- Vero, Workers Compensation (NSW) Ltd v Ferretti Pty Ltd

Nature of the application and background

By Originating Process filed on 8 July 2024, the Plaintiff, Mr Haq, applies for an order terminating the winding up of Australian Campus Management Group Pty Ltd (in liq) ("Company") under s 482 of the Corporations Act 2001 (Cth) ("Act"). I recognise that, as Mr Haq fairly acknowledges in his affidavit dated 8 July 2024, this is not the first occasion by which Mr Haq has brought an application to terminate the winding up of the Company. He had previously brought such an application, before Williams J in September 2023, which was dismissed by her Honour for reasons set out in her judgment in Re Australian Campus Management Group Pty Ltd (in liq) (rec & mgr apptd) [2023] NSWSC 1070. There were plainly inadequacies in the evidence then led by Mr Haq in that application, as Mr Haq acknowledges in his affidavit evidence in this application, and the fate of that application does not seem to me to be a matter that is adverse to this further application, in which further evidence has now been led.

Submissions and determination

Mr Oakes, who appears for Mr Haq in the application, refers to the applicable principles and to the factors identified by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, and in my judgment in Re MWM Sydney Pty Ltd (in liq) [2016] NSWSC 688 at [16]-[21]. Broadly, a person who seeks to terminate a winding up under s 482 of the Act must establish that order is appropriate, and the factors in Re Warbler are relevant factors.
The relevant matters were also identified by Austin J in Vero, Workers Compensation (NSW) Ltd v Ferretti Pty Ltd (2006) 57 ACSR 103; [2006] NSWSC 292 at [17], as including the interests of the company's creditors, including future creditors; the interests of the liquidator, particularly with regard to costs; the interests of contributories and the interests of the public, including the public interest in matters of commercial morality; and the public interest that insolvent companies should be wound up.
I will refer to matters which affect the interests of the Company's creditors, including future creditors, below, but they have primarily turned upon an assessment of the Company's solvency. The interests of the liquidator, with regard to costs, are addressed by the agreement for payment of the liquidator's costs and he has not opposed Mr Haq's application. Here, the Company was wound up as a result of non-payment of a relatively small debt, and in circumstances which did not indicate any failure of commercial morality by Mr Haq, where he had previously provided financial support to the Company over a considerable period of time. The public interest that insolvent companies should be wound up does not prevent a termination of the winding up if, as I will find below, the steps that are taken by Mr Haq will be sufficient to restore the Company's solvency.
Several issues arose in the application and require greater attention. The first was the proposition put by Mr Oakes that third party financial support was relevant to support the Company's solvency, and he pointed to the history of Mr Haq providing such support for the Company, other than on the occasion which, apparently by inadvertence and when distracted by a personal matter, he failed to take steps to ensure that strata levies due by the Company were paid. As matters have developed, it is ultimately not necessary to determine whether the winding up of the Company could have been terminated on the basis of a practical expectation of financial support by Mr Haq.
I am inclined to think that that would not have been sufficient where the case law has generally required that there exist an enforceable commitment to provide financial support if required to establish solvency, and it would be difficult to establish such an enforceable commitment where Mr Haq had control of the Company so that any contractual commitment to the Company could readily be released by Mr Haq. In the event, Mr Haq has now adopted an alternative approach which addresses that concern.
Mr Haq now proposes adopting an approach which has been recognised in earlier case law by subscribing a significant amount of capital to the Company in the amount of $50,000 by way of equity rather than debt. There are several cases in which that approach has been accepted, on occasion by way of undertakings given by a shareholder to undertake such capitalisation in the future, and on other occasions on the basis that the relevant steps should be completed prior to an order being made to terminate the winding up: Owners' Strata Plan 70294 LNL Global Enterprises Pty Ltd (2006) 60 ACSR 646; [2006] NSWSC 1386; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797; Re Living Creatively Exhibitions Pty Ltd (in liq) (subject to deed of company arrangement) [2013] NSWSC 717 at [1]. In Re Kimberly Securities Ltd [2014] NSWSC 298, in a case which had some matters in common with this case, I made an order terminating a winding up, on the basis that the applicant would subscribe a significant amount of capital to the company. I there noted that that approach avoided the need to deal with issues of subordination, if further loan funds had been provided to the company, and pointed to the difficulties which had arisen in respect of arrangements of that kind. I also there adopted the approach, which I will also adopt here, of indicating the Court's decision, so as to give the Plaintiff comfort that he may proceed with the relevant steps, but deferring the making of the termination order until the necessary steps have been taken.
Mr Oakes rightly recognises the question whether Mr Haq's contribution of $50,000 by way of equity to the Company is sufficient in the relevant circumstances, and I am satisfied that it is. A company's solvency is established by its capacity to meet its debts as and when they fall due, looking forward to some extent in the future. However no creditor dealing with a company ever has complete certainty that that company will be able to meet its debts in the future; here, the cashflow of the Company, at least if the lease is entered, together with Mr Haq's recognition that the property will likely need to be sold if the lease is not entered into, and the amount of that is to be substituted to the Company, would be sufficient to establish the Company's solvency and give a creditor, dealing with the Company in the foreseeable future, comfort as to its capacity to meet its debts as and when they fall due.
A further issue arose because, as Mr Oakes fairly recognised, an amount is due by the company to a related party, on terms that that amount will only be repayable when the relevant property is sold. As matters stand, it appears that the value of the property, on a sale, would be sufficient to discharge the debt of the secured third party lender but not to discharge both the debts of that secured third party lender and the related party debt. I accept that is not a matter which presently has the consequence that that Company is insolvent, because the principal on the debt to the secured lender is not presently due and payable, and because the arrangements which have been reached in respect of the related party debt are such that that debt is not presently due and payable, nor is it due and payable in the immediate future, so as to deprive the Company of present solvency, once a further capital contribution is made.
In these circumstances, I am satisfied that the winding up of the company should be terminated, upon the recapitalisation of the Company in the manner which I have noted above, and upon payment of the liquidator's costs, expenses and disbursements as agreed between the parties. Those steps should take place prior to an order for termination of the winding up. An order terminating the winding up can be made in Chambers, on the basis of an affidavit confirming that they have occurred. I have noted, in the course of the hearing, that practical issues may arise as to how equity is to be issued in the Company, while it is in liquidation, but those issues should be capable of resolution between Mr Haq and the liquidator, and the matter can be relisted if any difficulty arises in that respect.

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (7)