What to do when a winding up application is filed against your company

A winding up application asks the court to appoint a liquidator to your company. The court must determine it within six months of filing unless that period is extended, and the application is advertised on ASIC's insolvency notices at least seven days before the hearing. Paying or settling the debt before the hearing is usually what stops an order.

What the document is asking the court to do

An application to wind up a company in insolvency asks a court to appoint a registered liquidator to it. It is not an order, and it is not liquidation. Until an order is made the company is still the directors' to run, and the proceeding can be dismissed, withdrawn or adjourned. What has arrived is a date.

Most of these follow a statutory demand that was not complied with. That matters because of what the Corporations Act does next: where one of the events in section 459C(2) has happened — and failure to comply with a statutory demand is the common one — the court must presume the company is insolvent, subject to evidence to the contrary. The company does not arrive at the hearing on neutral ground. It arrives having to show solvency, and section 459S closes off any ground it relied on, or could have relied on, when it could have applied to set the demand aside, unless the court grants leave and the ground is material to proving solvency.

A creditor is the usual applicant, but not the only one. The company itself, a director, a contributory, a liquidator already appointed, and ASIC can all apply — some of them only with the court's leave, and the court grants leave only where it is satisfied there is a prima facie case of insolvency.

You are not the first one this week

Most directors who open one of these have never seen one before, and the first call they make is to their bank. The bank almost always says no, and it says no for reasons that have nothing to do with whether the loan would be repaid: the last financials look wrong, a lodgement is late, the credit file has a mark on it, or the file simply cannot be assessed inside the time the court has allowed. Those are the things a bank exists to care about. None of them says anything about whether there is equity in the building.

That gap is where HomeSec has been since 2004. We are not here to judge how the company got here; we have seen enough of these that it does not surprise us. What we look at is whether there is enough unused equity in Australian real property and whether the purpose is a genuine business one. No financial statements, no credit score, no interrogation. From a clean, complete scenario, funds can be available in as little as 24 hours, and interest can be capitalised for up to six months so there is nothing payable while the business gets out of the hole.

Back to the paperwork, because the hearing date does not care where the money comes from.

The dates on the paperwork, and what each one is for

The application has its own timetable, and every step in it is a step the applicant has to prove it took. Knowing what is meant to happen is how you tell whether something has gone wrong with the service or the advertising.

1. 1
   Notice to ASIC, by 10:30am the next business day after filing.Which is why the application can be visible on a public register before you have finished reading it.
2. 2
   Service on the company within 14 days of filing, and not fewer than 5 days before the hearing.Service is at the registered office in the ordinary case. If the address on ASIC's record is not where the company actually collects mail, that is worth fixing today — as it is for every other notice that will follow.
3. 3
   Publication on ASIC's insolvency notices, at least 3 days after the company is served and at least 7 days before the hearing.This is the advertisement. It is public, and it is public on purpose: other creditors are meant to see it and be able to appear. It is also how banks, suppliers and customers find out, which is the practical reason the days between filing and hearing are not quiet ones.
4. 4
   A registered liquidator's written consent to act, filed before the hearing and served on the company at least 1 day before it.The court will not make a winding up order until the applicant has that consent. Its arrival is not a sign the outcome is settled; it is a box the applicant has to tick either way.
5. 5
   Determination within six months of filing, unless the court extends that period.An adjournment is normal and is not a reprieve without a limit. The outer boundary is in section 459R.

What can still stop an order being made

At the hearing the court may adjourn or dismiss the application, or make any other interim order it thinks fit. Four things realistically get you there, and only the first is within the company's own gift.

1. 1
   The debt is paid or settled.This is the usual reason one of these ends without an order. It is not automatic: the applicant has to withdraw or consent to a dismissal, costs are normally part of it, and because the application has been advertised, another creditor who has appeared can press it. Documented, through solicitors, in time to be told to the court.
2. 2
   Solvency is proved.The presumption is rebuttable, but rebutting it means putting real evidence of solvency before the court, and section 459S bars the grounds that belonged to a set-aside application. This is expensive and it is not a document you write yourself.
3. 3
   A voluntary administrator is appointed.Where the company is under administration, the court must adjourn the hearing if it is satisfied that continuing the administration is in the creditors' interests rather than winding the company up. Administration is a serious step with its own consequences and it is taken by somebody registered to take it — but it is the reason a hearing date is not always the end of the road. A small business restructuring practitioner is the other appointment directors in this position ask about; our guide to small business restructuring explains which companies can use it.
4. 4
   Nothing.If the company does not appear and the applicant has proved service, publication and consent, an uncontested application is ordinarily granted. Ignoring this one does not buy time; it spends the only time there was.

What changes on the day an order is made

It is worth knowing precisely, because a great deal of what is written about winding up applications online is wrong on this point. A winding up ordered by the court is taken, in the ordinary case, to have begun on the day the order was made — not the day the application was filed. From that day, dispositions of company property are void unless the court orders otherwise, and attachments and executions put in force are void too.

That does not make the weeks before the order a free-for-all. The Act lets the court, at any time after the application is filed and before an order is made, validate a disposition of property or allow the business to continue on whatever terms it thinks fit — which is a provision that exists because those weeks are exactly when a company is tempted to sell something. Before a significant asset is sold or a large payment is made in this window, that is a question for a solicitor.

Once the order is made, a registered liquidator takes control and the directors' powers cease. The liquidator realises the assets, investigates why the company failed, and distributes what is left. Unsecured creditors can no longer begin or continue proceedings against the company without the court's permission. The directors must hand over the books and records and give the liquidator a report on the company's activities and property. A winding up can be stayed or terminated later on the application of the liquidator, a creditor or a contributory, but that is a separate and much harder application than the hearing you have now.

The first 48 hours

1. 1
   Find the hearing date on the originating process and write it down.Everything else is arranged around that date, including how long there is to raise money.
2. 2
   Engage an insolvency solicitor today, not next week.Appearing, seeking an adjournment, negotiating with the applicant's solicitor and telling the court a debt has been settled are all things somebody has to do properly and on the record. This is the step people delay and it is the one that costs the most.
3. 3
   Get the actual figure the applicant says it is owed, including costs.Not the balance in your accounts. The number that would end the proceeding is the applicant's number, and it is larger than the debt because of what has already been spent filing and advertising.
4. 4
   Find out who else is owed money and whether any of them has appeared.The advertisement is public. Paying the applicant while a second creditor waits behind it solves less than it looks like it solves, and the answer changes what the money needs to cover.
5. 5
   Work out what the property could release, and how fast.If settling the debt is the plan, the only questions left are whether there is equity and whether it can be reached before the hearing. That part we can usually answer the same day, and how funding works in this situation sets out what it looks like.

When borrowing is the answer here, and when it is not

Borrowing to clear the debt behind a winding up application makes sense when the business underneath it works — when the arrears are the residue of a bad year, a client who paid late or a project that ran long, and the trading position since has been sound. It makes sense when there is a real exit: a property to be sold, a bank refinance that will complete once the arrears and the application are gone, a contract that settles. And it makes sense because the alternative is not a worse loan, it is a liquidator.

It does not make sense when the company is losing money every month and this creditor is simply the first one to lose patience. Paying one application does not stop the next, and borrowing against a family home to hold a loss open is how somebody loses the house as well as the company. If there is no equity, this is not our answer, and we will say so on the phone rather than take an application: the conversation to have then is with a registered liquidator about administration, restructuring or a solvent wind-down, and having it a week earlier is worth more than any lender can do.

This page explains what a winding up application is and what the Corporations Act and the court rules require. It is general information, not legal or insolvency advice, and it is no substitute for advice on your own circumstances: speak to a registered liquidator or an insolvency lawyer, and check the court's own published guidance for the court the application was filed in. The sections referred to are in the Corporations Act 2001 (Cth).

Reviewed by Paul Stone, Joint Chief Executive