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Are you aware of the repercussions for companies who fail to pay debts on time? If your company is struggling financially and allowing debts to accrue, you may face legal proceedings which may result in the company being ‘wound up’. On the other side, if you are owed debts by companies, you may be considering taking further action to recoup your funds.
For businesses to avoid these types of proceedings, it is important to pay debts on time. This infosheet will provide an overview of the key terms, potential proceedings and outcomes if you are already in financial distress and struggling to pay your debts.
|Creditor||A person or business who is owed money Creditors Petition A legal application made by a creditor to a court seeking to have a debtor made bankrupt.|
|Debtor||A person or business who owes money.|
|Insolvency||Being unable to pay debts when and as they become due and payable.|
|Presumption of Insolvency||If a debtor fails to respond to or pay the debt subject to a statutory demand, a court may declare that the company is insolvent.|
|Service||This is when you legally send or provide a party with a court document. For example, an individual is generally required to be “personally” served, whereas you can serve a corporation by sending the document via post to the corporations last registered office (which can be confirmed by conducting an ASIC search)|
|Solvency||A person or business is solvent only if they are able to pay all of their debts as and when they become due and payable.|
|Winding up proceedings||A person or business who owes money.|
If you have received a statutory demand, it is critical that you satisfy the requirements within 21 days of service. This means that you must pay the debt demanded within 21 days of the day that you received the statutory demand notice. If you don’t, the creditor may have grounds to proceed with an application to wind up your company.
If you have grounds to dispute the debt, you can apply to the court to set aside the statutory demand within 21 days of service of the statutory demand. A set aside application may result in the court providing a legal decision or a judgment stating that the statutory demand is no longer in effect.
Further details and grounds to file a set aside application can be found on the Federal Court of Australia website.
A creditor may make an application seeking ‘winding up’ orders against a debtor company if a statutory demand is not paid or replied to. This is when the presumption of insolvency arises. The timing of this application is critical, it must be filed within 3 months of the date of non-compliance (i.e. when the debtor was required to respond to the statutory demand).
A court may dismiss a winding up application if it is made more than 3 months after the presumption of insolvency arose. Additionally, once the proceedings have been commenced, they must be determined within 6 months unless the court orders that they be extended.
The timing and calculation of the relevant service date and non-compliance is critical and can be complex.There is a presumed date of service if you have served the documents by prepaid post addressed to the company’s registered office.
Make sure you have kept a copy of all documents served as well as the details of the method of service (for example, sent via express post to the company registered office on 1 January 2022 under Australia Post tracking number 123456). In the case of serving the documents personally, then the service date is the date it is delivered.
A winding up application is required to be filed with an affidavit and certain evidence. The affidavit should:
You will also be required to provide the court with:
If you either failed to satisfy the statutory demand on time or were unsuccessful in attempting to set the demand aside, your company may be presumed to be insolvent. Consequently, you may be served with an application to wind up your company based upon this presumption of insolvency.
The presumption that your company is insolvent will continue until evidence proving that the company is in fact solvent is provided to a court. If you wish to oppose the application, you must file and serve a notice of grounds on which your company opposes the application to wind up.
The winding up process is complex and can be legally challenging from both sides of the transaction. It is critical that parties get their documents correct the first time to avoid having an application dismissed.
HIA strongly recommends that you seek independent legal advice to ensure your rights and interests are properly protected. The Federal Court of Australia has further information and guides on winding up proceedings on the Federal Court of Australia website.
To find out more, contact HIA's Workplace Services team on 1300 650 620.
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