Corporate Insolvency

A company is insolvent if it is unable to pay its creditors as and when they fall due. A director of a company is responsible for it’s corporate governance, and is under a duty to prevent insolvent trading. Failure to do so can result in the director being personally and criminally liable.

It is not in the interests of the community to allow insolvent companies to continue to trade and incur debt. The Corporations Act 2001 provides a mechanism for creditors to apply to the Court for an order winding up the insolvent company. The most common method of doing so is by issuing a Statutory Demand in accordance with section 459E of the Act.

A Statutory Demand must be for an amount of more than $2,000.00, be in the required form, be signed by the creditor or someone authorised by the creditor and attach a judgment debt. If there is no judgment debt then the Statutory Demand must be accompanied with an affidavit in the prescribed form setting out details of the debt.

Depending on the circumstances giving rise to the debt it may be unwise to issue a Statutory Demand without a judgment debt, for such a demand may be set aside by the creditor on the basis that there exists a genuine dispute. This application is made to the Federal or Supreme Court pursuant to section 459G of the Act. If the Statutory Demand is set aside because of an existence of a genuine dispute, even if the debt is in fact owing, then the creditor issuing the demand will be subject to a significant adverse costs order.

Once the Statutory Demand has been issued the debtor company has 21 days to pay the demand, or seek to set such aside in accordance with section 459G. If the debtor company does not do so the debtor company is presumed to be insolvent by reason of section 459C of the Act. The presumption of insolvency enables the creditor to commence winding up proceedings under section 459Q, and if the debtor company cannot overcome the presumption of insolvency, and provided the creditor complies with the rules of Court, the Court will order the company be wound up in insolvency and appoint an official liquidator.

The liquidator takes charge of the company’s unencumbered assets and will proceed to pay unsecured creditors in the order specified in the act and in an amount dependent on the funds realised from the liquidation.

The issuing of a company Statutory Demand can be a quick and cost effective method to recover debt owed by a company. If not done correctly, or if issued in circumstances where the company is not insolvent, or in dispute as to the debt, then there can be significant costs involved.

Prime Lawyers have conducted hundreds of winding up applications in the Supreme Court and have advised and represented clients in all matters relating to the conduct of those proceedings, including applications to substitute a petitioning creditor, winding up during administration, setting aside statutory demands. We have appeared both for and against creditor companies.

If you would like assistance from one of our corporate insolvency lawyers then get in touch with your nearest Prime Lawyers office.

We have debt recovery and corporate insolvency lawyers located at Sydney, Parramatta, Chatswood, Sutherland and Wollongong.