GIO v Advance [2002] NSWSC 261

New South Wales Supreme Court

CITATION : GIO v Advance [2002] NSWSC 261 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 5618/01 HEARING DATE(S) : 02/04/02 JUDGMENT DATE : 2 April 2002

GIO Workers Compensation (NSW) Limited - Plaintiff PARTIES : Advance International (Australia) Pty Limited - Defendant Wei Jin Gu - Applicant JUDGMENT OF : Barrett J

COUNSEL : Mr D.S. McCrostie, Solicitor - Plaintiff Mr P.A. Fury - Applicant SOLICITORS : P.W. Turk & Associates - Plaintiff Ma & Company - Applicant CATCHWORDS : CORPORATIONS - winding up - termination of winding up - subordination of shareholder loan as condition of termination - undertaking to court is not most suitable means of subordination LEGISLATION CITED : Corporations Act 2001 (Cth) CASES CITED : Brolrik Pty Ltd v Sambah Holdings Pty Ltd & Ors (2001) 40 ACSR 361 Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Ltd (1999) 17 ACLC 972 DECISION : Winding up terminated

- 3 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BARRETT J

TUESDAY 2 APRIL 2002

5618/01 - GIO WORKERS' COMPENSATION (NSW) LIMITED v ADVANCE INTERNATIONAL (AUST) PTY LTD

JUDGMENT

1 The applicant, Mr Wei Jin Gu, is the holder of one of the two shares constituting the issued share capital of Advance International (Aust) Pty Ltd ("the company") which became the subject of an order for winding up in insolvency on 4 March 2002. He seeks an order under s.482 of the Corporations Act 2001 (Cth) terminating the winding up. 2 Affidavits sworn by Mr Gu on 11 March and today depose to circumstances in which there was a misunderstanding, on his part, about the amount to be paid by the company by way of workers' compensation insurance premiums. Mr Gu had several conversations with solicitors for the insurer and, it appears, understood that only one sum was payable, whereas the true position was that two sums were payable. The fact that each was in the vicinity of $4,000 or $5,000, obviously compounded the confusion. Mr Gu was not aware of the significance of the moves to wind up the company. 3 At all events, Mr Gu acted promptly after the making of the winding up order to seek termination of the winding up and when the present application was first before the court on 11 March, some evidence was presented with a view to showing the company's solvency and financial stability. That has been supplemented by Mr Gu's affidavit of today and also, importantly, by an affidavit, also of today, of Mr John Wang, a chartered accountant, whose firm has acted as the accountant for the company since 1997. Such a third party appraisal is virtually indispensible in cases of this kind: see Deputy Commissioner of Taxation v Sydney Concrete Steel Fixing Pty Ltd (1999) 17 ACLC 972. 4 The evidence shows that immediately before the winding-up there were two current liabilities, one of $10,244.87 for workers' compensation insurance premiums and the other of $7,428.95 for goods and services tax. There was also a loan from Mr Gu of $7,721.68 which was treated as a non-current liability. The liquidator incurred expenses of $4,601.30. Those expenses, together with the two current liabilities to which I have referred, have now been paid in full. The affidavit of Mr Wang outlines the company's average income and average expenditure. There has been, and it is reasonable to expect that there will continue to be, some surplus of income over expenditure. Mr Wang further deposes that liabilities will be capable of being met as and when they fall due. 5 The liquidator neither consents to the present application nor opposes it. As I have said, the liquidator's expenses have been paid. 6 There is one aspect to which I should make special reference. It concerns the debt of $7,721.68 owed to Mr Gu. In his affidavit of today, Mr Gu proffers to the court an undertaking that he will not make demand for, sue for or in any other way seek to recover all or any part of the debt owing to him while any amount remains owing by the company to any creditors of the company other than himself. This undertaking is in a form which the court accepted in s.482 proceedings in Brolrik Pty Ltd v Sambah Holdings Pty Ltd & Ors (2001) 40 ACSR 361. I have indicated that the court will accept the undertaking from Mr Gu in this case as well, but that such an undertaking should be regarded as a temporary measure to be replaced, in due course, by an appropriate subordination arrangement, by which I mean that the contractual basis of the debt should be varied so that, as between the parties, restrictions will apply equivalent to those in the undertaking to the court, with the subordination so structured that a simple amending contract of the parties cannot undo it. 7 Unless shareholder and other related party loans are to be capitalised and thus made irrelevant to the issues to be addressed on a s.482 application, they should, on a longer term basis, be dealt with by formal and appropriate subordination arrangements put in place by the parties themselves rather than by undertakings to the court. 8 The order of the court is that, upon Wei Jin Gu giving to the court the undertaking to which I have referred, the winding-up of Advance International (Aust) Pty Ltd is terminated this day, 2 April 2002. 9 Because of the expectation I have expressed that the undertaking to the court should be replaced, the applicant has liberty to apply on seven days' notice. **********