Termination of winding up orders: 2015 in review (part 2)

18 April 2016

In our January 2016 edition of the Insolvency Quarterly we published Part 1 of our review of cases handed down in 2015 concerning the termination of the winding up/liquidation of a company.

Part 1 of our review contained a helpful summary of the cases and principles applied by the Court in considering an application to terminate the winding up of a Company in 2015. It also identified general trends adopted by the Court in considering those applications. You can find Part 1 of our review by clicking on this link.

In this edition we publish the final part of our review, which contains case summaries for each of the 6 decisions considered in Part 1 of our review. Accordingly this part acts as a supplement to Part 1 of our article. It provides practitioners, debtors and creditors with further details and clarification (such as the factual context/evidence before the Court) in respect of each of the principles summarised in Part 1.

In the matter of Xiang Rong (Australia) Construction Group Pty Limited [2015] NSWSC 971 (25 May 2015)
The application

This decision concerned an application for the termination of the winding up order made in respect of Xiang Rong (Australia) Construction Group Pty Limited that was filed by Andrew Xiang, a shareholder and creditor of the Company.

Consideration of the termination application

This decision is extremely sparse in setting out the relevant facts, however, the relevant points are as follows:

  • The Court appears to have been satisfied that there was an adequate and sufficient reason why the Company did not respond to the statutory demand or oppose the application to wind up the company, namely, that as a result of the Company changing accountants each of those matters did not come to the attention of the Company’s directors;
  • The liquidator had been put in funds to pay out all of the Company’s arm-length creditors and the liquidator’s remuneration;
  • The remaining debts owing by the company were liabilities owing to the director and/or his related entities, and although this is not explicit, it can be inferred that there was some evidence that each of those other creditors either agreed to either postpone or write off those debts; and
  • The liquidators prepared a solvency report confirming that if the preceding 2 matters were satisfied, the company would be solvent.

On the basis of the matters set out above, and the liquidators consent to the application, the Court was satisfied that the circumstances that warranted the winding up in the first place (insolvency) had been brought to an end and as such granted the application.

Isacson v Riad Tayeh & David Solomons as liquidators of Isacson Pty Ltd (In Liquidation) [2015] NSWSC 1394 (24 September 2015)
The application

This decision concerned Isacson Pty Ltd (In Liquidation) (Company) of which Stefan Isacson was the director of the company and Saravillea Pty Ltd (Saravillea) was a shareholder of the company.

The relevant facts

The relevant facts in this matter are somewhat complicated as they involve a number of different parties. For the purpose of understanding the principles applied and the matters considered by the Court it is sufficient to summarise the facts as follows:

  • The Company’s only commercial venture was the development of a property situated at Rosehill (Rosehill Property) that it purchased for $1.24M in 2003 and that it intended to develop into townhouses;
  • It appears that development was to be a joint venture with Weston Investment Group Pty Ltd (Weston) which owned 2 other properties adjacent to the Rosehill Property;
  • The Company, Weston and Saravillea were companies associated with the Issa family (the dominant member being Steven Issa (Mr Issa)) and/or the Isacson family (the dominant member being Stefan Isacson (Mr Isacson));
  • The primary creditor of the Company was Stevens Carpets Pty Ltd (Stevens Carpets), the sole director/shareholder of which was Georgette Issa (Ms Issa);
  • The purchase of the Rosehill Property was financed as follows:
    • by a loan from Westpac in the sum of $750,000.00 secured by a mortgage over the Rosehill Property and guaranteed by Stefan Isacson and Steven Issa; and
    • the balance sum of $490,000.00 was provided by Stefan Isacson and Steven Issa;
  • By about February 2014 it appears there was a breakdown of the interpersonal relationship between Stefan Isacson and Steven Issa, that included the commencement of proceedings by Mr Isacson against Mr Issa and Stevens Carpets (Isacson Proceeding);
  • On 30 June 2014 the Westpac Facility fell into default because Mr Isacson refused to sign loan documents to roll over the Westpac Facility (which the Court inferred was a consequence of the breakdown of the interpersonal relationship);
  • On 4 July 2014 Mr Issa, as guarantor, paid out the Westpac Facility, and as such became entitled to be subrogated to Westpac’s rights (which were formally assigned to him on 25 November 2014);
  • On 19 December 2014 appointed Riad Tayeh and David Solomons as administrators of the Company, and they were subsequently appointed as liquidators of the Company at the second meeting of creditors on 4 February 2015;
  • At the commencement of the winding up, the Company appears to have had the following debts:
    • a debt to Steven Carpets in the sum of $1.4M (First Debt);
    • a debt to Mr Issa in the sum of $740,000 (being the sum paid by Mr Issa to discharge the Westpac Facility and to which he had been assigned Westpac’s rights) (Second Debt)
    • various debts to other third parties totalling $9,000 (Third Debt);
    • a  further debt to Steven Carpets for an unidentified amount in respect of various payments made by Steven Carpets (e.g. council rates) in respect of the Rosehill Property (Fourth Debt);
    • a debt to Samuel Issa totalling $500.00 (Fifth Debt);
    • a debt to Steven Issa totalling $7,000.00 (Sixth Debt); and
    • a debt to Georgette Issa totalling $2,000 (although there was a question of whether this was in fact a debt owed by the Company) (Seventh Debt).
  • On 5 February 2015 Mr Isacson filed the Summons seeking a declaration that the appointment of Mr Tayeh and Mr Solomon as administrators and liquidators was void and that their appointments be set aside.
The basis for the application to set aside the winding up

On 23 July 2015 all relevant parties entered into a Deed of Settlement (Deed) that was conditional upon the winding up of the Company being terminated and that application was to be made by Saravillea.

The material effect of the Deed (once it became unconditional) was that the Summons and the Isacson Proceeding would be settled as follows:

  • Mr Isacson would receive a sum of money;
  • Mr Isacson would transfer his share in the Company to Saravillea and would resign as a director of Saravillea;
  • The Issa family (and their related entities) would pay the fees and expenses incurred by Mr Solomon and Mr Tayeh as administrators and then liquidators of the Company (including their legal costs of the proceeding);
  • Mutual releases were to be given, including a release by Mr Isacson in respect of any claims that he had against the Company; and
  • the Company would remain the owner of the Property.

In addition, the following evidence was before the Court:

  • An undertaking to the Court by Stevens Carpets (given in an affidavit by Ms Issa) in respect of the First Debt that if the Company was reinstated it would:
    • not demand repayment of the First Debt for 3 years commencing from the reinstatement of the Company; and
    • in the event that the Company was unable to repay the First Debt, it will not demand payment in cash and would accept capitalisation of the First Debt by way of issued share capital in the Company;
  • An undertaking to the Court by Mr Issa  in respect of the Second Debt, in a form substantially the same as the above;
  • The Third Debt had been paid in full;
  • The Fourth Debt, the Fifth Debt, the Sixth Debt and the Seventh Debt would be waived/forgiven;
  • The Issa family would continue with the proposed townhouse development and had financial arrangements in place to give effect to that proposal, which included making funds available to the Company on the same terms as the undertakings given;
  • An expert solvency report from an accountant (who the Court accepted had the appropriate qualifications and information available to her to make her opinions) that, among other things, included an adjusted balance sheet that indicated that the Company’s assets would be in excess of its liabilities in the sum of $867,617;
  • An expert valuation report that showed the value of the Property increased from $1.4M to $2.94M; and
  • An affidavit from one of the liquidators who, among other things, indicated that:
    • he agreed with the conclusions reached in the solvency report;
    • that it would be in the best interests of the creditors of the Company and the public interest for the winding up to be terminated; and
    • he consented to the application.
The Court’s consideration of the termination application

On the basis of the evidence before the Court, Justice Robb made the following findings:

  1. The cause of the events which led the Company going into liquidation was the breakdown of interpersonal relations rather than “any inherent commercial inadequacy of the business of the Company, or any questionable activities in the way in which it was managed”;
  2. If the Deed became unconditional the Court could be satisfied that:
    1. the “source of the disputation that was the effective cause of winding up the company” would be entirely removed;
    2. “a proper arrangement will be made for meeting the various costs and fees to which the Liquidators are entitled”;
    3. funds would “be available to the Company to pursue its objective of developing the three adjacent properties, including the Property”; and
    4. “the Company would not be at risk of any continuing insolvency” as all debts of the Company had either been paid, waived or were otherwise the subject of undertakings to the Court;
  3. In light of the matters set out in 1 and 2 above, if an order was made to terminate the winding up:
    1. the Company would have the benefit of excess assets over liabilities, that would not occur but by reason of the undertakings given; and
    2. the Company would “effectively have a clean slate”.

After His Honour referred to the general principles referred to by Justice Brereton in In the matter of Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439 (Glass Recycling Case), the Court granted the Termination Application on the basis that:

  1. There was no issue of “commercial morality” and the dysfunctional relationship that resulted in the winding up of the Company would be “removed entirely” once the Deed is implemented;
  2. The legitimate interests of the liquidators had been accommodated in the Deed and had consented to the application;
  3. The interest of creditors of the Company are not impeded by the termination of the winding up;
  4. The public interest weighed in favour of the Court granting the application “so that a commercially valuable and publicly useful development may be carried out”; and
  5. Having regard to the matters referred to above, there was “no reason why the court should thwart the aspirations of the parties to the deed of settlement, or the capacity of the Applicant to enjoy the fruits of that settlement”.
In the matter of R & S Trading Company Pty Limited (in liquidation) [2015] NSWSC 1712 (13 July 2015)
The application

This decision concerned a termination of a winding up order made against R & S Trading Company Pty Limited (in liquidation) (Company) that was filed by Ms Maria Ong, a director and shareholder of the Company.

The relevant material facts

The relevant material facts of this matter, as accepted by the Court on the evidence before it, can be summarised as follows:

  • The Company was wound up by order of the Court based on an application made by the Workers Compensation Nominal Insurer;
  • The Company did not respond to the documents relating to the winding up application as the application did not come to Ms Ong’s attention as she was at that time occupied in taking care of her father who was having health issues and there were issues concerning treatment of mail at the business premises;
  • Ms Ong had taken steps to pay out the Company’s debts, including the liquidators’ remuneration and the Insurer’s costs of the winding up proceeding;
  • Ms Ong had taken steps to improve its administration, such as hiring a bookkeeper.
  • Ms Ong had given an undertaking to contribute the sum of $67,000 to the Company from funds of a partnership that she had with her parents, and her parents consented to that undertaking and gave a signed acknowledgment to the release of those funds if the undertaking was accepted by the Court and the winding up terminated;
  • There was expert evidence from an accountant who prepared solvency reports that:
    • indicated the Company had been able to pay its debts as and when they fell due from at least June 2013 (notwithstanding the failure to pay the Insurer’s premium);
    • the Company remained solvent as a result of its ability to finance its operations from ongoing cash flow, and source additional funds to meet the extraordinary costs concerning the liquidation and the present court application;
    • the Company had a history of paying trade creditors and taxation obligations in a timely manner, save for the payment of the Insurer’s premium;
    • save for the extraordinary costs as a result of the liquidation and winding up, the Company’s solvency was not dependent on any ongoing financial support from the Company’s related entities; and
    • the funds that would be required from third parties to, in essence, put the Company back on track was a sum that rounded up to $67,000 (being the amount of the undertaking above);
  • There was also evidence from the liquidator who gave evidence that:
    • all creditors identified by him as at the date of his appointment had been paid;
    • all taxation obligations had been paid, save for superannuation where it appeared to him arrangements had been put in place to meet that obligation when the amount of the superannuation obligation had been quantified; and
    • he had no reason to doubt the conclusions but was unable to actively support it in circumstances where he did not have access to all the books and records and had not been able to assess himself the financial position of the related entities that would be supporting the Company.

After affirming the principles set out in the Glass Recycling Case, the Court referred to the following facts as matters of concern:

  1. The fact that the liquidator had not been able to reach a position where he was able to actively support the application;
  2. The fact that the Company had failed to meet its workers compensation obligations that led to the winding up of the Company; and
  3. The fact that there were outstanding superannuation obligations.

The Court also referred to the following facts as matters in support:

  1. Ms Ong had given an undertaking to give support to the Company by way of a significant capital contribution;
  2. The expert accountant had prepared solvency reports that concluded the Company was solvent on an ongoing basis;
  3. The fact all other debts apart from the superannuation obligation had been paid, and that the liquidator had formed the view that the superannuation obligation would be satisfied once quantified;
  4. That “there is no greater reason to think that future creditors’ interests will be prejudiced if the Company were released from winding up and would ordinarily be the case in respect of a trading entity”, especially given the additional funding to be made available by Ms Ong as a buffer;
  5. The liquidator did not oppose the application and the contributories supported it;
  6. The Company had taken steps to improve its administration; and
  7. There was no indication of non-compliance with statutory obligations (e.g. record keeping) and there were no issues of any “commercial morality”.

On the basis of the matters set out above the Court, “although not without hesitation”, granted the Termination Application.

In the matter of Kadzielski Soto Holdings Pty Ltd (in liquidation) [2015] NSWSC 1734 (29 June 2015)
The application

This decision concerned a termination of a winding up order made against Kadzielski Soto Holdings Pty Ltd (in liquidation) (Company) that was filed by Mr Stanley Kadzielski, who it is assumed was a director and shareholder of the Company (although this was not specifically confirmed in the Judgment).

The relevant material facts

The Judgment does not disclose a lot of facts in relation to this matter, and the relevant material facts can be summarised as follows:

  • The Company went into liquidation as a result of a failure to pay a land tax debt of approximately $7,000 in respect of a property in Wollongong (Property);
  • As at the date of winding up the assets of the Company comprised the Property (which was unencumbered, save for the land tax) and a “significant amount” in credit in its bank account;
  • The Company failed to respond to the winding up application as Mr Kadzielski at that time was dealing with his sick mother and there were a “number of difficulties in respect of the winding up application” (it is not clear what this was referring to);
  • The Company’s main source of income appeared to be through consultancy work provided by Mr Kadzielski through the Company, and that income would be sufficient to pay the Company’s debts, failing which, the Company wass able to sell the Property;
  • A third party had placed monies on trust for the benefit of the Company if the winding up order was terminated, and those monies were pursuant to an arrangement, or at its highest, a loan agreement, between the third party and Mr Kadzielski personally (Third Party Funds);
  • The liquidator gave evidence that if the winding up order was terminated, and having received the Third Party Funds, the Company would have enough funds to pay out its liabilities for the next 12 months (not taking into account additional income that might be received by the Company);
  • The liquidator’s costs would be paid in full; and
  • As at the date of the hearing, there appeared to have been at least one other debt, being an amount payable to ASIC in respect of annual review fees.
The Court’s consideration of the termination application

In addition to noting the matters set out above, the Court made the following findings:

  1. The Court accepted that the winding up of the Company appears to have arisen from “an unfortunate combination of circumstances”, including a failure to attend with appropriate care to the payment of the land tax debt, and there was no reason to doubt the proposition that the Company would not be able to pay its debts;
  2. The fact that the Third Party Funds was not a loan to the Company was relevant as a “loan to the Company would not necessarily have restored its solvency, since it would have raised a further question of how liabilities on that loan might be met”; and
  3. The affidavit given by the liquidator that provides evidence as to the Company’s ability to pay its debts in the future “is a matter to which the Court gives considerable weight” in a Termination Application.

After referring to a number of authorities, including the Glass Recycling Case, the Court granted the Termination Application on the basis that:

  1. There was “no reason to think that the interests of the Company’s creditors, including future creditors, would be prejudiced by termination of the winding up”;
  2. The interests of the liquidator were addressed (including as to costs); and
  3. There was “no suggestion that the Company’s activities have placed the interests of contributories or the interests of the public at risk, or involve any matters which give rise to issues of commercial morality”.
In the matter of Avenue Investment Capital Pty Ltd (In Liquidation) [2015] NSWSC 1919 (17 December 2015)
The application

This decision concerned a termination of the winding up of Avenue Investment Capital Pty Ltd (In Liquidation) (Avenue) and 82-84 Belmore Street Pty Ltd (In Liquidation) (Belmore) (collectively, Companies) by its respective sole shareholders Mr Sarkis Nassif and Holdmark Holdings Pty Ltd (Holdmark) (collectively, Shareholders).

The Companies had been put into liquidation by virtue of a resolution resolved by the Shareholders.

The relevant material facts

The relevant material facts can be summarised as follows:

  • Belmore was incorporated for the purpose of undertaking a commercial and residential development at Meadowbank (Development). Avenue was incorporated for the purpose of constructing the Development;
  • Various lots and units in the Development were sold to third parties, including related entities of Belmore;
  • The predominant reason stated by the Companies accountant for:
    • Belmore’s failure was, among other things, it’s assumption that no GST was payable for the purchase of the Development, when it in fact was, increased costs in respect of the Development and a fall in the market price by which the units in the Development were sold to third parties; and
    • Avenue’s failure was, among other things, Belmore’s failure, the low profit margins associated with the Development and increased construction costs.
  • In the liquidator’s first and/or second reports to creditors he noted that:
    • in respect of Belmore, the ATO had provided a clearance notice for over $33.3 million, there was debt recorded to Holdmark for an estimated $5 million as well as 2 other creditors totalling approximately $6,100.00; and
    • in respect of Avenue, the ATO had provided a clearance notice for over $37.2 million, there was a debt recorded to Holdmark for an estimated $10 million as well as 2 other creditor totalling approximately $6,500.00.
  • Mr Nassif and his related entities entered into a settlement agreement with the ATO. As the terms of the settlement agreement were confidential it was not put before the Court and the Court was given no details as to the arrangements, save that there was a requirement for the Termination Application to be brought (although apparently the effectiveness of the settlement agreement was not conditional upon the application being successful);
  • Evidence was given by one of the liquidators that subsequent to the settlement deed being entered into all proofs of debt had been withdrawn;
  • Evidence was also given by the liquidator and Mr Nassif that all debts had been paid, although this was not explained;
  • The liquidators did not oppose the Termination Application and their costs would be provided for if the application was successful;
  • The liquidators had given evidence that in respect of Belmore, whilst it appeared that Holdmark owed Belmore over $6.8 million, there were documents also suggesting Holdmark owed Belmore over $127.6 million, such as to make Holdmark a debtor rather than a creditor of Belmore;
  • Mr Nassif also submitted financial statements in respect of Belmore and Avenue, including balance sheets that showed nil assets and nil liabilities for both; and
  • The liquidators had conducted a number of investigations and had even instituted proceedings in respect of potential voidable transactions, issued various notices/order for production of documents and had also filed examination summonses with the Court as part of their investigations (the examinations of which were deferred as a result of the ATO settlement).
The Court’s consideration of the termination application

The Court held the following in relation to the evidence before it:

  1. The Court was not satisfied on the evidence before it that, as a matter of law, the creditors initially listed, specifically Holdmark, had extinguished their rights against the Companies or that those claims had otherwise been paid or compromised (the Court was not so concerned with the debts for approximately $6,000 against each Company, as the Court’s view was that those debts were so small that they were trivial). The mere fact that proofs of debt were withdrawn was not sufficient evidence;
  2. The Court was not satisfied that the comments made by the liquidators in respect of solvency of the Company (including the existence of debts) were based on considered opinions the Court could safely rely on;
  3. As for the financial statements put before the Court, those financial statements were criticised on the basis that they were not clear and were otherwise unexplained and unsubstantiated;
  4. Even if the Court were to accept the evidence before it that the Company has no current assets or liabilities:
    1. there appeared to be no explanation as to why the winding up orders were being sought to be terminated, save that it appeared to be a requirement of a settlement deed, which raised questions as to the utility of the application from a commercial perspective; and
    2. the Court could not be satisfied that if the Companies were intended to continue commercial operations, that it would not immediately become insolvent given that it had no assets;
  5. The mere fact that creditors had withdrawn their proofs of debt was not sufficient evidence for the Court to be satisfied that the debts had been settled or extinguished;
  6. There remained 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”, especially in light of:
    1. the fact that the “evidence suggests that both companies may have been seriously delinquent in relation to aspects of their taxation obligations”; and
    2. the subject matter of the liquidators’ investigations and proceedings;
  7. It appeared that one objective of the making of the application was to bring the liquidators’ investigations and proceedings to an end. However, the Court emphasised that this was “not necessarily an inappropriate outcome”, and if it can be shown that all unrelated creditors had been satisfied, then that may justify the termination of the winding up of the Companies. This was because those continued investigations/proceedings:

“may have no practical result other than to substantially increase the costs of the windings up for no commercial benefit or return to the parties who have real interests in the activities of the companies, save for the exploration of issues concerning commercial morality”

On the basis of the matters set out above, the Court refused the Termination Application.

However the Court appeared to be prepared to give the plaintiffs one final opportunity to address the issues raised by His Honour in the Judgment. Practitioners should not assume that this indulgence will be given as a matter of course if evidence put before the Court at a final hearing is deficient.

Judson, in the matter of Maneroo Pty Ltd (in liq) [2015] FCA 783 (29 July 2015)
The application

This decision concerned a termination of the winding up of Maneroo Pty Ltd (In Liquidation) (Company) by its shareholders, Graham Leslie Huddy and Linda Frances Huddy, the second and third plaintiffs (Shareholders).

The Companies had been put into liquidation by virtue of a resolution resolved by the Shareholders.

The relevant material facts

The relevant material facts can be summarised as follows:

  • The Shareholders operated a mining plant hire business (Business) through 2 entities controlled by them, Norbre Pty Ltd (Norbre) and Industrea Mining Services Pty Ltd (IMS);
  • The Company owned shares in IMS;
  • Industrea Limited purchased the Business from Norbre and IMS by, among other things, purchasing all the Company’s owned shares in IMS (Purchase Funds);
  • As a means for the Shareholders to gain access to the Purchase Funds, “in order to enable a tax-free liquidation distribution of pre-CGT reserves of Maneroo to be made” to them, and as such the Shareholders resolved to place the Company into liquidation;
  • The ATO disagreed that the Purchase Funds were non-taxable pre-CGT gains and found that they were post-CGT assets that resulted in Maneroo deriving a taxable gain;
  • The Company and the ATO entered into a Deed of Settlement that required a Court of competent jurisdiction to terminate the winding up;
  • The ATO issued notices of amended assessments for $43,580,077.47 (inclusive of interest), which was subsequently paid in full;
  • As a consequence of the matters set out above, the Company derived a franking credit balance of over $31.1 million, which was of significant value to the Shareholders. Maneroo also derived the benefit of being able to utilise the payment of interest (of about $14.4 million) as a deductible for the 2015 income year, or to carry it forward as a loss for future income;
  • If the termination of the Company was not wound up, the Company would be unable to utilise the deduction;
  • At the time of the application, the Company only had one creditor, being the liquidators and their solicitors, and provision had been made for the payment of those fees; and
  • The liquidator also gave evidence that:
    • he or she was satisfied that if the winding up was terminated, the Company would have “sufficient financial strength and stability to continue trading without an appreciable risk of becoming insolvent”; and
    • had not observed any conduct that may be amount to a breach of directors’ duties or offences by the Company or its officers.
The Court’s determination

After reviewing the principles concerning the termination of winding up the Court granted the Termination Application as it was “plainly in the interests of the members of … [the Company] and the liquidator supported the application”.

This article has been prepared by Grant Whatley, Partner and Matthew Youssef, Associate.

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