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Stay or termination of a winding up - review of recent case law

17 Jan 2012

At times, it may suit to have a company, which is in liquidation, removed from liquidation and be able to conduct business affairs. A liquidator, creditor or a contributory to a company which has been wound up has the right to seek an order from the Court terminating or staying the winding up pursuant to section 482(1) of the Corporations Act 2001 (Cth) (‘the Act’) provided they can satisfy the Court of certain elements.

Late 2011 saw, within a short period, two decisions on termination of liquidations, with opposite outcomes. They serve to highlight the elements necessary to succeed on an application and the way the courts view the discretion to terminate a winding up.

A liquidator or creditor who has been given notice of an application to terminate a winding up has the right to be heard and voice objection to the making of such an order.

Recent cases

In December 2011 the judgment in the matter of Re Kitchen Dimensions Pty Ltd (in liq) (2011) VSC 637 was handed down by Gardiner AsJ. This was an application brought by Mr Guidice as a contributory of the company to terminate the winding up.

The winding up order was made pursuant to an originating application based on an expired statutory demand. The winding up order was not contested.

The liquidator and 84% of the company’s creditors in value opposed termination of the winding up.

Gardiner AsJ in considering Re Warbler Pty Ltd (1982) ACLR 536 and Re Skay Fashion Pty Ltd (1986) 10 ACLR 743 as well as other case law on the issue dismissed Mr Guidace’s application for the following primary reasons:

  1. The circumstances leading up to and surrounding the winding up order point to a delinquent attitude by those associated with the company in the management of its affairs, in its dealings with revenue authorities and its other creditors.
  2. The evidence revealed there had been a serial disregard to compliance by the company with its obligations to file BAS statements.
  3. His wife continued to act as a director of the company for several years after she had been declared bankrupt.
  4. The company was involved in transactions which moneys held in a self-managed superannuation fund were misapplied. These funds have not yet been restored.
  5. The solvency of the company had not been established to a satisfactory degree.
  6. The financial position of the company presented by Mr Guidace was substantially different to that of the liquidator.
  7. An overwhelming proportion in value of creditors opposed termination of the winding up.

This case is distinguishable from a case decided by the New South Wales Supreme Court two months earlier (in October 2011) where an application to terminate a winding up was actually successful.

In Re Australian Eco-Retreats Pty Ltd (2011) NSWSC 1178 an application was brought by Mr Clifford and Ms Hackman, who together held all shares in the company, to terminate a winding up.

They sought orders on the grounds that:

  1. all debts owed by the company had been or would be discharged shortly after the winding up terminated; and
  2. if the winding up were to be terminated it would enable a joint venture to proceed which the company would become part of.

The liquidator neither consented nor opposed the orders sought.

It was acknowledged that if the winding up was not terminated the joint venture would not proceed and all the creditors would not be paid in full, however if the winding up was terminated therefore allowing the joint venture to proceed, all creditors would be paid in full.

In considering that all debts had or would be paid in full shortly after termination, and that provisions had been put in place to ensure the liquidator was reimbursed in full, the Judge ordered that the winding up be terminated.

What this means for you?

If you are considering applying to terminate or stay a winding up order or are a liquidator or creditor wishing to oppose an application to terminate or stay a winding up, you should consider the criteria set out in these recent cases and that of Re Warbler Pty Ltd and Re Skay Fashion Pty Ltd.

In summary, to be successful in having a wind up terminated, the Court (therefore any potential applicant) must consider and be satisfied of the following:

  1. whether the Applicant has satisfied its onus to make out a positive case for a stay or termination;
  2. whether there must be proof of service of the notice of the application for stay or termination on all creditors and contributories;
  3. whether or not all debts have or will be discharged if the orders are made including the nature and extent of the creditors;
  4. establish the attitude of the creditors, contributories and the liquidator.
  5. demonstrate the current trading position and general solvency of the company;
  6. whether or not there has been non-compliance by directors of statutory duties;
  7. establish the general background leading up to the winding up; and
  8. whether or not the conduct of the company was in any way contrary to ‘commercial morality’ or the ‘public interest’.

What is clear from the above is that in all cases, an insolvent company should stay in liquidation.

How we can help

Hynes Legal's  litigation team is well equipped in dealing with all aspects of insolvency law and are available to assist you with either bringing an application to stay or terminate a winding up or to defend such an application as either a creditor or a liquidator.