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External Administration (Part B):

Class 12

Liquidation/Winding Up

External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1

TABL 2741 (Anil Hargovan) Liquidation

External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1
External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1
External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1
External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1
External Administration (Part B): Class 12 Liquidation/Winding Up TABL 2741 (Anil Hargovan) Liquidation 1



• Process by which a company’s assets are

distributed to creditors and shareholders,

and company’s business (and existence) comes to an end

May be:



See Ch 22 of Australian Corporate Law (Harris, Hargovan & Adams 5th ed, 2016) at pp 640-650

Overview: Part B (liquidation)

On completion of this topic you should be able to:

Understand 4 different types of liquidations namely:

Compulsory (court ordered) winding up:

(1) in insolvency; and

(2) on another ground.

Voluntary winding up:

(3) by members; and (4) by creditors.

Explain legal test for insolvency [s 95A] and case law

Explain effects of liquidation on parties involved.

Describe how liquidators are appointed, their function and nature of their powers and duties.

Explain the law that enable liquidators to improve returns to creditors

[investigation and asset recovery powers]

Compulsory (Court ordered) winding up


Compulsory Winding Up ‘In Insolvency’(s.459A):

– “insolvency” (s.95A)

Who can apply? (s.459P)

Co or a creditor; liquidator; or

(with court consent) ASIC, a director or shareholder

Establishing Insolvency

Statutory demand (s 459E, s459C(2))

Grounds of challenge

There is a genuine dispute: s 459H or

– Contains a major defect; or for ‘some other reason’: s 459J;

21 day time limit to challenge

David Grant v Westpac

TABL 2741 (Anil Hargovan)




A statutory demand provides a 'convenient method of proof' that a co is unable to pay its debts: Clarke & Walker

Pty Ltd v Thew [1967] HCA 28;

Objective of Statutory Demand procedure under Pt 5.4

[Div 2 and 3 of the CA] is that:

“a creditor should have a quick and efficient means of

requiring a debtor who disputes the debt to “put up or

shut up”, - Mangraviti Pty Ltd Joe v Lumley Finance Ltd [2010] NSWSC 61 (at [15]).

TABL 2741 (Anil Hargovan) Liquidation


Statutory demand relevance of insolvency presumption

Presumption of insolvency under s 459C(2)(a)

High Court noted in ASIC v Lanepoint Enterprises Pty

Ltd (recs and mgrs apptd) [2011] HCA 18 at [28]:


statutory presumption of insolvency applies [unless the


a demand has not been complied with, the

demand is set aside in proceedings brought for that

purpose prior to the hearing of the application for an order to wind up [under s 459S].

[Unless the demand is rendered ineffective, by an order setting it aside,] the company is required to prove to the contrary of the presumption.

Statutory Demands - Overview

Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys (No 2) [2012] FCA 977

Once SD served under s 459E, co is on path to being wound up, unless it successfully applies under s 459G to set aside statutory demand.

If co fails to do so, or it is unsuccessful

, number of dire consequences


– … if an application is made to wind up the co [under s 459P] , the Court must presume that it is insolvent: [s 459C(2)(a)]

Once SD served, there is a very short time period during which co can apply

[to] set aside that SD generally 21 days after SD is served: [s 459F ].

All of this means that the co

is under time constraints and

has to defend its future existence as a co.

it essentially

Insolvency: Statutory Demand

Most common ground for winding up

Means that co cannot pay its debts as they fall due

Creditor usually issues a statutory demand when minimum

debt of $ 2 , 000 is owed and gives debtor company 21 days to

pay, otherwise debtor co is warned of the consequences of non - compliance (ie . appointment of a liquidator by the court) :

s 459H

Debtor co can challenge the statutory demand within this period (time limit strictly applied by courts) on the basis of:

Genuine dispute or offsetting claim (s 459 H)

Defect (causing substantial injustice if demand is not set aside : s 459 G)

Some other reason : s 459 J

Section 459H: Genuine Dispute

John Holland Construction (1994) 14 ACSR 250

• ‘ a “genuine” dispute requires that:

dispute be bona fide and truly exist in fact;

grounds for alleging

dispute must be real

and not

spurious, hypothetical, illusory or misconceived.Spencer


Onus on debtor to prove factual basis of genuine dispute:

Copies of correspondence helpful

Note: Challenging judgment debt, tax assessment is not a genuine dispute (may seek stay of order)

Not Court’s role to conduct an in-depth examination or to determine merits of the alleged dispute- not required to judge merits of dispute.

Offsetting amount

Counterclaim, set off or cross demand

Note: Part 5.4 does not, however, enable a statutory

demand to be set aside simply on the basis that there is

an off-setting claim or a genuine dispute as to the amount of the debt. Operates to reduce the demand by offsetting amount

If remaining amount is less than $2k then demand is set aside: s 459H(3)

If more than $2k, then demand operates from date of

court order: s 459H

Section 459 J (1) defect:

Section 9 definition of defect - in relation to a statutory demand includes:

(a) an irregularity; and

(b) a misstatement of an amount or total; and


a misdescription of a debt or other matter; and


a misdescription of a personal entity.

Note s 459 J(1)(a): defect must cause

substantial injustice

“Some other reason”: s 459J

Court has wide unfettered discretion

Problems with service, affidavit, abuse of process or any reason not related to demand notice itself Examples

Substantial non-compliance with court rules Incomplete affidavit Substantial overstatement to intimidate debtor Unenforceable Penalty clause (vs genuine interest clause); for eg interest charge of 25% compounding daily’

Note: Solvency is not ‘some other reason’

TABL 2741 (Anil Hargovan)



Abuse of statutory demand


For eg, Rohanna Pty Ltd v Nu-Steel Homes

Adelaide Pty Ltd [2013] WASC 109

Indemnity costs







criminal charges against defendant[extortion?]

Judgment referred to relevant authorities

regulating legal profession to take such action

as they deem appropriate in relation to the defendant’s lawyer

Compulsory (Court ordered) winding up (cont.)


Compulsory Winding Up “on other grounds” – s. 461

ss(e),(f), (g) & (k) (see Week 10 lecture)

ss(a) special resolution of members

ss(c) no business for 1 year

ss(d) no members

ss(h) by ASIC

ss(j) by APRA

Who can make the application? s.462

Storm Financial Case

Court ordered Storm Financial to be wound up under s 461(K) on ground of public interest:

The actions of the directors [of Storm], the

making of unsecured loans, the [voidable

transactions] and the $2 million dividend are all

each examples of subjects worthy of inquiry [by a




overwhelming public


interest in the inquiryASIC has already received

numerous investor complaints [this] is another

factor [pointing to a need for a winding up now].

In a case like this [the public interest] is much wider

than the interests of the creditors

Compulsory (Court ordered) winding up (cont.)

Court appoints a Liquidator (s.472(1))

Can appoint a Provisional Liquidator

between filing of application and order for winding up

Role of a Provisional Liquidator is to

maintain the status quo and preserve the

company’s assets.

Effect of Compulsory (Court ordered) winding up

1. On the company

Company continues as a legal entity until deregistration

All of its property comes under the Liquidator’s

control (s.474)

Cannot carry on business except for the purpose of winding up

All company documents must bear the words “in liquidation” (s.541)

Liquidator managers the company (s.471A)

Shareholders cannot transfer their shares (s.468(1))

Effect of Compulsory (Court ordered) winding up (cont.)


On directors and officers

Powers suspended (s.471A(1))

Report as to affairs (s.475)


Unsecured Creditors

All legal & enforcement proceedings cannot be started or continued (s.471B)


Secured Creditors

Right to enforce its security is not affected





Publication of winding up notice is notice of


Liquidation vs Receivership

Secured Creditor can appoint a Receiver over

assets even if a company is in liquidation.

If a company is in Receivership a Liquidator

can still be appointed.

If there is both a Receiver and a Liquidator:

Receiver is responsible for the interests of the secured creditor.

Liquidator is responsible for the interests of

the other creditors.

Voluntary Winding Up

1.Members’ voluntary winding up

Directors issue written declaration of

solvency: s 494

Members in general meeting pass a special

resolution: s 491

Members in general meeting appoint a liquidator: s 495(1)

Voluntary Winding Up (cont)

2. Creditors’ voluntary winding up

• Similar to members’ except that co is


Arises either when:

Meeting of creditors under s.497 and meeting of

members s.491;or

the creditors of a co under admin (or subject to a DCA) vote to wind up a co (see s.446A);or

Directors have failed to make a solvency the declaration required for a members voluntary winding up.

Liquidator’s functions


open a bank account;


take possession of co’s assets;


‘realise’ co’s assets;


determine what debts are payable by co and what valid claims exist against co;

Each creditor must lodge a proof of debt;

Must be in the prescribed form (see Form 535);

Liquidator accepts or rejects it.

Liquidator’s functions

5. distribute proceeds of realised assets (statutory

order of priority: s 556)


Secured creditors


Expenses of winding up/VA


Unpaid wages then super and other employee entitlements


Unsecured creditors

In equal shares (s 555)


Shareholders (subject to surplus, if any)

6. bring about deregistration of co

Liquidator’s Duties and Powers

Examiner powers

Powers to recover property (voidable transactions)

Liquidator’s duties include:

• Impartial investigation of co’s affairs;

• Collecting co’s assets;

Keep proper books/records

Lodge variety of notices/reports with


Any breaches of the CA

– 6 monthly reports on co’s financial position

Owes fiduciary duties to co

• Owes ‘officers’ duties to co (ss180-184)

Liquidator’s powers include:

• Sell co’s property;

• Carry on co’s business – but only to extent necessary to

wind up;

To make compromises/arrangements with creditors

• To bring/defend legal action in co’s name;

To make calls on contributories

Apply to the Court for directions (s.511 & s.479(3))

To initiate proceedings to:

examine officers (mandatory: s 596A);

examine other persons (discretionary)

produce books

Liquidators power to conduct


Section 596A

Power to examine: s 596A

Enable liquidator to be better informed about co’s “examinable affairs” (see s 9 definition);

• Used by “eligible applicant” (see s 9 definition);

Serves 2 important public purposes

(1) protect creditor interests through information gathering (facilitate asset recovery); and

(2) enable gathering of evidence to bring and

support criminal charges in connection with co’s affairs: Hamilton v Oades (1989) 166 CLR 486

Liquidators power of recovery

Sections 588FA-FE (voidable


6 mths of


2 yrs of RBD +



4 yrs of RBD and related party

10 yrs of RBD + intention to delay creditors

related party 10 yrs of RBD + intention to delay creditors Unfair Preference (s.588FA) Insolvent Transaction
related party 10 yrs of RBD + intention to delay creditors Unfair Preference (s.588FA) Insolvent Transaction




intention to delay creditors Unfair Preference (s.588FA) Insolvent Transaction (s.588FC) Uncommercial Transaction
intention to delay creditors Unfair Preference (s.588FA) Insolvent Transaction (s.588FC) Uncommercial Transaction
intention to delay creditors Unfair Preference (s.588FA) Insolvent Transaction (s.588FC) Uncommercial Transaction

Insolvent Transaction


Preference (s.588FA) Insolvent Transaction (s.588FC) Uncommercial Transaction (s.588FBA) Unfair Loan
Preference (s.588FA) Insolvent Transaction (s.588FC) Uncommercial Transaction (s.588FBA) Unfair Loan




(s.588FC) Uncommercial Transaction (s.588FBA) Unfair Loan (s.588FD) TABL 2741 (Anil Hargovan)

Unfair Loan


(s.588FC) Uncommercial Transaction (s.588FBA) Unfair Loan (s.588FD) TABL 2741 (Anil Hargovan) Liquidation 30

TABL 2741 (Anil Hargovan) Liquidation


Policy considerations

Rubin v Eurofinance SA [2013] BCC 1 Supreme Court in UK described the policy underlying avoidance provisions as being:

to protect the general body of creditors against a diminution of the assets by a transaction which confers

an unfair or improper advantage on the other party, and it is therefore an essential aspect of the process of liquidation that antecedent transactions whose

consequences have been detrimental to the collective

interest of the creditors should be amenable to adjustment or avoidance

Liquidator’s powers of recovery

Aim is to ‘claw back’ money for creditors

Recovery from directors

for insolvent trading

under s 588G ( see Week 4 lecture material)

Apply for court orders in relation to voidable

transactions (can try to seek to ‘undo’ certain

transactions in the period leading to winding up)


Done with a view to increase the size of the pool of funds available for payment to creditors

How does liquidator prove


Section 95A;[ plus operation of

presumptions in ss 459C and 588E]

Section 95A

“The law recognises that there is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading entity which is in


“There is a difference between temporary illiquidity and an endemic shortage of

working capital

The first is an embarrassment, the second is

a disaster”

Hall v Poolman [2007] NSWSC 1330

Assessing if co is insolvent

Legal test for solvency is found under s 95A

s95A (unable to pay debts as and when they become due and payable)

OVERVIEW: Indicators of insolvency [based on judicial interpretation of s 95A which favours a cash flow test] includes:

Clear focus on practical capacity to pay

Asset sales [can the asset be sold within a reasonable time, based on realistic commercial assessment?]

Borrowed funds [has the co recourse to credit facilities and ability to repay, based on realistic commercial assessment ?]

Debts payable in the future also included

But note CA also proves for deemed insolvency in certain situations (also known as presumption of insolvency)

s 459C [failure to comply with statutory demand],

s 588E [failure to keep proper books/records in context of insolvent trading]

Section 95A

Judicial approach - Southern Cross Interiors Pty Ltd (in liq) v DCT; Lewis v Doran [2005] NSWCA


Case law shows that whether the Co is able to pay its debts as and when they fall due and payable is

a question of fact

to be determined objectively and without hindsight in all the circumstances,

including the nature of its assets and business, and

the court will have regard to commercial realities.

TABL 2741 (Anil Hargovan)




Judicial indicators in ASIC v Plymin [2003] VSC 123

consistently relied upon in litigation

Continuing losses

Overdue taxes

Inability to borrow further funds or to raise further capital

Bank requests to reduce overdraft

Changing supply terms to COD, or otherwise demanding special payments before resuming supply

Failure to pay within trading terms

Post dated or rounded sum cheques

Dishonoured cheques

Special arrangements with selected creditors

Enforcement action taken by creditors

Inability to produce timely and accurate financial information

Liquidity ratios below 1

Deregistration and


Section 601

Section 601AA: Deregistration

Application to deregister a co may be lodged with ASIC by a co, a director or member, or liquidator. A person may apply only if:

all co members agree to the deregistration;

co is not carrying on business;

co's assets are worth less than $1,000;

co has paid all fees and penalties payable under the Corporations Act;

co has no outstanding liabilities; and

co is not a party to any legal proceedings.

If ASIC decides to deregister co and is unaware of any failure to comply with

above requirements, ASIC must publish notice of the proposed deregistration.

2 months thereafter, ASIC may deregister the company.

Note: Under s 601AD, a company ceases to exist on deregistration.

Effects of deregistration

Co ceases to exist;

If co still has any property, it vests in ASIC;

Directors must keep co’s books for 3 years after

deregistration: s 601D

Note: Co can be Reinstated by the court in limited circumstances: s 601AH (for eg, if deregistered in error; or upon application by an aggrieved person). If so, property is returned to co and directors are reinstated [usually for limited time and purpose].

TABL 2741 (Anil Hargovan) Liquidation


Factors influencing choices

Co in financial difficulty has 4 choices; election will depend on specific fact situations and on the interests of different creditor’s (secured; unsecured trade creditors and employees):

Creditors Scheme of arrangement

Voluntary Administration


Winding Up (or liquidation)

TABL 3741 Insolvency Law

Elective (Semester 2, 2018) 6 units of credit.

Summary of Course

Purpose is to examine the concept of insolvency, the aims of insolvency law and to study the law and practice of insolvency.

Focus is on the main principles of insolvency law, both personal and

corporate insolvency.

Emphasis will be given to the areas dealing with the process of insolvency, its consequences and the legal alternatives to personal insolvency (bankruptcy) and corporate insolvency (liquidation). Course will also focus both on insolvency prevention and rehabilitation. Role of the regulatory agencies and the professionals involved in the administration of insolvency law (trustee, administrators, receivers and liquidators), together with their legal duties and responsibilities will be examined.

Lecture material will be grounded in contemporary commercial and legal developments to illustrate practical relevance of topics studied.