Insolvency & Liquidation
6. Court-Ordered Liquidation
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Last updated: 11 Aug 2015
- Most commonly insolvent companies are wound up by order of the court.
- The Federal Court of Australia and the Supreme Courts in each state and territory have jurisdiction to make a winding up order against a company where:
- the company is insolvent; or
- it is ’just and equitable’ to do so.
- Various entities are entitled to apply to the court for a winding up order. This entitlement to apply to the court is known as ‘standing.’ The company itself has standing however the most common applicant to apply to the courts for a winding up order is a creditor.
- Some entities are entitled to apply but only with court permission. This permission is known as ‘leave’. Entities that can apply for court leave include:
- creditors that are owed only contingent or prospective debts;
- contributories;
- directors; and
- ASIC.
- A creditor who makes a winding up application must comply with various rules and procedures. For example:
- the creditor must be owed at least $2,000 by the company; and
- the debt must be either:
- supported by a court judgment; or
- verified by affidavit.
- Two questions tend to arise in such applications namely whether the applicant has:
- standing to make the winding up application; and
- proven that the company is insolvent.
- The meaning of insolvency is determined by legislation and case law.
- Essentially a company is insolvent if it is unable to pay its debts as and when they become due and payable. This is known as the ‘cash flow test’ of insolvency.
- While the test sounds simple enough in reality the question of insolvency can be difficult to answer.
- As a result the legislation facilitates proof of insolvency by creating presumptions of insolvency. The most common is the presumption invoked if a company fails to comply with a ‘statutory demand’ for payment. A statutory demand is a demand for payment made under legislation.
- Other circumstances in which the company will be presumed to be insolvent include:
- where execution or other process on a judgment awarded to a creditor is returned unsatisfied either wholly or partially; and
- where a receiver has been appointed to company property under a floating charge.
- In the absence of a presumption the creditor themselves must persuade the court of the company’s insolvency.
- If the issue escalates to this level the services of a lawyer will certainly be required. LegalEagle’s™ free directory profiles all lawyers in Australia. You can use it to Find a Lawyer near you.
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