Winding Up Procedures
By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers
A winding up application is generally used as an enforcement procedure after judgement has been obtained at court or VCAT.
Once you file a wind up application, and you force liquidation, it is likely the entire “empire” of the debtor will come crashing down.
A “wind up” will crystallise a termination (in most standard building contracts), and the creditor is then plunged into a throng of other creditors.
Once Liquidation occurs, there may be no funds to satisfy the debt, or if there is the creditor will need to serve a proof of debt on the Liquidator and await a dividend pay out (if any), in which case the creditors may obtain a repayment of a portion of their total debt.
Preferred option for debt recovery
Manage your debtors to ensure they do not owe you too much over too long a period of time. Otherwise you could find yourself “up a creek” having carried out a quantity of work that may never be paid for.
As a builder, this may mean keeping a tight rein on contract administration.
Be prepared to suspend works under the contract, or issue a notice of default, if payment is outstanding for too long.
Ensure that you have documentation of variations, or seek evidence of an owner’s capacity to pay.
Winding up Orders
An application to “wind a company up in insolvency” – these are filed with an application and affidavit. It comes after a statutory demand has been served, and that statutory demand has not been set aside or otherwise settled within 21 days.
An application to wind up the company is made. The failure to comply with the statutory demand compels the court to presume the company is insolvent.
These affidavits must disclose grounds for the winding up order to be made and evidence of the debt. Failure to comply with the statutory demand is good evidence of insolvency.
A winding up application (with affidavit) and statutory demands are technical documents and you should seek legal assistance in preparing, filing and serving them.
If a statutory demand is flawed, then the later winding up application may also be defective. Of course, this is also something to consider as a potential defence if you are instead on the receiving end of a statutory demand, as opposed to a creditor pursuing a debt.
Procedure
A complaint or application will be filed at a court or at VCAT (in the Domestic Building List).
Once a judgement is entered, that judgement will be sealed and is an enforceable debt. However, even with a judgement you are still not a secured creditor (such as the ATO, a mortgagee, or an employee.)
The usual procedure is: Judgement – Statutory Demand – Wind up Application
Statutory Demand
A statutory demand will normally be served at a company’s registered office, and also has an affidavit to support it.
The supporting affidavit must verify that the debt is due and owing as at that time and state there is no genuine dispute about the debt.
The statutory demand will make demand for payment of the debt (must be over $2,000) within 21 days. An example would be to agree to enter into an
instalment arrangement. It must also notify the recipient debtor of:
- The consequences of failure to comply with the demand; and
- How the company can apply to set aside the statutory demand
Application to set aside Statutory Demands
If the Statutory Demand is disputed the debtor must make an application to the Supreme Court of Victoria or the Federal Court of Australia seeking to set aside the Statutory Demand.
Application to Wind Up a Company
This may be made after a Statutory Demand has been served and if the Demand:
- Has not been set aside; or
- Otherwise settled;
within 21 days after service.
An application may be made to the Supreme Court to wind up the company, with an application and affidavit.
The affidavit will verify that the debt is due and owing, and the Statutory Demand was served and remains unsatisfied.
The company’s failure to comply with the Statutory Demand forces the court to presume that the Company is insolvent.
Unless the company can rebut the presumption of insolvency, a wind up order will be made by the Court.
Pitfalls
- The Wind Up application should be prepared, filed and served in accordance with all legal requirements and court rules;
- The application should be based on a valid and correct Statutory Demand that has not been complied with or set aside;
- It may all be too late; it is the ambulance at the bottom of the cliff.
Whether you wish to make an application, or are on the receiving end of an application, you should seek legal advice promptly if you have not already.
Accounting advice may also be required at the statutory Demand stage to see whether a compromise can be made, e.g. payment over time.
