Setting aside winding up orders with return of company to its directors
18 November 2013
In this issue:
- Reviewing applications to the court to have the winding up of a company terminated
- Who has standing to apply for a termination order
- The factors a court may take into account when assessing the merit of an application for termination of winding up
- Role of the independent, external expert in assisting the court with a report on a company’s financial position
Introduction
Following the court winding up of a company it is not uncommon to encounter directors seeking to have the winding up process terminated and the company reinstated to its former position. In such cases the directors will usually be acting in the belief that commercial or legal grounds exist justifying the release of the company from liquidation.
When this situation arises consideration will need to be given to an application to the court under section 482, Corporations Act.
A considerable body of case law has arisen under this section. It will be useful for those parties involved in, or contemplating making such an application, to have an understanding of the factors that a court will take into account when assessing the merits of their application.
Applications under section 482, Corporations Act seeking to terminate winding up
General
At any time during a company’s winding up the court has discretionary power under section 482, Corporations Act to terminate the winding up. The effect of such a termination order is to allow the company to resume its trading activities under the management and control of its directors and officers: section 482(3), Corporations Act.
The liquidator, a creditor, or a contributory has standing to bring an application under section 482 (see section 482(1A)(a)). Note that the company is not a competent applicant, and a director may only apply, where he or she is also a contributory.
Where an application is brought by a person other than the liquidator it is not unusual for the liquidator to neither oppose nor consent to the orders being sought. In Kennards Hire Pty Ltd v RMGA Pty Ltd1 the court noted that the fact that a liquidator neither consents nor opposes the application merely indicates that the liquidator is willing to abide by the court’s determination.
The role of the court
A long line of authorities has established the framework within which an application to terminate a winding up will be considered by the courts. In Re Warbler Pty Ltd2 the court provided a list of principles that cases have subsequently shown a willingness to follow3. The Warbler principles are:
- The applicant must make out a positive case for the favourable exercise of the court’s discretion;
- The applicant must show the nature and extent of the creditors, and whether all debts have been discharged, including the costs of the liquidation;
- The attitude of creditors, contributories and the liquidator is a relevant consideration;
- The current trading position and general solvency of the company should be demonstrated;
- A full explanation of any non-compliance by the directors with their statutory duties should be given;
- The general background and circumstances leading to the winding up should be explained;
- The applicant must show 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.
In setting out the above principles the court emphasised that the list was not intended to be exhaustive and, importantly, items on the list did not carry equal weight. In particular, emphasis is invariably placed on two dominant concerns:
- The solvency of the company
- Public interest consideration
The solvency of the company
The solvency of the company is to be demonstrated by the applicant, who bears the onus to do so by leading the best evidence of the company’s financial position. Unverified assertions of solvency or claims of ownership of assets, or self-serving valuations will not provide the court with probative evidence of solvency. The correct approach was stated by the Court in QBE Workers’ Compensation Pty Ltd v P Russell Enterprises Pty Ltd4:
“…..the court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant.”
The role of the external accountant is well illustrated by the proceedings in Su v SNL Group Pty Ltd5 where BRI Ferrier in its capacity as an independent expert provided the court with a comprehensive report analysing the financial position of the company in that case.
For the purposes of a section 482 application the test for solvency set out in section 95A, Corporations Act is relevant. Under that test a person is solvent if that person is able to pay all the person’s debts as and when they become due and payable.
The solvency of the company within the terms of section 95A can become problematic where, as is often the case, the applicant seeks to show that a company’s solvency would be achieved if a particular future course of conduct was followed. And so, in the matter of 311 Hume Highway Liverpool Fund Pty Ltd (in liq)6 the applicant’s proposal, which involved a complex series of steps, failed to satisfy the court on the solvency requirement.
Similar concerns arise where the financial position of the company involves the future provision of capital, or support that depends upon the discretion of a person who stands in a close relationship to the company. Recently, the court in in the matter of LJAC Energy Pty Ltd (in liquidation)7 observed with respect to this issue:
“It is not enough that such a party state an intention to support the company financially, or logistically, in the future or, even to provide an assurance that such support will be forthcoming. Particularly is it not enough when a company’s benefactor is under no contractual obligation to provide support or, for whatever reason, has failed in the past to provide timely support.
The court generally needs to be satisfied that the company’s ability to pay its debts as and when they fall due is grounded upon a foundation in net assets and a cash flow not contingent upon a promoter’s discretion.”
Public interest considerations
Where pre-liquidation dealings of the company or of its directors are found to have offended “commercial morality” an application under section 482 may prove unsuccessful on public interest grounds. In Intag International Ltd (in liq)8 the significance of the public interest requirement was expressed by the court in the following terms:
“It will be appreciated that the interests of the public at large and commercial morality are best served by precluding the return from liquidation of companies whose solvency is still questionable or whose past insolvency is the result of mismanagement where no adequate steps have been taken to correct it …. Thus it is important to have adequate assurance that the restored company has arrangements in place to correct for the future those causes of its past failure.”
It will be a primary focus of any court dealing with a section 482 application to ensure that a company’s affairs will be conducted responsibly.
Concluding comments
An application for termination of winding up under section 482, Corporations Act most usually involves court evaluation of new facts that suggest it is appropriate to bring the winding up to an end and return the company to the control of its directors.
It is not surprising that the courts have shown considerable caution when reviewing applications under section 482. Those seeking a termination order have a clear onus to make out a positive case for returning a company to the commercial arena. In this regard evidence of the financial stability of the company at the time of application and into the future, coupled with creditable assurances that the affairs of the company will be properly managed are crucial to the success of the application.
1 (2010) NSWSC 1387 at [52]
2 (1982) 6 ACLR 526
3 For example, see Leveraged Capital Pty Ltd (in liq) v Modena Imports Pty Ltd (in liq) (2010) NSWSC 739, 7 July 2010.
4 (2005) NSWSC 1128
5 (2010) NSWSC 797, 21 July 2010
6 (2013) NSWSC 465, 1 May 2013
7 (2013) NSWSC 1231, 23 August 2013
8 (1999) NSWSC 645, 29 June 1999