Insolvency and litigation risk: what happens when the other side goes under?
You’ve invested time and money pursuing a claim - then the other party enters liquidation. What now?
Insolvency can derail litigation. Whether you are mid-proceedings or have a judgment in hand, the opposing party’s financial collapse can leave you with a paper win and no recovery.
Legal proceedings and insolvency: what changes?
Once a company enters liquidation, legal proceedings against it are automatically stayed under the Corporations Act 2001 (Cth).
Section 471B prohibits starting or continuing proceedings - including enforcement - without leave of the court.
Courts won’t grant leave lightly. They will weigh your rights against those of other creditors and the need for orderly administration.
Protecting your position: move early, move smart
If you suspect financial trouble on the other side, act fast:
- File promptly. Delays could leave you behind other creditors;
- Seek financial disclosure. Raise concerns with the court if needed;
- Consider personal guarantees from directors or related parties;
- Apply for freezing orders if assets may be dissipated;
- Ensure PPSR registrations are up to date if you have contractual rights over goods or equipment.
Statutory demands and bankruptcy notices
Creditors can issue a statutory demand where a debt exceeds the statutory minimum threshold. As of 2025 in Victoria, the threshold is $4,000 for statutory demands against companies and $10,000 for bankruptcy notices against individuals. Failure to comply within 21 days creates a presumption of insolvency – grounds for a winding-up or bankruptcy application.
For individual debtors, a bankruptcy notice following judgment can trigger bankruptcy proceedings if ignored.
Timing is everything
If you are served with a Statutory Demand or Bankruptcy Notice, you must act quickly within the 21-day period to respond.
In Lamb v Sherman (2023) FCAFC 85, a solicitor filed an application to set aside a bankruptcy notice on the 21st day at 4.37 pm, 7 minutes after the court closed for the day.
As a result, the application filed was taken to be accepted on the following da,y resulting in a sequestration order being made against the solicitor’s client. The court emphasised strict adherence to the 21-day period to file an application to set aside.
The court's message was clear: even a delay of 7 minutes can be fatal and can cost you the right to defend a Statutory Demand or Bankruptcy Notice served.
A legal win isn’t always a commercial one
Litigating against an insolvent company can be like trying to squeeze water from a stone. Winning in court doesn’t always translate into recovering what you are owed.
Are you protected if the other party folds? Speak to our litigation team about strategies to secure your claim before it’s too late.
