By Jacob Reardon a Solicitor of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
Under section 467(1) of the Corporations Act 2001 (Cth) (“the Act”) the Court has discretion in a winding up application to:
- Dismiss the application with or without costs, even if a ground on which the Court may order a company to be wound up is proved; or
- Adjourn the winding up application hearing conditionally or unconditionally; or
- Make any interim order it thinks fit.
In exercising its discretion, the Court’s attention will be directed to the public interest which usually dictates, in the absence of special circumstances, that an insolvent company be wound up to prevent it from incurring further debts.
In Reform Projects Pty Ltd v Macarthur Projects Pty Ltd [2022] NSWSC 672, Parker J (“Macarthur Projects”) considered an application to have the defendant company (“Macarthur”) wound up in insolvency after it had failed to comply with a statutory demand served by the plaintiff company (“Reform”).
Macarthur, who was admittedly insolvent, had previously sought to have the statutory demand set aside but had been unsuccessful.
At the winding up application, Macarthur requested that the Court use its discretion under section 467 of the Act to dismiss or adjourn the proceedings so that it could pursue its own claims against Reform totalling $2.5 million. Macarthur had filed proceedings in the New South Wales Supreme Court commercial list against Reform which were not advanced very far towards a final hearing.
The Court was directed to the following cases in support of Macarthur’s application to dismiss or adjourn the winding up application:
- Bungey v Magnate Projects Pty Ltd (2006] NSWSC 734 (“Bungey”); and
- Deputy Commissioner of Taxation v TD Preece Pty Ltd [2013] FCA 1365 (“Preece”).
Bungey
In Bungey the company the subject of the winding up application was involved in substantial and complex litigation. The relevant proceedings were scheduled for hearing and if the company succeeded it would be entitled to recover sufficient funds to repay its creditors (none of which included trade creditors).
In these circumstances, the Court found that it was in the public interest not to take steps to prevent the litigation which had been prepared for hearing and for which a hearing date had been allocated.
Preece
Similarly in Preece, the debtor company was party to proceedings which were well progressed and in which judgment was imminent. The company had been operating a business which had been disrupted as a result of the proceedings commenced against it.
The company was paying its employees and suppliers out of its trading income and there were plans afoot which would allow it to repay its tax liability (which was the debt to which the winding up application related).
In those circumstances, the Court ordered that the company not be wound up subject to the payment of the unpaid tax liability by a certain date.
In Macarthur Projects Parker J considered Bungey and Preece and observed that:
- In Preece the court had relied on authorities where the Court’s discretion had been exercised to permit a company to trade out of temporary financial uncertainty. In the matter before him, however, it was admitted that Macarthur was insolvent;
- In both Bungey and Preece the proceedings sought to be prosecuted were nearly complete. In Macarthur Projects the court estimated that a hearing would be at least a year away;
- It was unclear to his Honour how the fixed 6 month period for determining winding up applications (pursuant to section 459R of the Act) could be accommodated without dismissing the proceedings to wind up Macarthur; and
- Macarthur had had a full opportunity in its earlier proceedings to set aside the statutory demand and had failed (putting to one side the different test for such applications).
In Macarthur Projects Parker J noted that:
- Macarthur was not trading in the usual sense;
- The conduct of the legal proceedings sought to be prosecuted by Macarthur would result in the incurring of costs which might be payable to third parties (and which it was not clear that the debtor would be able to pay);
- The making of a winding up order would not prevent a liquidator from prosecuting the same proceedings (although his Honour acknowledged that this could give rise to practical problems if the liquidator were unable to obtain funding); and
- The fact that the proceedings could be conducted by an independent liquidator tended to incline his Honour in favour of liquidation, given a liquidator is required to conduct the proceedings dispassionately, efficiently and in the interests or creditors.
Section 459S of the Act
Under section 459S of the Act a company is prevented from opposing a winding up order on a ground or grounds which it should or could have relied upon, to set aside the statutory demand. Consequently, Macarthur had effectively abandoned the existence of the offsetting claim against Reform as a ground of opposition to the winding up application.
Parker J held that to dismiss or stand over the winding up application in order to allow Macarthur to pursue the common law proceedings would come close to nullifying the purpose of section 459S. This was another distinction from Bungey and Preece given that those proceedings were proceedings against a party other than the applicant for the winding up order.
In the end the winding up application succeeded and a liquidator was appointed.
Costs of the application
Reform sought to have its Petitioning Costs granted under section 466(2) of the Act. Reform sought to avoid the costs associated with the taxation and applied to the court to make a lump sum costs order under section 98(4)(d) of the Civil Procedure Act 2005 (NSW) (“CPA”).
Interestingly, Justice Parker did not consider that he could make a lump sum costs order under the CPA for the following reasons:
- Section 466(2) of the Act refers to “Taxed costs;”
- The Act is federal legislation and the proceedings are taking place in federal jurisdiction;
- The wording of section 98(4)(d) CPA suggests that a lump sum costs order is an alternative to an assessment rather than a type of assessment. Therefore, it may beyond the scope of the term “taxation”.
The court further noted that one of the general objectives of the Act is to encourage creditor claims to be dealt within a non-litigious manner. The Court therefore considered it is usually more appropriate for the liquidator to fix costs in agreement with the creditor followed by a formal proof of debt procedure.
Read the decision here
The above case demonstrates the importance of ensuring that genuine disputes are fully litigated at an early stage, and before fighting off a a statutory demand or winding up application. Particularly where a debtor has sat on its hands it should not be expect that the Court will use its discretion to adjourn winding up proceedings to allow the debtor to pursue litigation (especially against the petitioning creditor, and even more so where the company is admittedly insolvent).
If you would like more information or advice in relation to Insolvency, Restructuring or Debt Recovery law, please contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
