Stop that liquidation!: Applications to stay or terminate a liquidations

27 January 2016

The recent Supreme Court of New South Wales decision in Re Avenue Investment Capital Pty Ltd (in liq) [2015] NSWSC 1919 is a useful reminder of the matters that a party seeking to stay or terminate the winding up of a company needs to establish in order to obtain an order staying or terminating a winding up.

Background

Section 482(1) of the Corporations Act 2001 provides that the Court may, on application, make an order staying or terminating a winding up.

Applications to stay or terminate liquidations usually occur when the company in liquidation has paid off or otherwise satisfied all of its debts and wishes to resume trading, or where some form of restructure is being pursued.

Facts

Re Avenue Investment Capital was an application pursuant section 482 seeking orders that the windings up of two related companies be terminated. The application was made by the sole shareholder of each of the companies in liquidation.

Prior to being placed in liquidation, the companies were involved in property development.

The companies had significant liabilities to the Australian Taxation Office (ATO). After the commencement of the winding up, the ATO conducted an audit of the taxation affairs of the sole shareholder and companies associated with him. The liquidators subsequently advised creditors that the shareholder and his related companies had reached a settlement with the ATO of its claims. The terms of that settlement were confidential but apparently required the liquidation of the companies (the subject of this application) to be stayed or terminated and control to revert to their directors.

The liquidator swore an affidavit that the settlement with the ATO had been reached and “all of the proofs of debt lodged in the administrations…have been withdrawn and there are presently no creditors of either company”.

The liquidator also filed financial statements prepared by the group’s accountant. The statements were prepared on the basis that the settlement with the ATO had been finalised and all creditor claims in the liquidations withdrawn.

The liquidators did not oppose the application seeking termination of the windings up.

The Court’s Decision

The Court was not satisfied that the evidence before it justified making an order terminating the windings up.

The Court’s main concern related to the evidence of solvency of the companies. The Court stated that the liquidators did not express “a considered opinion as to the solvency of the companies” or otherwise refer to “evidence that would establish that legally the companies have no creditors”.

The Court was not satisfied with the evidence provided that the apparent creditors had either not lodged proofs of debt or had withdrawn them because this evidence did not “establish that, as a matter of law, steps have been taken that have the effect that the companies are not indebted to the creditors who originally made claims”.

The Court considered that the position was “even less clear” in relation to a related company as there was some evidence suggesting it was a creditor. The Court found that the liquidators’ opinion that the related company was not a creditor of the companies in liquidation “could not, on the information available to the liquidators, have been a considered opinion upon which the court could safely rely”.

The Court attached little weight to the financial statements on the basis that they were “unexplained and unsubstantiated”.

The Court was also concerned about the lack of any evidence about the proposed future commercial activities of the companies. In the absence of evidence about proposed future activities, the Court considered that it was possible that the companies would engage in some commercial activity. Without any evidence about plans to capitalise the companies, the Court stated that any activity involving incurring debts would create the risk of the companies immediately being insolvent.

In addition to its concerns about solvency, the Court observed that there was some evidence that the companies engaged in questionable transactions involving the transfer of assets to related parties without receipt of proper consideration. The Court also noted that there were grounds for questioning whether the taxation affairs of the companies were conducted having regard to the obligations of the companies under the taxation laws. For these reasons, the Court was not satisfied that the order should be made, “because of a real issue of whether the companies were used, or conducted their activities in a manner, which exhibited a level of commercial immorality that would justify refusal of the orders”.

The Court stated that its concern was the absence of sufficient evidence justifying the termination of the winding up, rather than any positive finding as to conduct that caused the Court to exercise its discretion against ordering the termination of the winding up. Despite the liquidators not opposing the making of the orders and ASIC not appearing to oppose the application, the Court was not satisfied on the evidence before it that the winding up should be terminated. The Court did however provide the applicants with an opportunity to file further evidence to address the Court’s concerns.

What should you do?

Parties seeking the stay or termination of a winding up bear the onus of proving that the orders should be made. The Court retains an overall discretion in relation to such applications and, as this case demonstrates, it is not sufficient to rely on the fact that the application is not opposed.

The authorities establish that there are a range of considerations that inform the Court’s discretion on applications to terminate a winding up, including the attitude and interests of creditors (including future creditors), the liquidator and shareholders, the public interest including matters of commercial morality, the company’s trading position and solvency, and any explanation for non-compliance with statutory duties and the circumstances leading to the winding up.

Re Avenue Investment Capital is a useful reminder that:

  1. Proper evidence needs to be put before the Court to demonstrate that the company is and is likely to remain solvent. Whilst it may not always be necessary to lead the best and fullest evidence of the company’s financial position (see Re Glass Recycling Pty Ltd [2014] NSWSC 439), the company’s “capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is central to the inquiry” made by the Court on an application seeking termination of a winding up (see Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127);
  2. Evidence should be put before the Court as to what it is proposed the company will do if the winding up is terminated, and how those activities will be funded; and
  3. If possible, a proper explanation should be provided in relation to any of the company’s pre-liquidation conduct or operations which might, in the absence of explanation, be perceived as not being consistent with commercial morality.

This article was written by Polat Siva, Partner.

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