Winding up or liquidation

What is winding up or liquidation?

Winding up or liquidation is a process where:

  • a corporation can choose to dispose or sell its assets. This can be done through a resolution of its members or by liquidating its assets through a court process; or
  • where 'others' such as a creditor, can go to court to wind up the corporation. 

Sometimes these processes are required based on the solvency of a corporation. Solvent means that a corporation can pay its debts, as and when they fall due. Insolvent means that a corporation cannot pay its debts, as and when they fall due. Each director has an obligation to prevent insolvent trading and to not trade while insolvent. 

In some cases, a liquidator is appointed to the corporation to sell the assets and investigate the affairs of the corporation and its directors. 

Voluntary winding up can only occur where the corporation is solvent. A creditors voluntary winding up can be an option for a corporation that is insolvent. Read more about voluntary winding up.

Who can wind up the corporation?

Voluntary winding upCourt ordered winding up
Where the corporation is solvent, the members can choose to wind up the corporation.

There are a number of parties who can make the application to the court for winding up. These are:

  • the corporation
  • the Registrar
  • a special administrator
  • a member
  • a creditor
  • a director
  • a liquidator
  • a contributory

How is the winding up commenced?

Voluntary winding upCourt ordered winding up
The members pass a resolution seeking to wind up the corporation. 
The directors also need to hold a director’s meeting to pass a resolution declaring that the corporation is solvent and can pay all its debts within 12 months. 
That declaration needs to be in an ASIC Form 520 Declaration of solvency and lodged with the Registrar. 

A court application seeking the winding up needs to be filed with the court.

Section 526-5 of the CATSI Act sets out the grounds on which a party can apply to the court for winding up. These include:

  • the corporation has resolved that it be wound up
  • the corporation is insolvent
  • the corporation has been registered for a year and hasn’t started any operations, or has had its operations suspended for over a year
  • the officers have acted in their own interests or in a way that is unjust or unfair to members
  • there is oppressive or discriminatory or prejudicial conduct or omissions
  • it is in the interests of the public that the corporation is wound up
  • the corporation doesn’t satisfy the requirements for registration

The court will not however make orders for winding up where the corporation is under special administration.
 

What if the corporation is insolvent? 

For a court ordered winding up

Where the corporation is unable to pay its debts due and owing to a creditor, then the creditor can make an application to the court that the corporation be wound-up. 

What does a creditor have to do to start the Court process?

For a court ordered winding up 

Before a creditor can make an application for an order that a corporation be wound-up on the grounds of insolvency, the creditor must first serve the corporation with a statutory demand. 

A statutory demand is a formal demand for payment that should only be made where there is no genuine dispute that the debt is due and owing.
Once a creditor serves a statutory demand a corporation has 21 days to:

  • pay the debt
  • make an application to the Court that the demand be set aside on the basis that there is a dispute; or
  • do nothing.

What if a corporation disputes a statutory demand? 

For a court ordered winding up 

The corporation may apply to set aside the statutory demand if:

  • there is a genuine dispute that the debt is owing
  • there is an offsetting claim
  • there is a defect in the demand which wound cause substantial injustice; or
  • the corporation is able to persuade the Court that there is another reason why the demand should be set aside. 

What happens if the corporation fails to comply with the statutory demand and does not apply to have it set aside? 

For a court ordered winding up 

The corporation will be presumed to be insolvent. The creditor can then make an application to the court for orders that the corporation be wound-up. The application must be made by the creditor within 3 months of the statutory demand expiring.

What happens next? 

Voluntary winding upCourt ordered winding up

A liquidator will be appointed to investigate the affairs of the corporation.
The directors will no longer have an active role in running the corporation. 

Once the liquidator has completed their investigation, then the corporation will be deregistered. 

Unless the corporation opposes the application, it is likely the court will make an order for the corporation to be wound-up if an application is made by:

  • a creditor on the grounds of insolvency; or
  • any of the other entities on the grounds set out in section 526-5 of the CATSI Act.

A liquidator will be appointed to investigate the affairs of the corporation and sell any assets so that money can be paid to any creditors. 

The directors will no longer have an active role in running the corporation. 

Once the liquidator has completed their investigation, then the corporation will be deregistered. 

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