What is a winding up order?
A winding up order is a directive issued by a court formally placing a company into liquidation.
Creditors will usually obtain a judgment before issuing a Creditor’s Statutory Demand, a formal request for repayment of a debt within a 21-day period. If the defendant company then fails to respond within the period, an application can be made to the court for a winding up order.
What happens when the company doesn’t comply?
If the debtor ignores the Statutory Demand the creditor will apply to the court for winding up. The failure of the debtor to comply with the Statutory Demand gives rise to a presumption of insolvency.
A court will only grant an order where the debtor company cannot (and will likely never be able to) pay its debts. This presumption of insolvency can only be rebutted if there is ‘evidence to suggest otherwise’.
If the winding up order is granted, the court will then appoint a liquidator.
What happens after a liquidator is appointed?
Creditors are paid in accordance with the priorities regime as outlined in the Corporations Act (2001) Cth. It is important to remember that any unsecured claim will rank behind those of secured creditors. The petitioning creditor does not receive any additional priority (except for the application costs).
When should a creditor take action?
If a company is experiencing financial difficulty, the situation will usually only deteriorate. The debt will increase, and the company assets will diminish.
Early, pragmatic action is key for maximising return to creditors.
Early intervention can also protect directors from insolvent trading charges, which carry significant civil and criminal penalties.
