Pursuant to section 459A of the Corporations Act (the Act), a Court may order that an insolvent company be wound up in insolvency.  For such an order to be made, it is conventional practice that the applicant demonstrates insolvency at the date of filing the application and at the date of the hearing of the application.

On 12 July 2013, 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) [2013] FCAFC 74, confirmed that the conventional practice holds true and rejected an argument that in addition to proving insolvency at the filing of the application and date of hearing, an applicant must also prove that the company was insolvent at the “relation-back day”.

THE “RELATION-BACK DAY”

Various sections of Part 5.7B of the Act operate to make voidable certain transactions entered into by a company during prescribed periods prior to the commencement of its liquidation.  These periods are determined in the Act by reference to what is called the “relation-back day”. 

THE FACTS

The appellant was the agent for a syndicate of 8 lenders (the Banks) who held a circulating security interest granted by ZYX Learning Centres Limited, formerly ABC Learning Centres Limited (ABC Learning), and its related companies.

ABC Learning group of companies had been in voluntary liquidation since 2010.   At first instance, the liquidators applied to the Federal Court for an order that the ABC Learning group be wound up in insolvency.  The first instance judge made such an order for reasons including that:

  • the order enlivened section 588FJ of the Act, which renders any circulating security interest created during the 6 months ending on the “relation-back day” void as against a company’s liquidator (subject to certain exceptions); and
  • by making the order, the Court opened up the possibility of the liquidators commencing recovery proceedings to recover amounts paid under the circulating security interest for unsecured creditors. 

Section 588FJ is not available to a liquidator in a voluntary winding up.

The Banks appealed to the Full Federal Court.  They argued that the liquidators had failed to establish that the ABC Group was insolvent at the “relation-back day” and that this was an essential and material consideration that the Court ought to have taken into account in exercising its discretion as to whether to make the winding up order.

THE FULL FEDERAL COURT’S DECISION

The Full Federal Court dismissed the Banks’ appeal. They held that neither the wording of the section, its legislative history, or the authorities on which the Banks relied supported the imposition of a requirement that, for an order to be made under section 459A, insolvency has to be established at the relation-back day.

However, in making this finding, the Court clarified that there could be particular cases where in considering whether or not to make an order under section 459A, the Court may have regard to the solvency or insolvency of a company at the relation-back day.

For example, (noting that a holder of a circulating security interest can defend a liquidators’ claim under section 588FJ by demonstrating that the company was solvent immediately after it granted the circulating security interest) a company’s solvency at the relation-back day would be relevant if the only reason for ordering the winding up of a company in insolvency was to allow a liquidator to initiate proceedings under s588FJ, where those proceedings were bound to fail.  No evidence was put before the trial judge to suggest that this was the case.

COMMENT

An order winding up a company in insolvency under s459A opens up a range of recovery actions to a liquidator, even when a company is already being wound up voluntarily. 

This case is a reminder of the discretionary nature of section 459A and that appeal courts will be reluctant to interfere in the discretion of a first instance judge.  It is also reminder of the importance of ensuring that all relevant evidence is put before the Court, regardless of where the onus of proof lies.