A liquidation usually ends with a company being deregistered. However, there are two other ways a liquidation
- The liquidator appoints a voluntary administrator to a company, which leads to a Deed of Company Arrangement (DOCA); and
- The court orders the stay or termination of a winding up.
When will a Liquidator Appoint a Voluntary Administrator?
Liquidators appoint a voluntary administrator to a company when they believe creditors will receive a greater return under a proposed DOCA, than under a liquidation. The liquidator must be convinced that the DOCA proposed is worthwhile and is likely to be accepted. When the DOCA is accepted and signed, the liquidator applies to the court to end the liquidation.
Which Court can make a Stay Order?
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.
Why would the Court make an order to end a Liquidation?
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. Therefore, the liquidation is no longer necessary; or
- It is just and equitable to do so for any other reason.
What Factors are Considered by the Court to End A Liquidation?
A New South Wales Supreme Court decision in 2002 provides some insight into what the courts may look for when considering an application to end a liquidation. In this case, the judge listed eight criteria:
- 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;
- There must be service of a notice of the application for a stay on all creditors and contributories, and proof of this;
- The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged;
- The attitude of creditors, contributories and the liquidator is a relevant consideration;
- 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;
- 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;
- The general background and circumstances which led to the winding up order should be explained; and
- 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 company directors usually take control of company affairs as soon as the order is given to stay the winding up. 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.