New South Wales Supreme Court CITATION : McLenaghan v China West International Holdings Ltd (in liq) [2009] NSWSC 1457 HEARING DATE(S) : 14 December 2009 JURISDICTION : Equity Corporations List JUDGMENT OF : Austin J EX TEMPORE JUDGMENT DATE : 14 December 2009 DECISION : Order for termination of winding up made. CATCHWORDS : CORPORATIONS - winding up in insolvency - termination of winding up - evidence of solvency - no issue of general principle LEGISLATION CITED : Corporations Act 2001 (Cth), s 482 PARTIES : John McLenaghan (Plaintiff) China West International Holdings Ltd (in liq)(Defendant) FILE NUMBER(S) : SC 3386/09 COUNSEL : D Price (Plaintiff) P Beazley (Liquidator of Defendant) SOLICITORS : Blake Dawson (Plaintiff) Beazley Singleton Lawyers (Liquidator of Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST AUSTIN J MONDAY 14 DECEMBER 2009 3386/09 JOHN McLENAGHAN V CHINA WEST INTERNATIONAL HOLDINGS LTD (IN LIQ) JUDGMENT (Ex tempore, revised on 21 December 2009) 1 HIS HONOUR: The applicant, Mr Wong, who is a creditor of the defendant company, seeks an order under s 482 of the Corporations Act 2001 (Cth) to terminate the winding up of the company. The evidence in support of the application has been prepared with a view to the matters set out in an article that I prepared with Kristin van Zwieten, "Termination and Setting Aside of Winding-Up Orders" (2007) 81 ALJ 932. I have decided that the evidence meets the requirements set by the law and described in that article. 2 A winding up order was made against the company on 12 October 2009 after the plaintiff, Mr McLenaghan, a former director of the company, served a statutory demand on the company on 28 April in respect of unpaid directors' fees. Although the company disputed Mr McLenaghan's claim, it failed to comply with the statutory demand or apply to have it set aside within the prescribed time. Mr McLenaghan then commenced these proceedings to seek to have the company wound up. 3 It appears that in August 2009 the company sought legal advice and subsequently, in September 2009, it paid Mr McLenaghan the amount claimed by him. Mr McLenaghan also claimed an amount of $13,500 in respect of his costs. Negotiations took place between the company and Mr McLenaghan in relation to those costs, and while the negotiations were being conducted the company did not file any evidence in answer to the application for the winding up order. The negotiations in relation to the costs claim by Mr McLenaghan ultimately failed, and the Court refused to allow the company further time to file evidence in the winding up application, and made the winding up order. 4 Mr Wong is a creditor of the company, who therefore has standing to bring an application under s 482. Notice of the application has been given to the liquidator, Mr McLenaghan, ASIC and to Chongqing Yuao Building Materials Co Limited ("Chongqing"), a subsidiary of the company and its primary creditor. 5 Evidence in support of the application was given by Mr Guy Robertson, director of Integrated CFO Solutions Pty Limited, a company that provides chief financial officer and company secretarial services to other companies. He has provided assistance to the defendant company and to the liquidator. On 20 October 2009 he prepared accounts for the company as at 30 September 2009; they are in evidence. The profit and loss account shows a net loss for the period from July to September 2009 of some $63,000, and the balance sheet as at September 2009 shows negative net assets of $2.86 million. More importantly, for present purposes, current liabilities amount to $65,260.32 and long term liabilities to $3,509,368.58. The company has various assets, including some offshore assets that have been valued at nil value for the purpose of Mr Robertson's calculations. Also in evidence are the annual financial reports of the company for the years to 30 June 2008 and 2009, which are perhaps less informative than the later ones prepared by Mr Robertson. 6 Mr Ernest Wong, a director of the company, has given evidence as to the background of the making of the winding up order and as to the creditors of the company. He has also given evidence, confirmed by the liquidator, that he has responded to the liquidator's request for information. His evidence and the evidence of Mr Robertson, in his affidavit of 14 December 2009, indicates that the principal creditors of the company falling within the category of current liabilities have now all been paid. 7 In the case of the liquidator, Mr Wong's solicitor holds an amount $85,025 in a controlled moneys account established for the purposes of these proceedings, and undertakes to the Court to pay the liquidator's fees and expenses from that account upon the making of an order under s 482. The liquidator's evidence is that his fees and disbursements to date amount to about $55,000, and there is an estimated further amount of about $15,000 in legal fees. Therefore the amount held in the controlled moneys account will be sufficient to cover the liquidator's fees and disbursements and legal costs. In addition, Mr Wong, on behalf of the company, will indemnify the liquidator in respect of expenses incurred in the period of the liquidation and subsequent to the liquidation. 8 By far the largest creditor of the company, according to Mr Robertson's financial statements, is Chongqing, to which the defendant has two long term liabilities as at 30 September 2009, namely, a loan of $3,004,919.86 and an amount payable of $413,063. That is almost all of the long term liabilities apart from a car lease. Chongqing has executed a deed of subordination in respect of those amounts and the company undertakes to execute that deed upon the making of an order under s 482. The deed, on its face, purports to subordinate all moneys owing to Chongqing by the company to all other debts owed by the company. 9 The position is, therefore, that the creditors of the company have been paid except in the case of Chongqing, whose debt is subordinated, and in the case of the motor vehicle lease, the lease will continue in the hands of the company after the order is made. 10 All persons substantially interested in this application have been notified and there is no objection from anyone. The liquidator acquiesced in the Court making an order if the Court is satisfied of the company's solvency, as it is on the evidence tendered today. 11 The only other creditor whose claim has not been paid is Mr Wong, who is the applicant, and his claim is for a small amount. The evidence indicates that the company receives dividend income each year sufficient to pay his fees. 12 I am persuaded that the interests of the liquidator will not be impaired by the making of the termination order and that is in the interests of the shareholders that the winding up be terminated. This is because the assets of the company are shares in subsidiary companies which are primarily foreign entities. If the company is liquidated there is a real risk the liquidator will not be able to realise such assets for their true value. As to the public interest, the circumstances in which the company came to be wound up, as described above, are not reflective of mismanagement of the company by the directors, and therefore it seems to me there is no public interest precluding the termination order being made. 13 I have therefore decided to make the termination order, subject to receiving the company's undertaking to execute the subordination deed, and banned to see to the payment of the liquidator's fees and expenses, and to indemnify the liquidator in respect of other expenses incurred in the period subsequent to his appointment. I make the order in the handwritten document which I now initial and date for identification. I note those undertakings. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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