May 2017

Terminating a winding up: The need for unqualified evidence as to solvency

In the recent decision of Deputy Commissioner of Taxation v Project Tiling Group Pty Limited [2017] FCA 208, the Federal Court of Australia dismissed an application by the sole director of Project Tiling Group Pty Limited (in liquidation) (Company) for an order setting aside the winding up of the Company pursuant to section 482 of the Corporations Act 2001 (Cth) (Act).  The winding up order had been made in the absence of the Company.

The director’s application was supported by, among other things, evidence of his belief that the Company was able to meet its debts as and when they fell due.

The Court directed the liquidators of the Company to file and serve a report concerning the solvency of the Company and any other matters the liquidators considered relevant pursuant to section 482(2) of the Act.

In preparing their report, the liquidators noted their difficulties in obtaining the key books and records of the Company from the director which were relevant to the liquidators’ analysis of the solvency of the Company.  As a result, the liquidators were limited to providing a qualified view of the Company’s solvency, which was that the Company appeared to have sufficient assets and working capital to meet its immediate liabilities as at the date of the report.

In exercising its discretion under section 482 of the Act, the Court was guided by the principles set out in George Ward Steel Pty Limited v Kizkot Pty Limited (1989) 15 ACLR 464, in which it was held that a Court will usually set aside a winding up order made in the absence of a company where:

  1. The application is brought promptly by the company;
  2. Notice is provided to the liquidator, the plaintiff, and any other creditor who appeared in the winding up proceedings;
  3. The evidence provides an explanation for the company’s non-appearance at the hearing;
  4. The evidence indicates the solvency of the company;
  5. There is at least no opposition to setting aside the winding up order; and
  6. The Liquidator’s investigations indicate that there is no reason for the company to be stopped from trading.

In the present application, the fact that the director failed to provide the liquidators with sufficient books and records to allow the liquidators to form an unqualified view of the Company’s solvency proved fatal, with the Court dismissing the application on the basis that it could not be satisfied that the Company was solvent.

In the circumstances, the Court opined that it may be reasonably inferred from the failure of the director to provide the liquidators with the information they needed to form an unqualified view as to solvency that either: –

  1. the information did not exist; or
  2. that it did not support the position as asserted by the director (that the Company was solvent).

The decision provides helpful guidance as to the matters the Court will take into in exercising its discretion under section 482 of the Act and in particular, underlines the need for any potential applicant for such an order to ensure that sufficient evidence is before the Court to establish (on an unqualified basis) that the Company is solvent.

For further information, please contact ERA Legal.