Terminating a winding up – easier said than done

The recent decision of In the matter of Rainbow Carlingford One Pty Ltd (in liquidation) [2019] NSWSC 971 illustrates the importance of ignoring a statutory demand or winding up application, which can lead to the winding up of a company. 

After a winding up starts, a court has the power to terminate the winding up.  However it can very difficult to convince the court to do this, even if the liquidator and all creditors agree. A court will approach an application to terminate with real caution, and will carefully scrutinise the fine print in any supporting proposal. 

The statutory demand and winding up application

The company, Rainbow Carlingford One Pty Ltd, owned significant land that was earmarked for development.  Approval was granted for the construction of 450 apartments on the land. 

The company was served with a statutory demand for $900,000 in unpaid land tax.  The company did not comply, and it was wound up at the first return date of the subsequent winding up application after failing to appear.  The director mistakenly believed that the court would not proceed to make winding up orders at the first return date. 

The liquidator considered the company to be clearly insolvent, with approximate net assets ranging between minus $56 million (on a pessimistic scenario) to around $2 million (on an optimistic scenario). 

The application to terminate the winding up and the funding proposal

Shortly after the liquidator’s appointment, a shareholder of the company made an application to the NSW Supreme Court under section 482 of the Corporations Act 2001, which permits a Court to either stay or terminate a winding up. 

The application was made in light of a proposal which involved the winding up being terminated, and the company then obtaining funding to continue the development of the land. 

Undertakings were provided by the directors and related parties to enter into funding agreements within 7 days of the termination of the winding up. Those funding agreements would, if the company was not able to obtain sufficient external funding, require the related parties to advance within 12 months up to $60 million to the company to cover all its debts on a pessimistic scenario.  The related parties agreed to provide security to ensure that they met any drawdown requests from the company, and material was provided about the financial state of those related parties. 

The company’s creditors (both external and related) supported the proposal and the application to terminate the winding up.  They indicated that they were willing to extend the due dates for payment of debts owing to them. 

The liquidator supported the proposal, stating that the continued liquidation would involve a long realisation process for the company’s assets and an insufficient return for all creditors.  The liquidator considered development of the company’s land would maximise its value, which would also assist in creating jobs and benefitting the local community. 

The court’s refusal to terminate the winding up

While encouraged by the creditors’ support of the proposal and the application, the court refused to terminate the winding up.  Amongst other things:

  1. The court scrutinised the financial status of each of the related parties that would provide funding.  By reference to the balance sheet of the related parties, the court noted that the net asset position of some of the related parties was less than the amount of funding in respect of which it was proposed they would each agreed to provide. 
  2. The court categorised the director’s conduct in respect of the statutory demand and winding up application as “cavalier”.  It suggested that, while not determinative, this caused it some concern about the future management of the company if the winding up was terminated. 
  3. The court stated that it was not impressed by arguments that the community would be prejudiced if the company could not develop the land, as presumably a purchaser of the land would develop the land. 
  4. The court was not persuaded by the liquidator’s submissions that he had analysed the company’s position on a particularly conservative basis.  The court stated that it expected a liquidator to adopt a conservative stance, and noted that it would do the same. 

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