To terminate or not to terminate? Proving solvency following the making of a winding up order

Hughes, in the matter of Substar Holdings Pty Ltd (in liquidation) (No. 2)[1] (Substar No. 2) considers the Court’s discretionary power to terminate the winding up of a company pursuant to s 482(1) of the Corporations Act 2001. Substar No. 2 follows the decision of Hughes, in the matter of Substar Holdings Pty Ltd (in liquidation) [2020] FCA 1863 (Substar No. 1), which considered the extent to which liquidators can realise trust assets when a corporate trustee enters into liquidation.

Relevantly, the question of solvency was a primary consideration for the Court in Substar No. 2 in circumstances where winding up orders had been made against Substar Holdings Pty Ltd (In Liquidation) (Substar) on insolvency grounds. This required the Court to turn to eight established legal principles set out by Master Lee QC in Re Warbler Pty Ltd.[2]

The Application

The Liquidators sought orders for the termination of the liquidation of Substar on the basis that its sole director, Mr Scala, put forward a proposal which would allow Substar’s creditors to be repaid in full. As detailed in Substar No. 1, Substar carried on business and held all its assets in its capacity as trustee of the Taurus Investments Trust (the Trust).

In considering Mr Scala’s proposal to pay all creditors in full and termination of the liquidation of Substar, the Court considered Substar’s financial position, trust property and total liabilities. Substar was the registered proprietor of three properties and owned eleven motor vehicles. On the basis of proofs of debts received by creditors, the Liquidators estimated the total debt to be slightly less than $237,230.75.

The Proposal

The Liquidators considered that any proposal to meet Substar’s liabilities and terminate the winding up would need to satisfy the following conditions:

1. the Liquidators be paid the sum of approximately $530,000 (Requisite Funds) so as to satisfy the creditors’ claims against Substar, and the remuneration of the Liquidators and costs incurred by the Liquidators;
2. Andrew Scala’s nominee, Scala Holdings Pty Ltd, provide the Liquidators with confirmation that it has obtained a loan to meet its obligation to pay the Requisite Funds to the Liquidators; and
3. the Liquidators consent to security being registered against a property of which Substar was the registered proprietor as security for the loan.

It followed that Substar entered into a loan agreement with OFCS Pty Ltd (trading as Oak Capital) in which Oak Capital advanced $753,018. Mr Scala’s affidavit explained that the loan funds would satisfy the Requisite Funds, with the residual balance applied towards Substar’s debts.

The Liquidators, through Mr Bredenkamp, deposed that the legal costs, disbursements and remuneration claimed by the Liquidators had been reasonably incurred. Together with Andrew Scala, they also deposed that upon payment of the sum of $530,000 to the Liquidators and its distribution as set out above, Substar would be solvent.

Legal Framework

The Court’s power to terminate the winding up of a company is conferred by section 482(1) of the Corporation Act 2001 (Cth), which provides that the Court may make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.

The legal principles relevant to whether a winding up should be stayed or terminated were established by Master Lee QC of the Supreme Court in Re Warbler Pty Ltd[3], specifically:

1. the granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay;
2. there must be service of notice of the application for a stay on all creditors and contributories and proof of this;
3. the nature and extent of the creditors must be shown, and whether or not all debts have been discharged;
4. the attitude of creditors, contributories and the liquidator is a relevant consideration;
5. the current trading position and general solvency of the company should be demonstrated;
6. 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;
7. the general background and circumstances which led to the winding-up order should be explained; and
8. the nature of the business 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’ or the ‘public interest’.

The Court’s decision

The Court granted the orders sought by the Liquidators, whereby, inter alia, the winding up of Substar (and receivership of the Trust property) be terminated upon payment of the Requisite Funds within 60 days of the date of the orders.

Key takeaway

In circumstances where liquidators seek to terminate the liquidation of a company, the question of solvency will be a primary consideration for the Court. It is necessary for the company to demonstrate that it is now solvent and that the circumstances that necessitated the initial winding up order are no longer present.

Furthermore, this means the creditors are paid out, the liquidators’ costs and expenses are covered, and the members agree that the company will not enter insolvency in the foreseeable future.

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Authored by:
Guy Edgecombe, Partner
Meg Lucas, Solicitor

[1] [2021] FCA 658.

[2] (1982) 6 ACLR 526.

[3] (1982) 6 ACLR 526 at 533.