Supreme Court New South Wales Medium Neutral Citation: In the matter of Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439 Hearing dates: 26, 27 March 2014 Decision date: 27 March 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Upon the undertaking of Michael John Welsh to the Court to contribute to the company upon termination of the winding up the sum of $20,000 by way of equity capital, pursuant to Corporations Act, s 482, the winding up of Glass Recycling Limited (in liquidation) be terminated with effect from 28 March 2014. Catchwords: CORPORATIONS - external administration - winding up - termination of winding up - factors informing court's discretion - held, court must be satisfied that state of affairs that required company to be wound up no longer exists, and that it is reasonable in the interest of potential future creditors and the public to return its control to the directors - while strictures applicable to rebuttal of presumption of insolvency do not apply, more than "bare solvency" is required. Legislation Cited: (Cth) Corporations Act 2001, s 482 Cases Cited: Anderson v Palmer [2002] NSWSC 192 Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 Dubolo Pty Ltd (t/as Fender Signs) v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723 Expile Pty Ltd v Jabbs Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 In the Matter of 311 Hume Highway Liverpool Fund Pty Limited (in liquidation) [2013] NSWSC 465 In the matter of Kitchen Dimensions Pty Ltd (in liquidation) [2012] VSC 280 In the Matter of TMPL Pty Limited (in liquidation) [2012] NSWSC 1059 Krextile Holdings Pty Ltd v Widdows [1974] VR 689 Mercy and Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70 Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 Re Data Homes Pty Ltd [1972] 2 NSWLR 22 Re Kitchen Dimensions Pty Ltd (in liq) [2012] VSC 280 Re Skay Fashions Pty Ltd (in liq) (1986) 10 ACLR 743 Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 Re Warbler Pty Ltd (1982) 6 ACLR 526 Re Yeling Group Pty Ltd [2012] NSWSC 74 Vero Workers Compensation (NSW) Limited v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103 Von Riesefer v Main Freight International Pty Ltd [2009] VSCA 129; (2009) 73 ASCR 427 Category: Principal judgment Parties: Michael Welsh (plaintiff) Glass Recycling Pty Ltd (in liq) (defendant) Representation: Counsel: M Rosenblatt (solicitor) (plaintiff) Solicitors: M Rosenblatt (solicitor) (plaintiff) File Number(s): 14/ 55587 Judgment 1On 27 March 2014, the Court ordered that, upon the undertaking of Michael John Welsh to the Court to contribute to the company upon termination of the winding up the sum of $20,000 by equity capital, pursuant to (Cth) Corporations Act 2001, s 482 the winding up of Glass Recycling Pty Limited (in liquidation) be terminated with effect from 28 March 2014. These are the reasons for which that order was made. 2The plaintiff Michael Welsh and his wife Constantina Welsh have, since 10 December 1979, been the directors of the company Glass Recycling Pty Limited. Mr Welsh holds 13 and Mrs Welsh 4 of the 17 issued shares. 3From its incorporation in 1976, the company was in the business of glass recycling. More recently it ventured into property development, and in about 2005 commenced the subdivision and development of land, which it had purchased in 2001, at Badgally Road, Campbelltown. It sought to market the property in 2008, but did not achieve anticipated sales, and defaulted under its loan facility with the secured lender St Laurence Lending Limited ("St Laurence"). 4On 26 September 2011, Vaughan Neil Strawbridge and Neil Robert Cussen of Deloittes were appointed joint and several liquidators of the company pursuant to a special resolution of members, in a creditors' voluntary winding up. 5The land was initially estimated to be worth $4.5 million, but was ultimately sold on 1 May 2013, for $3.7 million. Otherwise, the company had sundry debtors of $51,589, and plant and equipment including motor vehicles and other assets, which ultimately realised $47,500. During the liquidation, rent was received in respect of the property, from a related entity, of $369,000. 6St Laurence held a registered fixed and floating charge over the company, securing an amount of approximately $14,459,729, which Mr Welsh had also personally guaranteed. Campbelltown City Council was owed outstanding rates, and the New South Wales Office of State Revenue was owed $49,444 (apparently for land tax). The unsecured creditors were Abelitis Solicitors for $8,590, Lilliendal Civil Pty Ltd for $216,203, and Thomson Hall Accountants for $31,735. 7The proceeds of sale of the Badgally Road were applied in partial satisfaction of St Laurence's claim as secured creditor, and the Office of State Revenue and Campbelltown City Council were also paid out. There was no dividend for unsecured creditors. 8Pursuant to Corporations Act, s 533, as there was a distribution to creditors of less than 50 cents in the dollar, the liquidators lodged a confidential report with the Australian Securities and Investments Commission in March 2012. ASIC has since advised that it does not intend to commence an investigation into the matters raised in the report. The liquidators have investigated whether there are any offences, voidable transactions or insolvent trading claims available and did not identify any offences committed by the directors or any voidable transactions. They also concluded that on balance it did not appear that the company was trading while insolvent. They did, however, form an opinion that the company had failed to maintain adequate financial records. 9The liquidators have not formally expressed a view as to the reason for the failure of the company, but it appears to have been attributable to its unsuccessful property development adventure. 10By originating process filed on 21 February 2014, Mr Welsh sought an order pursuant to Corporations Act, s 482 terminating the winding up. The directors wish to have the winding up terminated and the company returned to their control, in order to resume trading in the glass crushing and recycling business, and to take advantage of the substantial operating losses that appear to be available in the company and could be applied against future profits for tax purposes. The directors have no current intention that the company would again engage in property development. 11The liquidators have advised that they neither support nor oppose the application to terminate the winding up. The liquidators convened a final meeting of members and creditors, which was adjourned at the request of the directors to 24 February 2014. It was then further adjourned to 4 April 2014, to permit the present application to be heard and determined. 12Of the creditors, St Laurence and Lilliendal are now in liquidation. The directors engaged a consultant to negotiate compromises of their outstanding debts for $10,000 and $20,000 respectively, and Mr Welsh contributed the sum of $30,000 to fund those settlements. The liquidator of St Laurence has indicated that he has no objection to the winding up being terminated, and that upon payment of $10,000 the company's debt to St Laurence, and the liability of the guarantors, is extinguished. The liquidator of Lilliendal has agreed to release its claims upon payment of the sum of $20,000. On 24 March 2014, the creditors of Lilliendal approved the compromise of the debt owed to it by Glass Recycling and the liquidators of Lilliendal executed the Deed of Release. Thomson Hall has agreed to release its claim, as has Abelitis. 13The directors informed ASIC of the proposed application and requested that ASIC indicate whether it had any opposition or wished to be heard. ASIC asked to be provided with a copy of the application and an opportunity to consider it. By letter dated 11 March 2014, ASIC advised that it considered the matter one properly left for the determination of the Court and that it did not propose to intervene in the proceedings or to seek leave to appear. 14After payment of liquidators' remuneration, there appears to be about $4,795.00 assets remaining in the administration. 15The considerations that inform the exercise of the Court's discretion to terminate a winding up pursuant to Corporations Act, s 482, have been referred to in many cases [for example, Re Warbler Pty Ltd (1982) 6 ACLR 526; Mercy and Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70, [47]ff; Anderson v Palmer [2002] NSWSC 192, [6]; Vero Workers Compensation (NSW) Limited v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103, [17]; Re Yeling Group Pty Ltd [2012] NSWSC 74, [8]-[11]; In the Matter of TMPL Pty Limited (in liquidation) [2012] NSWSC 1059, [10]; In the Matter of 311 Hume Highway Liverpool Fund Pty Limited (in liquidation) [2013] NSWSC 465, [4]]. They include: * The attitude and interests of the creditors, including future creditors whose interests might be prejudiced if the company were released from winding up; * The interests of the liquidator, particularly with regard to remuneration; * The interests of contributories, so that a stay or termination will not generally be granted unless each member either consents to it or is bound not to object to it, or his or her rights are properly secured; * The public interest, including matters of commercial morality, and whether all the company's debts have been discharged; * The company's trading position and general solvency; and * Any explanation for any non-compliance with statutory duties and of the circumstances leading to the winding up. 16The relevant considerations were summarised by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526, as follows (at 533): 1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay: Re Calgary & Edmonton Land Co Ltd (in liq) [1975] 1 WLR 355 at pp 358-9 per Megarry J. See also s 243 of the Act [ie Companies Act 1961]. 2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this: Re South Barrule Slate Quarry Co (1869) LR 8 Eq 688; Re Bank of Queensland Ltd (1870) 2 QSCR 113. 3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Krextile Holdings Pty Ltd v Widdows, (above) [[1974] VR 689]; Re Data Homes Pty Ltd, (above) [[1971] 1 NSWLR 338]; Law of Company Liquidation (above) at p395. 4. The attitude of creditors, contributories and the liquidator is a relevant consideration: s 243(1); Re Calgary & Edmonton Land Co Ltd (in liq), (above). 5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding up is sought: In re a Private Company [1935] NZLR 120; Re Mascot Home Furnishers Pty Ltd [1970] VR 593 at 598. 6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd, (above) [[1903] 2 Ch 174]. 7. The general background and circumstances which led to the winding up order should be explained: Krextile Holdings Pty Ltd v Widdows, (above). 8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to "commercial morality" or the "public interest": Krextile Holdings Pty Ltd v Widdows, (above). 17The list is non-exhaustive, as has been emphasised in Dubolo Pty Ltd (t/as Fender Signs) v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723, 725; Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160, [5]; and Von Riesefer v Main Freight International Pty Ltd [2009] VSCA 129; (2009) 73 ASCR 427, 438. 18Essentially, on such an application, the Court must be satisfied, first, that the state of affairs that required that the company be wound up no longer exists. Where the winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent. This is usually the most significant consideration [Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797, [24]]. Thus it has been said that an order terminating the winding up would usually be made if all the creditors are paid out, the liquidators' costs and expenses are covered, and the members agree [Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84, [58]; Re Kitchen Dimensions Pty Ltd (in liq) [2012] VSC 280]. 19However, the factors to which the cases refer demonstrate that more is necessary than merely establishing that the state of affairs that required the company to be wound up no longer exists. This appears from, inter alia, the references to "commercial morality" as a relevant consideration, and also from references to the interests of future as well as extant creditors. These factors illustrate that the second broad consideration that informs the exercise of the Court's discretion - once satisfied that the state of affairs that originally required winding up no longer exists - is that it would be reasonable to entrust the affairs of the company, once again, to the directors, under whose management it previously failed. 20While there are cases in which it has been pointed out that, in the absence of an order disqualifying them from continuing to carry on business through a new entity, the same directors could simply incorporate another company to do so [see, for example, In the matter of Kitchen Dimensions Pty Ltd (in liquidation) [2012] VSC 280, [38]], the persistent reference in the cases to matters such as commercial morality and other considerations that relate to the future conduct of the company's affairs demonstrate that, where the Court's discretion to terminate a winding up is invoked, it seeks some comfort that such a state of affairs is not likely to recur in the foreseeable future. This concern with the future conduct of the affairs of the company is manifest from cases such as Re Data Homes Pty Ltd [1972] 2 NSWLR 22, 27 (where Mason JA was concerned that while a company was perhaps technically solvent due to an agreement with its creditors, its liabilities nonetheless greatly exceeded its assets) and Krextile Holdings Pty Ltd v Widdows [1974] VR 689, 695 (in which Gillard J referred to the circumstance that the company could continue its business "without any risk to any creditor or any other person"). These cases were considered by Judd J in Kitchen Dimensions (at [28]), where his Honour identified their focus as, broadly, "the likely impact on future creditors". 21In Re Skay Fashions Pty Ltd (in liq) (1986) 10 ACLR 743, Tadgell J observed (at 746) (emphasis added): It is a clear axiom that insolvent companies should be wound up and that they should stay in liquidation unless solvency can be demonstrated. If solvency could be demonstrated here, it would be no more than bare solvency. ... 22Accordingly, on an application of this kind, the Court requires that there be evidence that demonstrates not only that the company is, but also that it is likely to remain, solvent. Because on such an application the company is not involved in rebutting a presumption of insolvency, the strictures of cases such as Expile Pty Ltd v Jabbs Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711, to the effect that a company seeking to establish solvency must lead the fullest and best "evidence" of the company's financial position do not apply in their full rigour. But as Barrett J (as his Honour then was) observed in Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 (at [3]), a central question is: Whether the company's financial health is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. A capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is central to the inquiry. 23Sometimes solvency may be demonstrated, without resort to expert evidence, by proof of the actual balance sheet position of the company. So called expert accountancy evidence, when it amounts to no more than an opinion that on the state of the balance sheet the company is solvent, adds nothing. Where the future plans of the company are not mature, it may not be possible to produce, or reasonable to expect, cash flow predictions demonstrating solvency for the foreseeable future. However, where a company is intended to resume trading (and, therefore, presumably to incur debts) and it is only "barely" solvent in the sense that it has a "zero" balance sheet, with no liabilities but virtually no assets, the Court could have no confidence that it would not once again become insolvent as soon as it incurred its first debt. 24That was the state of affairs in this company when the application first came before the Court: the funds remaining in the liquidation were less than $5,000, and may in any event have been required to meet further liquidation expenses; and though the debts had been released this left, in substance, nothing more than a shell to be restored to the directors. 25In addition, I was concerned that in an early liquidator's report reference was made to potential claims by the directors for amount due on directors' loan accounts; and it was also observed that, had there been insolvent trading claims available, there would have been little utility in pursuing them as the directors' assets would have been exhausted by their liability on the guarantee to St Laurence. Thus I was concerned that it was not clear that the directors did not themselves remain creditors of the company (in which case it would have remained insolvent), and that there was a risk that in the foreseeable future they would be bankrupted on their personal guarantees of the St Laurence debt. 26However, while the matter was adjourned, additional evidence was adduced. First, and most significantly, Mr Welsh undertook to contribute $20,000 equity to the company. As I have said, at this early stage it is not possible to know with any degree of certainty what the future trading pattern of the company will be. However, a contribution of $20,000 provides some comfort that it will have assets with which to satisfy liabilities that may be incurred in the short term. This contribution moves the state of affairs from one of "bare solvency" to one in which the company has demonstrated solvency in substance. 27Secondly, Mr Welsh confirmed that neither he nor his wife was a creditor of the company. Finally, he pointed out that the release by the liquidator of St Laurence extended to the guarantors as well as to the company. 28I was therefore satisfied that the company was no longer insolvent, and that it is reasonable, having regard to the interests of potential future creditors and to the public interest, that the company be returned to the control of its directors. 29For those reasons, the Court ordered that, upon the undertaking of Michael John Welsh to the Court to contribute to the company upon termination of the winding up the sum of $20,000 by way of equity capital, pursuant to Corporations Act, s 482, the winding up of Glass Recycling Limited (in liquidation) be terminated with effect from 28 March 2014. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 April 2014