Mercantile Credits Ltd v Foster Clark

We have before us two appeals by the one appellant against an order of the Supreme Court of South Australia (Chamberlain J.) dismissing a creditor's petition for the winding-up by the Court of a company which was incorporated in the United Kingdom and, though registered as a foreign company in New South Wales, has never been registered in South Australia. One appeal is brought as of right, but the notice of appeal, though served on the second respondent, was never served on the company. The other is brought by special leave (the time for appeal having elapsed when the omission to serve the first notice of appeal was discovered), and the second notice of appeal has been duly served on the company in accordance with directions which we gave for substituted service. The appeals have been heard together and are to be consolidated.

As the petition was presented before, and was pending at, the commencement of the Companies Act, 1962 S.A., the provisions of the Companies Act, 1934-1960 S.A. govern the proceeding: see s. 4 (2) (b) (ii) of the 1962 Act.

Notwithstanding some conflict of evidence at an early stage of the hearing before the learned primary judge his Honour held, and it is not now in dispute, that the company carried on business in South Australia for some time after the commencement of the 1934 Act. Accordingly, it is a company to which Pt XII of that Act, and in particular s. 362, applies for the purposes of the pending proceeding. By virtue of s. 362 the company is liable to be wound up on the appellant's petition in the same way as if it were an unregistered company within the meaning of Pt XI. The relevant provision of that Part is in s. 346. By that section an unregistered company may be wound up under the Act, and all the provisions of the Act with respect to winding-up apply to it, with certain exceptions and additions. Among these is a provision in par. III of sub-s. (1), which defines the circumstances in which an unregistered company may be wound up. They include: (b) if the company is unable to pay its debts, and (d) if the court is of opinion that it is just and equitable that the company should be wound up. Paragraph IV describes several situations in which a company is deemed to be unable to pay its debts; but the paragraph need not be further mentioned, for the evidence proves beyond doubt that the respondent company is in fact insolvent.

The learned judge held that he had jurisdiction in the circumstances of the case to make a winding-up order, and indeed no argument to the contrary seems to have been addressed to him. Nor is his jurisdiction questioned in this appeal. It could hardly be questioned, in view of such cases as In re Commercial Bank of South Australia [1] and In re Hibernian Merchants Ltd. [2] . The contention to which the judge gave effect was that he had a discretion in the matter and ought to exercise it against the claim for a winding-up. That he had a discretion is undoubted: see s. 197; In re Chapel House Colliery Co. [3] . But it was a judicial discretion to be exercised in accordance with established principles. The leading principle is that as between himself and the company a creditor has a prima facie right to a winding-up order: In re James Millward & Co. [4] ; In re Home Remedies Ltd. [5] ; Re B. Karsberg Ltd. [1] . It is a right which he possesses on behalf of the whole class of creditors to which he belongs: In re Crigglestone Coal Co. Ltd. [2] ; Re P. & J. Macrae Ltd. [3] , and for that reason the wishes of the majority in value, if they are expressed, will always be considered. In the present case the company has unsecured debts amounting to more than £540,000. Of this sum £125,939 is owing to the appellant and over £200,000 to the respondent Bank. Another bank is a secured creditor in New South Wales but not in South Australia, holding an equitable charge which is registered in the former State but not in the latter, and it has appointed a receiver who is carrying on the company's business in New South Wales. The company is not in liquidation anywhere. No creditor save the respondent Bank objected to the making of a winding-up order in South Australia. Nevertheless it was submitted on behalf of the respondent Bank that a majority of the creditors did not desire a winding-up. The submission was based upon evidence to the effect that in New South Wales a meeting of unsecured creditors, called by the receiver, had agreed that the company be granted an extension of time for payment of debts; but the meeting was not called to consider and did not in fact consider the situation in South Australia, and its decision has no bearing upon a determination of the proper course to pursue in relation to the company's affairs in the latter State.

1. (1886) 33 Ch. D. 174. 2. [1958] Ch. 76. 3. (1883) 24 Ch. D. 259. 4. [1940] Ch. 333. 5. [1943] Ch. 1. 6. [1955] 3 All E.R. 854. 7. [1906] 2 Ch. 327. 8. [1961] 1 W.L.R. 229.

It is true, as we have been reminded, that no creditor other than the appellant has actively supported the petition; but obviously no inference of silent opposition can properly be drawn. Indeed, it would be odd if any creditor other than the respondent Bank were to oppose a winding-up in South Australia. The company's assets there at the date of the petition consisted of a number of motor vehicles and apparently nothing else. The company had bought some or all of the vehicles from the appellant, and the debt upon which the petition was founded was for unpaid and unsecured purchase moneys in respect thereof. Before the presentation of the petition the respondent Bank had obtained a judgment against the company for £200,000 and interest, together with costs, and had issued execution thereon. The sheriff had seized the motor vehicles under the execution but had not sold them, when the petition was presented. Thereafter, under an arrangement between the appellant and the respondent Bank, to which effect was given by a judge's order, the sheriff sold the vehicles and paid the proceeds into Court to abide further order. The appellant desires a winding-up order so that the moneys may be distributed (subject to costs of liquidation) amongst all the unsecured creditors in their due proportions. This would be the result because by reason of the provisions of s. 284 the respondent Bank could not retain the benefit of its execution, the execution not having been completed before the commencement of the winding-up, i.e. the time of the presentation of the petition: s. 202 (2). The respondent Bank opposes a winding-up order precisely because this would be the result: it wishes to be in a position to apply for payment out to itself of the whole of the moneys in Court.

The conflict is therefore between the interests of the whole body of unsecured creditors and the interests of one unsecured creditor which desires to get for itself the whole of the fund in Court. From the concluding paragraph of the learned judge's reasons for judgment it appears that his Honour regarded the proceedings merely as a conflict between two creditors, in which no reason had been shown for denying to the creditor which had issued execution, and also was owed the largest unsecured debt, the fruits of the steps it had taken. To decide the matter as if an unsecured creditor seeking to enforce his prima facie right to a winding-up order which must enure for benefit of all members of his class has to show some positive reason why one of them should be denied the right to take a part of the company's assets for his own benefit exclusively of the others is, with respect, an error of law. One of the strongest reasons there can be for making a winding-up order is that thereby one of a number of creditors will be stopped in an attempt to get more than his proper share out of assets that are insufficient to satisfy all. There are of course exceptional cases, but the general principle is basic to company law that the jurisdiction to order a winding-up will be used in order to prevent an execution which was uncompleted when the petition was presented from being completed so as to give the execution creditor a priority over other unsecured creditors: see In re Redman (Builders) Ltd. [1] and the line of cases therein reviewed. In the present case there is no reason why the principle should not be applied. Indeed, there is even more to be said in this case than in most for applying it, since the moneys the respondent Bank wishes to take for itself are the proceeds of sale of property which was bought by the company from another unsecured creditor and is still unpaid for. To borrow the words of Pennycuick J. in the lastmentioned case: "There appears to be no conceivable reason why one execution creditor which had not completed its execution should be preferred to the other creditors whether or not they had reached the stage of obtaining judgment or commencing execution" [2] .

1. [1964] 1 W.L.R. 541. 2. [1964] 1 W.L.R., at p. 547.

The case is said to be unique in that the company is a foreign company not now carrying on any active business in the jurisdiction, it appears to have no assets in the jurisdiction save the money in Court, and it is not in liquidation in any other jurisdiction. There is no reported case, it is said, of a foreign company being wound up save in aid of a foreign liquidation, or to secure assets of a company which is being wound up in a country where liquidation does not ensure an equitable distribution of assets, or to distribute assets of a company which has been dissolved in the country of its incorporation. We need not stay to consider how this argument is to be reconciled with In re Commercial Bank of South Australia [1] , where in the country of incorporation no more had occurred than an appointment of provisional liquidators. The short answer is that the relevant provisions of the Companies Act cover the case, and none the less because when the winding-up in South Australia has been completed the Act cannot operate to produce the dissolution of the company: In re Matheson Brothers, Ltd. [2] . The company is unable to pay its debts. It is manifestly just and equitable that the company should be wound up. In our opinion there is no ground upon which a winding-up order may properly be refused in the circumstances.

1. (1886) 33 Ch. D. 174. 2. (1884) 27 Ch. D. 225.

The appeal should therefore be allowed and a winding-up order made.