Parkway One, commercial morality and the Court’s refusal to terminate winding up

In the recent decision of In the matter of Parkway One Pty Limited (in liquidation) [2019] NSWSC 1495 (Parkway), Rees J dismissed an application to terminate the winding up of Parkway One Pty Ltd (in liquidation) (the Company) due to inconclusive evidence as to the solvency of the Company and, having regard to the non-compliance by its director of her statutory duties and the likelihood of the Company not being able to service the current and foreseen indebtedness, her Honour held that it would be contrary to commercial morality to terminate the winding up of the Company and allow the Company to return to the mainstream of commercial life under the control of the same director.

 

Key facts

Ms Page, the sole shareholder of the Company, made the application to terminate the winding up of the Company pursuant to section 482 of the Corporations Act 2001 (Cth).

A liquidator was appointed to the Company due to its failure to comply with a statutory demand for a judgment debt in respect of unpaid strata levies of $18,000.

Ms Page relied on cash flow projections provided by the Company's accountant in support of the Company's solvency, but there was no evidence from the accountant confirming that he prepared the projections and on what basis.

The liquidator had concerns about the Company's solvency. Of particular concern to the liquidator was the incomplete financial statements and tax returns of the Company (despite requests), the $50,000 liability to the Australian Taxation Office, the fact that the income of the Company appeared insufficient to discharge the debts of the Company, and that the Company could not pay its creditors as and when they fell due.

The Court's discretion to terminate winding up

As summarised by Black J in In the matter of MWM Sydney Pty Ltd (in liquidation) [2016] NSWSC 688, the following principles as set out by Master Lee QC in Re Warbler Pty Limited (1982) 6 ACLR 526 apply in exercising the Court's discretion to terminate the winding up of a company, being:
  1. Whether there is a “positive case” for the favourable exercise of the court’s discretion;
  2. Whether all debts have been discharged (considering the nature and extent of the creditors);
  3. What the attitude of creditors, contributories and the liquidator is;
  4. The current trading position and general solvency of the company;
  5. Any non-compliance by the directors with their statutory duties;
  6. What the general background and circumstances are leading to the winding up order; and
  7. Whether the conduct of the company was in any way contrary to “commercial morality” or “the public interest”, considering the nature of the company’s business.

The current and future solvency of the company

It is well established that the most important factor the Court will consider when terminating a winding up application is the solvency of the company.

This will be particularly be the case in circumstances in which the winding up was on the grounds of insolvency, and in an application to terminate the winding up of a company, the applicant must demonstrate that the company is not (or is no longer) insolvent and that it is likely to remain solvent. This includes proof that if new debts are incurred, the directors will operate in a financially sound and responsible way and pay debts as and when they fall due.

Maintaining the company's solvency is consistent with the directors' duty to prevent companies from insolvent trading pursuant to section 588G of the Corporations Act 2001 (Cth).

Commercial morality

In determining whether to terminate the winding up of a company, the Court must consider whether it is conducive or detrimental to commercial morality and to the interest of the public at large; In re Telescriptor Syndicate Limited [1903] 2 Ch 174.

In this context, "commercial morality" focuses mostly on the likely impact on future creditors, however, can also extend to instances where there has been serious impropriety and where there has been a history of failure in meeting statutory duties (which would indicate future difficulties).

The Court's decision in Parkway

Rees J observed and made the following findings:

1. Whether the Company was solvent:


  • The Court will not order a termination of a winding up unless it is satisfied as to the quality of the evidence of the financial position of the company. It is relevant in this context the view taken by the liquidator, who is expected to have expertise on matters involving solvency.
  • As Ms Page produced evidence that was not verified by external accountants or the liquidator, the Court found that this evidence was lacking, and accordingly that Ms Page had not made out a positive case that the Company is, or will continue to be, solvent.
2. Whether it was in the public interest to wind up the Company:

  • The Court considered that:

    • The Company's long history of non-payment to trade creditors;
    • Ms Page's indignant (rather than apologetic) attitude to the efforts of such creditors to obtain payment;
    • Ms Page's non-compliance of statutory duties as director; and
    • The Company's failure to keep proper books and records in accordance with section 286(1) of the Corporations Act 2001 (Cth)

suggested "that it is not in the public interest for the benefits of incorporation to continue to be available to this company."

On the basis of the above, her Honour was not satisfied that, if the winding up was terminated, that the company would operate in a financially sound and responsible way, servicing "foreseen indebtedness."

Key takeaways

The decision re-emphasises the principles the Court will apply when determining whether to exercise its discretion to terminate the winding up of a company, particularly the Court's vigilance in respect of the public interest and the current and future solvency of the company.

It also raises the importance of complying with the Corporations Act, particularly the statutory duties as a director and maintaining proper books and records of a company.

McCabe Curwood has extensive experience in advising on matters arising from the Corporations Act and the winding up process for companies, directors and shareholders. If you would like advice on any of the matters raised in this article, please get in touch with us today.

Contributors

Jennifer Bradley Lawyer