This week’s TGIF considers a recent Federal Court decision which validated dispositions of property made by a company after the winding up began.

WHAT HAPPENED?

On 8 May 2017, Bond J ordered that a coal exploration company (the Company) be wound up on just and equitable grounds following a shareholder oppression claim. So as to avoid the consequences of a liquidation, his Honour immediately stayed that order for a period of 7 days to enable the warring parties a final chance to resolve their differences.

Before that time period expired, an appeal was launched against the winding up order and the stay was subsequently extended until the resolution of the appeal. The extension of the stay was conditional on the provision of undertakings from four directors which restrained expenditure other than in the ordinary course of business and permitted the continued operation of the Company albeit in a limited capacity.

The appeal was ultimately dismissed and, as a consequence, the stay was lifted. However, during the period of the stay, some 380 transactions were entered into by the Company.

As the winding up order was made under s 461(1)(k) of the Corporations Act 2001 (the Act), s 513A(e) meant the winding up had commenced on the day the order was made (that is, on 8 May 2017). A consequence of this was, by virtue of s 468(1) of the Act, the transactions entered into during the period of the stay were void with a result that the law would treat those payments as having never happened.

Following their appointment, the Liquidators reviewed the transactions and found that the dispositions actually benefited the Company and that it would be detrimental to the Company’s interests to attempt to unravel them.

In light of this, an application was made seeking orders to validate the transactions. In support of the application, evidence was adduced to the effect that:

  • almost all the payments were made for the supply of services that had been used by the Company (services provided by employees, payment of rent and legal costs);
  • these could not be returned; and
  • as a consequence, the parties could not be placed into the position they were prior to the transactions.

Further, the Liquidators deposed to a separate category of transactions, being those using Company credit cards. If those transactions were void, the Liquidators would be required to take steps to recover from the Bank the amounts paid in reduction of credit card debts.

THE DECISION

Ultimately, the Court made the validating order under s 468(1).

Critical to this determination were the following factors:

  • when the dispositions occurred, the Company was not insolvent, so the interests of creditors was not a relevant consideration;
  • the transactions enabled the Company to trade and did not breach the undertakings provided by the four directors; and
  • the Liquidators’ assessment that the dispositions were advantageous to the Company and to reverse the transactions could be detrimental.

The purpose of s 468(1) is to prevent dissipation of company property and to ensure that assets are divided rateably among creditors. However, the Court has a wide discretion to validate transactions which would otherwise be void.

When the relevant entity is insolvent, the interests of creditors will be paramount to the exercise of the discretion with a balancing of the gains or losses arising from the transaction to be performed.

However, in this instance, where the company is solvent, a validating order will usually be warranted, absent a lack of good faith, particularly if the transactions are carried out in the ordinary course of business to enable a company to trade.