Recently the Full Federal Court, in the decision of CBA Corporate Services (NSW) Pty Limited v Walker and Moloney, in the matter of ZYX Learning Centres Limited (receivers and managers appointed) (in liq)  FCAFC 74, confirmed a number of important principles for Liquidators to consider when making an application to wind up a company in insolvency under section 459A of the Corporations Act 2001 (Cth) (the Act). In particular this case involved the situation where the company was already the subject of a voluntary winding up and the Liquidators were contemplating the availability of potential voidable transaction claims if the company was being wound up in insolvency rather than voluntarily.
On 6 November 2008 ZYX Learning Centres Limited, formerly ABC Learning Centres Limited (ABC Learning) went into voluntary administration. On 2 June 2010 the creditors of ABC Learning resolved that ABC Learning be wound up voluntarily, with the former Administrators appointed as Liquidators. The Liquidators then brought an application that ABC Learning be wound up in insolvency by the Court for the purpose of bringing voidable transaction claims under section 588FJ of the Act which allows the recovery of voidable circulating security interests. These actions would only be available to them upon an order winding up the company in insolvency.
In seeking the order, the Liquidators provided evidence of insolvency at the date they were appointed (2 June 2010) and the date the proceedings were first commenced (5 September 2011) and maintained that at the date of the hearing there was no change in ABC Learning’s circumstances which warranted a change to the conclusion that the company was insolvent. The Liquidators’ evidence in demonstrating that ABC Learning was insolvent at these times included that both the group as a whole and each company individually:
- would be approximately $800 million dollars short in paying back a debt owed under an agreement to various banks;
- had priority claims amounting to approximately $6.7 million;
- owed unsecured creditors approximately $1.214 billion; and
- the deficiency of assets to liabilities was approximately $2.19 billion.
In the initial decision1 the Liquidators of ABC Learning were successful in obtaining a winding up order in relation to ABC Learning. Section 467B of the Act provides that that Court can wind up a company which is already being wound up voluntarily, however the Court has discretion in determining when such an order should be made.
The Banks’ Arguments
CBA Corporate Services (NSW) Pty Ltd (CBA) and a syndicate of eight banks, with CBA acting as their agent, appealed the initial decision, arguing that:
- the liquidators had not proved that ABC Learning was insolvent at the relation-back day, which they argued was relevant to the potential voidable transaction claims; and
- the weight given to the possibility that the Liquidators may bring a claim under section 588FJ of the Act was not warranted and involved “mere speculation”.
Decision on Appeal
The Full Federal Court dismissed the appeal and awarded costs to the Liquidators. Importantly for those bringing an application to wind up a company in insolvency in order to bring a claim under section 588FJ of the Act, the Court observed that:
- there is no legislative provision or case authority requiring the applicant to prove that the company was insolvent at the relation-back day whilst seeking an order for winding up in insolvency;
- instead, proving insolvency at the date of the filing of the application and at the hearing date continues to be necessary;2
- the Court will carefully determine if the circumstances of the case warrant the making of a winding up order when the company is already the subject of a voluntary winding up;
- the potential benefit to creditors to be obtained from prospective voidable transaction claims that would otherwise be unavailable is a paramount consideration;
- there is no need for the Liquidators to prematurely prove their voidable transaction claims; and
- the specific wording of section 459A of the Act does not require that a winding up order should only be made “for good reason” and instead the established approach is that the Court may take into account various reasons in the exercise of its discretion to order a winding up.
Points to take away
This decision offers a timely reminder of the broad discretion that may be exercised by the Courts in determining whether or not to grant an order to wind up a company in insolvency. It continues to be crucial when applying for a winding up order in insolvency to demonstrate insolvency at the date of the filing of the application and at the date of the hearing.