By Originating Process filed today the Plaintiff, Mr Caan Phillips, who is the sole director of Loremo Pty Ltd ("Company"), seeks an order that the Company be wound up and that Mr Michael Smith be appointed as its liquidator. By Interlocutory Process also filed today, Mr Phillips also seeks an order that Mr Smith be appointed provisional liquidator to the Company.
The application is brought, as I have noted, by the sole director of the Company and I will shortly refer to the affidavit evidence in support of the application. I should first note a preliminary question as to whether a sole director of a company has the capacity to bring an application for a winding up order of that company. The case law has been divided as to whether a director may apply for a winding up order without members' approval: see the authorities cited in Austin & Black's Annotations to the Corporations Act [5.459E]. In Re Interchase Management Services Pty Ltd (in liq) (1992) 111 ALR 561, 9 ACSR 148, the Federal Court of Australia held that such an application could be brought by a director. Mr Weinberger, who appears for Mr Phillips, also draws attention to the decision of Austin J in Re United Medical Protection Ltd [2002] NSWSC 413, where his Honour observed that the directors had power to resolve that a company apply to the Court for winding up on the just and equitable ground, and for the appointment of a provisional liquidator, and that, at least where a company's constitution confers powers of management on a board of directors in the normal form, the directors have the power to make such an application.
Mr Weinberger also refers to Trans Pacific Insurance Corporation [2009] NSWSC 308, where Barrett J referred to Re Interchase Management Services Pty Ltd above and Re United Medical Protection Ltd above, and held that a director could bring such an application where the company itself had standing to bring that application. His Honour also pointed (at [42]) to the significance of the fact that, in that case, the sole director of that company had indicated that he no longer wished to be responsible for the company's administration, where it appeared to be insolvent and instability existed and needed to be addressed. The same issue arises in this case, where Mr Phillips is the sole director and the general manager of the Company, and the application itself indicates his decision, in his capacity as the Company's sole director, that such an application should be brought. I am satisfied that Mr Phillips has standing to bring the application in the relevant circumstances.
The application is supported by three affidavits, the first being an affidavit of Mr Phillips dated 13 August 2018, which indicates the Company's history and the circumstances in which he was appointed as a director. Mr Phillips had been employed by the Company or its related entities for approximately nine years. He refers to the fact that in 2014, a fire occurred at the Company's business premises and a former director of the Company was arrested and convicted of manufacturing narcotics at the premises. Subsequently, Mr Phillips' immediate predecessor as a director of the Company was also arrested and charged with importing and possessing chemicals linked to the manufacture of an illegal drug, and it appears he is presently incarcerated.
Mr Phillips' evidence is that the significant publicity surrounding that former director's arrest has adversely affected the Company's business and that revenue on sales has substantially decreased since July 2018. Mr Phillips also expresses concern as to the validity of his appointment as director, and indicates a concern that any attempt by him to sell the Company's business would involve an issue as to whether he had authority to do so. If, of course, Mr Phillips was not a director of the Company, then there may be a question as to his standing to bring that application. However, in that situation, there would be greater reason to wind up the Company, in the public interest, so far as the Company had no director capable of making corporate decisions on its behalf. Mr Phillips also refers to the Company's financial position, which indicates that it has operated at a loss in the last financial year; that it owes a substantial related-party debt to its shareholder, although Mr Phillips identifies an unresolved question as to the validity of that debt; and that the Company is only trading with the support of its key suppliers and agents with a view to a potential sale of the Company's business. Mr Phillips indicates a concern that the Company may be trading while insolvent, a matter which would be of significance to him as the Company's director.
The application is also supported by an affidavit of Mr Mercer, dated 13 August 2018. Mr Mercer is both the Company's chief financial officer and a director of an entity which is a secured creditor of the Company. Mr Mercer indicates that he is also the director of another entity which loaned money to the Company and also refers to a third entity's loan to the Company. Mr Mercer indicates that a substantial amount is presently due and payable to the first of those entities by the Company and supports the application for appointment of a provisional liquidator, and his evidence is also that amounts due under the loan facilities to the second and third entities are also due and not paid. I infer those entities also support the application.
Finally, the application is supported by the affidavit dated 13 August 2018 of Mr Gleeson, who is the trustee in bankruptcy of the Company's former director, Mr Michael Snounou. Mr Snounou holds all the ordinary shares and holds 10 dividend shares in another entity, Snounou Holdings Pty Ltd, which in turn holds all of the ordinary shares in the Company. Mr Gleeson, as Mr Snounou's trustee in bankruptcy, supports the application for appointment of a provisional liquidator.
The circumstances in which the Court may appoint a provisional liquidator are of course well-established. The Court has power to appoint a provisional liquidator after the filing of a winding up application and prior to the making of a winding up order. The principles as to when such an appointment would be made were discussed in Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 and I recently summarised them in Re Therma Truck Pty Ltd [2016] NSWSC 266. In Re New Cap Reinsurance Corp Holdings Limited (1999) 32 ACSR 234 at [23], Young J observed that what was ultimately required was a bona fide application constituting sufficient ground for the making of an order. That will ordinarily require that the applicant establish that there is a reasonable prospect that a winding up order will be made on the application: see Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80. The Court will also consider the degree of need established by the applicant and the balance of convenience.
Mr Weinberger puts the winding up application on two alternative bases, being the just and equitable ground and on the ground of insolvency. It seems to me that there is a substantial probability that a winding up order would be made at least on the just and equitable ground. It is apparent, as it was apparent in Trans Pacific Insurance Corporation above, that the sole director of the Company no longer wishes to act in that capacity, as he has a concern as to the Company's solvency; he thinks it unlikely that any other person would consent to be appointed as director; and the trustee in bankruptcy of Mr Snounou, who holds the substantial shareholding in the Company's holding company, also supports the application. There is also evidence that indicates potential insolvency, including the identification of three significant loans that are said to be due and unpaid. The likelihood of insolvency is reinforced by the evidence of the decline in the Company's sales revenue and its trading loss in the immediately previous financial period. It is likely, having regard to the evidence of the Company's deteriorated financial position, that a winding up would also be made on the ground of insolvency. In these circumstances, I am satisfied that a sufficient basis for the appointment of a provisional liquidator has been shown.
The Court normally requires an undertaking as to damages in respect of the appointment of a provisional liquidator, particularly where that appointment is made ex parte. Mr Weinberger fairly points out that such an undertaking is not universally required and there are factors in this application which suggest at least a possibility that such an undertaking should not be required, including an element of public interest in the application. In Trans Pacific Insurance Corporation above, in a somewhat similar case, where a company (by its director) sought the appointment of a provisional liquidator, Barrett J observed that the balance of convenience strongly favoured that appointment and did not require the usual undertaking as to damages. On balance, notwithstanding the ex parte character of the application, I consider that it is appropriate that I should follow the same course as his Honour followed in that case and not require an undertaking as to damages from Mr Phillips.
Accordingly I order:
Mr Michael Smith be appointed provisional liquidator of Loremo Pty Ltd ACN 002 135 864.
These orders be entered forthwith.
Stand over the winding up application to the Corporations Motions List at 9.45 am on 10 September 2018.
Reserve liberty to any interested party to apply, on two business days' notice, specifying the relief sought.
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Decision last updated: 04 September 2018