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Wind Back the Clock: Terminating a Winding Up – Part 2

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Wind Back the Clock: Terminating a Winding Up – Part 2

“In a liquidation scenario, the “blue sky” should be eschewed”

In part 1 of this article, we saw that the Court will consider a wide range of factors when an application to terminate a winding up under s. 482 of the Corporations Act 2001 (Cth) is made.

This includes (amongst other things) the solvency of the company, the nature and attitude of creditors and the liquidator, whether the company’s debts have been discharged and the general background leading up to the winding up order.

A recent decision in the Supreme Court of New South Wales, Re Rainbow Carlingford One Pty Ltd (in liq) [2019] NSWSC 971 has emphasised the amount of evidence required to successfully bring an application.

Facts

The application was brought by a related company who applied to terminate the winding up of the company, Rainbow Carlingford One Pty Ltd (“Rainbow”) not on the basis that Rainbow was solvent but rather that, if terminated, related companies would provide sufficient funds to ensure that it was.

The funding required to ensure that the company would be solvent, on what the liquidator described as the “pessimistic scenario”, was some $56 million. For this reason, Rees J considered that the application warranted careful review.

Rainbow had two external financiers and those facilities were set to expire in August 2019.  The liquidator estimated that over $105 million would need to be repaid once those facilities expired (unless the facilities were extended or refinanced).

Rainbow also had loans with related parties and owed the SRO approximately $900,000. The SRO issued a creditor’s statutory demand to Rainbow and subsequently applied to wind up Rainbow and the company did not appear. The company was placed into liquidation on 27 February 2019.

A liquidator having been appointed, the company’s solicitors promptly wrote to the liquidator advising that they intended to apply to terminate the winding up.

In April 2019, two related party debtors of Rainbow Carlingford sent a letter stating that they had the intention to pay particular debts within 12 months.

In April 2019, the two external financiers wrote letters stating that they would consider extending the terms of the facilities due to expire in late August 2019.  In June 2019 one of those financiers agreed to grant a 24-month extension of the maturity date of the facility.

The application to terminate the winding up was brought by the related party and the related and external financiers indicated they did not oppose the application.

Counsel for the liquidator also submitted that the liquidation should be terminated because:

  • the liquidator had done his analysis on a conservative basis;
  • the company “learnt its lesson”; and
  • given that the secured creditors did not oppose the termination nor appoint receivers nor call for repayment, it may not be necessary to call upon the related party funders.

The Decision

Justice Rees was not prepared to grant the application.

Her Honour highlighted that when a company is in liquidation because it has failed to pay its only trading creditor, then the Court should approach this exercise with caution. In a liquidation scenario, the “blue sky” should be eschewed.

Her Honour did not think it would be sensible to approach this exercise on the basis that the external financiers would extend their loans, which appeared inadequate.

Additionally:

  • The financial position of each of the proposed related party funders needs to be considered to determine whether the funding is realistic;
  • The proposed funding agreement was insufficient because the company had to pay $105 million within one month to repay finance over land presently worth approximately $63 million;
  • The evidence produced by the applicant did not suggest that the company was, and was likely to remain, solvent.

Whilst refusing the application, Rees J provided the parties with a further opportunity to put forward further and better information to support the application.

Key take away points

  • The decision reinforces the need to ensure that sufficient evidence is before the Court to establish on an unqualified basis that the company is solvent.
  • The power of the Court to terminate a winding up is discretionary. The bottom line is that it is necessary to do more than merely establish that the state of affairs that required the company to be wound up no longer exists. The interests of future creditors and ‘commercial morality’ also need to be considered as part of the broader considerations, which are relevant to the Court’s discretion.

The MMRB insolvency and litigation team has a great deal of experience in these applications acting for all parties, including company directors, contributories, related parties and Liquidators.

If you would like more information, please don’t hesitate to contact Paul Marsh or Annabel Clarke on (03) 9604 9400.

Disclaimer: This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

 

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