Winding back the clock: Can a company have a winding-up order terminated because the company didn’t know about the application?

What are your responsibilities if there is a change to your company’s registered office?

The Corporations Act 2001 (Cth) (the Act) sets out an exhaustive (and even onerous) list of duties for Australian registered companies and their directors. Among these is the duty to notify the Australia Securities and Investment Commission (ASIC) of a change to the company’s registered office. This must be done within 28 days of the change in location.

Although you can update registered office online through ASIC Connect, or through lodging a Form 384, companies often forget to update their registered office when the company moves offices or when they change accountants or solicitors. Not having an up to date registered office may have commercial ramifications for a company’s day-to-day business activities. It can also have more serious consequences – you could fail to receive a document simply because it has been served at the company’s former registered office.

How is a company validly served?

Under s 109X(1)(a) of the Act, a document can be served on a company by leaving it at or posting it to the company’s registered office. It is important to be aware that even if the document is never received by the company or is returned to the sender as a result of the change of address the document is still deemed to be served on the company validly.

Failing to receive documentation that has been served at an old or out-of-date registered office can even result in a company failing to receive a crucial document, such as a statutory demand or a winding-up application. For example, technically, a company could be wound up in insolvency in accordance with Section 459A of the Act simply because it failed to respond to a statutory demand or defend a winding-up application made by one of its creditors. This means that if a company has not updated its registered office it could be wound up without knowing that a winding-up application had been validly served. In addition, it would not have the opportunity to consider the application or file a defence.

After a court order has been made to wind up a company, it is too late to have the company reinstated?

How can a winding-up application be set aside?

Section 482 of the Act provides the court with a discretionary power to terminate the winding up of a company and have the company reinstated to the control of the directors. In order to convince the court to use this power, it is not sufficient for the company to prove that it did not have knowledge of the winding-up application because it failed to update its registered office.

Rather, in determining whether it will grant the application, the court will consider a wide range of issues, including:

1. The attitude of the creditors, contributories, and the liquidator to the application and whether they consent to or do not oppose the application;
2. The current trading position of the company and whether the company is solvent;
3. Whether the company’s directors have provided a full explanation of any non-compliance with their statutory duties;
4. The explanation of the general background and circumstances that led to the winding up order; and
5. The nature of the company’s business and whether the conduct of the company was in any way contrary to ‘commercial morality’ or ‘the public interest’.

If you are seeking to determine whether a winding-up application should be terminated, you also need to be aware that:

1. The onus is on the applicant (i.e. the company) to make out a positive case for a stay;
2. The application should be brought as quickly as possible; and
3. The applicant must serve notice of the application on all creditors, the liquidator and the members.

The importance of solvency and public interest considerations

As the court’s power is discretionary, the list above is not exhaustive. The court will also examine two additional questions: Is the company solvent? Are there any public interest considerations that should prevent the company from being reinstated? You will neeed to satisfy the court of both these facts if you are to have any chance of persuading the court to terminate the winding-up order.

Solvency

A company must demonstrate that it is solvent in order to satisfy the court that the situation that required the company to be wound up no longer exists. Solvency is defined in s 95A(1) of the Act as the ability to pay all debts as and when they become due and payable.

Therefore, an application is usually successful if the company can satisfy the court that:

1. All creditors have or will be paid;
2. The liquidators’ costs and expenses will be met (or have already been met) by the company; and
3. The members agree to terminate the winding up.

However, assessing a company’s solvency is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole, both before the winding-up order was made and taking into consideration the future of the company. For a company with a complex financial structure, it may be difficult to satisfy the court that the company is solvent, particularly when the evidence is being given by a director or shareholder of the company. As such, applicants commonly have to rely upon expert evidence from an independent and external accounting expert to demonstrate to the court that the company is solvent. For this reason, the applicant in Ibrahim v Deputy Commissioner of Taxation (Ibrahim) relied on both an external and independent accountant to prepare and provide a report that was able to satisfy the court that the company was solvent.

Public interest considerations

Even if a company can prove its solvency, and satisfy the other relevant factors, the court will not terminate the winding-up order if, in its opinion, the company has acted in a way that is contrary to ‘commercial morality’ or ‘the public interest’. The concept of ‘commercial morality’ includes whether there has been any serious impropriety in the conduct of the company’s affairs or any other matter which may pose as a risk to future creditors. The court will also consider whether it is reasonable to entrust the directors with the company’s management, considering that the company was wound up under the management of those same directors.

As a result, it is essential that the company can provide evidence that its solvency is no longer questionable and that adequate steps have been taken to correct any previous mismanagement. For example, in Ibrahim, the applicant put forward evidence to the court that, as a result of this experience, he had been made aware of the importance of accurate record keeping. In addition, the applicant committed to work closely with his accountant and legal advisers to ensure that the company’s records would always be kept accurately in the future. In addition, the court was satisfied that, moving forward, the applicant would be able to adequately manage the company’s affairs.

If your company is wound up because you didn’t update your registered office, what should you do?

If your company is wound up, the onus is on you to make a positive case to the court for reinstating the company. The courts have shown a tendency to act cautiously when reviewing applications, and therefore, if you find out that your company has been wound up because you didn’t update your registered office you should:

1. Quickly contact the liquidator to find out the liquidator’s position in relation to your proposed application;
2. Obtain external accounting advice proving that the company is solvent; and
3. Be able to show that the company has future commercial prospects and has implemented new policies and procedures to ensure that it can operate and manage its affairs moving forward; and
4. Bring the application as quickly as possible.

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