The recent Supreme Court of New South Wales decision in Re V & M Davidovic Pty Limited [2012] NSWSC 1598 clarifies where the directors of a company in receivership will be authorised to defend a winding up application and confirms that Courts will be reluctant to adjourn such applications in order to allow the directors to gather evidence of solvency.

The Facts

In July 2012, Windlock, a creditor of V & M Davidovic Pty Limited (Company), applied for a winding up order based on the Company’s failure to comply with a statutory demand for approximately $8.2 million.  The application was set for hearing on 12 December 2012.

By the time the application was heard, receivers had been appointed to the company.  The receivers neither consented to, nor opposed, the winding up application.  However, the directors did oppose the application and sought an adjournment to gather evidence that the Company was solvent.

The questions before Black J were:

  • Did the directors of the Company in receivership retain the power to oppose the winding up application?
  • Should an adjournment be granted?
  • If the adjournment is not granted, should the Company be wound up in insolvency?

Directors’ powers in receivership

His Honour relied upon existing authority that held ‘that the power of a company’s internal organs to function, during the receivership, bears a direct inverse relationship to the validity and scope of the receivership’.  In this case, the receivers had not assumed any responsibility for opposing the winding up application, meaning that the directors’ authority to do so had not been displaced.

Adjournment of the winding up application

The directors sought an adjournment in order to gather evidence of the Company’s solvency.  His Honour held that there were a number of other factors against granting an adjournment, even though the directors pointed to favourable property valuations and an indicative offer for refinancing to suggest that the Company could, if given sufficient time, rebut the presumption of insolvency created by the failure to comply with the statutory demand.  The key factors were that:

  • the Civil Procedure Act 2005 (Cth) obliged the Court to resolve disputes expeditiously;
  • an adjournment would see the expiration of the six-month deadline for hearing of winding up applications: s459R(1) Corporations Act 2001 (Cth); and
  • the lack of evidence of solvency was entirely within the Company’s control.

Accordingly, Black J refused the adjournment and noted that the Company was essentially ‘not seek[ing] to prove its solvency as of today, but instead [seeking] to put itself in a position where it would be solvent at the date of a future adjourned winding up application’.

Having refused the adjournment, his Honour held that the Company had failed to rebut the presumption of insolvency and ordered that the Company be wound up.

Comment

This case confirms two interesting points.

First, the scope of directors’ authority over a company in receivership will depend on the breadth of the responsibilities assumed by the receivers.  This means that directors’ remaining authority will vary depending on the scope of the appointment and the particular facts facing each company in receivership.

Secondly, the imperative for quick resolution of winding up proceedings means that directors may not get a second chance to defend any winding up application.