Compulsory liquidation (in the context of corporate insolvency)

A compulsory liquidation occurs when a court of competent jurisdiction, in accordance with the Corporations Act 2001 (Cth), makes an order that a company be wound up. The courts that have the jurisdiction to make these orders are the Federal Court and state Supreme Courts.

Section 459A of the Corporations Act provides that:

On application under section 459P, the Court may order that an insolvent company be wound up in insolvency.

Section 459P of the Corporations Act is the provision that outlines who has standing to make a winding up application. Some of these people include:

  1. The company;
  2. A creditor;
  3. A director (with leave);
  4. ASIC (with leave).

Applications made under these sections of the Corporations Act are based on the insolvency of a company. The most common applicant in winding up proceedings are creditors, who must be able to prove that the company that they seek to wind up is insolvent at the time the application is made. Proving insolvency is a difficult task and therefore section 459C states various situations where a company is presumed to be insolvent. It is important to note that any application to wind up a company must be made within 3 months after the date that the last presumed insolvency event occurred.

The most common basis for a Court to wind up a company is on the application by a creditor for the failure of a debtor to comply with a Creditor’s Statutory Demand for payment of debt.

Further to section 459A and 459P, there are general grounds on which a company may be wound up by the Court. Section 461 outlines these circumstances:

  • By special resolution of a company;
  • If the company does not commence trading within 12 months of incorporation or suspends trading for an entire year;
  • If the company has no members;
  • If directors breach their duty not to act in own self-interest and is unfair and unjust on the members;
  • If members are oppressed, either by actions or missions of the company;
  • If ASIC prepares a report and is of the opinion that;
    1. The company cannot pay its debts;
    2. It is in the interests of the public, members or creditors that the company be wound up.
  • It is just and equitable for the company to be wound up.

Once a court has made a winding up order, a liquidator (who has provided consent to act) is appointed to the company and the normal liquidation process occurs. This includes the realisation of company assets, a cessation or sale of company operations, distribution of the realised assets among creditors and any excess to shareholders.