The decision of Ferguson J in the Victorian Supreme Court handed down last week of Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq) [2011] VSC 577 provides a good opportunity for review of the legal principles as to when a Court will terminate a winding up, and to consider what evidence an applicant should come armed with to succeed.

Section 482(1) of the Corporations Act 2001 (Cth) provides as follows –

(1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.

(1A) An application may be made by:

(a) in any case – the liquidator, or a creditor or contributory, of the company; or

(b) in the case of a company registered under the Life Insurance Act 1995 – APRA; or

(c) in the case of a company subject to a deed of company arrangement – the administrator of the deed.

In this case, the application was made by a corporate shareholder of the company in question, 7 months after the winding up order had been made.

Her Honour at [17] cited the principles set out by Barrett J in Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 –

“The jurisdiction to terminate a winding up under s 482 is discretionary. The court may have regard to a range of factors. While not to be rigidly applied, the list of criteria set out in the judgment of Master Lee QC in  Re Warbler Pty Ltd (1982) 6 ACLR 526 provides useful guidance:

1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay.

2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this.

3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged.

4. The attitude of creditors, contributories and the liquidator is a relevant consideration.

5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought.

6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given.

7. The general background and circumstances which led to the winding up order should be explained.

8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to ‘commercial morality’ or the ‘public interest’.

Her Honour, perhaps by way of emphasis, repeated that “in addition to these factors”, the court is required to take into account the interests of the public and whether the termination will be detrimental to commercial morality. Here, she noted that the principal factors for consideration were those relating to solvency and commercial morality. I will mainly focus below on the evidentiary issues as to solvency, save to note in passing that the commercial morality issues in this case arose from the director having resisted many requests from the liquidator that he provide the Company’s books, records and full details of the Company’s assets and there whereabouts. So much so that the liquidator filed a report with ASIC about the director’s conduct. The director had also continued litigation in the company’s name in VCAT, post-liquidation, including getting 19 days into the trial, before it was stayed.

I will not rehash the facts of this case, as aside from a useful reminder of the relevant legal principles to be applied, its significance is largely illustrative. However it is worth noting that while her Honour found that the Company was “technically solvent”, she was not willing to find this was sufficient to justify a termination of the winding up having regard to this factor. The Company had been insolvent in the past and there was insufficient evidence to establish that it would be anything more than barely solvent were it to recommence trading. The liquidator’s evidence was that the Company had been insolvent from June 2007, there was evidence of a significant number of dishonoured cheques from May 2008, and prior to the litigation which the director claimed caused all the trouble, the Company was trading beyond the  limit of its bank account.

I pause to note her Honour’s next observations, at [49]. Ferguson J remarks that given the historical (borderline) performance of the Company, evidence was required about how the business would run both operationally and financially were the liquidation terminated. Her Honour usefully indicated that what was required by way of evidence was –

• a business plan,
• cash flow forecasts, and
• more detailed information about support from third parties (as to their identity, level of support and ability to provide that support).

Her Honour remarked that where effectively the Court’s imprimatur is sought to permit a company to begin trading again, she did not think it acceptable to brush aside considerations such as the likely position of future creditors and persistent failure by the director of the company to comply with statutory obligations.

In many of these cases. evidence adduced to make out a case for a stay or termination of a winding up does not go so far as her Honour has outlined. Applicants would be well-advised to take heed of her Honour’s express indications in this judgment as to how they can go about marshalling the evidence to support a termination application, and how far that evidence will need to go to provide sufficient comfort to the Court as to the likely well-being of creditors and of the public moving forward, were it to permit the Company to come out of a winding up and recommence trading.