This week’s TGIF considers the case of In the matter of CNL Transport Pty Ltd (in liq) [2017] NSWSC 291, where the New South Wales Supreme Court terminated a liquidation where the company was solvent and its debts had been paid.

Background

A company was wound up by the Court on 27 February 2017 following its failure to comply with a creditor’s statutory demand. The statutory demand had been issued by an insurer in respect of unpaid workers’ compensation insurance premiums.

The sole director and shareholder applied to have the liquidation terminated under s 482 of the Corporations Act, pursuant to which the Court has a discretion to stay or terminate a winding up. Neither the liquidator nor the insurer opposed the application. There was no suggestion the winding up order had been wrongly made.

The director gave evidence that:

  • He was aware there was an outstanding debt to the insurer;

  • He had paid around $8,000 to reduce the debt and believed the insurer therefore knew the company could and would pay;

  • He was not aware of the statutory demand, which was properly served by post on the registered office of the company;

  • He did not open an email attachment from the insurer’s solicitors informing him of the winding up proceedings; and

  • He only became aware of the winding up proceedings the day after the liquidator was appointed.

Result

The Court allowed the application and terminated the liquidation. Crucial to the Court’s exercise of discretion were:

  • A credible explanation of why the winding up order was made, in that the director had separated from his partner and neglected paperwork during the important period;

  • Strong evidence of the company’s solvency and previous profitable trading; and

  • The director putting in more than $200,000 of his personal funds to cover the company’s outstanding debts.

Capitalising the director’s contribution

The Court was concerned that the director’s contributions would create a further debt of the company in favour of the director, which would effectively dilute other creditors’ rights.

To address this, the Court ordered that the director capitalise his contribution by subscribing for capital in the company equivalent to the amount of his contribution. To ensure this occurred, the Court only made the order terminating the liquidation once the director provided evidence this had been done.

Liquidation need not necessarily be the end of the line. The Court may terminate a liquidation where it becomes apparent it is not appropriate.

Liquidators who participate in such applications should assist the Court by ensuring both that there is strong evidence the company is solvent and that orders are sufficient to protect creditors. As with the capitalisation requirement in this case, this may require some lateral thinking from liquidators and their advisors.