Introduction
In Empire Capital Partners Pty Ltd v CMB Investments 1993 Pty Ltd [2021] FCA 605 (“the Winding-up Proceeding”), the Federal Court of Australia examined the relevant principles applicable to the adjournment of a winding up application made when a company is already in receivership.
Background
On 25 March 2021, the Federal Court of Australia appointed receivers to the property of CMB Investments 1993 Pty Ltd (“the Company“), and the sole director and shareholder of the Company, Mr Brown. This occurred in a different proceeding, referred to by the Court as the “Receivership Proceeding”.
The applicants for the appointment of the receivers were six creditors to whom Mr Brown owed money. Although the debts were not that of the Company, there was evidence to suggest that Mr Brown intended to transfer substantial assets to the Company. Mr Brown and the Company consented to the appointment of the receivers.
The orders made in the Receivership Proceeding included that on 15 June 2021:
- the receivers’ report on their investigations into the Company and Mr Brown was to be provided to the Court (“the Report”); and
- the receivership was to end.
In the Winding-up Proceeding, a different creditor, Empire Capital Partners Pty Ltd (“the Creditor”), applied for the winding up of the Company on the basis of an unsatisfied statutory demand in the sum of $100,000 plus interest. The receivers sought a stay or adjournment of the winding up application to a time after they had provided their report to the Court.
The receivers’ arguments
The receivers argued that if a liquidator was appointed, it would lead to an unnecessary duplication of effort and costs, and also lead to confusion as to the respective powers and functions of the receivers and the liquidators.
The receivers relied on a line of cases which found that a bankruptcy notice served after a court appointment of receivers is bad, because interference with a court’s order giving possession of the property to the receivers (which can result from a sequestration order) is a contempt of court. The receivers submitted that the same principle should be applied to applications made to wind up a company when receivers have already been appointed.
The receivers further submitted that there was no immediate need to make a winding up order, because the Company was not trading or incurring debts. Accordingly, there was no risk to creditors that property would be lost.
The Creditor’s arguments
The Creditor submitted that the cases relied on by the receivers were distinguishable because in those cases, there was a debtor opposing the bankruptcy. In the Winding-up Proceeding, there was no one capable of opposing the winding up application on behalf of the Company (Mr Brown became automatically disqualified as a director of the Company upon the sequestration order being made against him).
Further, the Creditor submitted that no specific power to defend a winding up application had been included in the receivers’ powers in the Court’s orders. It was argued that this was because it would have been “impermissibly restrictive” for creditors of the Company to have the Court fetter their right to enforce debts owed to them by the Company, in order to allow other creditors, who had debts owed to them by Mr Brown, to “have their chosen insolvency practitioners tinker around with the proceeds of a company”.
The decision
The Court ordered that the winding up application be adjourned to 30 June 2021, to be heard at the same time as an interlocutory hearing convened for the purposes of considering the Report.
The Court’s main consideration was the interests of the creditors. The Court found, in agreement with the receivers, that the receivership was nearly over, the receivers were formulating their report, the assets of the Company were secured by reason of the receivers’ appointment and the Company was not trading. It was therefore in the best interests of the creditors for the receivers to conclude their Report before considering whether the Company should be wound up. The risk of duplication of effort and costs, and the risk of confusion were real.
The Court also addressed the Creditors suggestion that the receivers were acting inconsistently with their duties to the Court so as to advance the partisan interest of the applicants in the Receivership Proceeding, noting the choice of words such as “tinker around” and “chosen insolvency practitioners”. The Court held that there was no evidence that the receivers were acting otherwise than in the interests of all creditors of the Company.
Ultimately, the Company was wound up at the next hearing.
Take-Aways
In deciding whether it is appropriate to file an application to wind up a company which is already under receivership, it should be considered:
- how far along the receivers are in finalising their investigation and their report (i.e. will there be a duplication of costs and effort, and risk of confusion);
- whether the assets of the company are secure (i.e. is the company trading and incurring debts);
- whether there is any basis for believing that the receivers are not acting in the best interests of all creditors.
~ by Helen Hodgins, Lawyer
