In Hume v Carey [2022] WASC 256, the Supreme Court of Western Australia considered an application to terminate a winding up order made against HHA Architects Pty Ltd (‘Company’) under section 482 of the Corporations Act (Cth) 2001 (“Act”).
Background – Winding Up Order
The defendants (in an earlier proceeding) applied to wind up the Company under section 461(1)(k) of the Act on just and equitable grounds. The defendants argued they had standing as creditors to bring the application because they had brought separate proceedings against the Company for negligence.
Whilst those proceedings had not yet been heard, Master Sanderson found the defendants to have standing as “prospective creditors,” and ordered the Company be wound up under section 461(1)(k).
Current Application
The plaintiff, a shareholder of the Company, made application for termination of the liquidators’ appointment under section 482 of the Act. The application was opposed by the defendants on grounds that there was no relevant change in circumstances from the date the liquidators were appointed that would justify termination of their appointment, and because there was no evidence as to solvency.
Consideration
The power to make an order under section 482 is discretionary. The factors that generally inform the exercise of the court’s discretion include:
- the attitude and interest of creditors;
- the interests of the liquidator and contributories;
- the nature and extent of creditors and whether all debts have been discharged;
- the company’s current trading position and general solvency;
- any explanation for non-compliance by directors with their statutory duties and of the circumstances leading to the winding up order;
- the nature of the company’s business; and
- the public interest, including the public interest in upholding commercial morality.
Hill J observed that pursuant to section 462(4) of the Act, the court must not hear an application (under s461) by a person who is a contingent or prospective creditor of the company for an order to wind up the company, unless and until certain conditions are met including that security for costs has been given to the court and a prima facie case has been established. It was not evident whether those matters were considered.
Nonetheless, Hill J rejected that the defendants were a creditor or a contingent creditor. To be a contingent creditor there must be an existing obligation or liability on the part of the company to pay a sum of money that will arise on a future event.
Further, Her Honour referred to Treadtel International Pty Ltd v Cocco [2016] NSWCA 360, in which Justice Barrett stated that it is a well-established rule of practice that a person who claims to be a creditor whose debt is disputed on genuine grounds will not be permitted to initiate or pursue a winding up application. Justice Hill observed that the defendants had commenced proceedings against the Company for breach of contract and negligence and that it was a disputed claim. Accordingly, the defendants did not have standing to bring the original application to wind up the Company and the order should not have been made.
Justice Hill set out the factors that informed the exercise of the court’s discretion to terminate the winding up including:
- it was not clear why the defendants would be prejudiced if the Company was released from winding up;
- there were no funds to pay the liquidators’ outstanding costs;
- there were no other creditors of the Company and the Company was not trading;
- the unusual circumstances which led to the winding up order to be made.
The defendants argued that the plaintiff had not put on evidence to prove the solvency of the Company which they contended must be done prior to any order been made. This issue was considered by Justice Osborn in Brown–Kerr v Woods (in his capacity as liquidator of Thoroughbred Consultants Pty Ltd [2021] VSC 627. After summarising the authorities, his Honour expressed the view that, “it is not a prerequisite to the exercise of the discretion that solvency be established. As the authorities make clear, the power under section 482 is discretionary. The list of relevant factors is just that – a list where the particular significance of each factor is a matter of judgment.”
While Osborne J found that solvency is not a precondition, his Honour noted that the solvency or otherwise of a company will loom large where a company has been wound up on insolvency.
On the hearing of the present application, Justice Hill observed that the Company was not wound up because of insolvency. Whilst Hill J did not consider the plaintiff entitled to have the winding up set aside as of right, the fact that the Company should not have been wound up at all was a relevant discretionary factor that weighed very heavily in favour of the application.
The liquidators only reported there to be two liabilities; the costs of the liquidation and any liability to the defendants. But, for the reasons stated, Hill J did not consider the liability to the defendant as relevant to the question of whether the Company would be solvent if the winding is terminated.
Conclusion
In the result, the court did not terminate the winding up order, but stayed it until further order. The court left for determination the assessment of and liability for the liquidators’ remuneration and expenses. In the event that the judge considers the plaintiff liable for some or all of these costs, and they can be secured or paid, the winding up will be terminated. If they cannot, the stay will be lifted and the Company will remain in liquidation.
