ENDING A LIQUIDATION

How Does Liquidation End?

A liquidation ends with a company being deregistered, the liquidator appointing a voluntary administrator to a company which leads to a Deed of Company Arrangement (DOCA), or the court orders the stay or termination of a winding up.

A court can make an order to end a liquidation for many reasons, including:

  • The winding-up application and other supplementary material was not served on the company in the proper way or in a way that did not allow the company to suitably defend it. That is, the process of winding up the company was deficient.
  • The company is solvent and should not have been wound up.
  • The liquidator has appointed a voluntary administrator and this appointment resulted in the company entering into a DOCA. The liquidation is no longer necessary.
  • It is just and equitable to do so for any other reason.

Factors Considered by the Court to End a Liquidation

The courts may look for the following criteria when considering an application to end a liquidation:

  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’.

Stay Orders

The power to wind up companies resides with the Federal Court of Australia, the Supreme Court in each state and the Family Court of Australia. These courts have jurisdiction to order the stay or termination of a winding up. In most cases, a stay application is made in the court that ordered the original winding up. However, a stay application can be made to any of these courts, and they can subsequently transfer applications between the courts.

Under section 471A of the Corporations Act 2001, director’s powers are removed while 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. Usually, the liquidator will make a stay application after a DOCA is signed, or a contributory or company member can make an application to stay or terminate the winding up.

After the winding up is stayed, the company directors usually take control of company affairs as soon as the order is given. Some circumstances make this inappropriate, particularly if the company was wound up due to disputes between directors and shareholders. Where there is some disagreement between the directors and shareholders, the court may make directions on the matter.

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