of the company to the directors, under whose management it previously failed.

Before bringing an application there needs to be discussions with the liquidator to ascertain the liquidator’s position.

While it is appropriate for a liquidator to bring to the court’s attention matters relevant to the exercise of the court’s discretion, the liquidator has a duty to act impartially. In a recent matter the court said it is undesirable for a liquidator to become an active protagonist on the application.

Where the company is a trustee

Where the company is a trustee of a trust there may be implications for the trust, as it is not uncommon for trust deeds to include provisions for the automatic removal of the trustee upon a winding-up order being made.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.