Background
- On 1 May 2018, the Supreme Court of NSW ordered the winding up of the Company and the appointment of Jason Porter of SV Partners as liquidator of the Company.
- The winding up order made was based on the presumption of insolvency from the failure of the Company to comply with a statutory demand issued by the applicant creditor (section 459C(2)(a) of the Corporations Act (Act)).
- On 4 May 2018, the director filed in the Company’s name an interlocutory application seeking the following orders:
- pursuant to section 482(1) of the Act, that the winding up of the Company be terminated or stayed indefinitely;
- pursuant to section 482(3) of the Act, that the management and control of the Company revert back to the director; and
- pursuant to regulation 36.16 of the Uniform Civil Procedure Rules (UCPR), that the orders to wind up the Company and appoint a liquidator be set aside.
Evidence
- The director had submitted that the relevant form to change the Company’s registered office was not lodged with the ASIC and accordingly, he did not have notice of the winding up application or the creditor’s statutory demand. The director also made enquiries with his former accountant (which was the listed registered office) and had been advised that the relevant documents were not received by the former accountant.
- The director also provided a letter from the Company’s accountant who expressed the opinion that the Company was solvent. However, the accountant’s opinion was based solely on the Company’s profit for the last 2 years.
- The director had also settled the liabilities of the Company including the liquidator’s fees and costs, and the applicant creditor’s costs and debt.
- The liquidator had not identified any other liabilities of the Company.
- The Liquidator neither consented to nor opposed the orders sought.
Outcome
- On 28 May 2018, the Court ordered that the winding up of the Company be set aside. Summarily, the reasoning for the Court’s decision were as follows:
- The application to set aside the winding up order was brought with little delay.
- The director had explained the reason for the Company’s non-appearance at the winding up hearing and its failure to respond to the statutory demand.
- The director had caused the liabilities of the Company to be paid (there was also an order that the balance of the liquidator’s additional fees and costs be paid).
- The liquidator’s investigations had not identified any other outstanding debts (including any taxation liabilities).
- There was some evidence produced by the director as to the solvency of the Company.
Issues determined
Can the director bring the application in the Company’s name?
- A director is prohibited from exercising their powers whilst the company is in external administration, unless written approval is obtained from the external administrator or the Court (sections 198G(1) and 198G(3)(b) of the Act).
- During the hearing, an oral application was made for leave to be granted for the director to bring the application in the name of the Company. The Court found that it was appropriate for the grant of leave.
Was the director/Company on notice of the winding up application?
- Regulation 36.16(2)(b) of the UCPR states:
“The court may set aside or vary a judgment or order after it has been entered if it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order.”
- The Court was satisfied on the basis of the evidence submitted by the director that the Company/director did not have notice of the winding up application or creditor’s statutory demand.
Was the Company solvent?
- The Court found that the letter provided by the Company’s accountant was not sufficient to prove the Company was solvent.
- However, the accountant’s letter coupled with the liquidator’s submission that no other liabilities of the Company were identified was sufficient for the Court to be satisfied that there was some indication of solvency.
- The Court commented that it was not necessary to prove the Company was solvent for the purposes of the order sought under regulation 36.16(2)(b) of the UCPR and that an indication of solvency was sufficient.
Take away points
- Directors should act quickly when bringing an application to set aside a winding up order. The Court will look favourably on ‘set aside’ applications brought without delay. This will also reduce the liquidator’s costs.
- Directors should carefully consider the appropriate section under which relief should be sought (i.e. section 482 of the Act or regulation 36.16 of the UCPR). The level of proof as to the solvency of the company is generally lower if the application is made under the latter provision. In this matter, whilst no positive proof of solvency was provided, the Court found there was sufficient evidence to exercise its discretion to set aside the winding up. Of course, depending on the circumstances, regulation 36.16 of the UCPR may not be available.
- Accountants (and similarly, liquidators and solicitors) should carefully consider the level of proof of solvency required depending on the nature of the application. If an application was to be made under section 482 of the Act, then the applicant should consider some of the following elements to prove solvency:
- profit and loss analysis
- balance sheet analysis (including liquidity ratios, current ratios, net asset position, etc)
- cash flow analysis (including access to available funds/financing)
- whether creditors (including taxation liabilities) were paid within trading terms or whether creditors had commenced enforcement action (e.g. demand letters, etc)
- status of books and records and financial information (e.g. reliability and timeliness of records)
- obtaining a solvency report from a sufficiently qualified accountant/liquidator.
- Liquidators should consider whether it would be appropriate to allow directors to commence ‘set aside’ applications in the name of the company under section 198G(3)(b) of the Act. One might suggest that it would be unreasonable for the liquidator to withhold consent particularly in circumstances where they have taken a neutral stance as to the orders sought.
- It matters not whether the liquidator consents or opposes the application. The important consideration is that justice is done to the parties. However, if there were any matters from the liquidator’s investigations, which indicates the winding up should continue (e.g. the company was insolvent or misconduct by the directors) then that should be brought to the Court’s attention.
- To avoid similar situations, directors should ensure that the company’s registered office is always up-to-date on the public register maintained by the ASIC.
Article written by Ben Ho, Senior Manager SV Partners Sydney.
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