LIQUIDATION

Voluntary winding up (Pt 5.5):

- Can either be a member’s voluntary winging up (where the company is solvent) and a
creditor voluntary winding up (company is insolvent, coming from a VA or member
approval). Note ASIC also has the power to wind up (Pt 5.4C)
a) Members’ Voluntary Winding Up

- Purpose is to distribute assets to members in accordance with the constitution, and

to properly close the company down.
- Initiated by a special resolution (ss491), where members must approve.
- Directors are required to make a written declaration of solvency (ASIC form 520), to
the effect they have made all enquiries and the company is solvent and can pay its
debts in full within 12 months of the commencement of the winding up: s 494(1).
- Liquidator need not be a registered liquidator, and may in be an officer, employee of
the company, or an accountant or lawyer: s 532(4)

b) Creditors’ Voluntary Winding Up

- When the company is insolvent, and the members resolve, by special resolution that
the company be wound up.
- When voluntary liquidator discovers insolvency (s496)
- When directors refuse to sign solvency declaration
- When transition from voluntary administration (s446B)

COMPULSORY WINDING UP (court-Pt 5.4):

- Court may order that company be wound up in insolvency – s 459A

- Usually initiate by on application by the creditors: CA, s 462(1)(b).
- Other persons may also apply for a winding up order – company itself (s 462(1)(a)),
the members (s 462(1)(c)), the liquidator (s 462(1)(d)), ASIC (s 462(2)(e) – (f)) and
APRA (s 464(2)(h).

When does the liquidation starts?

 Compulsory liquidation (s513A)

Winding up commences when the winding up order was made (s513 A) unless;

- voluntary administration has already commenced, in which case the day on which
the administration began (s 513C);
- another winding up was already in progress, the date of the first winding up;
- where the company is operating under a DOCA, the date of commencement for the
voluntary administration giving rise to the deed;
 - where a provisional liquidator has been appointed after a voluntary administration,
the date of commencement of the voluntary administration.

 Voluntary liquidation (s513B)

Winding up commences when the special resolution for winding up has been passed (512B)
unless; VA has already begun, in which case the day on which the administration began (s
513C).
- If company was in VA (s513C)
a) If co was in liq before VA-then when liq started
b) Otherwise, on the day when the VA began - see s435C
Relation-back day
- Relation-back day is important for a liquidator to go back and void transactions from
a certain date.
- Relation-back day is calculated under new s91- series of rules that determine when
the relation-back date (apply the table)
Who can be a liquidator?
- Compulsory liquidator is an officer of the court- No longer needs to be ‘official
liquidator’
- Liquidator must be registered (ss532(1); IPS Div 20)
- Grounds for disqualification: s532(2)- where consent cannot be given.
- DIRRI: s506A (vol liq)- designed to require someone who is to be appointed as a
liquidator to disclose the circumstances how the liquidation was appointed to them
- The DIRRI must disclose how the appointment came to be, as well as any important
relationships that might impact independence.
Initiation of winding up- Compulsory insolvency
S 459A provides that insolvency is a ground upon which a winding up application can be
made.

Standing
The following people may apply without the leave of the court:
- The Company;
- A creditor of debts that are not contingent or prospective. The creditor may be an
assignee of the debt (DCT v Lansteel Pty Ltd);
- A liquidator or provisional liquidator of the company; or
- A prescribed agency {reg 5.4.01} (s439P).
The following people can apply only with leave of the court:
 - A creditor with only a contingent or prospective debt - where an existing obligation
out of it a liability may arise on the happening of a future event, whether or not the
event is certain (Community Developments v Engwirda Construction)
- A contributory (a member with unpaid calls: s 9);
- A director;
- ASIC;

Creditor is the Usual Applicant Under s 459P

- S 459P: confers standing on creditors to apply to the court for a winding up order

Creditor
- Creditor must be owed a valid debt which is capable of legal enforcement even if
they have yet become due and payable.
- Valid demands can only be issued by creditors who have a debt due and payable (s
459E(1)(a)) and which are immediately recoverable by enforcement action.
- The debt must also be unpaid at the time of lodging the application: Re William
Hockley Ltd [1962].
- Unliquidated claims? Winding up was not intended to be vested in those with merely
arguable claims, such claims may be without foundation, must show a degree of
certainty as to the liability Roy Morgan.
- For secured creditors-query whether enforceable security-see Masri (2004, NSWCA)
Contingent creditors must apply for leave
- Debts cannot be contingent or prospective or unliquidated (must apply for leave)
- A person towards whom, under an existing obligation, the company may or will
become subject to a present liability- liability whether it be an event that must
happen or only an event that may happen”  Community Development
Commencement
Insolvency must be proven, however, creditors can rely upon certain presumptions of
insolvency as a way of avoiding to prove actual insolvency.
The most common basis for an application under s459P is that the subject company has
failed to comply with a Statutory Demand and is presumed to be insolvent (s459C(2)(a)).

Section 459C provides that a company is presumed to be insolvent if:

a) the company failed to comply with a s 459E statutory demand;
b) an execution process issues on a judgment in favour of a creditor was returned wholly
or partly unsatisfied;
c) a receiver was appointed in respect of property of the company pursuant to a
circulating security interest;
d) an order was made for the appointment of a receiver for the purposes of enforcing a
security interest;
e) a person entered into possession or assumed control of property to enforce a security
interest; or
f) a person was appointed to enter into possession or assume control of property of a
company.

Application Must be Made Within 3 Months

Any application for winding up must be filed with the courts within 3 months of the last date
for compliance with the demand or other presumed insolvency scenarios under s 459C(2).

- Court has 6 months to determine (s459R)

- Applicant creditor may be substituted (s 465B)
- Court may appoint provisional liq to protect co (s472)
- Note: company director may appoint VA which stays application (s 440A)
Statutory Demand
A Statutory Demand is a creditor’s formal, written request requiring a company to pay a
debt within 21 days of service.

Under s 459E (2) the demand must satisfy the following requirements:
- It must specify the debt claimed and the nature of the debt
- Debt must be at least $2,000 must be due and payable
- Serve copy on debtor (s 109X)
- The demand must require the company to pay the debt within 21 days of the
demand being served on the company;
- Affidavit in support if not a judgment debt
Demand not Based on a Judgement Debt to be Verified by Affidavit

- A demand need not be based on a money judgment.

- Where there is no judgement, the demand must be accompanied by an affidavit
which verifies that the debt is due and payable: s 459(3)(a).

Improper use
- s9 stat demand is a document that purports to be a stat demand
- Improper use may impose cost penalty on creditor
- Creditor is not entitled to serve a demand at the same time as taking proceedings
against the debtor’s company’s directors in relation to the same alleged debts – it’s
an abuse of process and reason for setting the demand aside: Perlake Pty Ltd v
Finance and Mortgage Corp (NSW) Pty Ltd [2004]
Service of statutory demand
- Service of a demands sets in motion proceedings and the procedure must be strictly
followed.
- Service of the statutory demand is crucial when considering the timeline  Failure
to meet demand occurs 21 days from when it is served (s459F)
 - Demands must be expressed in clear, correct and unambiguous terms by the
creditors: Topfelt Pty Ltd v State Bank of NSW Ltd (1993)

Corporation Act s 109X requires that the demand must be served on the company by:
1. Leaving the demand at the registered office
2. Sending it by post to that office; or
3. Delivering a copy of that document personally to a director of the company who
resides in Australia or an external Territory (s109X(1))
Must give debtor full opportunity to either satisfy the debt (if they are able) or be presumed
insolvent
When served by post, date of service is to be determined by s 29 of the Act Interpretation
Act 1901 (Cth) - Absent the proof of the date of actual receipt, the date is to be taken as
being effected at the time at which the letter would be delivered in an ordinary course of
post.
S 28A of the Act Interpretation Act 1901 regulate for personal service; service by fax or email
is not adequate unless it can be proved that the document came to the person’s attention
before the relevant period for service expired: Austar Finance Group v Campbell [2007].

Setting aside a statutory demand (s459G)

A debtor company has 21 days to either comply with the demand, or apply to the court
under s459G to for an order setting aside the demand: s 459G.
Application must be accompanied by a supporting affidavit, and copies of the both the
application and the affidavit must be served on the person who served the demand
(creditor): s 450G(3)

If an application to set the demand aside pursuant to s459G is made, and the court refused
to extend the time, then the time for compliance ends 7 days after the application is finally
determined by the court: s 459FF(2)(a)(ii).

21 days is a Definite Time Limit – David Grant & Co v Westpac

Failure to file and serve an application and affidavit to set aside an demand within the 21
days of being served, that time cannot be extended by S 1322 of the CA because the time
limit is fully prescribed in s 459G(2): David Grant & Co v Westpac Banking Corp (1995).

Court may not extend the time after is has expired: Aussie Vic Plant Hire Pty Ltd v Esanda
Finance Corporation Ltd [2008].

Grounds for setting aside (459H and 459J):

- If there is a genuine dispute about the existence of the debt: s 459H(1)(a);
- If the company has an offsetting claim: s 459H(1)(b);
 - If there is a defect in the demand and substantial injustice will be caused if the
demand is not set aside: s 459J(1)(a);
- If there is some other reason why the demand should be set aside: s 459J(1)(b).
Failure to set aside creates insolvency presumption and prevents re-argument without leave
(s 459S)
Graywinter principle
- An affidavit that is insufficient cannot be added to at a later date, after the expiry of
the 21 days.
- An applicant may, however, file further affidavits to support the original grounds
outside of 21 days as long as they expend on the grounds in the original affidavit 
the supplementary material must be raised in the supporting affidavit.

The only grounds of opposition which may be relied on in an application to set aside a
statutory demand are those identified in the affidavit supporting that application filed
within the 21 day period Homeward Bound [2012]
Inferences are permitted from the terms of the supporting affidavit- Hopetoun [2011]
NSWSC 1343
Section 459H(1)(b) – Offsetting Claims
- Demand to be set aside on the basis of an offset claim - Operates to reduce the
demand by offsetting amount
- Claim must sound in money, and must be genuinely held
- Not limited by mutual dealings (cf s 553C)
- If remaining amount is less than $2k then demand is set aside
- If more than $2k, then demand operates from date of court order
Section 459H(1)(a) – Genuine Dispute About the Debt

Demand to be set aside due to a genuine dispute about the existence of the debt.
Courts just need to conclude that there is a dispute and it is a genuine dispute: Mibor
Investments Pty Ltd v CBA [1994].
- Connotes a plausible contention requiring investigation’- Eyota Pty Ltd v Hanave Pty
Ltd (1994)
- Should not be used as a convenient way of bringing disputed debts before the court’
- John Holland Construction (1994)
- “Courts will not examine the merits or settle the dispute. It will just determine the
“genuineness” of the claim or dispute as against spurious claims”.

In our view a “genuine” dispute requires that: Spencer Constructions (1997)

- the dispute be bona fide and truly exist in fact;
- the grounds for alleging the existence of a dispute are real and not spurious,
hypothetical, illusory or misconceived.’
The affidavit in support must disclose the facts showing there is a genuine dispute. Mere
assertion is not enough: Graywinter Properties (1996).

The dispute or off-setting claim should have a sufficient objective existence and prima facie
plausibility to distinguish it from a merely spurious claim. Something “between mere
assertion and the proof that would be necessary in a court of law” may suffice.’- TR
Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd [2008]
If a debt is found to be genuinely in dispute to the extent that the amount of the debt not in
dispute falls to less than the statutory minimum of $2000 (ss 459E and 9), then the demand
will be invalid.
Section 459J(1)(a) – “Defect in the Demand (Leading to) Substantial Injustice” or “Some
Other Reason”
Defective demands
Failure to specify the nature of the debt is a defect in demand, but may not cause
substantial injustice as to render the demand invalid (see s 459J(1)(a)).
Failure to specify amount of debt will justify setting the demand aside.

 Substantial injustice
- Insufficient information to allow compliance
- Debt expressed in 2 currencies without method for calculating date of conversion
- Must genuinely be substantial injustice – Spencer Constructions
- Substantial injustice where demand is likely to mislead, confuse, or fail to property
inform the debtor’ – Assaf, Statutory Demands Law and Practice

 No substantial injustice
- Non-compliance with court form
- Minor misdescription or miscalculation
Definition of defect: s 9 defect, in relation to a statutory demand includes:
- (a) an irregularity; and
- (b) a misstatement of an amount or total; and
- (c) a misdescription of a debt or other matter; and
- (d) a misdescription of a personal entity.
Some other reason
- Court has wide unfettered discretion
- Problems with service, affidavit, abuse of process or any reason not related to
demand notice itself
- Relevant time is the date of the application, not necessarily when demand was
served
Sections 459C and 459S
- s459S - disputes about the debt owed by the debtor co must generally be raised at
the first court hearing - not be allowed to be raised at the final hearing (unless
‘material’/pivotal to proving solvency): s 459S(2).
- s459S(2) – viewed as a safety net

- Once the insolvency of the co has been determined (within 6 months of application),
court can appoint an official liquidator
s459S
- ‘it is not necessary to prove at the s 459S(2) stage that the existence or otherwise of
the disputed debt is pivotal, crucial or determinative of solvency. In my opinion to
satisfy the s 459S (2) materiality test it is only necessary to prove that the existence
or otherwise of the debt is relevant to, or has the capacity to have some influence or
effect on the conclusion as to the company’s solvency…the company that is seeking
leave must adduce sufficient evidence concerning solvency to satisfy the Court that
the existence or otherwise of the debt will be material to the conclusion as to the
company’s solvency’
- Soundwave Festival Pty Limited v Altered State [2014]
Effect of setting aside stat demand
If the statutory demand is set aside, no presumption is created under 459C while the order
is in place (s 459K)

Effect of liquidation appointment

Company
- The Liquidator gains control of the company’s property (S.474) and the company
loses beneficial ownership of its property.
- In both voluntary (CA s 493(1)) and compulsory liquidation (s 477(1)(a)) the company
must cease to carry on business  except to the extent the liquidator believes that it
will assist or be necessary for the beneficial disposal of the business.

Company Retains Ownership of its Property

- Liquidator merely becomes the agent of the company, the property does not vest in
the liquidator as the company retains ownership.
- S468(1): any disposition of property of the company made after the commencement
of winding up is void unless the courts decide otherwise  however, disposition by
the liquidator are allows -s 468(2)(a).

Company Litigation
- Creditors’ claims are automatically stayed: s 471B- equivalent for voluntary
liquidation is found in S500(2)
- Stay on creditor claims (s 471B)
o Not secured claims (s 471C)-who may appt receiver
 o Creditors rights change from enforcement to submit POD
- During insolvency, a person cannot begin or proceed with a proceeding in a court
against the company in relation to its property to enforcement proceedings in
relation to such property.
- A creditor can seek leave from the court to commence or continue litigation 
leave allowed where they can demonstrate that there is some good reason why a
departure from the procedure is justified- Ogilvie-Grant v East (1983)

Directors
- Director loses their power to manage the company: Ayerst v C & K (Constructions)
Ltd [1976].
- Liquidator controls company and its property.
- Their powers in both voluntary (s499(4)) and compulsory (s 471A) liquidations are
suspended.
- Directors can’t pursue an appeal against a winding up order or appoint an
administrator, without leave of court: Rock Bottom Fashion Market [1997].

Obligations of Directors and Other Officers

- S530A requires an officer of the company to co-operate with the liquidator.
- The term “officer” is defined and includes the directors, the secretary and other
senior persons in the company: s9.
- S530A(1): Officers are to deliver to the liquidator all books in their possessions,
where those books related to company.
- S530A(2): officers to assist the liquidator, give information concerning the company’s
affairs, business and property, and attend such meetings of the company’s creditors
or members as the liquidator reasonable requires.
- Winding up may lead to a liquidator conducting public examinations of nominated
persons concerning the affairs of the company- 596A.

Officers
- Once an order is made for the winding up of a company, its officers are not
permitted to perform or exercise any functions or power as officers of the company,
except (s 471A(1)) with written approval of the liquidator or approval of the courts.

Report as to Affairs
- Directors must prepare and submit to the liquidator a report as to the affairs of the
company (RATA): s 475(1); ASIC Form 507.
- A director may be required by a liquidator to provide further information by way of a
report (s 475(2)) which is to be given within 14 days of the service of notice for such
a report: s 475(5).
- Failure to comply with any requirements of s 475 without reasonable excuse is an
offence: Jovanovic v ASIC [2001]
Company Books and Records
- S 483(1) courts can require delivery of all of the company’s property, books and
records to the liquidator on the liquidator’s applications

Members
- Members lose any right to control the management of the company’s business.
- Share transfers after commencement of liquidation are void, unless authorised by
the court or liquidator (ss 468A & 493A).
- Any debts owed to members in their capacity as members will be subordinate in
liquidation until creditors have been paid in full: s 563A  members rank below
creditors in the hierarchy of priority payment

Creditors
- No creditor is unduly favoured to the detriment of others.
- S468(4): creditors are prohibited from enforcing their claims through execution
proceedings against a company.

Rights of Creditors
The most significant opportunities and rights are that creditors may:
- Require liquidators to convene a meeting of creditors (ss 478(2) and 506(1)(b)) and
be given notice of any such meetings (Corporations Regulations reg 5.6.12) and
attend and vote (regs 5.6.23 and 5.6.28(1));
- Inspect the books and records of the liquidator (s 531, reg 5.6.01 amd 5.6.02)
- Resolve at meeting to give the liquidator lawful directions (s 479(1)).

Creditor meeting
- In a court liquidation, the liquidator is not required to call a creditors’ meeting unless
a matter requires creditor approval or creditors pass a resolution requiring a
creditors’ meeting to be called, or at least one-tenth in value of all the creditors
request the liquidator in writing to do so.
- The creditor or those representing 25% in value of the creditors can direct the
liquidator to convene a creditors meeting.
- In a creditors’ voluntary liquidation, the liquidator may choose to hold an annual
meeting of the creditors or lodge a report with ASIC on the progress in the
administration.

Secured and other Creditors

- Secured creditors retain the right to their security over the company’s property after
the company is wound up: Corporations Act s 471C.
- If a secured creditor needs to take proceedings in order to realise the security, the
court will usually grant leave to allow those proceedings against the company.
• S 51E of the Corporations Act provides that a secured creditor is a creditor who has a
debt secured by a security interest.
 - ‘security interest’ is defined in s 51A as meaning either a PPSA security interest or a
charge, lien or pledge, include fixed and floating charges, lessors, retention to title.
• ROT: property is in the possession of the lessee but titled is owned by the secured party.
• PPSA requires secured party to perfect its security interest.
o Most common step in doing this is to notify it on the PPS registry.
o Creditors to fail to perfect their security interest prior to liquidation might be
unable to enforce the security interest: s 267 of the PPSA.

Employees
- Publication of a winding up operates as a notice of dismissal to all the employees of
the company: Re General Rolling Stock Co (1866).
- Therefore, employees who are entitled to a period of notice, may claim damages for
a breach of contract and lodge a proof of debt accordingly: Re RS Newman Ltd
(1916).

- However, liquidator may waive this notice of dismissal if the company’s business is
to be run for a short time after the order.
- Liquidator may need to retain some or all employees to run the business after the
order under existing employment contracts: Re Associated Dominions Assurance
Society Ltd (1962).

Contracts
- Appointment of a liquidator does not necessarily constitute grounds for termination
of a continuing contract: Smith v DCT (1996).
- Contracts may continue, depending on the terms- if the contractor chooses to
terminate the contract, relying on the ipso facto clause, whatever business the
company had, may collapse and the liquidator will have to sell off the property and
assets.
- Disclaimer of a contract: A contract cannot be disclaimed without the leave of court
unless it is an unprofitable one or relating to a lease of land: s 568(1A).

Effect of disclaimer
- If it takes effect, the company’s rights, interest, liability and property in or in respect
of the disclaimed property is taken to have terminated.
- No other person’s rights are affected except so far as is necessary in order to release
the company and its property from liability: s 568D(1)

Assets
• Liquidator has the power to get rid of assets under s 568, which is:
o Land burdened with onerous covenants;
o Shares;
o Unsalable or not readily saleable property;
o Property which may give rise to a liability to pay or some other onerous
obligation;
o Property where it is reasonable to expect that they costs incurred in selling it
would be greater that the sale proceeds; or
 o Contract.

Review of liquidator
- The court may review the liquidation process either on its own initiative or by
application of the creditors: s 1618, Div 90-5, 90-100.
- Liquidator can be removed/replaced by creditors by a resolution passed at the
creditor’s meeting: s 1620, Div 90-35).

Preliminary report to ASIC – section 476

- Liquidator is obliged to lodge a preliminary report with ASIC providing details of the
company: s 476. It must specify the amount of capital, assets and liabilities and
reason for company’s failure.
- Report must be made within 2 months of receiving the directors’ report as to the
company’s affairs, the RATA under s 475: s 476.

Further report to ASIC – section 533

A report under s 533(1) must be lodged as soon as practicable, but within 6 months with
ASIC if:
o Offences have been committed;
o Officers or employees, members or contributories, or promoters or managers
are guilty of improper behaviour; or
o The company is unable to pay unsecured creditors more than 50 cents on the
dollar.

Remuneration
- Remuneration of liquidator is determined by agreement with the committee of
inspection, by resolution of creditors or by the court – s 473(3)

Duties of liquidators (s477)

- Carry on the business of the company so far as is necessary for the beneficial
disposal or winding up of that business (s 477(1)(a));
- Bring or defend any legal procceedings in the name and on behalf of the company;
- To do all such other things as are necessary for winding up the affairs of the
company and distributing its property (s 477(2)(m)).
- Apply for court directions to sell assets (IPS (Corps) s 90-15)
- Conduct compulsory examinations under oath (ss596A- mandatory, 596B-
discretionary power)
- Review validity of security (PPSA vesting)
- Put company into voluntary administration (s436B)
- Must have regard to creditors directions (IPS s85-5)
- Certain contracts involving liquidator must be approved (s477(2B))
- To inform the court of any difficulty and seek directions; (Commissioner for
Corporate Affairs v Harvey [1980] ).
- Can seek orders against officers guilty of fraud, negligence, default or breach of duty
- s 598
 Duty of directors to take into account the rights of creditors
- Liquidator has an obligation to act in interests of creditors as a whole: JGM
Nominees Pty Ltd v Tulip Investments Pty Ltd [2010].
- Duty to protect creditors once the company is insolvent- Westpac Banking Corp v
The Bell Group Ltd (No 3) (2012).

Sell assets
- The liquidator is obliged to sell assets and distribute the proceeds of sale to
creditors- s 477(2)(c)
- The liquidator must try to obtain the best price (Re George Bond & Co).

Proper administration / company books

- The liquidator has a duty to maintain a proper record of the winding up.
- This includes keeping proper books and records of meetings (ss 531 & 5O2; reg 5.6.01 &
.02).
- If the liquidator carries on business, it must keep records as appropriate to the business
(Re Timberlands).

Indemnity

- Liquidator acts as agent for the company  Not personally liable, although expenses
will be claimed against the co assets (priority payment under s556(1)(a))

Liquidators as officers
Liquidators are officers of the company under s 9, and are bound by directors’ duties.

Corporations Act
• Section 180: exercise due care and diligence;
• The liquidator must complete the work in a reasonable time (Re Timberlands
• Section 181: good faith
• The liquidator must not place themselves in a position where their duty an
interest conflict (Re Timberlands).
• Section 182: use of position;
• Section 183: use of information.

Duty to act personally

The liquidator must exercise their discretion in exercising their powers (s 479 (4); Re
Timberlands).
The liquidator may appoint an agent (s 477(2)(k)), but must take ultimate responsibility (Re
Timberlands).

Duties of director to their company

- Directors owe duties to their companies as fiduciaries (CAC v Harvey [1980])
Criminal offences
• The Corporations Act has a number of criminal liability provisions for directors.
• The main offence related to liquidation is the directors’ failure to assist the liquidator.