You snooze, you lose – Court refuses to reinstate former directors when winding up almost complete

In a recent case, Emmett AJA of the Supreme Court of New South Wales refused to make an order to terminate the winding up of an incorporated association. In this article, we re-examine the principles with which the Court will have regard when determining whether to exercise its discretion to terminate the winding up of a company or incorporated association.

 

Background

In June 2018 we published an article on our website setting out the Court’s wide discretion to make an order terminating the winding up of a company and some of the main factors that it will take into account when making such an order (our earlier article is available here). Note that the principles apply equally to incorporated associations and companies.

Since we published that article, Emmett AJA of the Supreme Court of New South Wales handed down a decision in which his Honour rejected an application for an order that the winding up of an incorporated association be terminated: In the matter of St Gregory’s Armenian School Inc: Ghougassian v Arnautovic in his capacity as Liquidator of St Gregory’s Armenian School Inc [2018] NSWSC 1022 (the Case).

The relevant incorporated association in the Case was the St Gregory’s Armenian School Inc (the School) which the Court ordered to be wound up on 21 June 2010. The land owned by the School was subsequently sold by the Commonwealth Bank exercising its power of sale as mortgagee. The Court was satisfied that there would be more than enough money from the proceeds of this sale to satisfy the debts owing to the School’s creditors in full and that there would significant surplus property after the winding up was completed.

Relevant Principles

The Court has wide discretion to terminate the winding up of a company or incorporated association at any time during the winding up upon application by a liquidator, creditor or contributory (member).

In the Case, Emmett AJA stated that the successive decisions in Australia have held that certain considerations are relevant to the Court’s exercise of its discretion to order that a winding up be terminated:

  1. whether the applicant for termination of the winding up has made out a positive case for the favourable exercise of the Court’s discretion;
  2. the current trading position and general solvency of the entity;
  3. the nature and extent of the creditors and whether all debts have been discharged;
  4. the attitude and interests of the creditors, including future creditors whose interests might be prejudiced if the entity were released from winding up;
  5. the interests of the liquidator, particularly with regard to remuneration;
  6. the interests of shareholder and contributories, such that an order will not generally be made unless each member either consents to it or is bound not to object to it or his or her rights are properly secured;
  7. the public interest, including matters of commercial morality, and whether a full explanation of any non-compliance by the directors of their statutory duties has been provided; and
  8. whether the general background and circumstances leading to the winding up order have been explained.
At the same time, the Court warned against too rigid an application of these considerations.

The Court’s Reasoning

Chief among the Court’s reasons in deciding that there were no grounds to terminate the winding up of the School was that the winding up was almost complete (having commenced on 21 June 2010). In a similar vein, the Court held that the reference to the attitude and interest of creditors (point 4 above) has no application where the winding up of the entity is almost complete.

While the Court recognised that the School would have significant surplus assets from the sale of the land, it held that this was only by virtue of its being wound up – there was no evidence that the School could trade solvently and successfully in the future, especially given the Court’s lack of confidence in the applicants’ capacity to act as directors of the School. Accordingly, the Court was not satisfied that it would be reasonable to entrust the affairs of the entity to the directors under whose management it previously failed.

In any event, the Court held that any distribution of surplus property from the winding up of an incorporated association must be approved by the Director General of the Department of Fair Trading – it was not open to the applicants circumvent that process and apply the surplus property to reopening the School’s business.

Our Litigation and Dispute Resolution Group has expertise in corporate insolvency. If you require advice in relation to terminating the winding up of a company or incorporated association, please contact us for assistance.

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Guy Lewis Lawyer