Corporate Insolvency: Setting aside or terminating a winding up order
There is a general presumption that once a Court makes a final order or judgment for a company to be wound up in insolvency, there is no going back. This article addresses how a winding up order can be brought to an end by the Court – either via a court application to have the winding up order set aside or a court application to have the winding up order stayed or terminated. Both directors and members of a company forced into liquidation can make an application to the Court to undo the winding up order and ultimately resume control of the company.
What is a Winding up order?
A winding up order is an order made by the Court usually on the application of a disgruntled creditor for a company to be wound up in insolvency and for a liquidator to be appointed to the company. As soon as a winding up order is made by the Court, the control of the company shifts from the director and members to the newly appointed liquidator.
The majority of winding up orders made by the Court stem from the company failing to comply with a Creditor’s Statutory Demand for Payment of Debt (the statutory demand). A statutory demand is a demand for payment of money served by a creditor on a debtor company under section 459E of the Corporations Act 2001 (Cth) requiring payment within 21 days after been served with the demand. Failing to comply with a statutory demand gives rise to the presumption of insolvency, giving the creditor a basis to apply to the Court requesting that a winding up order be made against the Company. It is common for a solvent company to go into liquidation because it failed to comply with a statutory demand due to the inattention of its directors. In many cases, the director of a company becomes aware of the application by the creditor and/or the winding up order, after the winding up order is made by the Court or after being contacted by the newly appointed liquidator.
If a company is in a situation where a winding up order has been made against it and the company, but for the winding up order, is otherwise solvent, the order can either be set aside or terminated on the application of a director and/or member of the company. It is important to note that in trying to “undo” a winding up order, such application to the Court must be commenced as soon as possible after the winding up order was made.
The two common types of court applications to undo a winding up order
Two common types of court applications that can be made to undo a winding up order are as follows:
- An application seeking to set aside a winding up order; and
- An application seeking a stay (temporary or indefinite) or termination of the winding up order.
Set aside applications
A set aside application is ordinarily made by a director of the company, the subject of the winding up order, after being granted leave by the court to bring an application in the name of the company. The company may apply under Rule 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW) or Rule 39.05(a) of the Federal Court Rules 2011 (Cth) requesting for the Court to exercise its power to set aside or vary a judgment or order after it has been entered if it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing of the application for the judgment or order. It is common for winding up orders to be made in the absence of the company.
Stay or termination applications
A stay or termination application can be made by a liquidator, a creditor or a member of the company at any time after the winding up order is made. The earlier the better. Ordinarily, this type of application is made by a member of the company where the member is seeking resumption of control of the company. The member may apply to the Court for an order pursuant to section 482 of the Corporations Act 2001 (Cth) to obtain a stay or termination of the winding up order.
Depending on the circumstances of the company and also the matters which gave rise to the winding up order will determine which application is made to undo the winding up order. Notwithstanding the ultimate effect of each type of order, being that such order places the company out of liquidation and back in control of the directors/members of the company, it is important to appreciate one distinguishing factor. That is, a set aside application has the effect of removing the mark against the company of the winding up order as if it was never made, whereas the termination application does not dismiss the winding up order but rather a new order is made in addition to the winding up order for the winding up to be terminated at a point in time in the future.
The primary factors that must be established
These types of applications are subject to the Court’s discretion and it is up to the applicant to make a positive case for the winding up order to be set aside or terminated. There are certain factors that a court must be satisfied with in deciding to undo a winding up order, rather than allowing for the liquidation to take its course.
Some of the factors, in no particular order, that a Judge will take into account in hearing these applications, are as follows:
- the solvency of the company and its current trading position;
- the position of the liquidator and his/her opinion about the state of the company;
- the attitude, nature and extent of all existing creditors (and future creditors – if any) and whether all debts have been discharged;
- the applicant’s explanation of the circumstances which led to the winding up order, the non-appearance at the final hearing and/or any instances of non-compliance with their statutory duties; and,
- whether the company’s conduct was in any way contrary to commercial morality or the public interest.
This is not an exhaustive list however, the above principles have been extracted from prior decisions of the courts to give guidance to Judges in exercising their discretion in making the order to either set aside, stay or terminate a winding up order.
The costs associated with such Court applications
A common factor which the Court must be satisfied in these applications is whether the applicant has satisfied the various costs associated with the winding up order. On the assumption that most of the above factors can be satisfied and/or explained, it is likely that such orders to either set aside or terminate a winding up order would generally be made if all of the liquidator’s costs and remuneration properly incurred are paid in full and also all creditors’ debts are paid, where they are outstanding, in particular the petitioning creditor’s debt which gave rise to the winding up order. Paying out all debts of the company at this stage demonstrates to a Court that the company is solvent and should not have been placed into liquidation.
Should you find yourself in a position where a winding up order has been made against one or more of your companies, with or without your knowledge and you would like to understand your rights, please do not hesitate to get in contact with a member of Coleman Greig’s Litigation & Dispute Resolution team who would be more than happy to assist you.