If a company is in the process of being wound up by a liquidator, a creditor or member (shareholder) may make an application to a court to terminate the winding up under section 482 of the Corporations Act 2001.
Such an application may be made for various reasons, but it often arises from a desire to preserve accumulated tax losses or to avoid regulatory consequences that can result from a liquidation (for example, the cancellation of a building licence).
To persuade a court to exercise its discretion to terminate a winding up, an applicant will typically need to show that the company’s creditors and liquidator’s fees and expenses have been or will be paid in full.
However, a court will not rubber-stamp a termination order simply by an applicant showing that all debts will be paid.
An example of a recent unsuccessful termination application is the case of In the matter of Kele Group Holdings Pty Ltd [2021] NSWSC 412 (Kele Group).
The sole director and shareholder of the company, Ms Hilda Elias, made an application to terminate the company’s winding up.
The company’s sole business activity was owning and renting out residential property.
The company had incurred large tax losses over a significant period totalling approximately $1.9 million.
The sole unrelated creditor was the ATO, which was owed about $60,000 at the time of the termination application.
While related creditors were owed substantial sums, those creditors agreed to convert that debt into shares in the company.
Ms Elias had funds available to pay the ATO and the liquidators’ fees and expenses in full.
Accordingly, Ms Elias showed that the company would be solvent immediately after the termination order.
Despite this evidence, the court refused to terminate the winding up for the following reasons:
- When the liquidator was appointed, he reported that the company had not lodged tax returns since 2009. While evidence was given on behalf of Ms Elias that the tax returns were up to date when the application was heard, no explanation was given by her for the historical failure to lodge tax returns.
- The evidence showed a historical failure to operate in a financially sound manner and that Ms Elias did not provide evidence to show why this would be different in the future. The court was concerned that future creditors might be put at risk with Ms Elias in charge.
- The ATO did not have sufficient notice of the application and therefore did not have an adequate opportunity to be heard on it. If the court was minded to terminate the winding up, it would have adjourned the hearing to allow the ATO to be heard.
The critical factor that counted against the termination was probably the company’s failure to lodge its tax returns over a significant period of time. While these seemed to have been brought up to date by the time the application came on, there was no explanation of the prior failures, suggesting the company may have operated contrary to “commercial morality”.
In our previous article, we discussed the case of In the matter of Rainbow Carlingford One Pty Limited (in liquidation) ACN 604 122 054 [2019] NSWSC 971. In that case, the application for termination of a winding up failed because the court was not satisfied that all debts would be paid in full and in a timely manner.
The case of Kele Group is an important reminder that if a termination application needs to be made, you should not assume the court will wave it through simply by all debts being paid. Any previous irregularities, including how the company ended up in liquidation, will need to be properly explained. Evidence of the company’s future plans, and evidence as to why the company will not end up in liquidation again will need to be provided. If the evidence on these issues is lacking and lingering questions are left unanswered, you can expect the court to refuse your application as it did in Kele Group.
If you have any questions or concerns please contact Chamberlains and talk to one of our insolvency lawyers today.
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