This decision of the Supreme Court of Western Australia illustrates the proposition that mere assertions about cross claims by a company against a creditor who is seeking to wind up the company will often not be enough to avoid a winding up order.
In July 2010, an adjudicator under the Construction Contracts Act 2004 made a determination by which Perrinepod Pty Ltd (Perrinepod) was liable to pay Georgiou Building Pty Ltd (Georgiou) $1,575,912.57. In August 2010, the Supreme Court made an order by which Georgiou had leave to enforce the determination, as a judgment of the Court. A substantial part of the judgment sum was not paid.
Georgiou applied under sections 459A and 459P of the Corporations Act 2001 for an order for the winding up of Perrinepod.
Perrinepod opposed the application on the grounds that (1) Georgiou was not a creditor with standing to make application under section 459P of the Act; (2) there was a disputed claim between the parties, so that the application for winding up was an abuse of process; and (3) Perrinepod had rebutted the presumption of insolvency under section 459C(2). Perrinepod sought a stay of Georgiou’s application until the disputed claims had been determined.
The Court’s decision
The Court found that on entry of the judgment pursuant to the Construction Contracts Act, Georgiou had standing as a creditor to apply for a winding up order under section 459P of the Act. This position was not altered by the fact that Perrinepod contended that it and related companies had claims against Georgiou, in excess of the amount of the judgment. The Court found that the adjudicator’s determination was binding on the parties, and the alleged dispute between the parties could only be taken into account as part of the exercise of the Court’s discretion under sections 459A and 467.
The Court also found that the application was not an abuse of process, because enforcement of the judgment against Perrinepod was returned unsatisfied, and Perrinepod is presumed to be insolvent. Further, unless and until the judgment based on the adjudicator’s determination is “clawed back” under section 45(4) of the Construction Contracts Act 2004, the judgment stands.
On the question of insolvency, the Court noted that the onus was on Perrinepod to establish solvency, given that it was presumed to be insolvent. This required Perrinepod to produce to the Court “the fullest and best evidence” of its financial position. However, the financial statements showed that Perrinepod’s liabilities exceeded its assets. Further, it had relied on loans, but there was no evidence of its ability to continue to borrow or the terms on which it could do so. It had various other unpaid debts and there was no adequate explanation as to why payment had not been made.
For these reasons, winding up orders were made and the application for a stay was dismissed.
Lavan Legal comment
This case shows that mere allegations of cross-claims will often not be enough to avoid winding up orders, particularly where the company is not able to adduce evidence showing that it is not insolvent.
In that regard, the company should produce detailed financial statements and a full explanation of its overall financial position, including as to what other debts it has and why they have not been paid.
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