WINDING UP ON THE GROUNDS OF INSOLVENCY

The Corporate Law Reform Act 1992 repealed s 460. Under s 459A," the court is empowered to order the winding up of an insolvent corporation on the application of any of the persons listed in s 459P(1): see, for example, Pongrass Group Operations Pty Ltd v Lowerpinems Pty Ltd (1994) 15 ACSR 341. Applications under s 459P will require the leave of the court where they are made by a contingent or prospective creditor, by a contributory, by a director or by the Commission: s 459P(2). Leave will only be granted by the court if the court is satisfied that there is prima facie a case that the company is insolvent: s 459P(3); in Bingham v lona Corporation Pty Ltd (1995) 16 ACSR 436 at 443 Lindgren J declined to make an order under s 459P as he was not satisfied that a prima facie case had been made out.

Such leave will only be given if there is 'a prima facie case' ; that the corporation is insolvent and this may be subject to conditions imposed by the court: s 459P(3). The nature of the judicial discretion to be exercised by the court under s 459P(3) was discussed by Lindgren J in Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 at 190 where his Honour observed that:

Under s 459P(3), the first question to arise is whether the evidence relied on by the applicant, if accepted on a final hearing, would establish insolvency. A further but related question may arise as to how countervailing evidence relied on by the respondent company is to be treated. Clearly, the determination called for by s 459P(3) is of a preliminary nature and is to be distinguished from the determination as to insolvency called for on a final hearing.

It should also be noted that the court is empowered by s 459B to order the winding up of insolvent companies where the application was initially brought under ss 260, 462 or 464. Where a corporation is under administration pursuant to a deed of corporation arrangement, as provided ; for in Part 5.3A, it cannot be wound up except as provided for by s 446A: s 440A(1). The appointment of an administrator is intended to create a moratorium (s 440F) to protect the corporation from creditors so as to allow the, administrator of the corporation to prepare a rational plan for the future of the corporation. The court may adjourn the hearing of an application to wind up a corporation under administration where it is satisfied that it is not in the interests of the creditors for the corporation to be wound up rather than to be continued under administration: s 440A (2).

The Explanatory Memorandum to the 1992 Corporate Law Reform Act noted (para 515) that:

... [g]enerally, it would not be appropriate to wind up a company under administration unless the applicant was able to show that the position of the company was deteriorating so rapidly that, during the 28 or 35-day period prior to the meeting of creditors, or while that meeting is adjourned for up to 60 days, the applicant or other persons would be so significantly prejudiced that an immediate winding-up should be ordered.

However, under s 439C(c), the creditors of a corporation under administration may, at a meeting of creditors called under s 439A, resolve that the corporation be wound up. Where this occurs, the administrator is deemed by s 446A(4) to be appointed as the liquidator for the purposes of s 499(1).

The test of insolvency: s 95A

The Corporate Law Reform Act 1992 introduced a statutory test of insolvency in the new s 95A. This important provision, in part, reads as follows:

95A (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

The lack of a precise test of insolvency in the pre-existing Corporations Law provisions was a matter of concern; for example, in relation to actions under the insolvent trading provisions (s 592). The Explanatory Memorandum to the Corporate Law Reform Act noted (para 388) that:

... s 95A will establish a clear statement of when a person is or is not solvent. A person will be solvent under subsection 95A(1) where they can pay all their debts as and when they become due and payable. Under ... [new] ... subsection 95A(2), a person who is not solvent will be insolvent.

Section 95A therefore establishes a 'cash flow test' rather than a 'balance sheet test' of insolvency. However, s 459D also introduces a balance sheet test when it notes that in proceedings under s 459P the court take into account other contingent and prospective liability of the company in determining whether the company is solvent. Both s 95A and s 459D were considered by Olsson J in Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 at 63-4. In this case, his Honour observed (at 64):

It is to be seen that, by its definition of insolvency, the Law poses what has been described in the decided cases as a 'cash flow' test, rather than a 'balance sheet' test. This aspect must firmly be borne in mind ... In reviewing the evidentiary material it is important to keep in mind what was said by McGarvie J in Taylor v Australian and New Zealand Banking Group Ltd (1988) 13 ACLR 780 at 784 ... The issue of insolvency is a question of fact, which falls to be decided as a matter of commercial reality in the light of all the circumstances or, as Gummow J in Re New World Alliance Pty Ltd (rec & mgr apptd); Syncotex Pty Ltd v Baseler (No 2) (1994) 51 FCR 425] ... a situation must be viewed as it would be by someone operating in a practical business environment. Moreover, it is not to be forgotten that the statutory focus is on solvency and not liquidity ... So it is that it is appropriate to consider the terms of credit or financial support available to the respondent with which to defray debts owed to creditors ... The question is not to be answered merely by looking at the financial statements, although these are, of course, not irrelevant.

The courts have traditionally taken the broad view that, in determining solvency, it is necessary to look at the overall situation of the corporation. For example, in Re Adnot Pty Ltd v The Companies Act (1982) 7 ACLR 212 at 216-17, Kearney J first stated the facts as follows:

The features presently relevant to the company are unusual in that it is not trading in the sense of turning over stock and thereby generating income. It has embarked solely upon the Redfern Shopping Centre [construction] venture, and the completion of that venture will be achieved by the sale of that property. In the meantime, the company is in the position of owner of the property, subject to the substantial mortgage liability in favour of Trans City Holdings Ltd, and receiving income only in the form of payments for rental and outgoings from the tenants of the property.

His Honour observed:

The test to determine insolvency is succinctly expressed in the judgment of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670 where his Honour points out that whilst insolvency is expressed in the relevant bankruptcy provisions as an inability to pay debts as they fall due out of the debtor's own money, nevertheless, the debtor's own moneys are not limited to his cash resources immediately available. His Honour points out that they extend to moneys procurable by realisation or mortgage or pledge of assets within a relatively short time, bearing in mind the nature and the amount of the debt and the circumstances of the debtor. This view echoes what both his Honour and Taylor J said in Rees v Bank of New South Wales (1964) 111 CLR 210, Taylor J, in particular, referring at 230 to the judgment of Isaacs J in Bank of Australasia v Hall (1907) 4 CLR 1514 at 1543. Isaacs J's remarks concluded with the following: 'In other words, if the debtor can by sale or mortgage of property which it owns at the time of assignment change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied'.

Meaning of “able to pay all the person’s debts’

In assessing the ability of a company to pay its debts, the courts have looked at the overall  commercial position of the corporation and not merely at whether the corporation can pay the debt immediately. That the court will not automatically wind up a corporation which cannot immediately pay its debts was illustrated in the decision of Harper J in Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 at 621, where his Honour observed:

Many trading corporations, including banks and other financial institutions, would be liable to be wound up if the test [in the old s 460(1) and in new s 95A] was whether they could repay all their debts immediately. But, in my opinion, that is not the correct approach. The Court must, rather, assess the overall trading and financial position of the company in question and ascertain whether, in the light of all the facts, that company is able to meet its obligations. If the company is not obliged to repay a debt now or in the immediate future, it should not be subject to a winding-up order made on the basis that, if it were so obliged, it would not be able to meet that obligation. (See, generally, Bank of Australasia v Hal? (1907) 4 CLR 1514; and Sandell v Porter (1966) 11 5 CLR 666.)

That a corporation is unable to pay its debts may be established by means of the statutory presumptions which most commonly arise from the failure of a corporation to comply with a statutory demand. However, the court may also conclude that insolvency exists based upon positive evidence being proved before the court: per Heerey J in Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 5 ACSR 10 at 19. A similar approach was taken in Syd Mannix Pty Ltd v Le Serve Constructions Pty Ltd [1971] 1 NSWLR 788. In the latter case, Mannix petitioned to wind up the corporation before the notice of demand had expired. The court granted this petition as there was other evidence which established that the corporation was unable to pay its debts. In the New South Wales Court of Appeal, Jacobs JA observed (at 791) that where a winding up order is made, it is necessary that there be substantial evidence of the inability of the corporation to pay its debts. Leserv Constructions Pty Ltd v Syd Mannix was affirmed by the High Court (at (1972) 46 ALJR 548).

 

Is the dispute a genuine one?

In exercising its discretion to wind up a corporation under s 459A or s 459B, the court may have regard to the well-established argument to the effect that there is a dispute in regard to the debt. This consideration has now been written into the Law as a ground for setting aside a statutory demand: s 459H(1)(a).

The principles to be applied in assessing the genuineness of a dispute were examined by Santow J in Jarpab Pty Ltd v Winter — trading as Bolden Haulage (1994) 14 ACSR 255 at 260-1, where his Honour reviewed various cases which had interpreted s 459H. The various principles or approaches which have been applied in determining whether there is a genuine dispute were summarised by Santow J as follows:

(1)  In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 5605-6    Thomas J warns against the court going beyond identifying the genuine level of claim and any offsetting claim and thus against attempting to determine the likely result of either ...

(2)  In Scanhill Pty Ltd v Century 21 Australia Pty Ltd (1993) 120 ALR 173; 12 ACSR 342 Beazley J applied a test akin to that applicable to an interlocutory injunction. That is, whether there was a serious question to be tried, so adopting the relatively low threshold in American Cyanamid Co v Ethicon Ltd [1975] AC 396. That test of course does not require that the party seeking the interlocutory injunction provide all the evidence ultimately relevant to a final decision. Both sides may have provided incomplete, conflicting evidence, requiring ultimate resolution only at a final hearing.

(3) Lockhart J in Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39 reviewed the authorities and stated that: 'The notion of a "genuine dispute" in this context suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance' ...

(4) In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, McLelland CJ in Eq at 787, in my view correctly, characterised the test as whether there is 'a plausible contention which requires investigation'.

(5)  In ... Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (1994) 13 ACSR 455 Young J applied a similar approach ... [and stated] ... that whilst the legislators' aim appears to have been to prefer certainty over any other factor, none the less the word 'substantiated' should have some semantic significance so there should be some attempt to substantiate the claim.

(6) Thus the cases recognise that the court must not totally abdicate its critical function, in testing attempts to set aside a demand by reference to some claimed dispute or offsetting claim ...

(7) McLelland Q in Eq in Eyota Pty Ltd v Hanave Pty Ltd (supra) at 787, strikes the proper balance, when recognising the inherent limits on how far a court should go in testing a claim for genuineness, while stopping short of resolving the ultimate dispute ...

The above principles were referred to approvingly by Matheson J in Le Grog Holdings Pty Ltd v Roofview Pty Ltd (1995) 18 ACSR 313 at 315-16. In Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787, McLelland Q in Eq, considered that in determining whether a dispute was genuine the court should not uncritically accept every statement in an affidavit as giving rise to a genuine dispute. As he observed:

This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed documents or other statements by the same deponent, or inherently improbable in itself, it may be 'not having 'sufficient prima facie plausibility to merit further investigation as to [its] truth' ... or 'a patently feeble legal argument or an assertion of facts insupportable by evidence ...

But it does mean that, except in such an extreme case, a court required to determine whether there is a genuine dispute should not embark upon an enquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving such a dispute.

 

Thus the dispute must not be plainly vexatious or frivolous and there must be a 'genuine claim' before the court will find that there is a genuine dispute. LindgrenJ observed (at 353) that in this context:

[T]he word 'genuine', in the present context, is directed to a dispute or claim which, if sustained, would militate against the existence of the debt in the amount stated in the statutory demand, the approach which would be taken by a court on an application by a creditor for summary judgment for that amount suggests itself as a useful analogy. The creditor would not be entitled to summary judgment if the company raised a defence or cross-claim deserving of a trial, and, concomitantly, a defence or cross-claim would not be struck out or dismissed if it raised an issue deserving of a trial.

It is not sufficient for the company merely to show that there is a bona fide dispute, the company must do so on the balance of probabilities. As Nicholson J added in Derby Motorplus (at 241): '... there is authority that the duty of   (a company which claims to dispute a debt is a duty "to bring forward a prima facie case which satisfies the Court that there is something to be tried."

 

The court may also exercise its discretion to decline the order the winding up of  a company where it is clear that the application constitutes an abuse of process upon the part of the creditor. Such a discretion would seem implicit in s459A and s459B.

 

The onus is on the company to show why a creditor should be restrained from seeking to wind up the company. As Kirby P noted in the Australian Mid-Eastern Club Ltd case (at 241):

... courts will be sensitive to the misuse of the statutory right both so as to prevent unjustifiable damage to the company's business and reputation and to restrain the improper use of the procedure as a mechanism for debt recovery, bypassing the ordinary procedure provided in that regard.

The circumstances in which such a conclusion will be reached by the court were specified by McLelland J in L&D Audio Acoustics Pty Ltd v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183 as follows:

Proceedings by a person as creditor for the winding up of a company on the ground that it is unable to pay its debts will ordinarily be held to be an abuse of process:

(1) if the winding up proceedings are bound to fail eg if it is clear that the applicant will not be able to prove that he is a creditor within the meaning of s 363(l)(b) of the Code [s 459P(l)(b) and s 462(2)(b) of the Law], or will not be able to prove that the company is unable to pay its debts within the meaning of s 364(l)(e) [of the Companies Code or see now, s 95A(1) of the Law];

(2) if the application is made for some improper purpose eg if the applicant is seeking to use the winding up proceedings to coerce a company into paying an alleged debt without affording the company a reasonable opportunity to ascertain or have it established that the debt is properly payable; or

(3)  if issues will arise in the winding up proceedings of a kind inappropriate for determination in such proceedings eg a substantial contest as to the existence or enforceability of a debt relied on by the applicant, which should properly be resolved in separate proceedings brought for that purpose.

 

Where there clearly is an abuse of process, the court will usually dismiss the application. The relevant principles in this respect were set out by Ipp J in Re Bond Corporation Holdings Ltd (1990) 1 ACSR 350 at 363. In this case, his Honour approved of remarks made by Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 as being applicable to abuse of process cases. In that case, which dealt with solicitor-client costs,  Woodward J noted that an award of such costs would occur:

... whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.

Ipp J added (at 363) that the filing of the petition was an abuse of the process of the court because:

... the filing of the petition in the circumstances I have outlined constituted a deliberate tactical manipulation of the winding up process by the SG1C for the purposes of bringing very substantial pressure to bear on BCH. [Here the winding up petition had been filed at the last possible moment before the New Year's weekend without advising the solicitors for BCH, there was clear knowledge upon the part of the applicant that the debt was disputed and that the filing of the petition would lead to widespread publicity and harm to BCH's trading position and causing it to default on other loan agreements. The petition also provided no evidence that BCH was not meeting creditors' claims].

The courts have been critical of attempts to use a statutory demand merely to seek a 'faster track' as an alternative to seeking summary judgment. It is therefore improper to initiate winding up proceedings merely to place pressure upon a company to pay what is known to be a disputed debt; in such cases a statutory demand will be set aside: per Heerey J in Megraph Public Safety Pty V Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523 at 526-7. Although not always considered an abuse of process, courts have frowned on such strategies. For example, White J observed in Re Copperart Pty Ltd (1995) 16 ACSR 351 at 360 that 'the use of the statutory demand procedure to force a solvent company to pay a small rental debt seems entirely inappropriate, however, having found that there was no genuine dispute, I am not prepared to hold that it was an abuse of process ... It seems to me a wrong use of the procedure to use the fear or the apprehension of winding up proceedings as a debt collecting procedure.

 

In regard to the standing of an applicant as a creditor, Santow J made a similar comment when he observed in The Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 20 ACSR 108 at 119 that:

insolvent companies, even if generally insolvent, are not to be put to the equivalent of citizens' arrest; particularly when the 'citizen' most likely to do this has yet to satisfy the requirements for standing. Otherwise the threat of winding up can so easily be used as a source of unfair pressure to achieve that end, or other unfair commercial advantage.

 

Presumptions of Insolvency: s 459C

459C(2) The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made:

(a)  the company failed (as defined by s 459F) to comply with a statutory demand; or

(b)  execution or other process issued on a judgment, decree or order of an Australian Court in favour of a creditor of the company was returned   j wholly or partly unsatisfied; or

(c)  a receiver, or receiver and manager, of property of the company was appointed under a power contained in an instrument relating to a floating I charge on such property; or

(d)  an order was made for the appointment of such a receiver, or receiver and I manager, for the purpose of enforcing such a charge; or

(e) a person entered into possession, or assumed control, of such property for such a purpose; or                                                                                         

(f) a person was appointed so to enter into possession or assume control (whether as agent for the chargee or for the company).

 

The Statutory Demand: s 459E

The 'statutory minimum' amount for a statutory demand is defined by s 9 as $2000 or such other amount as is prescribed. This procedure is as follows:

459E(1) A person may serve on a company a demand relating to:

(a)  a single debt that the company owes to the person, that is due and payable and whose amount is at least the statutory minimum; or

(b)  2 or more debts that the company owes to the person, that are due and payable and whose amounts total at least the statutory minimum.

(2) The demand:

(a)  if it relates to a single debt — must specify the debt and its amount; and

(b)  if it relates to 2 or more debts — must specify the total of the amounts of the debts; and

(c)  must require the company to pay the amount of the debt, or the total of the amounts of the debts, or to secure or compound for that amount or total to the creditor's reasonable satisfaction, within 21 days after the demand is served on the company; and

(d)  must be in writing; and

(e)  must be in a prescribed form (if any); and

(f)   must be signed by or on behalf of the creditor.

(3) Unless the debt, or each of the debts, is a judgment debt, the demand must be accompanied by an affidavit that:

(a)  verifies that the debt, or the total of the amounts of the debts, is due and payable by the company; and

(b)  complies with the rules.

 

The statutory demand must satisfy various form and content requirements, as set by s 459E(2). Except in the case of a judgment debt, the demand must be accompanied by an affidavit which verifies the amount that is alleged to be due and payable. This affidavit must comply substantially with the Rules of Court: per Bryson J in Portrait Express (Sales) Pty Ltd v Kodak-(Australasia) Pty Ltd (1996) 20 ACSR 746 at 753-4.

 

Entitlement of a creditor to a winding up order as of right

In general, a creditor who has satisfied the requirements of the statutory demand procedure is entitled to winding up of the debtor company as of right. As McHugh J noted in FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (1988) 14 ACLR 285 at 301:

... [o]nce a creditor proves in accordance with s 364(2)(a) [of the Code, see now s 459E] that the company is unable to pay its debts, the jurisdiction conferred by [Code] s 364 [Law s 459A] ought ordinarily to be exercised whatever the sum involved. For the jurisdiction is conferred so that companies which are unable or deemed to be unable to pay their debts may be wound up.

His Honour added that:

Gibbs J has pointed out, that as a general rule la creditor who cannot obtain payment is, as between himself and the company that owes the debt, entitled to a winding up as of right ... ': IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 49 ALJR 176 at 182. A person whose notice of demand is not met and whose debt is not disputed 'cannot obtain payment' within the meaning of that proposition. If no more appears, the general rule applies and the creditor is entitled to a winding up order.

 

The general rule may not apply because there is a bona fide dispute on reasonable grounds as to the existence of the debt which is the basis of the summons: Re Kings Cross Industrial Dwelling Co (1987) LR 11 Eq 149 at 151. It may not apply because most of the creditors think that the company should continue trading: Re Leonard Spencer Pty Ltd [1963] Qd R 230 at 233-4. It may not apply because the company is able to prove that it is solvent: Re London and Paris Banking Corporation (1874) LR 19 Eq 444. These matters do not exhaust the circumstances which may enable the Court to refuse to make a winding up order either by dismissing the summons or adjourning the proceedings.

 

Setting Aside a Statutory Demand: s 459G

The policy bases of this Division are further spelt out in the Explanatory Memorandum. These observations are worth quoting at length:

686. The Harmer Report proposed that a demand may be set aside if the Court is satisfied that:

•     there is a substantial dispute as to whether the debt is owing;

•     the company appears to have a counter claim which may exceed the amount of the debt; or

•     the demand ought to be set aside on other grounds.

 

687. This last general power would enable the court to take account of matters such as improper or invalid service and mistakes or misstatements in the notice of demand, in circumstances where this would significantly prejudice any party.

 

688.  The provisions in relation to the setting aside of a statutory demand are intended to be a complete code for the resolution of disputes involving statutory demands, and to do so on the basis of the commercial justice of the matter, rather than on the basis of technical deficiencies. In particular it is intended to remove the present difficulties which are experienced where difficulties in estimating the extent of the debt may lead to an invalidating of the statutory demand on the basis of a minor overstatement of the amount due ...

 

689.This ... [new] ... Division, together with ... [new] ... Division 4, also provides a means of dealing with statutory demand disputes in such a way that an alleged defect in the statutory demand does not have the effect of prolonging proceedings leading to the commencement of a winding up, by requiring debtor companies to raise genuine disputes (about, for example, whether a debt is owed) at an early stage, rather than after winding up proceedings have commenced.

 

Setting aside a statutory demand: s 459J

Section 459J(1) allows the court to set aside the demand completely for reasons such as: (a) the existence of a defect in the demand which may cause substantial injustice; or (b) for some other reason. It has been held that para (a) and (b) in s 459J(1) are 'mutually exclusive': Kalamunda Meat Wholesalers Pty Ltd v Red Russell & Sons Ply Ltd (1994) 13 ACSR 525 at 530; Turner Equity Pty Ltd v Melvista Park Pty Ltd (1995) 18 ACSR 399 at 403; and Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 at 755-6. In regard to s 459J(l)(b), such an 'other reason' for setting aside a demand may include a defect in the accompanying affidavit: per Nicholson J in Delta Beta Pty Ltd v Vissers (1996) 20 ACSR 583 at 590; and per von Doussa J in Cempro Pty Ltd v Dennis M Brown Pty Ltd (1994) 13 ACSR 628 at 632-3. Such 'other reason' will also include the failure to provide an affidavit with the statutory demand at the time that the demand is served: per Cox J in Victor Tunevitsch Pty Ltd v Farrow Mortgage Services Pty Ltd (in liq) (1994) 14 ACSR 565 at 567-8. An affidavit will, for example, be defective where it fails to verify the alleged debt: per Burley J in Zhen Yun (Aust) v State Bank of South Australia (1994) 13 ACSR 801 at 803. But an affidavit may be supplemented with further material so long as the initial affidavit satisfied the basic threshold of containing sufficient information about the debt: per Sundberg J in Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund (1996) 21 ACSR 581 at 588. However, as we have seen, the court is prohibited by s 459J(2) from setting aside the demand because of a mere 'defect' in the demand; a defect in an affidavit will be regarded by the court as being more significant than a defect in the statutory demand: per Bryson J in Portrait Express (Sales) Pty Ltd v Kodak (Australasia) Pty Ltd (1996) 20 ACSR 746 at 758.

 

To establish that there has been substantial injustice, the defect must be in the demand itself and not in the accompanying affidavit: per McLelland C] in B&M Construction Pty Ltd v Buyrite Steel Supplies Pty Ltd (1995) 15 ACSR 433 at 436; also see, Delta Beta Pty Ltd v Vissers (1996) 20 ACSR 583 at 589. Section 9 defines a 'defect' as including (i) an irregularity, (ii) a misstatement of an amount or total, (iii) a misdescription of a debt or other matter and (iv) a misdescription of a person or entity. In Topjelt Pty Ltd v State Bank of New South Wales (1993) 12 ACSR 381 at 392, Lockhart J noted that:

[a]ccording to its ordinary usage a 'defect' means a lack or absence of something necessary or essential for completeness; a shortcoming or deficiency; an imperfection. A defect according to ordinary understanding is not necessarily something which is of a minor nature, it may be either major or minor.

His Honour added that '[t]he notion of a "defect" is not to be confined to a misstatement of an amount of a debt to a small or minor misstatement or to an immaterial or minor misdescription of a debt or a person or entity'. These statements have been approved in subsequent cases: see, for example, Chains & Power (Aust) Pty Ltd v Commonwealth Bank of Australia (1994) 15 ACSR 544 at 552.

 

Who may apply to wind up a company in insolvency: s 459A

Section 459P provides an exhaustive list of the persons who may apply to the court for winding up upon the basis of insolvency under s 459A. The persons covered by s 459P are the company, a creditor, a contributory, a director, a liquidator or provisional liquidator of the company, the Commission or a prescribed agency. This list parallels the category of persons who may apply for winding up under the general grounds in s 462(2), although there are some differences between these provisions. It should be noted that s 459P(2) provides that applications under s 459A may only be made with the leave of the court by contingent or prospective creditors, by contributories, by directors or by the Commission.

 

Applications by a creditor: s 459P(l)(b)

A creditor of the company is entitled to bring action to wind up the company. Such a creditor may be presently entitled or may be a contingent or a prospective creditor. Although the term creditor is not defined by the Corporations Law, the term will be construed broadly. There needs to be a valid debt between the creditor and the company and the debt must be payable by the company. This matter was considered by McPherson J in Rothwells Ltd v Nommack (No 100) Pty Ltd (1988) 13 ACLR 421. This case involved an attempt by Rothwells to stop Nommack seeking to wind up Rothwells. Nommack had previously demanded an amount of $2 million from Rothwells which was said to be due and owing. The question arose whether Nommack was actually a 'creditor' to whom Rothwells was indebted. Nommack had apparently been induced by persons associated with Rothwells to accept another company, Beltech, as its associate in a land development venture in central Sydney. Nommack was about to incur substantial liabilities in the venture and therefore sought an assurance from Rothwells that the associate company would make its contribution of $2 million when required. An exchange of correspondence followed. This included a letter from Rothwells to the effect that it held an amount of $2 million in the account of Beltech to satisfy the obligation to Nommack. As McPherson J noted (at 427), 'unless the relation of creditor and debtor subsists between Nommack and [Rothwells], the former prima facie lacks standing as a creditor ... to apply for winding up'. However, in the circumstances his Honour was reluctant to conclude that Nommack was a creditor until its claim was established as 'the reputation and business of ... [Rothwells] ... as merchant banker will, as one might expect, be placed at serious risk if an application to wind up is made and advertised'. In reaching this conclusion, McPherson J reviewed the general law regarding creditors and noted (at 424) that:

... the transaction would, I am satisfied, not have given rise to a debt at common law. Under the old law there were three ways in which a debt could arise. They were (1) by judgment; (2) by deed under seal; and (3) as the quid pro quo for a consideration that was executed. The first two are not relevant here. On behalf of Nommack Mr Sofronoff submitted that the third form is present. To make good that claim, it is necessary to show that the company in effect said to Nommack 'if you do certain specified acts, I will pay you $2 million'. The nature of the relation required between the promise and the executed consideration or performance was stated in Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 at 456-7 ...

 

In the present case there is evidence before me to the effect that, having received the company's promise to pay, Nommack acted to its detriment in various ways by incurring liabilities to consultants, continuing to seek development approval, and so on. But that is not enough to constitute those acts as the executed consideration for the precedent, promise to pay, because it does not of itself create between the promise to pay and the acts done in reliance upon them the relation of quid pro quo. The acts done by Nommack were not requested, demanded or required by the company [Rothwells] as the price of or in exchange for its promise to pay $2 million. It is conceivable that, after thorough investigation of the facts and circumstances, it might be possible to imply the essential precedent request; but the material before me now is not such as to justify such a conclusion, which could be reached, if at all, only after a full trial.

The Rothwells v Nommack case clearly illustrates some of the difficulties involved in establishing the status of a creditor for the purpose of initiating winding up proceedings. This was also illustrated in Gradjan Pty Ltd (in liq) v Miling Nominees Pty Ltd (1996) 19 ACSR 466 at 468 where the liquidator of Gradfan had sought to bring action in the name of the company (as a creditor) to recover a debt due to a trust from a third party; the company had been the trustee of the trust. The defendants argued that the debt was in fact owed to the trust and not the company. It was held that the liquidator could not bring this action upon behalf of the company as the company was not a creditor for the purposes of s 459P because it had ceased to be the trustee with the appointment of the liquidator. Evidence of actual insolvency of a company is immaterial to establishing the threshold question of standing to bring proceedings pursuant to s 459P as a creditor: per Santow J in The Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 20 ACSR 108 at 113-16.

 

Applications by secured, contingent or prospective creditors

Applications to wind up the company upon the basis of insolvency may be made by creditors who hold a security over some asset or property of the company. This situation is relatively straightforward. A contingent creditor may also make such an application: s 459P(2)(a). Such a creditor is a person to whom repayment will only occur upon the happening of a specified event. On the other hand, a prospective creditor is also permitted to make a winding up application under s 459A. A prospective creditor is a person to whom repayment will become due at some point in time in the future or upon the occurrence of a future event. None of these terms is defined in the Corporations Law although the case law has provided some assistance in clarifying the meaning of these expressions. For example, in Community Development Pty Ltd v Engwirda Construction Co (1969) 43 ALJR 363, the High Court considered the issue of whether a building contractor was a contingent or prospective creditor. Kitto J noted (at 366) that:

Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word 'contingent', and I shall refer to one only. In Re William Hockley Ltd [ 1962] 2 All ER 111 at 113, Pennycuick J suggested as a definition of 'a contingent creditor' what is perhaps rather a definition of 'a contingent or prospective creditor', saying that in his opinion it denoted 'a person towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future date'. The importance of these words for present purposes lies in their insistence that there must be an existing obligation, and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen.

 

The statement of Kitto J in Community Development Pty Ltd v Engwirda Construction Co was applied by King J in Re International Harvester Credit Corp (Aust) Ltd (1983) 7 ACLR 415 at 416. An illustration of a case involving a successful application for the appointment of a provisional liquidator by a contingent or prospective creditor under s 462(2)(b) is United States Surgical Corporation v Ballibil Holdings Pty Ltd (1985) 9 ACLR 904 at 908. In that case, Needham J noted (at 907) that the basis of the creditors claim in this case is that it has a claim against the defendant for a considerable sum of damages together with a considerable sum of costs': see further Re Gasbourne Pty Ltd (1984) 8 ACLR 618 at 642-8.

 

For the purposes of what is now s 462(2)(b), a contingent or prospective creditor may not use a statutory demand where debts are not due and payable: per Cohen J in First Line Distribution Pty Ltd v Whiley (1995) 18 ACSR 185 at 188. McPherson (pp 44-5) has summarised the cases in this area and noted that:

Formerly it was necessary that the applicant be a creditor in respect of a debt presently due and payable, in the sense that, at the time of filing the winding-up application, there was an unconditional right to immediate payment of the debt upon which the petition was founded ... This requirement was the source of considerable inconvenience: it meant that, even where a company was actually insolvent, many of its ‘creditors’ were unable to petition for winding up because the date for payment of their debts had not yet arrived and might, in fact, still be a long time off.. the result is that in most, if not all, of the cases previously mentioned, the claimant would now be qualified to apply for a winding up order where formerly he was not.

 

Is the debt presently due?

The debt must be due at the time that a creditor serves a notice on the debtor for payment of the debt s 459E(1). As McPherson noted (p51): ‘the debt must at the time, be absolutely due or presently payable in the sense that the creditor is entitled to claim immediate payment thereof.’

 

The Court and the winding up Process

Where a company is being wound up by order of the court, the court has a discretion to make any of the orders provided for in s 461 and in s 459A and s 459B. Thus, the terms of s 461 are permissive rather than mandatory in character and confer a residual discretion upon the court: per WC Lee J in Re Fernlake Pty Ltd (1994) 13 ACSR 600 at 607. Section 467B also provides that the court may make winding up orders even where the company is being wound up voluntarily. Other discretionary powers of the court include the powers in s 467, such as the power to dismiss, stay or adjourn an application, the power to substitute an applicant in a winding up under the new s 465B and the Rules of Court, and the discretionary power to validate dispositions made by the company or the liquidator after the winding up has commenced. Another significant power of the court, based upon s 468, is to validate dispositions made after the commencement of the winding up. The court also has other discretionary powers, such as the power under s 571, to declare void the dissolution of a company made under s 481(6). Other discretionary powers in the winding up process which are dealt with elsewhere are the power of the court under s 472(2) to appoint a provisional liquidator and the power of the court under s 1322 to correct procedural irregularities.

 

Voluntary Winding Up and Dissolution

 

Court-ordered winding up under Part 5.4 is to be contrasted with the procedures for voluntary winding up, either by the members or by the creditors, which is provided for under Part 5.5 of the Law. Just as insolvent and non-insolvent companies may be wound up by order of the court, so too can insolvent and non-insolvent companies be wound up voluntarily. Where an insolvent company is wound up voluntarily this is known as a creditors' winding up. The voluntary winding up of solvent companies is known as a members' winding up. If during the course of a members' winding up it becomes apparent that the company is actually insolvent, the members' voluntary winding up becomes a creditors' voluntary winding up. Other major differences between the two forms of voluntary winding up include differences between who it is that controls the winding up and who it is that appoints and supervises the liquidator. In the case of the members' winding up, it is the members who undertake these tasks, whilst in the creditors' winding up it is the creditors who do so. One leading insolvency practitioner has described the voluntary winding up process in the following colourful terms:

Voluntary winding up is a process which is a cross between corporate euthanasia and suicide, with the corporate mind, the directors, deciding it's time to go, the shareholders administering the fatal vote and the members or creditors, depending on the company's solvency, assisting to lay the body to rest and squabbling over the remains. Death is not immediate, there are rituals to be observed before the company is struck from the register and its assets distributed to the beneficiaries, be they the members or the creditors, as the case may be. There is even a provision to revive a company which has perhaps met a premature end: s 571 (R Lindwall, 'Voluntary Winding Up', p 55,101 in Australian Corporation Law: Principles and Practice, Butterworths, 1992).

There is some overlap between the statutory provisions regarding voluntary winding up and court-ordered winding up. For example, pursuant to s 513, the provisions of the Corporations Law are to apply to both voluntary and court-ordered winding up, unless a contrary intention is apparent from a provision. Furthermore, in regard to a voluntary winding up, s 511(l)(b) permits the court to exercise all the powers that are available to it in a court-ordered winding up: see generally in regard to s 511, Christianos v Aloridge Pty Ltd (prov liq apptd) (1995) 18 ACSR 272 at 281; and WM Scollay & Co Ltd (in liq) v South Pacific Energy Trading Pty Ltd (in liq) (1996) 21 ACSR 42 at 43. As McPherson has said of an equivalent provision to section 513:

... [s]ince prevailing judicial policy now favours a liberal interpretation of the latter provision, the only fundamental practical difference between the two forms of winding up consists of the much more detailed provisions of the rules regarding the handling of funds by liquidators in compulsory winding up, coupled with greater formality in the distribution of surplus assets among the members (The Law of Company Liquidation, 3rd ed, p 27).

 

The court is also empowered under s 467B to make a winding up order under s 461, even though the company is being wound up voluntarily. Some reference has also been made to the new regime for the commencement of winding up, which is provided in Division 1A of Part 5.6, which deals with both court-ordered and voluntary winding up.

 

The Proof and Ranking of Creditors’ Claims

 

Once a winging up has commenced, the key insolvency law provisions concern the proof and ranking of claims. Division 6 of Part 5.6 of the Corporations law deals with the proof and ranking of claims made by unsecured creditors, employees, the liquidator and others.

 

Debt owed by the company to a member: s 553A

Where a debt is owed by the company to a member in that persons capacity as a member, by way of dividends, profits or otherwise, s 553A provides that this debt is not admissible to proof against the company unless the member has paid the company or the liquidator all amounts which may be outstanding as a consequence of that persons membership. It should be emphasised that this section only applies to debts owed by the company to a person in that persons capacity as a member. As the Explanatory Memorandum noted (at para 863), '[t]he Harmer Report recommended that a claim by a member not be admitted until all contributions payable by the member have been paid in full'.

 

Penalties and fines: s 553B

Section 553B provides that, except in respect of amounts payable under the Proceeds of Crime Act 1987, penalties or fines imposed by a court are not to be admissible against an insolvent company. The policy bases of this change were set out by the Explanatory Memorandum to the 1992 Reform Bill:

854. Under subsection 82(3) of the Bankruptcy Act, penalties or fines imposed by a court in respect of an offence against the law, whether the law of the Commonwealth or not, are not provable in a corporate winding up. The Harmer Report recommended that fines imposed before or after the commencement of a winding up should be admissible in a corporate insolvency ... The rationale for this recommendation was that in relation to a corporate insolvency a fine should be admissible because, after the company has been wound up, there is no-one against whom the fine may be claimed and the fine is a claim by the community as a whole. The recommendation of the Harmer Report is not implemented in the Bill on the basis that although the fine ma)' be a claim by the community, fines are by their nature generally intended to be a deterrent.

In the case of corporate insolvency, it is difficult to justify penalising creditors for a wrong committed by the company.

 

Mutual credit and set-off between insolvent companies: s 553C

Section 553C(1) provides for mutual credit and set-off to occur where there have been dealings between an insolvent company and a person so that after the set-off of the amounts due to each, only the balance is to be admissible to proof against the company or payable to the company as the case may be. However, this is subject to the qualification in s 553C(2), that if at the time of giving the credit to the company, or at the time of receiving credit from it, the person knew that the company was insolvent, the benefit of the set-off will not be available. As the Explanatory Memorandum to the 1992 Reform Act stated (para 869), this new section '... sets out the provisions of the Bankruptcy Act, section 86 as it is applied at present to the winding up of insolvent companies by virtue of existing section 553'. A precondition to the right of set-off under s 553C is the existence of mutuality.

 

In Old Style Confectioners Pty Ltd v Microbyte Investments Pty Ltd (in liq) (1994) 15 ACSR 191 at 196, Hayne J observed that s 553C was substantially in the same terms as s 86 of the Bankruptcy Act 1966 and that the cases considering this earlier provision have shown that mutuality 'is a prerequisite of the right of set-off arising'. His Honour noted that the achievement of 'substantial justice' was the policy basis for this mutuality whereby mutual debts are set off against each other. Hayne J quoted approvingly from a statement of principle from the High Court decision in Gye v Mclntyre (1991) 171 CLR 609 where the High Court considered s 86 and noted (at 618-19) that the object of set-off is to do substantial justice between the parties and added that:

Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 [cents] in the dollar upon the whole of the debt owed to the bankrupts but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the 'mutual credits' and 'mutual debts', and later 'mutual dealings', provisions were introduced into bankruptcy legislation ...

In this case, Old Style was found to be entitled to set off its claim for damages against the company's claims for licence fees. It should also be noted that s 553C applies both to the situation where there is a proof of debt as well as to all other claims which are provable: per Young J in Winterton Constructions Pty Ltd v MA Coleman Joinery Co Pty Ltd (1996) 20 ACSR 671 at 675.

 

Application of the Bankruptcy Act to the winding up of insolvent companies: s 553E

 

Determining the value of debts and claims: s 554A

Where a debt or claim does not bear a certain value and the liquidator admits the debt or claim, the liquidator is required by s 554A to make an estimate of the value of the debt or claim as at the relevant date, or alternatively, to refer the question of the value of the debt or claim to the court. Where the liquidator has made an estimate of the debt or claim under s 554A(2), an aggrieved person may appeal to the court against the liquidator's estimate, in accordance with the regulations, pursuant to s 554A(3). Section 554A implements the Harmer Report recommendation that a mechanism be provided for the estimation of debts or claims which have an uncertain value (Explanatory Memorandum para 876). Where a question of the value of the debt or claim has been referred to the court either by the liquidator or by an aggrieved person, the court is required by s 554A(4) to make an estimate of the value of the debt or claim as at the relevant date or else to determine a method of valuation which is to be applied by the liquidator. Where the court does determine such a method of valuation, s 554A(5) requires that the liquidator apply this method. Where a person is aggrieved by the manner in which the liquidator applies the method of valuation set by the court, the aggrieved person may appeal to the court under s 554A(6), and the court must itself work out the value of the debt or claim if it is satisfied that the liquidator did not correctly apply the method of valuation set by the court: s 554A(7). The amount of the debt or claim worked out as a result of the application of the procedures set out in s 554A is deemed by s 554A(8) to be the debt or claim that is admissible to proof.

 

Foreign currency debts or claims: s 554C

Where the amount of a debt or claim which is admissible to proof against a company would constitute a foreign currency amount, s 554C provides a method of converting this foreign currency amount to Australian currency. Under s 554C(2), the amount admissible to proof in Australian currency is the amount worked out by resort to an agreed method as at the relevant date. Where no such agreement has been reached, s 554C(3) provides that the amount of the debt is to be calculated by reference to the 'opening carded on demand airmail buying rate in relation to the foreign currency available at the Commonwealth Bank of Australia on the relevant date'. This new section adopts a recommendation of the Harmer Report. As the Explanatory Memorandum to the 1992 Reform Bill stated (paras 886-7), the new section:

... implements the recommendation of the Harmer Report that the principle which represents the law in relation to the valuation of a debt denoted in a foreign currency, as enunciated in the English Courts, be codified in the Corporations Law.

 

887.  Where a debt is denominated in a foreign currency the rule in England appears to be that the date for conversion is the date upon which the insolvency administration actually commenced. In Australia, there is a lack of authority on the question, although there is some suggestion that the conversion date is the date when the debt becomes due.

 

888.  The Harmer Report argued that the recommendation was appropriate as:

•       it brings certainty in operation of the law and

•     on insolvency, the contractual right of the creditor to be paid by the debtor becomes the statutory right to share a common fund; therefore, the size of the fund must be ascertained as soon as possible to enable satisfaction of the insolvent liabilities. The date of the actual commencement of the insolvency administration is the earliest convenient date for making this conversion.

 

889. Although not recommended by the Harmer Report, to achieve greater commercial certainty, the provision is made subject to any contrary provision stipulated in the instrument creating the debt.

 

Proof of debt by a secured creditor pursuant to s 554E

Secured creditors of a company that is being wound up are prohibited by s 554E(1) from proving the whole or part of their debt except in accordance with the section and the applicable other provisions of the Law and the regulations. The section provides that the creditors proof of the debt must be in writing and that where the creditor surrenders the security to the liquidator, the creditor may prove the whole of the secured debt. In circumstances where the creditor has realised the security in good faith, the creditor may prove for any balance due after deducting the net amount realised. Where the security has not been realised, the creditor is required by s 554E(5) to estimate the value of the security and prove for the balance after deducting the value which has been estimated. In the latter circumstances, the proof of debt must include particulars of the security and the creditors estimate of its value. In Health and Life Care Ltd (in liq) v South Australian Asset Management Corporation (1995) 16 ACSR 453 at 458 Debelle J considered the effect of s 554E upon debts of secured creditors who had voted at meetings of creditors. His Honour noted that:

A secured creditor cannot both retain the security and prove for the full amount of the debt: Moor v Anglo-Italian Bank (1879) 10 Ch D 681. In other words, the secured creditor cannot have it both ways. The options available to the secured creditor are, first, to rely entirely on the security and not prove the debt at all: Re Longdendale Cotton Spinning Co (1878) 8 Ch D 150; secondly, to realise the security independently of the liquidation and then to prove for the balance; thirdly, to surrender the security to the liquidator and then to prove for the whole debt merely as an ordinary creditor; and fourthly, to place a value on the security and to prove for and rank for dividend purposes in respect of the differences between the estimated value and the total debt ... All of these options are effectively recognised by s 554E.

 

His Honour also noted that unless a secured creditor complies with s 554E, the secured creditor is not entitled to prove the whole or part of the debt. A secured creditor who intends to vote at a meeting of creditors must therefore comply with s 554E and have lodged a proof of debt or claim which complies with this section. In this case, it was found that the secured creditor had not been required to lodge a proof of debt which complied with s 554E and the creditor had not stated that it intended to surrender its security or do any act which would amount to a surrender of its security. The court therefore concluded (at 459) that the secured creditor had not surrendered its security. An appeal against the decision of Debelle J was dismissed by the Full Court of South Australia: Health and Life Care Ltd v 5A Asset Management Corp (1995) 1.8 ACSR 153 at 160-1 and at 162. The Full Court (at 162) also pointed out that there is:

a principle well established by case law that a secured creditor who proves for the full amount of the claim will usually be regarded as having elected to give up the security ... the underlying notion is that the secured creditor participates in the liquidation on the basis of its debt which is unsecured (assuming it to be partly unsecured), when the value of the debt is relevant.

 

Amendment of the valuation pursuant to ss 554G, 554H and 554J

A secured creditor may at any time apply to the liquidator or to the court to alter the estimated value of the security and amend the proof of debt in respect of the balance due after deducting the creditors estimate of the value of the security. Under s 554G(2) the liquidator or the court may permit the creditor to amend the proof of debt if it is satisfied that the original estimate was made in good faith or that the value of the security has actually changed since the estimate was made. The court may permit the amendment to take place on such terms as it thinks to be just and equitable. Any excess of the amount which the creditor would be entitled to receive under the amended proof of debt must be repaid to the liquidator without delay, pursuant to s 554H(1). However, where the amendment of the proof of debt has meant that the creditor has received less than that creditor would have been entitled to receive under the amended proof of debt, the creditor is entitled to be paid any deficiency out of the money remaining for distribution in the winding up, under s 554H(2). Section 554J also provides that where a secured creditors proof of debt is in respect of the balance that is due after the creditors estimate of the value of the security has been deducted, and subsequently the creditor realises the security or the security is realised under s 554F, then the net amount realised is to be substituted for the estimated value of the security. Furthermore, the procedure in s 554H applies as if the proof of debt had been amended under s 554G.

 

The ranking of proved debts: s 555

A basic rule of insolvency law is known as the pari passu rule under which creditors in the same class will usually be treated equally. Basically, s 555 embodies the pari passu rule in a winding up and provides that all debts and claims in the same class which are proved in a winding up rank equally, subject to any contrary provision in the Law. Where there are insufficient funds to fully meet the debts of the company, the debts and claims are to be paid out proportionately. The amendment of s 555 by the 1992 Corporate Law Reform Act was intended to clarify the fact that both claims and debts rank equally in a winding up. However, s 555 will not prevent a creditor from entering into a debt subordination agreement whereby the creditor defers payment of its debt in favour of the payment of the debt of another creditor, provided that this does not affect the rights and entitlements of other creditors: per New South Wales Court of Appeal in United States Trust Company of New York v Australia & New Zealand Banking Group Ltd (1995) 17 ACSR 697 at 706-7; also see Santow J in Re NIAA Corporation (1993) 12 ACSR 141 at 156 where his Honour observed that there was nothing in the scheme of the Corporations Law which would deny the effect of contractual debt subordination provisions.

 

Priority payments: s 556

The ranking of unsecured debts and claims in the winding up of a company is dealt with under s 556, as amended by the Corporate Law Reform Act 1992. The 14 subparagraphs of s 556 set the priority for the payment of debts. The pari passu rule in a winding up is largely displaced by s 556 by its ordering of priorities in the payment of the assets of the insolvent company. Priority is given to the payment of the properly incurred expenses of the relevant authority in preserving, realising or getting in the assets of the company The Explanatory Memorandum to the 1992 Corporate Law Reform Bill stated the rationale for this first priority (paras 904-5) as follows:

904. As noted by the Harmer Report, the rationale for the priority of administration costs is that creditors have a community of interest in having a common agent to maximise a fund for distribution among them. The Report referred to the view of the High Court in In Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 that where persons are entitled to share in the distribution of a fund, the costs and expenses of recovering, caring for, preserving and realising assets to create the fund are a fair charge on the fund.

 

905. However, the Report also noted that no priority is accorded in the Corporations Law or the Corporations Regulations among the various components of the costs, charges and expenses of a winding up. Problems arise where there are insufficient funds to meet all these administration costs. Thus the Report recommended that there should be ... priority ranking of the costs, charges and expenses of administration ...

 

The first 10 paragraphs of s 556(1) set out, in priority, various expenses of the winding up. Reference is made to a 'relevant authority' in paras (a) and (d); defined in s 556(2) as meaning any of the following:

(a)   in any case — a liquidator or provisional liquidator of the company;

(b)  if the winding up began within 2 months after the end of a period of official management of the company — an official manager appointed for the purposes of the official management;

(c)  in any case — an administrator of the company, even if the administration ended before the winding up began;

(d)  in any case — an administrator of a deed of company arrangement executed by the company, even if the deed terminated before the winding up began ...

 

Expenses of a relevant authority: s 556(l)(a)

First priority is given to the expenses of a relevant authority properly incurred in preserving, realising or getting in the assets of the company. However, excluded from this category are deferred expenses, which are now defined by s 556(2). The Explanatory Memorandum noted (para 908) that:

... [t]he effect of the exclusion will be to exclude remuneration payable directly and indirectly to a liquidator, provisional liquidator, official manager, administrator of a company or administrator of a deed of company arrangement, including the professional fees of their partners and the salary or other costs incurred by them in paying their employees or the employees of 'service' companies or other entities that may be interposed between them and the company that is being wound up.

 

The 'expenses' referred to in this paragraph are also described in the Explanatory Memorandum (in para 909) as follows:

... the term 'expenses' is otherwise intended to have a wide meaning, to include all payments properly made by the liquidator, provisional liquidator, official manager, administrator of a company or administrator of a deed of company arrangement including the payment of the fees of persons such as solicitors, real estate agents and stocktaking agents who are independent of the liquidator, provisional liquidator, official manager, administrator of a company or administrator of a deed of company arrangement and who are engaged by them for the purposes of preserving, realising or getting in the assets of the company or carrying on of the business of the company.

 

Taxed costs of the applicant: s 556(l)(b)

In a court-ordered winding up, the next priority is accorded to the costs of the application, including taxed costs which are payable under s 466. However, such costs will only be awarded where there is power to make the winding up order against the company which has been sought, so that costs under s 556(l)(b) may not be available in the case of a second winding up order which is sought against the same company: per Moore J in Dewina Trading 5DN BHD v Ion International Pty Ltd (1996) 22 ACSR 352 at 354.

 

Certain debts of the administrator: s 556(l)(c)

Where the company has been under administration prior to the commencement of the winding up, the debts of the administrator referred to in s 443D(a) rank next in priority. These are the costs set out in ss 443A and 443B and cover such things as services rendered, goods bought or property hired, leased or used by the administrator. It also includes the rental of premises occupied by the company from the period of seven days after the commencement of the administration.

 

Properly incurred debts of the company: s 556(l)(d)

The properly incurred debts of the company incurred by the official manager carrying on the business of the company, provided that the winding up began within two months after the end of official management of the company, rank next in priority. Excluded are expenses covered by para 556(l)(a).

 

Costs and expenses incurred in a court-ordered winding up: s556(l)(da)

The next priority arises in respect of the costs and expenses payable out of the property of the company under s 475(8) in a court-ordered winding up.

 

Expenses of the winding up: s 556(l)(db)

Priority is next accorded to costs that form part of the expenses of the winding up because of s 539(6).

 

Remuneration of an auditor: s 556(l)(dc)

Where the winding up commenced two months after the end of a period of official management of the company, the next priority is accorded to the remuneration of any auditor appointed in accordance with Part 3.7 in respect to the period of official management.

 

Other expenses of a relevant authority: s 556(l)(dd)

Other properly incurred expenses of a relevant authority receive the next priority, apart from deferred expenses. Deferred expenses are defined in s 556(2) as meaning:

... expenses properly incurred by a relevant authority, in so far as they consist of:

(a)  remuneration, or fees for services, payable to the relevant authority; or

(b)  expenses incurred by the relevant authority in respect of the supply of services  

      to the relevant authority by:

(i) a partnership of which the relevant authority is a member; or

(ii) an employee of the relevant authority; or

(iii)a member or employee of such a partnership; or

(c)  expenses incurred by the relevant authority in respect of the supply to the

      relevant authority of services that it is reasonable to expect could have instead    

      been supplied by:

(i) the relevant authority; or

(ii) a partnership of which the relevant authority is a member; or

(iii)an employee of the relevant authority, or

(iv)a member or employee of such a partnership.

 

Deferred expenses: s 556(l)(de)

The next priority is given to deferred expenses payable for service in relation to the company. This had been excluded from priority under para (a).

 

Expenses of committee of inspection: s 556(l)(df)

Where a committee of inspection in relation to the company had been appointed under s 548, the expenses of a member of the committee as a member of that committee rank next in priority.

 

Wages and superannuation contributions: s 556(l)(e)

The next priority is accorded to the payment of the wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date. The term 'superannuation contribution' is defined in s 556(2) as meaning, in relation to a company '... a contribution by the company to a fund for the purposes of making provision for, or obtaining, superannuation benefits for an employee of the company, or for dependants of such an employee'. This priority is subject to s 556(1 A). The

 

Explanatory Memorandum noted (para 920) that:

... [t]he effect of the amendment ... is to make it clear that superannuation contributions are given the same priority as wages for the purposes of priority payments made under s 556. Thus, where an employee has forgone wage increases in exchange for enhanced superannuation contributions by his or her employer, the employee will not be disadvantaged in a winding up.

 

In regard to the payment of wages, see Gericevich Contracting Pty Ltd (in liq) v Sabemo (WA) Pty Ltd (1984) 9 ACLR 452.

 

Injury compensation entitlements: s 556(1 )(f)

Priority is next accorded to all amounts due in respect of injury compensation, where the liability for such compensation arose before the relevant date. However, pursuant to s 563, where the company is being wound up voluntarily only for the purposes of reconstruction or amalgamation with another company, the priority in para (f) does not apply to the rights of injury compensation in this situation.

 

Certain amounts due to employees: s 556(1 )(g)

The next priority is given to all amounts which are due to or in respect of employees of the company on or before the relevant date by virtue of an industrial instrument and in respect of leave of absence. An 'industrial instrument' is defined by s 9 to mean a contract of employment or a law, award, determination or agreement relating to terms or conditions of employment. This provision is now subject to s 556(1 B), which limits payments to a director or to a spouse, relative or de facto spouse of a director to $1500. Section 558 also deals with the payment of debts due to employees. Pursuant to this provision, whether or not an employee is referred to in s 556(1), where the person had an employment contract with the company immediately before the commencement of the winding up, that person is entitled to the same priority accorded to employees by s 556: see further Steinberg v Herbert (1988) 14 ACLR 80.

 

Retrenchment payments payable to employees: s 556(l)(h)

Finally, priority is accorded to retrenchment payments payable to employees of the company. This provision is now subject to s 556(1C) which excludes all payments to a director or to a spouse, relative or de facto spouse of the director. The term 'retrenchment payment' is defined by s 556(2) as 'an amount payable by the company to the employee [of the company], by virtue of an industrial instrument, in respect of the termination of the employee's employment by the company, whether the amount becomes payable before, on or after the relevant date.

 

Debts due to employees: ss 558, 560 and 561.

Where an employee had a contract of employment with a company immediately before winding up is taken to have commenced, that employee has a statutory entitlement to be paid under s 556 in the same way as would gave been the cause of that employee’s contract had been terminated by the company: s558(1). Furthermore, in certain circumstances, s 561 gives a priority to employees over unsecured creditors where the unsecured creditors have  a floating charge over property of the company. Such a priority arises where insufficient funds remain to meet the payment of these employees and unsecured creditors: Crawford v Australian New Zealand Banking Group Ltd (1994) 14 ACSR 310 at 316-17.

 

Third Party Liability Insurance payments: s562 and s562A

Payment of interest in debts and claims and debts subordination: s563B

 

Purchases of property made in good faith: s 569(6)

Despite any provisions in Div 7A, a person who purchases any property of the company in good faith obtains good title to the property pursuant to s 569(6). Thus, good title is obtained where the property is purchased either in a sale by a sheriff consequent upon the issue of execution against property of the company or as a result of a sale following the enforcement of a charge or a charging order by a creditor. In Re Fairline Furniture (Aust) Pty Ltd (in liq) (1988) 12 ACLR 787, a director and his wife sold their interests in a company and a debenture was then granted by the company in exchange. The company subsequently went into liquidation, but it was held that mere knowledge of a debt was insufficient to lead to a conclusion that there had been a lack of good faith so as the negate the debenture. The New South Wales Court o( Appeal has held, in Tellsa Furniture Pty Ltd (in liq) v Glendave Nominees Pty Ltd (1987) 13 ACLR 64 at 73, that where a disposition takes place in good faith and the parties were unaware of the commencement of the winding up at the time, the court will generally validate such a transaction. Priestly JA considered (at 70 and 73) that the trial judge (Young J) had correctly stated the law regarding the courts exercise of its discretion in cases such as this. As Priestly JA stated this position (at 70):

A disposition carried out in good faith at the time when the parties are not aware that a petition has been presented will, generally speaking, be validated. Young J stated some further considerations which perhaps strictly speaking are independent of it, but which I will deal with as part of it, namely: on the one hand both bona fide payments where parties are unaware of the presentation of a winding up summons and bona fide payments in the ordinary course of business (presumably irrespective of awareness of the presentation of a summons) might ordinarily be validated so long as they 'relate to the need to continue business, and earn income, or save loss, during the pendency of the petition' (per Fox J in Re Atlas Truck Service Pty Ltd (1974) 24 FLR 220 at 225) as distinct from on the other hand payments which even though made honestly are no more than reductions of a pre-existing debt without arguable countervailing benefit to the company.

 

Voidable transactions: s 588FE

Section 588FE(1) declares as potentially voidable a series of transactions entered into, at or after the commencement of Part 5.7B, where a company is being wound up. Being voidable, the transactions are not automatically void but may be declared void on application to the court. Transactions covered by s 588FE must come within the definition of an 'insolvent transaction'. This is defined by s 588FC by reference to an 'unfair preference' or to an 'uncommercial transaction' (terms which are themselves defined by s 588FA and s 588FB).

 

Thus, an 'unfair preference' is defined as a transaction involving the company and a creditor which results in that creditor receiving from the company more than the creditor would receive in relation to an unsecured debt if the transaction were to be set aside and the creditor was required to prove for the debt in a winding up of the company. This definition also applies to transactions entered into or given effect to because of an order of a court or a direction from an agency.

 

Uncommercial and insolvent transactions: s588FB

The current legislative regime may therefore be summarised as follows:

-          First, s 588FE(2) declares an 'insolvent transaction' voidable where it was entered into, or given effect to, during the period of six months before the 'relation-back day'. As noted above, the term 'insolvent transaction' is defined in s 588FC.

-          Second, s 588FE(3) declares voidable an 'uncommercial transaction' of a company which was an 'insolvent transaction' and which was entered into or given effect to during the two years leading up to the relation-back day. The term 'uncommercial transaction' is defined in s 588FB as one where it might be expected that a reasonable person in the circumstances of the company would not have entered into the transaction having regard to the detriment to the company entering into the transaction and the benefits to the company and to other parties to the transaction.

-          Third, s 588FE(4) declares to be voidable an 'insolvent transaction' between the company and a 'related entity' (as defined in s 9, as amended) where it was entered into, or where an act was done for the purpose of giving effect to it, during the four years up to the relation-back day. Included in this definition is a promoter of the company, a relative or de facto spouse of the promoter, a director or member of the body or of a related body corporate, a relative or de facto spouse of such a director, a body corporate that is related to the first body corporate and a beneficiary under a trust of which the first company is a trustee. It should be noted that a liquidator can under s 588FH recover from a related entity the benefit resulting from an insolvent transaction.

-          Fourth, s 588FE(5) declares that a transaction is voidable if it is an insolvent transaction and the company became a party to the transaction for the purpose of 'defeating, delaying, or interfering with', the rights of any of its creditors in a winding up. This seems to suggest that some deliberate action must be taken, although s 588FE(7) emphasises that the doing of an act includes a reference to making an omission. Such transactions are voidable where they were entered into or given effect to up to 10 years prior to the relation-back day.

-          Fifth, s 588FE(6) declares a transaction to be voidable if it is an 'unfair loan' made to the company at any time on or before the day when the winding up began. The expression 'unfair loan' is defined in s 588FD as one where the interest was 'extortionate' at the time when the loan was made or has since become extortionate because of a variation. An 'unfair loan' also includes extortionate charges which were imposed at the time when the loan was made or a charge which becomes extortionate as a result of a variation to the terms of the loan. A loan will be unfair even if the interest or charges are no longer extortionate. As the Explanatory Memorandum to the 1992 Corporate Law Reform Act noted (para 1048) in respect of unfair loans:

... This provision [ie s 588FD] is quite different from anything contained in the present law and is directed to the situation where the rights of unsecured creditors as a class are prejudiced by the company's having entered into a loan agreement for which the consideration is excessive. The section is not directed to loans which in hindsight may be judged as bad bargains but at transactions which are grossly unfair, so that in normal circumstances no reasonable company is likely to have entered into such a contract unless there were some further rationale such as where the agreement is a sham agreement intended to operate in circumstances of insolvency to confer an undue benefit on the lender.

The factors which may be taken into account in determining whether a loan or a charge in relation to a loan was or became extortionate are set out in s 588FD(2). These involve an examination of the risk to which the lender was exposed, the value of any security in relation to the loan, the term of the loan, the schedule of repayments of interest and charges, the amount of the loan and any other relevant matter.

 

Court orders in respect of voidable transactions: s 588FF

Where the court is satisfied that a transaction is voidable pursuant to s 588FE, it may make a number of orders after an application has been made by the liquidator. The court is given wide power under s 588FF to make any of the following orders:

 

a)    an order directing that an amount equal to the amount that the company paid under the transaction be paid to the company by a person;

b)    an order directing the person to transfer to the company property that was transferred by the company under the transaction;

c)    an order requiring the payment to the company of an amount that fairly represents the benefits received by a person as a result of the transaction;

d)    an order requiring the transfer of property to the company that fairly represents the application of money paid by the company or the proceeds of the property transferred by the company;

e)    an order releasing or discharging all or part of a debt incurred or a security given by the company;

f) an order directing a person to indemnify the company where the transaction is an unfair loan;

g) an order providing for a debt which arose under the transaction to be proved in a winding up;

h) an order declaring an agreement to be void at and after the time when the agreement was made;

i) an order varying such an agreement and declaring it to have effect as varied;

j)    an order declaring an agreement to be unenforceable.

 

The court declined to make an order under s 588FF(l)(b) in Rothmans Exports Pty Ltd v Mistmorn Pty Ltd (in liq) (1994) 15 ACSR 139 at 155. Courts are often simply asked to make a declaration under s 588FF that the making of a payment was void: see, for example, Re Benjamin's Furniture Pty Ltd (in liq); Levi v Guerlini (1996) 21 ACSR 543; such an order was unsuccessfully sought in Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 22 ACSR 641 at 642.

It has also been held that where a preference has been paid contrary to the predecessor to s 565, the court has the power to order that interest be paid on such payments which have been received as a preference: per Ryan J in Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121 at 128. Where a defence under s 588FG is available, the court is of course precluded from making an order under s 588FF: see, for example, Olifent v Australian Wine Industries Pty Ltd (1996) 19 ACSR 285 at 295.

 

Defences in relation to voidable transactions: s 588FF

The court is not to make any orders under s 588FF if to do so would, in the circumstances set out in s 588FG(1), materially prejudice the interest of a person other than a party to the transaction. The court is also precluded by s 588FG(2) from making orders under s 588FF if the transaction is not an unfair loan and the person became a party to the transaction in 'good faith’, for valuable consideration and without suspecting that the company was insolvent or would become insolvent. As the Explanatory Memorandum to the 1992 Reform Bill has explained, the good faith requirement which was present in s 122 of the Bankruptcy Act has been supplemented in s 588FG by the addition of the requirement that there be an objective basis for the belief that the person had no reasonable grounds for believing that the company was or would become insolvent. In Sands & McDougall (Wholesale) Pty Ltd (in liq) v Commissioner oj Taxation (Commonwealth) (1996) 22 AC5R 383 at 405, Nathan J (at 405) followed the earlier discussion of these new provisions and noted:

Ashley J in Downey v Aim Pty Ltd (1996) 14 ACLC 1068 referred to this [Explanatory] memorandum and then extensively examined the authorities. In concluding what the law re FG(2) now is he said:

 

Looking to s 588FG(2) some matters may be immediately stated. Thus:

•     'good faith' now contains no objective elements; what was previously the objective element of 'good faith' is expressed in subs (2)(b);

•     the former objective element of good faith is now unambiguously limited to suspicion — as contrasted with knowledge — of insolvency;

•     'insolvency' — a term defined in s 95A — stands in place of the two matters previously referred to in [the Bankruptcy Act] s 122(4c)(i) and (ii) — subs 2(b)(i) refers both to suspicion of insolvency at the time when that creditor became a party to the transaction and to suspicion that the debtor might become insolvent by reason of the transaction itself;

•     it is now clear that the creditor must prove both the subjective and objective element in what were the old s 122(2) and (4). That is evidence not only from the opening words of s 588FG(2) but also from the formulation of paragraphs (b)(i) and (ii);

•     the requirement in [the Bankruptcy Act] s 122(2) that a payee show that the payment was made in the ordinary course of business has not been replicated.

I can do nothing more than repeat Ashley J's formulation of the law with a minor qualification that subs 2(b)(i) and (ii) might contain a subtle distinction ... [in that unlike para (i), para (ii) may import an objective test by using the phrase 'in the person's circumstances'].

I considered, as did Ashley J, that good faith in s [588]FG should be read according to its ordinary meaning and that is by acting honestly and with propriety ...

It should also be noted that s 588FG(2)(c) requires that to avail oneself of the defence provided by that section that the person seeking to rely on the test has provided valuable consideration or has changed his or her position in reliance on the transaction.

Similarly, in Olijent v Australian Wine Industries Pty Ltd (1996) 19 ACSR 285 at 290, Burley SCM said that:

Section 588FG(2) seems to differ from s 122 of the Bankruptcy Act in that under the latter, good faith is negatived by proof that the creditor knew or had reason to suspect that the debtor was insolvent and that the effect of the transaction would confer a preference, priority or advantage over other creditors, whereas the former provides a defence if it is proved that the transaction was entered into in good faith and that at the same time the defendant creditor had no reasonable grounds for suspecting that the debtor company was insolvent or would become insolvent and that a reasonable person in the defendant creditor's circumstances would have had no such grounds for so suspecting. Given the structure of the section, it seems to me that 'good faith' is not confined to an examination of whether or not insolvency was in view of when the payments were made. The concept of 'good faith' is identified as a separate concept from the requirements of s 588FG(2)(b) and consequently, it must, in my opinion, be given its ordinary meaning of propriety or honesty.

The Law is silent as to which party bears the onus of proof of the matters referred to in s 588FG(2), but it seems to me to be implicit from the wording of the subsection that that onus is borne by the person seeking to rely upon its provisions.

These comments were quoted approvingly by Acting Master Chapman in Re Benjamin's Furniture Pty Ltd (in liq); Levi v Guerlini (1996) 21 ACSR 543 at 551-2. In this case, s 588FG(1) was considered and the evidence before the court was such that it concluded (at 552) that it was not persuaded that a reasonable person would have suspected that the company was insolvent at the time that the suspected unfair preference payment was made. The meaning of the phrase 'good faith', as used in s 588FG was also considered by Nathan J in Sands & McDougall (Wholesale) Pty Ltd (in liq) v Commissioner of Taxation (Commonwealth) (1996) 22 ACSR 383 at 405-6, a case involving the question of whether a sales tax remittance was an unfair preference; see also the discussion of this phrase by Mansfield J in Smith v Deputy Commissioner oj Taxation (1997) 23 ACSR 611 at 621-3.

The onus of establishing that a transaction was not entered into in good faith lies with the liquidator: per Cohen J in Shirlaw (Now Rodgers) v Malouj (1989) 15 ACLR 641 at 649. On the other hand, the onus of establishing that a transaction was entered into in the ordinary course of business lies with the creditor: per Ryan J in Re Toowong Trading Pty Ltd (in liq) (1988) 13 ACLR 121 at 127. The onus is also placed upon the creditor where it is argued that an equitable charge was created: per Full Court of Queensland in Freeway Mutual Pty Ltd v Hamilton View Pty Ltd (in liq) (1978) 3 ACLR 726. The onus of showing that there is a defence under s 588FF rests with the respondent: Rothmans Exports Pty Ltd (in liq) (1994) 15 ACSR 139 at 152 and Re Benjamin's Furniture Pty Ltd (in liq); Levi v Guerlini (1996) 21 ACSR 543 at 550. In Sands & McDougall (Wholesale) Pty Ltd (in liq) v Commissioner oj Taxation (Commonwealth) (1996) 22 ACSR 383 at 406, Nathan J noted that '[t]he requirements under subs (a) and (b) [of s 588FG(2)] are conjunctive and can be seen to proffer variable standards of proof.

Where a creditor in an unfair transaction has put the company in the same position in which it was prior to the transaction being entered into, whether as a result of a court order or otherwise, s 588F1(3) allows the creditor to prove in a winding up as if the transaction had not been entered into.

 

LIQUIDATORS

Division 3 of Part 5.6 contains some general provisions regarding liquidators, although as has been seen earlier, the compulsory winding up provisions (in Div 2 of Part 5.4) and the voluntary winding up provisions (for example, ss 499, 502-507), also deal with the powers and duties of liquidators. In addition to these statutory provisions, the general law also contains law that is relevant to the activities of liquidators. Most importantly, the fiduciary duties of officers are also applicable to liquidators as fiduciaries. As the Harmer Report noted (para 930): '[a]n insolvency practitioner is, above all else, a trustee, of whom the highest standard of honesty, competence, skill and diligence is required'. The general law duties of care, diligence and skill are also applicable so that liquidators would need to comply with the standard of a reasonably competent liquidator. Also, the law of agency would affect the powers and duties of the liquidator as the liquidator is the agent of the company in a winding up.

 

The fiduciary duties of a liquidator

The duties of the liquidator are, as McPherson has noted (The Law of Company Liquidation, 3rd ed, p 206), 'unique in many respects'. They are a mixture of statutory, fiduciary, administrative and quasi-judicial responsibilities. The need for the liquidator to be able to act impartially was evident from the facts in Re GK Pty Ltd (in liq); Ex parte Deputy Commissioner of Taxation (1983) 7 ACLR 633. In that case, there was a close business relationship between the liquidator and the directors of the company. The directors of GK Pty Ltd were also directors of both the debtor company (Jabba) and the company (Habba) which was the beneficial owner of all shares in GK Pty Ltd. Subsequently, the liquidator was appointed to be liquidator of another company (J abba), even though he had threatened to sue the latter company in his capacity as liquidator of the first company (GK Pty Ltd). In these circumstances the court ordered the removal of the liquidator from his position as liquidator of the first company.

 

In the course of doing so, Olney J (at 639) approved the following summary of the fiduciary duties of the liquidator taken from the second edition of McPherson's The Law of Company Liquidation:

From the practical point of view it does not seem to matter much whether the liquidator is treated as a trustee in the strict sense or simply as an agent, for in either capacity he occupies a fiduciary position in relation to the company, its creditors and contributories. This imposes upon him certain obligations identical with those resting upon trustees, agents, and directors, one of which is that he is bound to act honestly and to exercise his powers bona fide for the purpose for which they are conferred and not for any private or collateral purpose. In addition, two further duties of major importance follow from his fiduciary relationship: these are (a) that he must not allow his private interest to come into conflict with his duty, and (b) that in discharging his duties he must at all times act with complete impartiality as between the various persons interested in the property and liabilities of the company.

 

The statutory and administrative duties of a liquidator

McPherson has identified nine specific statutory and administrative duties of a liquidator (p 240):

• First, there is the duty to lodge a notice of appointment. This duty is created by s 537.
• Second, the liquidator has a duty to investigate affairs. This duty is reflected in the requirement that a liquidator prepare a report on the company under s 476, and in other powers such as the power to conduct examinations and interviews under s 597 and the power to gain possession of the books of the company under s 530A.
• Third, the liquidator has the duty to keep books and accounts. This is to be found in s 531.
• Fourth, the liquidator has a duty to collect assets of the company. This arises from the fact that the assets of the company are vested in the liquidator under s 474.
• Fifth, the liquidator has the duty to preserve the assets of the company, such as by carrying on the company's business under s 477 and by defending legal proceedings brought against the company.
• Sixth, the liquidator has a duty to realise assets of the company and may dispose of assets under powers granted by s 477.
• Seventh, the liquidator has a duty to discharge the liabilities of the company. Under s 501, for example, the liquidator is required to distribute the proceeds of the company after the payment of preferences.
• Eighth, the liquidator has a duty to distribute surplus assets of the company pursuant to s 501.
• Finally, the liquidator has a duty to bring about a dissolution of the company upon the completion of the winding up.

The Statutory Powers of the Liquidators

Section 477(1) lists four general powers which are invested in liquidators, subject to that section. Furthermore, s 477(2) sets out a number of other specific powers possessed by the liquidator. It should also be noted that in a voluntary winding up, the liquidator's powers are set out in s 506; thus, s 506(l)(b) provides that the liquidator will have the same powers as are conferred in a court-ordered winding up: see further Avamure Pty Ltd (in liq) v Fletcher Jones and Staff Pty Ltd (1996) 22 ACSR 256 at 260 and Pyramid Building Society v Howell (1994) 14 ACSR 633 at 635.

Each of the sub-paragraphs of s 477(1) will be discussed further below:

1. Under s 477(l)(a), the liquidator has the power to carry on the business of the company to the extent that it is necessary to do so for the beneficial winding up of the company. Often the carrying on of the business of the company facilitates the realisation of the assets of the company as the company can be sold as a going concern. This was, for example, a consideration which led the court in Re Skay Fashions Pty Ltd (in liq) (1986) 10 ACLR 743 at 747 to allow the liquidator to continue to run the business of the company. The power of the liquidator to carry on the business of the company so as to enable it to complete work in progress was considered by Hodgson J in Deputy Commissioner of Taxation v Status Constructions Pty Ltd (1987) 12 ACLR 689 at 691-2. His Honour (at 692) preferred to appoint a liquidator rather than a provisional liquidator to the insolvent company as there was no prospect of the company trading out of its difficulties. However, where there is little prospect of the company being able to trade out of its financial difficulties, the court may be prepared to allow the liquidator to carry on the business so as to complete various building contracts for work that was still in progress.
2. Under s 477(l)(b), the liquidator has the power to pay any class of creditors in full. This power is subject to the provisions of s 556 dealing with the priority of payment of debts and claims against the company. McLelland CJ in Eq in Re Oygevault International BV (in liq) (1994) 14 ACSR 245 at 248 considered the tax debts of a foreign registered company which was registered in Australia as a foreign company. An amount of about $6000 was owed to the Dutch Inspector of Taxes and creditors in the Netherlands were owed about $20,000. His Honour observed (at 248):

In my opinion 'creditors' in s 477(l)(b) does not include persons not entitled to prove in the winding up. The foreign tax debt, being unenforceable in Australia, is not admissible to proof in the winding up (see Government of India v Taylor [19551 AC 4910), and the foreign administration debts, being liabilities incurred after the winding up order, are also not admissible to proof in the winding up (see Re Denton Subdivision Pty Ltd (in liq) (1968) 89 WN(Pt 1) (NSW) 231).

3. Under s 477(l)(c), the liquidator has the power to make any compromise or arrangement with creditors or persons claiming to be creditors of the company: compare the interpretation of a similar power in the area of official management by Kelly J in Re Capital Civil Contractors Pty Ltd (1984) 8 ACLR 924 at 926.

4. Under s 477(l)(d), the liquidator is empowered to compromise calls, debts, liabilities to the company and any claims between the company and a contributory, a debtor or a person apprehending liability to the company. Such claims may be present or future claims, contingent or certain claims or claims which are ascertained or sounding only in damages. For example, in Re Rothwells Ltd (1989) 15 ACLR 142, a provisional liquidator had been appointed to the company. Section 472(4)(b) gives a provisional liquidator the same powers as are available to liquidators by s 477(1 )(d) to compromise claims. In Re Rothwells Ltd a compromise occurred in relation to a debt of $100 million owed to Rothwells by Tryart Pty Ltd, a company which was the takeover vehicle for John Fairfax Pty Ltd. Rothwells had secured a loan of $100 million from Bond Media Ltd secured by the amount owed to Rothwells by Tryart. A compromise was agreed between the parties whereby some $27 million was to be paid by Tryart to Bond Media. Cooper J set out a number of considerations in relation to the power to enter into a compromise. The first of these was that '[a] provisional liquidator ought generally to compromise claims only where it is necessary to preserve the assets of the company and maintain the status quo and where the result of such a compromise is beneficial to the company and the persons interested in it ...'. His Honour added (at 148) that 'It]here must be some real dispute as to the liability of the creditor and some question as to the certainty of recovery of the debt before it is appropriate to compromise the claim.

It should be noted that s 477(2A) generally imposes an upper limit of $20,000 upon the amount that can be compromised without the approval of the court, by a committee of inspection or by a resolution of creditors. In State Bank of New South Wales v Turner Corporation Ltd (prov liq apptd) (1994) 14 ACSR at 483, Tamberlin J observed that:

An approval under s 477(2A) empowers a liquidator to do what would otherwise be beyond power. It is not simply a means whereby the liquidator may be guided in the conduct of the liquidation and protected against allegations of breach of duty. This is the role of s 479 of the Corporations Law. It is not the role of the court in an application for approval under s 477(2A) to make a commercial decision. That is for the liquidator. In such an application the court pays regard to the commercial judgment of the liquidator ... The court is not of course a rubber stamp for whatever is put forward by the liquidator but it is not the role of the court to independently appraise the commercial soundness of the proposal. The court will generally not interfere unless there can be seen to be some lack of good faith, error in law or principle, or some real and substantial ground for doubting the prudence of the liquidators proposal: Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6.

5. Under s 477(2)(a), the liquidator has the power to bring or defend any legal proceedings in the name of or on behalf of the company. For example, in Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 12 ACLR 730, Gummow J held that once a winding up has commenced, proceedings in the name of the company can only be instituted by the liquidator. In this case, proceedings had been initiated by a contributory prior to the commencement of the winding up, but upon the appointment of the liquidator, the liquidator decided not to continue these proceedings. Gummow J observed (at 736) in relation to what is now s 477(2)(a) that '[g]eneral considerations as to the desirability of following equitable procedures do not operate to supplement the precise provisions laid down by the legislation dealing with liquidations'. His Honour added (at 737) that:

... when the company went into liquidation, the question of the subsequent carriage of claims of the company was brought within the scope and control of the winding up and of the court having charge of that winding up ... [T]here is obviously much sense in the policy of the legislation in confining these questions to the one forum specially designated by the legislation to deal with the whole of the subject matter.

This decision was followed by Cole J in Partnership Pacific Ltd v Aliprandi (1990) 4 ACSR 51 at 54. Where a liquidator brings proceedings in the name of the company, it has been held that the court has no jurisdiction to order that the liquidator personally pay the costs of the litigation: Egankarra Pty Ltd v Vince (1990) 2 ACSR 463 at 467. However, where a liquidator declines to exercise these powers, the court is empowered by s 477(6) and other sections to allow other parties, such as minority shareholders, to bring an action in the corporation's name: per Full Federal Court in Christianos v Abridge Pty Ltd (prov liq apptd) (1995) 18 ACSR 272 at 28.1.

6. Under s 477(2)(b), the liquidator may appoint a solicitor to assist him or her in their duties.
7. Under s 477(2)(c), the liquidator may sell or otherwise dispose of all of the property of the company. This power has been held to be a statutory exception to the prohibition of maintenance and champerty: per Hansen J in UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 251 at 265. In this case, Hansen J also noted (at 277) that 's 477(2)(c) does not place any limitation on the person or body to whom the liquidator may cause the company's property to be assigned. In particular, the exercise of the power is not confined to assignments to creditors.' An appeal from the decision in UTSA Pty Ltd v Ultra Tune was dismissed. Thus, in L7TSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457 at 463, in agreeing with the judge at first instance that the liquidator had power to dispose of the company's right of action, Hayne JA (with whom Brooking JA and Phillips JA agreed) looked at s 477(2)(c) and observed that the section should not be read narrowly, stating that:

[T]aken literally, the statute provides that a liquidator has power to sell or otherwise dispose of, in any manner, any thing in action of the company ... In my view there is no warrant for reading down the general words of the law. The reference to sale or disposal "in any manner" makes plain that it is the intention of the legislator that the powers of the liquidator are to be ample. If a liquidator is to realise the assets of the company in liquidation to the best advantage, it would be surprising indeed if the liquidator were able to sell a particular form of the company's assets (its rights of action) to only a limited class of persons — those who are already interested in the outcome of the action concerned.

This statutory exception to the prohibition against maintenance and champerty was recognised in earlier decisions, such as that of Re Movitor Pty Ltd (rec and mgr apptd) (in liq) v Sims (1996) 19 ACSR 440 at 448, where Drummond J noted that the liquidator's power to dispose of rights of action was identical to the similar power possessed by a trustee in bankruptcy; also see Grovewood Holdings Pic v James Capel & Co Ltd [1995] 2WLR70at76.

In Australian Guarantee Corporation Ltd v Registrar of Titles (1992) 7 ACSR 577 at 579, property of the company had been disposed of by an attorney acting for the company and the liquidator. This occurred after the company went into liquidation. Harper J noted that there was nothing in the legislation 'preventing the company, acting as it is directed by its liquidator, appointing an attorney for the purpose of effecting the sale he clearly has power to effect'.

8. Under s 477(2)(ca), the liquidator may exercise the powers of the court under s 483(3)(a) in relation to calls on contributories.

 

9. Under s 477(2)(d), the liquidator may do all acts in the name of the company and execute all deeds, receipts and other documents for the company. Upon the appointment of a liquidator, these powers, which usually reside in the directors or other officers of the company, are transferred to the liquidator and his or her agents: per Beach J in Pyramid Building Society v Howell (1994) 14 ACSR 633 at 636. Unlike a receiver, a liquidator is able to use the seal of the company with the effect that this was equivalent to personal execution by the company: per McLelland J in Re Leslie Homes (Aust) Pty Ltd (1984) 8 ACLR 1020 at 1024. The liquidator is empowered by s 477(2)(d) to appoint a proxy to attend a meeting of creditors to consider a scheme of arrangement as well as having the power to delegate this function to an agent: per Olney J in Re Agushi; Ex parte Farrow Mortgage Services Pty Ltd (in liq) v Cole (1992) 8 ACSR 549. It should also be noted that under s 477(2)(k), the liquidator is empowered to appoint an agent to undertake any business that the liquidator is unable to do or which it is unreasonable for him or her to perform in person. However, where a liquidator enters into an agreement upon behalf of the company this is subject to the time limits which are imposed by s 477(2B), whereby the liquidator is prohibited from entering into certain agreements without the approval of the court, the committee of inspection or of the creditors. Such approval will be required in circumstances where the terms of the agreement may end more than three months after the agreement is entered into. In exercising its powers under this section, the court will look to 'see that the transaction that is to enure past three months is really for the proper realization of the assets of the company or assists its winding up ...', per Young J in Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 311.
10. Under s 477(2)(e), subject to the Bankruptcy Act, the liquidator is able to prove in the bankruptcy proceedings of any contributory or debtor of the company or under any deed executed under the Bankruptcy Act.
11. Under s 477(2)(f), the liquidator is empowered to draw, accept, make and endorse any bill of exchange or promissory note in the name of the company. Also, under s 477(2)(g), the liquidator is empowered to obtain credit, whether on. the security of the property of the company or otherwise. Further, under s 477(2)(h), the liquidator is also empowered to take out letters of administration of the estate of a deceased contributory or debtor. It should be noted that to enable the liquidator to take out letters of administration or recovery of money under s 477(2)(h), such money is deemed by 477(5) to be due.
12. Finally, s 477(2)(m) empowers a liquidator to do such other things as are necessary for the winding up of the affairs of the company and for the distribution of its property. For example, once a company is being wound up, the liquidator (and not the company's directors) may either assert or waive legal professional privilege upon behalf of the company, so long as the liquidator has formed a view that such action is in the interests of the company's creditors: per Sackville J in Mercantile Credits Ltd v Dallhold Investments Pty Ltd (in liq)(rec and mgrs apptd) (1994) 15 ACSR 230 at 238.

 

The Rule in Ex parte James

The power of the court to control the exercise of powers by a liquidator under s 477(2) needs to be set in the context of the so-called rule in Ex parte James; Re Condon (1874) LR 9 Ch App 609. (See further McPherson, The Law of Company Liquidation, 3rd ed, pp 266-7.) Although this rule arose out of a bankruptcy case, it has been applied to the conduct of liquidators in compulsory winding up situations. Thus it is said that under this rule, where a mistaken payment has been made, an officer of the court should disregard technical rules and do what honest people ought to do. Gummow J reviewed the application of this rule in Hartogen Energy Ltd (in liq) v Australian Gas Light Co (1992) 8 ACSR 277 at 293-4. His Honour referred to the judgment of Walton J in Re Clarke (a bankrupt); Ex parte The Trustee v Texaco Ltd [1975] 1 WLR 559 at 563-4, and observed that in regard to the exercise of the powers of liquidators, the rule had been reduced to four conditions which had to be met for Ex parte James to apply. Gummow J summarised these as follows:

1. There must be some form of enrichment of the assets of the bankrupt by the person relying upon the application of the rule, this being 'a universal feature' of all the cases in which the rule has been applied.
2. The claimant must not be in a position to submit an ordinary proof of debt, the rule existing not merely to confer a preference on an otherwise unsecured creditor, but to provide relief to a claimant that would otherwise be without relief.
3. The rule applies so as to nullify the claim the liquidator or trustee otherwise would have if in all the circumstances of the case, as an honest man he would nevertheless be bound to admit that it would not be fair 'that I should keep the money; my claim has no merits'.
4. The rule by no means necessarily restores the claimant to the status quo ante and it applies only to the extent necessary to nullify the enrichment of the estate.
5. On that footing, what the Court of Appeal in Chancery was saying in Ex parte James was that it was not fair that the trustee should seek to retain money which had been paid to him purely under a mistake of law.

 

Court Appointment of Liquidators

With the commencement of the winding up, the directors cease to control the company, except in so far as this is specifically approved. Most of the functions of the directors are taken over by the liquidator of the company who will have control of the company, under the supervision of the court or the committee of inspection, where relevant. In a compulsory or court-ordered winding up, the court is empowered to appoint a liquidator under s 472(1). As we have seen, the court may also make a provisional appointment under s 472(2) after the making of the winding up application but before the making of the winding up order. As the Full Federal Court observed in Emanuele v Australian Securities Commission (1995) 19 ACSR 1 at 17:

The power to appoint a provisional liquidator is found in s 472(2) of the Law. The power is not conditional upon the court being satisfied that there is a prima facie case that the company is insolvent. The discretion to appoint a provisional liquidator arises once the filing of a winding up application has been made, and is otherwise unconfined by the grant of power.

The court-appointed liquidator has the status of an officer of the court. The implications of this status as an officer of the court were considered by Marks J in Commissioner of Corporate Affairs v Harvey (1979) 4 ACLR 259. This was a case arising under the equivalent provision to what is now s 536. Marks J observed (at 286) that:

... In a compulsory winding up his office stems from appointment by the Court. He is clearly not an employee of the Court but the nature of the appointment makes him a representative of it. As Street J said in Duffy v Super Centre Development Corporation Ltd [1967] 1 NSWR 382 at 383 the decisions the liquidator makes from time to time are in effect made under the authority of the Court itself. The winding up is by the Court which for the purposes the liquidator is. As such he is entrusted with the reputation of the Court for impartial and proper despatch of duties. No lesser standard in that regard is to be expected of the liquidator than of a court or a judge.

When a winding-up occurs, the financial outcome for creditors and contributories is dependent, amongst other things, on honest administration. It is the trust which those persons are obliged to place in the liquidator to preserve the assets and act faithfully and fairly that defines the weight of the duties owed and the strictness with which his conduct must be considered by the Court.

The law in the circumstances regards such duties as fiduciary although clearly it will not interfere with bona fide exercise of discretions which are not beyond the acts or omissions of a reasonable man.

 

Independence of liquidators

In appointing a liquidator, it is essential that the liquidator be seen to be acting independently. This fundamental principle was applied by the Full Court of Victoria in Re National Safety Council of Australia Victorian Division (1989) 15 ACLR 355. In that case, Humphris, from the firm of Ernst & Whitney, was appointed to the National Safety Council as provisional liquidator in March 1989. Subsequently, Humphris was later appointed as the liquidator to wind up the National Safety Council. Two creditors, the State Bank of Victoria and the State Bank of South Australia, objected to the appointment of Humphris claiming that a conflict of interest might arise as there might have been a breach of duty upon the part of Humphris as the provisional liquidator. Thus it was argued by the banks that Humphris might be in a position as liquidator where his personal interest and his duty as liquidator might conflict.

In December 1988 Ernst & Whitney had been paid some $40,000 to assess the financial records of the National Safety Council, prior to the appointment of Humphris as provisional liquidator. The banks claimed that Humphris as liquidator 'would have to investigate the question whether the Company might have an action against Ernst & Whinney for failing to investigate the affairs of the company with due diligence and reasonable care' [quoted at 359 of the judgment]. On the other hand, the liquidator claimed that great advantage to the creditors would flow from the fact that the liquidator would have access to the work done by him as provisional liquidator and that work should not be thrown away until it was clear that a real conflict existed. As the Full Court noted (at 359), the judge at first instance, O'Bryan J, had observed that this conflict of interest and duty was more apparent than real.

The Full Court rejected this finding and concluded (at 361) that the appointment of Humphris as liquidator should be set aside. In reaching this conclusion, the Full Court noted (at 360) that:

Although the judgment is an interlocutory judgment, it involves no substantial difficulty in law. The principle to be applied is clear and was indeed quoted by the learned judge from McPherson, The Law of Company Liquidation, 3rd ed, p 209 where it is said 'The guiding principle in the appointment by the court of a liquidator is that he must be independent and must be seen to be independent'. The authorities to which we were referred amply support that statement of principle and it is unnecessary to refer to them.

It seems clear that Mr Humphris cannot be seen to be independent because he is a partner in Ernst & Whinney whose relationship with the Company between 23 December 1988 and 17 March 1989 may require to be investigated by the liquidator ... The very fact of Mr Humphris's having been provisional liquidator might be enough to suggest that he should not be appointed liquidator of the Company. It is true that as provisional liquidator he will have acquired useful knowledge, but it is necessary to weigh the benefit of that knowledge against the possibility that a conflict of interest and duty may arise: see Re Stewden Nominees No 4 Pty Ltd (1975) 1 ACLR 185 at 188.

 

Appointment of a liquidator in a voluntary liquidation

In contrast, in a members' voluntary winding up, the appointment of the liquidator is in the hands of the general meeting of members under s 495(1), or in the hands of the creditors, in the case of a creditors' voluntary winding up. Where a voluntary winding up changes its character from being a members' to a creditors' voluntary winding up, the creditors may accept the liquidator who had previously been appointed by the members, unless the creditors nominate another person or persons to be liquidators under s 499(1). There are few reported cases dealing with the voluntary appointment of a liquidator, suggesting that the issues involved in such cases are far less contentious than those arising in the context of court appointments. However, in Commissioner of Corporate Affairs v Harvey (1979) 4 ACLR 259 at 285-6, Marks J summarised the duties of the liquidator in a voluntary winding up as follows:

The balance of authority favours the liquidator being treated not as a trustee stricto sensu but as an agent of the company. Although Lawrence LJ in Re Windsor Steam Coal Co (1929) 1 Ch 151 at 167 referred to the liquidator being 'in some respects in the position of a trustee', he also said that in many respects the liquidator undoubtedly acts as the agent for the company.

In Thomas Franklin & Sons v Cameron (1935) 36 SR (NSW) 286 Davidson J discussed the authorities on this question and concluded (at 296):

It appears to me then on the whole from these authorities that the liquidator is principally and really an agent for the company but occupies a position which is fiduciary in some respects and is bound by the statutory duties imposed upon him by the Act.

I consider that conclusion of Davidson J in accordance with what I understand to be the true position of a liquidator ... It is correct that he is in a position of trust but that does not make him a trustee in the strict sense.

Persons disqualified under s 532 from appointment as a liquidator

Certain persons are disqualified from being appointed as liquidators under the terms of s 532. Under this section, a person is prohibited from consenting to being appointed as a liquidator of a company unless the person is a registered liquidator or registered as a liquidator of that particular company under s 1282(3). A penalty of $1000 or imprisonment for three months or both applies for a breach of this prohibition. ASC Policy Statement 40 also deals with the experience requirements which need to be satisfied for the purposes of registration as a liquidator.

Persons having certain relationships with the company are also prohibited by s 532(2) from accepting appointment as a liquidator, except with the approval of the court. Those persons prohibited by this subsection from being appointed as a liquidator of the company include persons who are indebted to the company or to a related company for more than $5000 or a person who is creditor of the company or a related company for an amount exceeding $5000. The reference to 'indebtedness' in s 532(2) is defined in s 532(3). Other persons who are prevented by s 532(2)(c) from seeking appointment as a liquidator without the leave of the court include:

              I.      an officer of the company (as defined by s 532(6));

            II.      a person who is an officer of another company that is a mortgagee of property of the company to be wound up (as defined by s 532(6));

          III.      an auditor of the company (as defined by s 532(6));

          IV.      a person who is a partner or employee of an auditor of the company;

            V.      a person who is a partner, employer or employee of an officer of the company; or

          VI.      a person who is a partner or employee of an employee of an officer of the company.

 

Action by the Commission under s 1291

The registration of official liquidators is subject to suspension or cancellation at any time under s 1291. The Commission is empowered to require an official liquidator to provide an undertaking to refrain from engaging in certain conduct. Where the Commission decides to suspend or to cancel registration, or to seek undertakings, it is required by s 1291(3) to provide the person with reasons for its decision within 14 days of its decision. The decision is effective from the end of the day on which notice is given. The provisions regarding the cancellation of an appointment as an official liquidator were also considered by Rowland J in Morley Bakery Pty Ltd & Corporate Affairs Commission (WA) v Allan (1983) 8 ACLR 375.

In this case, the Commission had sought to remove Allan as liquidator of Morley Bakery Pty Ltd on the grounds that the respondents recent performance as a liquidator fell short of that expected of an official liquidator. Similar applications were made in respect of five other companies that the official liquidator had been appointed to. The respondent had been appointed official liquidator of Morley Bakery almost 10 years before it was wound up in September 1981. Thereafter, Burt CJ ordered that Allan had been guilty of neglect as an official liquidator of another company and of misfeasance in mixing trust fund moneys in the winding up of that other company. There was not, however, any suggestion of any misconduct in relation to the respondents duties as official liquidator of Morley Bakery.

Thereafter, the National Companies and Securities Commission declared that Allan’s conduct fell short of that required of an official liquidator and decided to cancel his registration as an official liquidator. However, cancellation of registration did not affect any existing appointment by the court of Allan as official liquidator and the respondent actually remained registered as a liquidator and auditor. Allan then applied to the Commission to be registered again as an official liquidator, but this was refused. In relation to the official liquidation of Morley Bakery, Rowland J considered the special circumstances of this case and observed (at 380) that:

It would have to be, in my view, in exceptional circumstances that this court would not give effect to and support the findings of the Commission when those findings, as they do here accord with the court's own view of the conduct complained of.

I believe however, that the circumstances of this case are now exceptional.

The matters complained of were ascertained during an investigation in early 1981. It is now some two and a half years later. The motion to remove is said to be on the grounds of the respondent's 'recent performance as liquidator'.

In allowing the respondent to remain registered as an auditor the applicant and the Commission must clearly have reached the conclusion that the respondent was in September 1982 fully aware of his duties and was unlikely to be a danger to the community. The present winding up is said to be nearly complete. It would apparently involve the creditors in further expenditure for a replacement to take over. This seems to me to be an unnecessary burden. There is no present complaint about the respondent's conduct in regard to this winding up and evidently no fears as to his future conduct. At this late stage I am prepared to hold that the fact of his registration having been cancelled is sufficient to protect and emphasise the integrity of the office both intrinsically and in its relation with this court without it being necessary for me to do anything further.

That the circumstances of the Morley Bakery case may have been somewhat exceptional is illustrated by the Supreme Court of Western Australia decision of Commissioner D R Williams QC in Bellambi Pty Ltd v Monck (1989) 15 ACLR 442 not to allow an official liquidator to complete two liquidations then underway. Here the NCSC had also cancelled the registration of Monck as an official liquidator. Commissioner Williams noted that what is now s 473(1) allows the court to remove a court-appointed liquidator, and that s 532(8) only allows a person registered as an official liquidator to be appointed by the court to compulsorily wind up a company. The Commissioner declined (at 446) to follow the decision of Rowland J in Morley Bakery as the court in that case had not taken into account what is now s 532(8).

The Commissioner concluded that Monck was prohibited from acting as an official liquidator after his registration had been cancelled by the NCSC and that he should therefore be removed from office in relation to the two companies in question. The court also declined (at 447-8) to allow an adjournment of this case pending a consideration of it by the Ministerial Council, holding that the decision of the Commission under what is now s 1291 is final, with no right of appeal as such, apart from a right to judicial review of the decision: see further the Western Australia Full Court decision in Monck v National Companies and Securities Commission (1992) 6 ACSR 625.

 

Exercise and control of liquidator's powers: s 479

Section 479 provides a mechanism for consultation and advice to the liquidator in respect to the exercise of his or her powers. Under s 479(1) the liquidator is to have regard to any directions given by a resolution of the creditors or contributories at a general meeting. A direction given by the creditors or contributories overrides any direction given by the committee of inspection. The liquidator is empowered by s 479(2) to convene meetings of creditors or contributories for the purposes of ascertaining their wishes. Alternatively, the liquidator may be directed to hold such meetings by a written request from one-tenth in value of the creditors or contributories. The liquidator is also empowered to seek directions from the court in relation to any particular matter arising under the winding up: s 479(3). The meaning of the phrase 'any particular matter arising under the winding up' (as used in s 479(3)) was considered by Beach J in Re Byron Moore Journeaux Ltd (in liq) (1989) 1 ACSR 181.

In this case, the liquidator sought directions from the court as to whether he was required to deliver three bills of costs for taxation, although each bill was for an amount of less than $5000. Rules of Court required a bill of costs of more than $5000 to be taxed.  His Honour (at 182) rejected the argument that this issue was not a particular matter arising under the winding up within the terms of what is now s 479(3). However, the liquidator is not required to seek directions from the court where the question involved is primarily one of commercial judgment. This has been confirmed by McLelland J in Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 1 ACSR 79, where his Honour observed (at 84) that:

... although it will often be prudent for a provisional liquidator to himself approach the court for an appropriate direction to pre-empt any future complaint by a creditor or contributory, there is no legal obligation upon him to do so and there may be circumstances where such an application would not be justified, for example where the proposed sale had the consent of all interested creditors and contributories.

Even where such an application is made it is necessary to bear in mind that there are limits to the kind of question on which the court will normally think it proper to give directions. A question of principle, eg as to whether in particular circumstances it is proper for a provisional liquidator to exercise his power of sale of the whole or a substantial part of a company's assets or undertaking, is to be distinguished from a question whether a particular sale or particular terms of sale are prudent. The latter type of question is primarily a matter for the commercial judgment of the provisional liquidator.

The court appoints as liquidators, and provisional liquidators, only persons who are registered as official liquidators, whom it assumes to have a high degree of commercial expertise which the court itself lacks.

 

Directions by the court under s 479(3)

Where a court is asked to give directions under s 479(3), it does not provide a conclusive determination of the matters in issue, although a liquidator is protected from claims that he or she acted in breach of duty where the liquidator acted in accordance with the directions of the court. The origins and effect of directions made under s 479(3) were considered at length by McLelland J in Re GB Natham & Co Pty Ltd (in liq) (1991) 5 ACSR 673. His Honour observed (at 675-6) that the statutory directions procedure derived from the practice of the Court of Chancery and was mainly relied upon by official administrators such as trustees and receivers appointed by the court. McLelland J added (at 678):

The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.

Modern Australian authority confirms the view that s 479(3) 'does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions 'is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation': see Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 9 ACLR 56; 2 ACLC 594 at 595 ...

Supervision and removal of liquidators: ss 503 and 536

The same broad principles applying to the appointment of liquidators also apply to their removal. For example, just as conflict of interest may disqualify a person from appointment as a liquidator, such a conflict may also lead to the removal of a person as a liquidator. In a voluntary winding up, a liquidator may be removed by the court under s 503 and another person may be appointed to that position. The need to show some cause for the removal covers such situations as a potential conflict of interest, as was shown in Re Shanks Byrne Industries Pty Ltd (in liq) and the Companies Act (1979) 4 ACLR 676, where the liquidator was the partner of the person who had been the auditor of the company. It has often been said that not only must the liquidator be independent, but she or he must be seen to be independent; where this is lacking a liquidator has been removed under s 503: see, for example, Re Biposo Pty Ltd (1995) 17 ACSR 730 at 736-7, where Young J followed earlier decisions in Re Allebart Pty Ltd (in liq) [1971] 1 NSWR 24; Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 and Re Giant Resources Ltd [1991]1 Qd R 107. In Re Biposo, Young J observed (at 736):

What the court has to do is to make up its mind by looking at the overall picture, whether there is a manifested tendency of the liquidators to favour certain interests at the expense of others. If there is that perception, and if in the eyes of a reasonable observer there is not the carrying on of the liquidation to the general advantage of the persons interested in the winding up, then the court might act. Indeed, the cases have stressed over and over again that not only must there be independence in the winding up, that there must be seen to be independence.

However, there must be a real conflict of interest and not merely a theoretical possibility of such a conflict: per Santow J in Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 233-4. In regard to the removal of a liquidator, the same principles will generally be applied as would be applied in regard to the appointment of a liquidator. In Re Shanks Byrne Industries, Needham J (at 677-8) stated the general principles regarding the removal of a liquidator in the following terms:

It is submitted on behalf of Mr Brown, that, while a person in his position might not be appointed by the court as a liquidator, nevertheless one must show something more than that fact in order to show cause for his removal. 1 think, however, I should apply the same principles to an application to remove a liquidator as I would apply to an application to appoint a person to be a liquidator.

I think, from what I have said, that it is already clear that, if I were appointing a liquidator to this company, I would not appoint Mr Brown or one of his partners, not because there is any criticism voiced of Mr Brown, nor because there was any suggestion that Mr Brown would perform his duties in any way other than to the best of his ability; I would not appoint him because he would be placed immediately into a position where a conflict might arise, and it is not proper that an order of the court should place anybody in such a position.

It is equally, I think, quite proper that the court should revoke, when it is challenged, the appointment of a person in such circumstances ...

This statement of principle was approved by Asche J in Aboriginal & Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corp (in liq) (1992) 10 ACSR 121 at 125-6. Asche J also added that in conflict of interest situations 'the principles are plain, that "in performing his functions the liquidator must both be and appear to be independent and impartial of the creditors": Re International Properties Pty Ltd (in liq) (1977) 2 ACLR 488 at 491-2'.

A similar consequence occurred in Re GK Pty Ltd (in liq); Ex parte Deputy Commissioner of Taxation (1983) 7 ACLR 633, a case which also led to the removal of the liquidator on grounds of conflict of interest.

Powers of the court under s 536

Section 536 also provides a wide statutory basis for removal of liquidators in two broad sets of circumstances. First, the court may take such action as it thinks fit where it appears that the liquidator has not faithfully performed his or her duties or is not observing the requirements set by the court or by the Law and the regulations. Second, the court may take such action as it deems appropriate upon the basis of a complaint regarding the conduct or performance of the duties of a liquidator which is made to the court or to the Commission by any person. There must therefore be a complaint before the court will undertake an inquiry under s 536: per Lindgren J in Australian Forest Managers Ltd (in liq) v Bramley (1996) 19 ACSR 398 at 407. The phrase 'any person' (as used in s 536(l)(b)), has been considered by McLelland J in Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 1 ACSR 79. His Honour concluded (at 83) that this phrase should be broadly interpreted and observed that what is now s 536:

... is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons. Although the section applies to any liquidator it has particular significance in the case of a liquidator appointed by the court who is, in that sense, an officer of the court, and to a liquidator whose qualification for office is that he is a registered official liquidator or a registered liquidator with the public accreditation that such registration involves and who is in that sense a public officer.

 

In such circumstances the legislature may well have taken the view that it is not in the public interest to limit the class of persons who might bring a complaint to the court of misconduct by a liquidator. The phrase 'any person' must, I think, be taken to have its literal meaning ...

Action by creditors to seek dismissal of liquidator

It has been suggested that creditors have power under what is now s 536 to move to dismiss the liquidator in the context of a scheme of arrangement: per Needham J in Re G & V White & Co Pty Ltd (1982) 1 ACLC 396 at 397. However, merely because a majority of the creditors support the removal of a liquidator, is not in itself sufficient to lead the court to remove a liquidator: per Ryan J in Re Giant Resources Ltd (1991) 9 ACLC 1,418 at 1,424. However, it has been held that resort to s 536 is inappropriate where an applicant seeks to stop a liquidator from commencing proceedings until other creditors have agreed to share the costs of the proposed liquidation: per Young J in Spedley Securities Ltd; Ex parte Australian National Industries Ltd (1991) 4 ACSR 552 at 553. Where proceedings have been brought by a liquidator of a company to recover moneys owed to it by another company, the court will not make an order to make the liquidator personally liable for the costs of the other company where proceedings against the latter are unsuccessful: per Fullagar J Egankarra Pty Ltd v Wince (1990) 2 ACSR 463 at 468-9.

 

Appeals from decisions of liquidators: s 1321

The court is empowered by s 1321 to confirm, reverse or modify an act or decision of a liquidator, provisional liquidator or receiver or to remedy an omission of a liquidator. Applications to the court may be made by a 'person aggrieved'.

James LJ in Ex Parte Sidebotham (1880) 14 Ch D 458 where, in discussing s 71 of the Bankruptcy Act 1869 (UK) his Lordship said at 465:

But the words "person aggrieved" do not really mean a man who is disappointed of a benefit which he might have received if some other order had been made. A "person aggrieved" must be a man who has suffered a legal grievance, a man against whom a decision has been pronounced which has wrongfully deprived him of something, or wrongfully refused him something, or wrongfully affected his title to something.

 

In other contexts, particularly where the public interest is affected, this statement may well be too restrictive: see A-G (Gambia) v N'jie [1961] AC 617 at 634.

Even in the area of insolvency administration James LJ's remarks should not be treated as an exhaustive definition: see Re Reed Brown & Co (1887) 19 QBD 174 at 178 per Lord Esher MR. Nevertheless the concept encapsulated in the phrase 'legal grievance' is I think sound in principle ... although its application to particular facts may not be without argument. It should not be overlooked that the wider the class of persons entitled to appeal to the court in respect of an act, omission or decision of a liquidator (or provisional liquidator) the greater the scope for potential disruption of an orderly administration.

The discretion of the court under s 1321

The discretion vested in the court under s 1321 to 'confirm, reverse or modify the act or decision, or remedy the omission as the case may be, and make such orders and give such directions as it thinks fit has been interpreted broadly by Wallwork J, in Re Bow Investments Ltd (in liq); Allied Pacific Investments (in liq) v Melsom (1992) 8 ACSR 515 at 528, where his Honour considered a decision of a liquidator who rejected the applicant's proof of a debt and observed that '[t]he matter could not be said to be entirely clear, but without taking an extravagant view of s 1321, it would be reasonably open to conclude that the court did have the power in dealing with the matter de novo ...'. His Honour also noted that:

... [lit was submitted the court really takes over the functions of the liquidator and deals with the matter accordingly. It would be a matter of manifest inconvenience if the matter had to go back to the liquidator in the event that the appeal was upheld, because this would require the applicant to make an application to the liquidator for leave to amend the proof [of debt]. If the liquidator then said no, he would then have to come back to the Supreme Court to complain about the failure of the liquidator to amend the proof.

His Honour concluded that the debt which the liquidator had rejected was in fact proved. However, he deferred a decision on the ranking of the creditor's claim until further submissions were made.

Examinations

Persons who may be able to provide assistance concerning the insolvency of a corporation:

Eligible applicants and scope of examinations

An 'eligible applicant' is defined in s 9 as meaning the Commission, a corporation's liquidator or provisional liquidator, an administrator of the corporation or of a deed of company arrangement, the corporation's official manager or a person authorised in writing by the Commission. The 'examinable affairs' of the corporation are also defined widely in s 9 and s 53 and include the promotion, formation, management, administration or winding up of a corporation, any other affairs of the corporation, or the relevant business affairs of a related corporation or of a 'connected entity', as defined in s 9 and s 64B.

Under s 596A, an 'eligible applicant' may apply to a court to summon a person to appear for an examination about a corporation's 'examinable affairs' (as defined in ss 9 and 53A(a) and extended to the property of the company in liquidation). The grounds for seeking an examination are set out in s 596B, which requires that the applicant must be an 'eligible applicant' and the court must be satisfied that the person has taken part in the 'examinable affairs' of the corporation and has been or may have been guilty of misconduct in relation to the corporation, or alternatively, that the person may be able to provide information concerning the examinable affairs of the corporation.

The examinable affairs of a corporation extend to its choses in action and would include an examination of the prospects of successfully litigating various insurance claims to judgment as such an examination was clearly 'about' the property of the corporation.

Meaning of 'examinable affairs'

In Lamb v Fixler (1994) 13 ACSR 447 at 451, Jenkinson J concluded that a restrictive reading should not be given to s 53 (which defines the examinable affairs of a body corporate) and, therefore, that the phrase 'examinable affairs' included the property right which derived from the corporation's claim for damages against a director of that company. However, where a liquidator seeks a summons under s 596A or 596B merely to obtain material for the purposes of legal action solely to assist a creditor who was pursuing his or her own interests unconnected with the winding up, it has been held that a liquidator should not seek an examination summons for this purpose: per Whitlam J in Re GPI Leisure Corporation Ltd (in liq) (1994) 15 ACSR 282 at 291; as his Honour noted (at 290) in this case, 'the purpose of the examinations must be relevant to performance of his statutory duty by the liquidator'.

Similarly, where an administrator of a deed of company arrangement seeks an examination summons, the Full Court of Victoria has held that the purpose of the examination must be to better exercise the powers and perform the obligations of the administrator under the deed of company arrangement, 'and not for any extraneous purpose' (such as to collect evidence for a libel action): per Ormiston J in Flanders v Beatty (1995) 16 ACSR 324 at 335.

Insolvent trading: Part 5.7B

The new Part 5.7B deals with the recovery of property or compensation for the benefit of creditors of insolvent companies. As the Explanatory Memorandum to the 1992 Corporate Law Reform Act noted (paras 1012— 1013):

... Part 5.7B implements reforms to the provisions of the Corporations Law (sections 592 to 594) which make it an offence for a director to permit a company to incur further debts while insolvent. The reforms separate out civil and criminal liability, restructure the defences in the current provisions (which operate unsatisfactorily in certain respects) and facilitate recovery for the benefit of all creditors where a director breaches the duty to prevent insolvent trading ... .Part 5.7B also imposes a liability on companies which fail to prevent insolvent trading by subsidiary companies. Where a holding company should have known that its subsidiary was incurring debt while insolvent the holding company will be liable, at the suit of the liquidator, for any loss or damage suffered by unsecured creditors of the subsidiary.

The new insolvent trading provisions

The Corporate Law Reform Act 1992 introduced new provisions to take the place of s 592. The old section now only applies to the incurring of debts up until the commencement of the new provision in June 1993. The new provisions are to be found in ss 588G-588ZB. The Corporate Law Reform Act 1992 introduced new provisions regarding the directors duty to prevent insolvent trading. The new s 588G decriminalises the insolvent trading provisions and introduces a civil penalty provision in the place of the old s 592. Difficulties were caused in the application of s 592 by the fact that this section was both civil and criminal in character. Various defences are provided for in s 588H.

 

Section 588G is now as follows: (1) This section applies if:

a)      a person is a director of a company at the time when the company incurs a debt; and

b)      the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

c)       at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

d)      that time is at or after the commencement of this Part.

(2)  By failing to prevent the company from incurring the debt, the person contravenes this section if:

a)      the person is aware at that time that there are such grounds for so suspecting; or

b)      a reasonable person in a like position in a company in the company's circumstances would be so aware.

(3) This section is a civil penalty provision as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening it, or of being involved in a contravention of it.

(4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section.

For a case brought under s 588G, see Stargard Security Systems Pty Ltd v Goldie (1994) 13 ACSR 805.

The rationale behind these new provisions was described by the Explanatory Memorandum to the Corporate Law Reform Act 1992 (para 1082) as follows:

... The proposed provisions address ... criticisms [of s 592] in a number of ways:

• criminal and civil sanctions will be separate, with criminal liability being retained for cases where actual dishonesty or fraud are involved;
• directors will be under a positive duty to ensure that the company does not incur debt while insolvent. Breach of this duty will render the director liable to civil action and will also constitute a breach of duty to which a civil penalty will apply;
• the liquidator will have a primary right to sue a director for the benefit of all unsecured creditors, with other unsecured creditors being permitted a separate right of action only where the liquidator fails to take action;
• the duty is expressed in such a way that the director will not be able to use lack of involvement in the company's affairs as a basis for asserting that a particular transaction was entered into without his or her implied authority; and
• a series of rebuttable presumptions (set out in Division 1) will assist the liquidator in establishing that the company was insolvent at a particular time. [The presumption of insolvency in s 588F(3) has been discussed in an earlier chapter.]

The Explanatory Memorandum (paras 1085-1086) introducing s 588G also distinguished this section from the old s 592 as follows:

Under section 592, for a director to be liable there must be reasonable grounds to expect that a company would not be able to pay its debts. Under proposed s 588G it is sufficient if there are reasonable grounds to suspect insolvency. This is based on a recommendation of the Harmer Report ... Under s 592, a director has a defence where he or she could show that the debt was incurred without his or her express or implied authority or consent. This defence has been successfully invoked in circumstances where a director failed to take an active role in the management of the company and could therefore claim that debts incurred while the company was insolvent were incurred without his or her authority [see further Metal Manufacturers v Lewis] ... Such a situation does not accord with modern expectations about the role of company directors. In particular, most persons would nowadays expect all the directors of a company to acquaint themselves with the general financial position of their company, and to take positive steps where necessary to protect the interests of members and creditors.

Section 588G only applies to directors, whilst the old s 592 also covered persons involved in the management of the company. However, the definition of 'director' in s 60 may be wide enough to at least include some persons involved in the management of the company who have not been formally appointed as directors of the company: see ASC v AS Nominees Ltd (1995) 18 ACSR 459 at 508-9 and 515; and Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1; also see generally PMC Koh, 'Shadow Director, Shadow Director, Who Art Thou?' (1996) 14 C&SLJ 340.

Civil penalties and compensation orders

Where it is sought to apply the civil penalty order, as defined in s 131 7DA, against a director under s 588G, the order may be sought against a person who has contravened this section or who has been 'involved in a contravention of the section. Section 79 provides a very wide definition of the circumstances in which a person will be regarded as having been 'involved in a contravention'. These circumstances include the aiding, abetting, counselling or procuring of the contravention; inducing the contravention by way of a threat or promise or otherwise; having been in any way directly or indirectly knowingly concerned in or a party to a contravention or conspiring with others to effect the contravention. More often than not, actions for compensation would be brought against directors under Div 4 of Part 5.7B. Such compensation may also be sought under the civil penalty order procedure where the grounds in s 588J have been met, even if an order is not made under s 1317EA(3). Section 1317EA(3) provides for orders to be made by the court prohibiting a person from managing a corporation and the imposition of a pecuniary penalty not exceeding $200,000.

Compensation orders may be made by the court under s 588K for a contravention of s 588G where the court is satisfied that the creditor was wholly or partly unsecured and that the person to whom the debt was owed suffered loss or damage in relation to the debt because of the company's insolvency. The order may require the payment of an amount equal to the amount of the loss suffered and such an order may be enforced as if it were a judgment of the court: s 588L. Under s 588M(2), a liquidator of a company being wound up may recover from a director, as a debt due to the company, the loss or damage suffered as a result of the contravention of s 588G by the director. Creditors may also bring similar actions against directors under s 588M(3), although they will need to obtain the written consent of the liquidator, pursuant to s 588R. However, proceedings may be commenced without the consent of a liquidator if the notice procedure set out in s 588T is complied with. A certificate, signed by the registrar or other proper court officer, evidencing the contravention of s 588G will be sufficient for an action under s 588M(2) or (3) to be brought against a director: s 588Q. However, double recovery in relation to a debt by a liquidator and a creditor under s 588M is prevented by virtue of s 588N. Proceedings commenced under s 588M must be commenced within six years after the commencement of the winding up.

Defences to an action under s 588G: s 588H

Defences to an action brought under s 588G are to be found in s 588H. Under s 588H(2), it is generally a defence if it can be shown that at the time that the debt was incurred, the person had 'reasonable grounds to expect, and did expect, that the company was solvent at the time and would remain solvent even if it incurred that debt ...'. This defence was successfully used in Stargard Security Systems Pty Ltd v Goldie (1994) 13 ACSR 805 at 815-16 where it was found by Master Bredmeyer that Goldie had reasonable grounds for expecting that income from sales would quadruple; this expectation had been based upon a conservative cash flow projection. His Honour concluded (at 816) that Goldie may have 'genuinely believed these estimates to be realistic' (although the court thought that they were unrealistic estimates).

Without limiting the generality of s 588(2), s 588H(3) provides that it is a defence if it can be shown that the director has reasonable grounds to believe, and did in fact believe, that a 'competent and reliable person' was monitoring the solvency of the company and was keeping the director informed of this. Further particular defences are available where the director was ill at the time when the debt was incurred and as a result of this, or for some other good reason, the director did not take part in the management of the company. Finally, it is also a defence where a director took 'reasonable steps to prevent the company from incurring the debt.'