Australia: Substituting Creditors – Why You Should Join A Winding Up Petition

What you need to know

Where a company that owes you money is subject to a winding up application brought by an unrelated third party, you should always seek to join the proceedings as a supporting creditor.

If you are a supporting creditor, you have a right to apply to be substituted as the petitioning creditor should the original applicant withdraw their winding up application because their debt has been paid in full or otherwise compromised.

Your right to substitution is a right to have the original winding up application continue so that you can take advantage of the winding up proceedings commenced by the original applicant. This will save you time and costs of having to serve your own statutory demand and/or commence your own winding up proceedings. This will increase your prospects of being paid quicker than if you need to start again.

Right to Substitute

Section 465B of the Corporations Act 2001 (Cth) provides broad grounds under which a creditor can apply to be substituted as the petitioning creditor in winding up proceedings. The first is if the applicant is not proceeding with the application diligently enough¹, the second is for some other reason thought appropriate by the Court.²

In general, substitution applications are mostly made where the debtor company has paid off the debt owing to the petitioning creditor, and for that reason the applicant no longer wishes to proceed to wind up that company. The supporting creditor can then pick up where the original applicant left off.

This will save you from having to prepare winding up documents afresh and paying the usual court fees to commence proceedings.

Relevant procedure

The substitution process is straightforward and uncomplicated. Substitution under section 465B is conferred on a person or persons "who might otherwise have so applied for the company to be wound up". The applicant must be a creditor of the debtor company at the time of filing the application.

The substituting creditor should file a Notice of Motion and supporting affidavit that sets out the particulars of the debt owed to them by the debtor company.

Notice and Originating Process

Upon granting an application for substitution, the Court is likely to make an order that the substituting creditor publishes a notice stating that it intends to apply for an order that the debtor company be wound up. Rule 5.10 of the Corporations Rule sets out the appropriate form and timetable for publishing this notice.

The Court is also likely to allow the substituting creditor to amend the original applicant's petition to suit the circumstances of its case. Alternatively, the substituting creditor may rely on the ground of winding up alleged in the original petition, although proof of that ground may be established in a different manner.

Once an order for substitution is made, the substituting creditor is entitled to proceed as if it were the original applicant.³

Considerations by the Court

Applications for substitution are seldom met with opposition. However, an order for substitution will not be made if the debt is disputed on substantial grounds by the debtor company. You should therefore only bring an application to substitute if you have a straightforward claim against the debtor company that is not likely to be contested. The test that applies under section 459J of the Corporations Act to test whether a statutory demand ought to be set aside provide a useful guide for a creditor seeking to substitute to consider whether such an application should be made.

In considering a substitution application, the Courts have the discretion to decide whether to allow the substitution based upon two competing policies best summarised by Ryan J in South East Water Ltd v Kitoria Pty Ltd (1996) 21 ACSR 465 at 472:

"The first is that an insolvent company should not be permitted to continue to trade to the detriment of its existing and future creditors but should be wound up as expeditiously as possible. If the achievement of that objective is jeopardised by the inaction or lack of diligence of the petitioning creditor, another creditor should be substituted as contemplated by s 465B(1)(a) to allow the winding up proceedings to continue in the interests of the generality of creditors, some of whom may have refrained from initiating their own proceedings in the knowledge that the original petition had been instituted. On the other hand, the court should not allow winding up proceedings to be used as a debt-collecting mechanism or an instrument of oppression to be held over the head of a company otherwise trading satisfactorily by a creditor whose debt is the subject of a genuine dispute."

Key Takeaways

A substitution application in winding up proceedings provide supporting creditors with a cost-effective and efficient way to "piggy back" off existing proceedings to recover its debts quickly where a winding up process is on foot. Before serving a statutory demand, one is best served by completing an ASIC search to see whether it is possible to take advantage of this process to expedite recoveries.

Footnotes

1. Section 465B(2)(a) of the Corporations Act 2001 (Cth).

2. Section 465B(2)(b) of the Corporations Act 2001 (Cth).

3. Section 465B(4) of the Corporations Act 2001 (Cth).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.