In winding up proceedings, if the debtor company pays out the applicant’s debt, the Court has power to order the substitution of another creditor as the applicant for a winding up.
The substitution process can be very cost-effective and efficient because after substitution, the application proceeds as if the person who is substituted were the original applicant.
We consider the practice and procedure of substituting a creditor in further detail below.
Australian companies may be wound up by the Court if they are insolvent.
Winding up is the process whereby the assets of a company are realised, the creditors paid out in accordance with the Corporations Act 2001 (Cth), any surplus is distributed amongst the shareholders and the company is then de-registered.
There are various circumstances which enable the Court to order the winding up of a company.
Most applications to wind up a company in insolvency are based upon a failure by a debtor company to comply with a statutory demand served on it by a creditor.
Winding up proceedings are notionally brought on behalf of all creditors of an insolvent company. This is an important consideration in the case where the debtor company pays out the applicant creditor’s debt before the winding up hearing.
If the applicant creditor seeks to discontinue the proceedings, the Court can order the substitution of another creditor as the applicant for a winding up if the requirements of section 465B of the Corporations Act are met.
After substitution, the application proceeds as if the person who is substituted were the original applicant. The substituted applicant can rely upon the documents prepared and filed by the creditor who brought the winding up proceedings and can rely on the debtor’s failure to comply with the original creditor’s statutory demand.
Other creditors which are owed money by the debtor company can continue to be substituted in on the original application, until all creditors have been paid, or the company runs out of money and is wound up.
An application for substitution is normally the subject of an interlocutory process, whereby the substituted applicant files a Notice of Motion and supporting affidavit.
The supporting affidavit should set out evidence of the debt owed and be sworn by a person who knows the circumstances of the debt.
In a standard affidavit of debt, the person swearing the affidavit would:
Generally, an application for substitution arises where the original creditor has been paid and wishes to withdraw from the winding up application.
It is usual for the substituting creditor to file a Notice of Motion and put on credible evidence regarding his or her debt. There does not have to be a final determination at the application for substitution regarding the existence of such debt as it is argued at the winding up hearing.
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