Ending a Liquidation

How can a company get out of liquidation?

A liquidation usually ends with the company being deregistered. This occurs once the liquidation process has been finalised. However, there are two other ways that the liquidation may end. One involves a decision of the directors and the liquidator, and the other requires an Order of the Court.

These alternatives are:

1. The liquidator appointing a voluntary administrator to the company which leads to a deed of company arrangement; or
2. The Court ordering the stay or termination of the winding up.

When will a liquidator appoint a voluntary administrator?

Liquidators will only appoint a voluntary administrator to a company when they believe that the creditors will receive a greater return under the proposed deed of company arrangement than under the continuation of the liquidation. The liquidator will have to be convinced that the proposed DOCA is worthwhile and also that it is likely to be accepted. Once the DOCA has been accepted and signed, an application will be made to the Court to end the liquidation.

When will the Court end or stay the liquidation?

An application for an Order staying or terminating the winding up generally occurs shortly after the initial winding up was ordered, but this is not essential. This application may be made at any time, though it becomes less practical the longer that the liquidation continues.

What Court can make a Stay Order?

The power to wind up companies resides with the Federal Court of Australia, the Supreme Courts in each state and the Family Court of Australia. These Courts also have the jurisdiction to order the stay or termination of a winding up.

In most cases the application for a stay will be made in the Court that made the original winding up order. However, it may be made to any of these Courts, and the Courts themselves may transfer these applications between the Courts.

Who can apply for the Orders?

Most people would expect that the directors would apply for these orders, effectively having the company resist the liquidation process. However, the powers of directors are removed once the company is in liquidation. The residual powers of the directors only allow them to resist or appeal against the original winding up application or Order, not make a new application. Section 471A of the Act states:

While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company.

Usually the liquidator will make the application after a deed of company arrangement is signed, and a contributory or member of the company will make the application to stay or terminate the winding up. Section 482 contains the relevant provisions:

482(1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.
(1A) An application may be made by:

(a) in any case - the liquidator, or a creditor or contributory, of the company; or
(b) in the case of a company registered under the Life Insurance Act 1995 - APRA.

Why would the Court make an Order ending the liquidation?

There are a number of reasons why an Order may be made, including:

(a) The winding up application and other material was not served upon the company in the proper manner, or in a way that did not allow the company to properly defend it. That is, the process was defective.
(b) The company has been proven to be solvent to the Court's satisfaction and should not have been wound up.

(c) The liquidator has appointed a voluntary administrator and this has resulted in the company entering into a deed of company arrangement. The liquidation would no longer be necessary.

(d) It is just and equitable to do so for any other reason.

What are the factors considered by the Court?

A 2002 decision by the NSW Supreme Court provides some insight to what the Courts may look for when considering these applications. The Judge in that case listed 8 criteria:

1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay;

2. There must be service of a notice of the application for a stay on all creditors and contributories, and proof of this;

3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged;

4. The attitude of creditors, contributories and the liquidator is a relevant consideration;

5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought;

6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a Report as to Affairs, a full explanation of the reasons and circumstances should be given;

7. The general background and circumstances which led to the winding-up order should be explained;

8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to 'commercial morality' or the 'public interest'.

What happens to the company after the winding up is stayed?

The directors of the company will usually take control of the affairs of the company as soon as the Order granting the stay is given. But that may not be appropriate in some circumstances, particularly if the company was wound up due to disputes between directors and / or shareholders.

If there is any disagreement between the directors and shareholders, the Court may make directions on the matter. The Act provides that:

Where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members of the company to elect directors of the company to take office upon the termination of the winding up.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 25.2.2010