STATUTORY DEMANDS AND LIQUIDATIONS
When a company owes a person or corporation more than $2,000, that company may be forced out of business by an application for a winding-up order. An application for a winding-up order may be initiated in response to a company's failure to comply with a Statutory Demand.
Graham Legal acts for clients who require advice or representation in matters concerning a Statutory Demand. Graham Legal also acts for clients who wish to apply for or defend an application for a winding-up order. The merit of each case has to be considered against its own facts. The costs of the process will vary from case to case.
Clients are invited to make an initial appointment for a face-to-face conference. Clients should bring to the appointment all relevant documents. The first 30 minutes of such an appointment are provided free of charge and without obligation. During this time Phillip will give advice as to the merits of the client's claim and as to the costs the client is likely to incur if instructions to act are received.
The Winding-Up Process
The winding-up process (also known as liquidation), can be a relatively quick and inexpensive way of recovering a debt owed by a company. The process does not, however, always result in recovery of a debt. Insolvent companies should not be trading and a director faces personal liabilities if a company continues to do so.
The cost to a client of Graham Legal serving a Statutory Demand is not substantial, particularly when compared with the cost of litigation. Upon being served with a Statutory Demand, a company that owes money may well prefer to settle the debt rather than face the prospect of being placed in liquidation.
The process may result in recovery of the debt particularly where the company has been stalling payment or where the company is temporarily short of funds.
Consequences of Liquidations
In cases where the company's director(s) believe that paying the debt is the lesser of other evils, a Statutory Demand may result in payment being promptly made. A company director may well prefer to pay an outstanding debt rather to see his or her company go into liquidation.
Even where the company does not have funds readily available for payment of a debt, a director may choose to look to his or her personal resources to pay the debt particularly where the director believes that the company’s liquidity problems are of a short term nature.
Payment of the debt will avoid any one or more of the following consequences
- The Corporations Act provides incentives for directors to take appropriate care. When directors fail to do so, in certain circumstances, the Australian Securities and Investments Commission (ASIC) can seek criminal or civil penalties.
- Section 206F of the Corporations Act gives ASIC the power to disqualify a director from managing a corporation for up to five years.
- ASIC may exercise this power against a person who has been, within the previous 7 years, a director of two or more companies that have been placed into liquidation.
- The power also extends to persons who were former directors of corporations where those corporations were liquidated within 12 months of the director ceasing to hold that position.
- Credit Reporting Agencies
- Keep track of companies that, at any time within the last seven years, are placed in liquidation.
- They also keep track of the names of the directors of liquidated companies.
A person proposing to enter into contractual relations with a corporation may well undertake a personal name search at a Credit Reporting Agency. This will reveal details of any companies that have entered liquidation while a particular person was a director. A director may well prefer not to have his or her personal credit rating tarnished by past dealings.
- A director of a liquidated company may, as a consequence of the liquidation, be forced into personal bankruptcy.
- A director is not necessarily personally liable for the company's debts.
- However, it is fairly common for a director to be forced into bankruptcy, usually as a result of providing personal guarantees to company creditors. Taking action to force a company into liquidation may therefore result in a director becoming bankrupt.
- A person cannot act as a director of any company whilst they are a bankrupt. Bankruptcy normally lasts for three years.
- Under the Corporations Act (Section 206D) ASIC may apply to court for an order to disqualify a person from managing a corporation for up to 20 years if the person has been an officer of two or more companies that have entered liquidation within the previous seven years. A court is required to consider the following matters before determining whether or not it should ban a person from acting for such an extended time, namely:
- whether any of the liquidated companies were related to one another;
- whether the person's conduct in relation to the management of the company was wholly or partly responsible for the corporation failing; and
- whether the disqualification is justified and in the public interest.
- A director who breaches his or her duties or other obligations may be liable to significant consequences including:
- monetary penalties (fines);
- liability to compensate the company or others for loss suffered; and
- liability to account to the company for profits made by the director.
- If a person is convicted of an offence that is a contravention of the Corporations Act and is punishable by imprisonment for a period of greater than 12 months, then the person is automatically disqualified from acting as a director of a company for the same period of time (Section 206B).
The Process to Liquidation
An order placing a company in liquidation requires a court finding that the company is insolvent.
Section 459C(2)(a) of the Corporations Act requires the court to presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made, the company failed to comply with a Statutory Demand.
Providing that the company owes the creditor $2,000 or more, Section 459E of the Corporations Act provides that a creditor may serve a Statutory Demand on a company.
A Statutory Demand must be in writing and must comply with the prescribed form. It must require the company to pay the amount of the debt, or the total of the amounts of the debts, or to secure or compound for that amount or total to the creditor's reasonable satisfaction, within 21 days after the demand is served on the company.
Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that verifies that the debt, or the total of the amounts of the debts, is due and payable by the company.
If a company that has been served with a Statutory Demand fails to comply with it, Section 459F of the Act applies and the company is presumed to be insolvent. There are strict requirements to be observed in relation to service of the Statutory Demand. Once properly served, a creditor may then issue proceedings at court for a winding-up order that will see the company being placed in liquidation.
The Statutory Demand process should not be used when the claim against the company is the subject of a genuine dispute or where the company has a genuine cross-claim against the creditor.
A company that denies the debt and maintains that it can prove its solvency may apply to court for an order setting aside the demand. This would only be worthwhile if the company had good prospects of success in proving both matters. However, a company that successfully applied to have a Statutory Demand set aside would also be likely to obtain an order for costs against the creditor.
After a Winding-Up Order has been made
Winding-up is a process where a liquidator is appointed to take control of the company's outstanding matters. Once all outstanding matters are finalised and the company's assets have been liquidated, it ceases to exist as a company.
The liquidator will investigate the company’s business, property and affairs. This includes determining if any assets exist that are worth recovering for the creditors' benefit. The liquidator will also look to see if a claim exists against a director; including for:
- failing to prevent the company from trading and incurring debt while insolvent, and
- any breaches of director’s duties.
The liquidator will also investigate whether there have been any transfers of assets that can be recovered for the creditors' benefit.
The advantage of the Statutory Demand process is that it does not require a creditor to incur the costs of obtaining a court order for the payment of damages in order to establish that the company is insolvent.
However, a proceeding at court to obtain an order against a company for payment of a specific debt is not a proceeding that will automatically result in the company's liquidation. After the court order has been obtained it is still necessary to serve a Statutory Demand.
The Statutory Demand process creates a presumption of insolvency that is the basis upon which the court can make an order formalising liquidation. This order may be made without having to prove the exact amount of the creditor's monetary loss. For that reason it is a significantly less burdensome and expensive process than running a proceeding at court even if that proceeding is not opposed by the company.