Battle Not Over – Blindsided Spartan Has Company Winding Up Terminated - Insolvency/Bankruptcy

This week's TGIF looks at the NSW Supreme Court's recent guidance on factors relevant to whether a winding up ought be terminated.

Key takeaways

The power to terminate a winding up under s 482 of the Corporations Act 2001 (Cth) is discretionary and the onus is on the party making the application to make out a positive case.
Factors relevant to whether a winding up should be stayed or terminated include: the attitude of creditors, contributories and the liquidator; solvency; compliance by directors with their statutory duties; the public interest; and the general circumstances which led to the winding-up.
Absent exceptional circumstances, an order terminating a winding up would usually be made if all creditors are paid out, the liquidator's costs and expenses are covered and the members agree.

What happened?

In February of this year, on the application of Oilsplus Holdings Australia, the Court ordered that Spartan Pastoral Company (in liq) (Company), which operated an agricultural business in the Bathurst and Parkes areas of NSW, be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) (the Act).

In the current proceedings, the sole director and shareholder of the Company applied for the winding up to be terminated under s 482 of the Act and gave evidence that he was unaware of the winding up application until contacted by the liquidator's office and advised the Company was in liquidation.

The Applicable Test

The Court considered its power to make an order terminating a winding up under s 482 of the Act, noting:

that the power is discretionary; and
that a person who seeks a termination order must make out a positive case for the exercise of the Court's discretion in their favour.

The Court also referred to the following principles relevant to whether a winding up should be stayed or terminated:

the current trading position, general solvency of the company and nature and extent of the company's creditors – noting that there is no absolute rule that a winding up cannot be terminated as long as one or more debts remains undischarged;
the interests of creditors, taking into account whether they objected to the proposed termination (the Court noted that even if all the existing creditors agreed, the Court could find that the proposed termination puts at risk the interests of future creditors);
whether each member of the company consents to the termination (or is bound not to object to it); and
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'.

Was the onus discharged?

Counsel for the Company's director submitted his client had made a positive case for the Court to exercise its discretion in favour of terminating the winding up, on the basis that:

the Company had a viable business;
the termination was supported by the Company's financier (NAB) and its major creditors, being Mr Toole's parents and Mr Toole himself;
the nature and extent of the Company's creditors were shown and evidence was adduced that disputed debts could be serviced from a cashflow perspective;
a mechanism for payment of any disputed debts was in place (once the disputes were resolved); and
the liquidator neither consented to nor opposed the termination.

As for Oilsplus, the creditor who had petitioned for the winding up in the first instance, the Company put on evidence that the dispute related to a bulk order for fuel that the company had no knowledge of receiving. Evidence was also adduced that agrei>ent had since been reached with Oilsplus to settle the dispute.

What did the Court decide?

The Court ultimately found that orders could be made with a view to terminating the winding up.

Justice Black was prepared to accept evidence provided by a registered liquidator (who also made cashflow forecasts available to the Court) that if the winding up was terminated, the Company would ri>ain solvent for the foreseeable future. That evidence included that the Company would have a positive cashflow outcome for 15 of the next 18 months.

For these reasons, and having regard to the principles of the 'Applicable Test' (discussed above), the Court was prepared to make orders to terminate the winding up.

Comment

This decision provides useful guidance to practitioners of the basis upon which a winding up can be stayed or terminated and what must ultimately be proved by the applicant to have the discretion exercised in their favour.

While the factors described above are not exhaustive or rigid principles, solvency is of significance as is the attitude of creditors, the interest of future creditors and the liquidator (with respect to costs).

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.