Not as easy as you might think: Termination of a winding up

In Hughes, in the matter of Substar Holdings Pty Ltd (in liquidation) (No 2),¹ the Federal Court considered an application by the joint and several liquidators of Substar Holdings Pty Ltd (Substar) to terminate the liquidation of Substar pursuant to section 482 of the Corporations Act 2001 (Cth) (Act).

The application was made on the basis that Substar’s sole director had put forward a proposal which would allow each of the Company’s creditors to be repaid in full as well as the costs and remuneration of the liquidators to be met.

Background

Substar carried on no business of its own but held assets in its capacity as trustee of the Taurus Investments Trust (Trust). 

In August 2020, joint and several liquidators (Liquidators) were appointed to Substar upon application by a creditor of the company.  The Federal Court also appointed the Liquidators as receivers and managers of the property of the Trust to enable the Liquidators to realise that property to satisfy the liabilities incurred by Substar as trustee.

Subsequently, following negotiations in January and February 2021, Substar’s sole director, Mr Andrew Scala put forward a proposal to the Liquidators to terminate the winding up of Substar.

The Liquidators had confirmed that Mr Scala or his nominee would need to provide the sum of $530,000 to the Liquidators in order to pay out all creditor claims and to cover the Liquidators’ costs and expenses of the winding up (Requisite Funds).

Mr Scala’s proposal provided that Mr Scala’s nominee, Scala Holdings Pty Ltd (Scala Holdings), and Substar would enter into a loan agreement to borrow the funds to pay the Requisite Amount, with the loan to be secured by:

• guarantees and an AllPAP security interest to be provided by Mr Scala as the sole director of both Substar and Scala Holdings; and

• first ranking mortgages over real property owned by Substar and/or Scala Holdings.

With the consent of the Liquidators, Mr Scala, Substar and Scala Holdings then entered into a conditional loan agreement (and associated security arrangements) with OFCS Pty Ltd t/a Oak Capital (Oak) on 1 April 2021 to allow Substar and Scala Holdings to borrow sufficient funds to pay the Requisite Funds to the Liquidators.

The Application

The Liquidators commenced the application for orders under section 482 of the Act by interlocutory process in or around late April 2021.  The application was subject to a number of amendments with the final version being filed on 14 June 2021. 

The application (or at least one or more of the versions of the application) was served on all of the 11 creditors of Substar, with 4 of those creditors confirming that they did not object to the application.

The Liquidators also served the application on the Australian Securities and Investments Commission (ASIC) who confirmed that (in accordance with ASIC’s current policy) ASIC would not provide a formal response to the application unless specifically requested to do so by the Court.

The application was also supported by Mr Scala and Scala Holdings.

In its final form, the application sought orders that if the Requisite Funds were paid to the Liquidators within 60 days of the orders being made, then the winding up of Substar (and the receivership of the Trust) be terminated.

Decision

Justice McKerracher noted that the Court’s power to terminate a winding up is conferred by section 482 of the Act, which gives the Court a discretion to either stay or terminate a winding up.

However, Justice McKerracher also observed that in considering the exercise of the discretionary power pursuant to section 482, regard must be given to the eight factors set out by Master Lee QC in Re Warbler Pty Ltd² which are as follows:

• The granting of relief is a discretionary matter, and the applicant bears the onus to make out a positive case for the relief.

• Notice of the application must be served on all creditors and contributories, and proved by evidence before the Court.

• The nature and extent of the creditors must be proved, including whether or not all debts have been or will be discharged.

• The attitude of creditors, contributories, and the liquidator is a relevant consideration.

• The current trading position and general solvency of the company should be demonstrated where a stay of proceedings in the winding-up is sought.

• If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given.

• The general background and circumstances which led to the winding-up order should be explained.

• The nature of the business previously carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to “commercial morality”.

The Court also cited Austin J in Mercy & Sons Pty Ltd v Wanari Pty Ltd³ where it was held that in circumstances where winding up orders have been made against a company on insolvency grounds, it will be necessary for the company to demonstrate that it is now solvent and that the circumstances that necessitated the initial winding up orders are no longer present.

The Court ultimately made the order sought pursuant to section 482 on the basis that: 

• The proposed form of orders sought was appropriate as the termination of the winding up was contingent upon the receipt by the Liquidators of the Requisite Funds, and there was a time limit of 60 days placed on the payment of these funds.

• The nature and extent of the Company’s creditors had been identified by the Liquidators with a reasonable degree of certainty and the proposed sum of $530,000 would be sufficient to pay out all current creditors in full.

• While the Liquidators had not served the original filed version of the application on all creditors, and while there were questions as to whether the initial response period of 5 days given to creditors was sufficient, by the time the application was heard it was clear that all creditors had been given notice of the application and had sufficient time to respond.  

• Although responses had not been obtained from all creditors, no creditors had objected to the application and it was difficult to foresee the basis for any potential objection because the creditors were to be repaid in full.

• It was significant that the application to terminate the winding up had been brought by the Liquidators, with the support of Mr Scala.

• The Liquidators considered that the proposal would result in Substar returning to solvency.  Mr Scala had put forward evidence that he would repay the Oaks loan by selling a number of properties.  It was also relevant that Substar does not trade and its sole purpose is to act as trustee of the Trust.

• The circumstances leading up to the winding up had been explained by Mr Scala as relating to a failure by the former accountants of Substar to notify Mr Scala of the service of the statutory demand, court process and related documents on the accountants on behalf of Substar.

• Although the Court had some concerns about the previous conduct of the Director in failing to maintain any books and records for Substar and initially failing to cooperate with the Liquidators, the weight to be given to this factor was somewhat lessened due to the fact that the Liquidators were satisfied that it was appropriate for them to bring the application.

• It was not contrary to commercial morality or the public interest for the winding up to be terminated as Substar did not carry on any business of its own, all of the existing debts of Substar would be repaid under the proposal, and Substar would be solvent as Mr Scala had undertaken to repay the Oak loan.

Lavan comment

This case serves as a useful reminder that whilst it is possible to terminate the winding-up of a company pursuant to section 482 of the Corporations Act, the process is not as straightforward as it might seem and those seeking a termination order will have to satisfy the Court about the matters listed above.

If you are thinking about applying to terminate or stay a winding up, or if you are called upon to consider or respond to such an application, please contact the experienced Lavan team.