There are three main types of winding up:

• winding up by the court, which is in turn divided into:

• winding up by order of ASIC in specified circumstances.

• voluntary winding up, which is in turn divided into:

See Introduction.

A company may be wound up on the ground that it is insolvent; that is, unable to pay all its debts as they fall due. Insolvency may be established in a number of ways, but the most common is failure to comply with a statutory demand by a creditor for payment of a debt. Such a demand may be set aside by the court on grounds including a dispute about the debt or a counter-claim.

The court can also wind up a company on a number of other grounds, including irregularities in the makeup or conduct of the company, or that it is just and equitable to do so.

The court is given wide powers to stay or terminate the winding up, to order the transfer of books or property to the liquidator and to pursue delinquent or absconding officers. It is also given powers as to the convening of meetings of creditors, the proving of debts and the making of calls on and distributions of surplus to, contributories (shareholders). These administrative powers are delegated to the liquidator.

See Winding up by the court.

A company may be wound up by order of ASIC in specified circumstances. Such a winding up proceeds as a creditors’ voluntary winding up.

See Winding up by ASIC order.

Both types of voluntary winding up are initiated by a special resolution of the members. If the directors have previously made a declaration of solvency, it will be a members’ voluntary winding up; if not, a creditors’ one.

In a creditors’ voluntary, the liquidator must convene a meeting of creditors within 11 days and advertise it. The liquidator must table a declaration of relevant relationships at the meeting, which can change the liquidator and appoint a committee of inspection. If the liquidator in a members’ voluntary forms the view that the company will not be able to pay all its debts in full in the period stated in the declaration of solvency, he or she must convene a meeting of creditors and lay before it a statement of assets and liabilities. The meeting may again change the liquidator but in any event, the winding up then proceeds as a creditors’ voluntary.

See Voluntary winding up.

Liquidators must be registered with ASIC and must also not be disqualified from a particular appointment by a series of tests directed towards their independence, although the tests are less stringent in voluntary windings up, especially a members’ voluntary. All liquidators must maintain and keep proper books and comply with rules as to bank accounts and the investment of surplus funds.

See Liquidator generally.

Appointment in a court winding up is by the court, which also fills any casual vacancy from resignation, death or incapacity. A liquidator can be appointed in a court winding up provisionally at any time after an application has been filed.

The powers of a liquidator in a court winding up are:

• those delegated by the court; and

• those conferred directly by the Corporations Act 2001 (Cth) (CA), which in some cases requires approval by creditors or the court.

In a court winding up, the liquidator must:

• lodge a preliminary report into the company’s property, the causes of its failure and whether investigation of any matter is warranted;

• lodge supplementary reports about matters requiring investigation; and

• lodge 6 monthly accounts.

On completion of the winding up a court liquidator can seek an order for release from the court, with or without an order that ASIC deregister the company, but in practice usually just applies to ASIC for deregistration.

See Liquidator in court winding up.

A liquidator is appointed by ASIC, which it may also remove or replace. The winding up then proceeds as a creditors’ voluntary one.

See Winding up by ASIC order.

In a voluntary winding up, the members appoint initially, subject to change by the creditors in a creditors' voluntary. A vacancy is filled by the creditors in a creditors’ voluntary, and the members in a members' voluntary. The powers of a liquidator in a voluntary winding up are broadly the same as those of a liquidator in a court winding up, with additional powers to facilitate a reconstruction of the company or its amalgamation with others.

On completion of the winding up, a voluntary liquidator lodges a return of the final meeting of members (plus creditors in a creditors’ voluntary) and the company is deregistered 3 months later.

See Liquidator in voluntary winding up.

The CA and the Corporations Regulations 2001 (Cth) (Regulations) require or permit meetings of creditors and/or members to be held for a variety of purposes in both winding up and voluntary administration. For some statutory meetings, notice on the ASIC insolvency notices website is required but most meetings are convened by notice to attendees only. In most cases, notice by electronic means (email or website) is permitted.

Detailed provisions as to the convening and conduct of meetings are contained in the Regulations, which also provide for the outcome of meetings to be notified to ASIC.

Special provision is made in the CA for:

• the court to intervene where the outcome of a resolution has been determined by the votes of creditors related to the company; and

• the court to review resolutions, which have been won or lost on the casting vote of the chairman, usually the liquidator or a deputy.

See Meeting of creditors.

A committee of inspection may be elected by creditors and contributories from their number to advise and assist the liquidator, particularly in larger administrations. They are given a number of powers, especially to determine the liquidator’s remuneration but cannot direct the liquidator.

See Committees of inspection.

This is the term given to members of a company when it goes into liquidation, whether or not they are liable to contribute to a shortfall in the winding up. The CA contains a series of rules as to the liability of contributories, the most important being that the holders of fully paid shares are not liable to contribute. If it is necessary, and possible, to enforce a contribution from contributories, this is done by way of a call by the liquidator following the preparation and settlement of a list of contributories.

Conversely, it may be possible for the liquidator to have a surplus for distribution to contributories and this will often be the case in a members’ voluntary. In a court winding up, a surplus can only be distributed with the special leave of the court.

See Contributories.

The general rule is that all liabilities of the company are provable in the winding up and that all provable claims rank equally; but there are a number of creditors given priority, especially employees. Provision is made for the computation of claims, especially those which are unliquidated, future or contingent. Some claims are deferred to those of other creditors, notably claims by a member in their capacity as such. There are detailed provisions in the Regulations for the submission of proofs of debt, either formally or informally, for the admission or rejection of proofs and for appeals to the court against the rejection of a proof wholly or in part. The Regulations also provide for the notification and declaration of dividends to creditors and for payment of arrears to those creditors whose proof is admitted after a dividend has been paid.

Secured creditors can, in general, opt to stay outside the winding up and rely on their security, or to surrender their security and participate in the winding up. There are special provisions applicable to secured creditors, most notably those in the Personal Property Securities Act 2009 (Cth) (PPSA), which came into effect on 31 January 2012.

See Creditors.

A creditor:

• must disgorge the proceeds of any enforcement process (ie a writ of execution, garnishee or charging order under a judgment against the company) received within 6 months before the commencement of the winding up; and

• cannot start or proceed with the enforcement process once given notice of the filing of an application or the convening of a meeting for winding up, which freeze is lifted if the application is dismissed or the resolution not passed.

A similar freeze applies to the sheriff if given notice. The sheriff must pay any proceeds or money held to the liquidator once notified of his or her appointment.

See Effect of enforcement process.

This is the right given to the liquidator to reject any onerous property or contract of the company, in most cases other than contracts without the leave of the court, by notice in writing. Once the disclaimer takes effect, it terminates the interest of the company in the property or contract concerned. The liquidator can be compelled to elect whether to disclaim by a person interested.

The court can set aside a disclaimer before and in some circumstances after, the disclaimer takes effect, and can make orders about the disposition of disclaimed property.

See Disclaimer.

Where two or more failed companies are related and hold property or carried on business in common, their administration can be combined into one by either:

• a pooling determination by the liquidators involved, followed by approval by a majority in number and 75% in value of those attending or represented at a meeting of creditors of each company concerned; or

• a pooling order by the court.

The effect of either is to merge the assets of the companies, to eliminate inter-company debts and to make the creditors of each creditors of the pooled group, with special provision for secured creditors. The effect can be varied by the determination or order, or subsequently and the court has wide powers to alter the effect of either a determination or an order at any time.

See Pooling.

The CA:

• requires courts of the Commonwealth, of the states and territories, of certain external territories and of “prescribed countries” (notably the USA, UK and NZ) to aid and be auxiliary to each other in winding up matters;

• permits the same action with respect to other foreign courts(although this is now mandated by the Model Law dealt with below); and

• allows local courts to act on letters of request from foreign courts and to issue such letters to foreign courts.

In addition, Australia is now a party to the Model Law on Cross-Border Insolvency prepared by the United Nations Commission on International Trade Law (UNCITRAL) by reason of the Cross-Border Insolvency Act 2008 (Cth). This has precedence over the CA (subject to an overriding public interest test) and basically provides local recognition to the rights of foreign administrators and creditors, using the international concept of a “centre of main interest” of a company.

See International cooperation.

The liquidator is given power to seek a variety of orders, usually for the payment of money, to recover property disposed of by the company at differing times before and after the "relation-back day", which is usually the day of filing of the winding up application. The dispositions liable to attack are:

• an unfair preference to a creditor where that is made within 6 months before the relation-back day (or 2 years if it is also an uncommercial transaction) and at a time when the company is insolvent;

• an uncommercial transaction that is entered into within 2 years before the relation-back day;

• an unfair preference or an uncommercial transaction that is entered into:

• an unreasonable director-related transaction that is entered into within 4 years before the relation-back day; and

• an unfair loan that is made at any time.

In addition, the liquidator can recover from a related entity a benefit received from such a transaction, such as the discharge or reduction of a guarantee in favour of the company.

Under amendments to the CA consequent upon the introduction of the PPSA, certain PPSA security interests created by a company which is wound up, vest in the company (and so become unenforceable by a secured party) unless registered within a prescribed time prior to the commencement of the winding up. There are exceptions and in some cases a right in the (formerly) secured party to prove for its loss in the winding up.

The same amendments provide for the avoidance of security interests in favour of officers, some former officers and their associates if steps are taken to enforce them within 6 months after they are created, unless the court grants leave.

See Recovery of property for creditors

It is an offence for a director to allow a company to incur a debt when the company is insolvent if he or she is aware that there are reasonable grounds for suspecting insolvency or a reasonable person in his or her position would have been so aware. An offending director can be:

• prosecuted or made subject to civil penalty orders under the CA; and

• made civilly liable for the debt so incurred to the liquidator or, under certain conditions, to the relevant creditor.

In civil proceedings, it is a defence to prove:

• that the director had reasonable grounds to expect that the company was solvent, including reliance on some other competent and qualified person;

• that he or she did not take part in the management of the company at the relevant time for good reason such as illness; or

• that he or she took all reasonable steps to prevent the company incurring the debt, including steps to appoint a voluntary administrator.

A creditor can only sue for its own benefit with the consent of the liquidator or with the leave of the court after request for consent has been sought and not given; and cannot sue after the liquidator has taken action with respect to the debt. Any amount recovered by the liquidator is available to unsecured creditors generally but a creditor who knew the company was insolvent at the time it suffered loss may be prevented by court order from participating in any recovery until all other unsecured creditors are paid in full. A secured creditor is postponed to all unsecured creditors.

See Insolvent trading.

The court has a wide power to make compensation orders against persons guilty of fraud, negligence or breach of duty where the company has suffered loss as a result.

See Other orders against persons involved with corporation.

Arrangements entered into to avoid employee entitlements (being essentially those claims given priority in the winding up) are prohibited. If an employee suffers loss as a result of such an arrangement (which can include the payment of a debt), the liquidator can recover the loss for the benefit of creditors generally; or, under much the same conditions as a creditor can recover for insolvent trading, the employee can recover for his or her own benefit.

The Commonwealth has established the Fair Entitlements Guarantee (FEG) to enable payment of employee entitlements where the company’s assets are insufficient.

See Employee entitlements.

The liquidator can apply for a summons for the examination under oath of persons who might be able to give information about the company’s examinable affairs. There are two types:

• a mandatory summons which the court must issue where the examinee is or has during the 2 years before the winding up began been, an officer of the company; and

• a discretionary summons where another person is sought to be examined.

In both cases, the application is supported by a sealed affidavit only available to the examinee with leave of the court. The examinee can be directed to produce documents when attending. Examination is generally in public under the direction of the court. A person is not excused from answering questions on the grounds of self-incrimination, but if an objection is taken, the answer can only be used against him or her in a prosecution for perjury. Otherwise, the court can direct the examinee to sign the transcript and it can be used in evidence against that person.

See Examinations.

Deregistration of a company in liquidation is usually effected by ASIC:

• automatically on the making of a court order directing it, with or without an order for the release of the liquidator, in a court winding up;

• on the expiration of 3 months after lodgment of the report of the final meeting in a voluntary winding up; or

• on application by the liquidator to ASIC on the grounds that the company’s affairs have been fully wound up and there are insufficient funds to pay for an application for a court order for deregistration.

Deregistration puts an end to the company’s existence, and any remaining assets vest in ASIC. The company’s registration can be reinstated by ASIC for administrative irregularity, or by the court on the application of an aggrieved person. This is not necessary when pursuing an insurer of the company, which may be sued direct.

See Deregistration.

The PPSA, which came into force on 31 January 2012, effects wide changes to the law as to winding up. These are dealt with in the notes, but it is important to bear in mind that the PPSA contains a number of new concepts, some of which are closely related to well-understood legal concepts and expressions. With some simplification:

• a mortgage or charge is now a security interest (defined in s 51 CA);

• a floating charge is now a circulating security interest (defined in s 51C CA);

• a mortgagor is now a grantor; and

• a mortgagee is now a secured party: defined in s 51B CA.

The CA also introduces a number of PPSA-related concepts, including:

• PPSA security interest, defined in s 51 CA;

• possessory security interest, defined in s 51D CA;

• PPSA retention of title property, defined in s 51E CA; and

• secured creditor, defined in s 51E CA.

These definitions are complex, chiefly because of their cross-reference to the PPSA and to other terms and concepts defined in that legislation. These notes can do no more than give a broad overview.