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How to Respond to a Wind-up Notice

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How to Respond to a Wind-up Notice

It’s common that there is confusion about what a company director or business owner should do upon receiving a winding-up notice.

Wind-up notices are serious legal matters, and you should act swiftly by pursuing expert professional advice.

Here’s what you need to know about how to react and respond to a wind-up notice:

Who can issue a wind-up notice?

Wind-up applications are made through the court. The Australian Tax Office (ATO) and your creditors are the two entities that can make the application. The notice means that the entity applying wishes to know if your business is solvent. If you don’t respond, the issue will be resolved in court.

Winding up notices aren’t typically the first notice that something is amiss. They are served after a statutory demand has been served on a company and the company hasn’t met the requirements of that demand.

First action – Talk to stakeholders.

If your company has other directors or stakeholders, you should consult them about the choices you can take upon receiving a wind-up notice. While it’s unlikely you’ve received a wind-up notice without first receiving other information from the ATO or your creditors, you may not yet have taken action, however, receiving this notice means you must take action swiftly.

You’ll also want to get help from a taxation and administration specialist. The choices you make now will impact your business, so act decisively but consider all options.

Does a wind-up notice mean you have to cease trading?

A wind-up notice is not a notice to cease trade. You can continue your business, however, choosing to do so largely depends on how you want to react to the wind-up notice and what path you want to take.

You may continue trading to pay off the debts in the required time, however, serious penalties can apply if you incur more debts during trading while insolvent. Directors can be held personally liable and criminal sanctions can be applied unless the new Safe Harbour laws apply.

If you’re not sure whether you are able to legally continue trading; seek professional advice.

Knowing your options.

There are three basic courses of action you can take if you’ve been issued a wind-up notice.

  1. Do nothing, allow the business to be wound up on the date of the notice.
  2. Pay the debt amount either in full or through an arrangement, and ultimately the wind-up proceedings will be ended, and you can continue to trade.
  3. Work with creditors through a Deed of Company Arrangement (DOCA), which sets out how the company can continue to operate.

A wind-up notice doesn’t have to mean the end. The ATO has shown that they are open to the possibility of commercial alternatives even once the wind-up notice has been filed in court.

In the event the ATO issues a wind-up notice, certain notices must be filed and with certain notice periods. It involves:

  • The ATO issues the statutory demand.
  • After the 21-day statutory demand expires, the ATO files a wind-up notice application in court.
  • The court sets a hearing date, which could be 21-28 days (or longer).
  • The ATO serves the wind-up notice on the company.
  • The winding up application is heard before the court.

Can you enter creditors’ voluntary liquidation after a winding-up application is filed?

The short answer is no.

Once the ATO has filed a winding up application, the opportunity is, by law, gone. However, voluntary administration (VA) can be instigated by the company as an appointment of formal insolvency. This can be useful if the company has some prospect to continue.

Entering voluntary administration won’t automatically stop the winding-up application. The ATO is not obliged to consider your VA as an opportunity to relinquish the winding-up notice; however, they may consider it if the VA is part of a commercial proposal to creditors for a DOCA.

If the ATO is satisfied with the proposal to formulate a DOCA, they may adjourn the court hearing for the winding up application. In order to give your business the best chance of gaining support from the ATO for a DOCA you should consider:

  1. The appointment of a VA should not be made on the day of the court hearing.
  2. You should do it as early as possible to convince the ATO to adjourn the winding-up hearing.
  3. The proposed DOCA must be genuine and with commercial viability. The ATO has to ‘like’ the proposal.

Any flexibility from the ATO is a good thing, though it’s by no means a hard and fast policy that the ATO has, good faith negotiations can take place. In most instances, it’s worth your while to speak with taxation experts about your standing.

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