Supreme Court New South Wales Medium Neutral Citation: In the matter of Classic Corporation Pty Ltd [2016] NSWSC 1627 Hearing dates: 17, 31 October 2016, and 2, 14 November 2016 Date of orders: 18 November 2016 Decision date: 18 November 2016 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Winding up terminated upon undertaking to subscribe share capital. Direction for convening of meeting to elect directors. Catchwords: CORPORATIONS – external administration – winding up – termination of winding up – whether condition requiring company to go into liquidation no longer exists – where voluntary winding up and no interested person opposes termination – where balance sheet solvency barely if at all established – where applicants offer to subscribe share capital – commercial morality – where directors withdrew support when faced with claim against company but reinstated support when claim resolved – where no other claims against company – held, winding up terminated upon undertaking to subscribe share capital – direction for meeting to elect directors prior to reinstatement where current director has not consented to resume office Legislation Cited: (CTH) Corporations Act 2001, s 482, s 511 (NSW) Supreme Court (Corporations) Rules 2001, r 2.8 Cases Cited: Carter v New Tel Ltd (in liq) (2003) 44 ACSR 661; [2003] NSWSC 128 Glass Recycling Pty Ltd, Re [2014] NSWSC 439 McAusland v Deputy FCT (1993) 47 FCR 369; 118 ALR 577; 12 ACSR 432 McKern v Pacific Edge Corp Pty Ltd (in liq) (2004) 51 ACSR 602; [2004] NSWSC 1150 Pine Forests of Australia (Canberra) Pty Ltd, Re [2010] NSWSC 1127 Category: Procedural and other rulings Parties: IJG Group 2 Pty Limited (first plaintiff) Architectural Aluminium Systems Pty Limited (second plaintiff) Classic Corporation Pty Limited (in liq)(first defendant) David Solomons (second defendant) Riad Tayeh (third defendant) Cinzia Hanna (fourth defendant) Lillian Hanna (fifth defendant) Representation: Counsel: Mentioned (plaintiff) T Hall (solicitor) (fourth and fifth defendants) Solicitors: Lexes Lawyers (plaintiffs) Hall Partners (fourth and fifth defendants) File Number(s): 2015/ 164680 Judgment 1. HIS HONOUR: On 19 February 2015, the first defendant company Classic Corporation Pty Limited ("Classic") resolved that it be wound up, and the second and third defendants Mr Solomon and Mr Tayeh were appointed its joint and several liquidators. Their appointment was confirmed at a creditors' meeting on 9 March 2015. 2. The shareholders in Classic were and remain the fourth defendant Cinzia Hanna and her sister-in-law the fifth defendant Lillian Hanna. They were also the directors until 7 October 2014, when they were replaced by John Richard Bates. 3. Classic did not trade. Its sole asset of significance was industrial land at Greenacre. Its liabilities included an alleged liability to Cinzia and Lillian Hanna of $1,763,591, said to be secured by mortgage on the Greenacre property, in respect of moneys allegedly advanced by them to Classic, including to fund the purchase of the Greenacre property; and a debt of $841,500 to Hannas Contracting Services Pty Ltd, a related corporation. In addition, the plaintiffs IJG Group 2 Pty Limited and Architectural Aluminium Systems Pty Limited claimed to have rights in respect of the Greenacre property arising under an option agreement to acquire the property for a price of $1.3 million, for which they had paid an option fee – which they contended had transmogrified into a deposit – of $130,000. Classic disputed that it had any such liability, contending that the option agreement had lapsed. 4. The liquidators proceeded to have the Greenacre property listed for sale by auction in April 2015, but in the face of a threatened application by the plaintiffs for an injunction, the sale was deferred. Then, on 22 May 2015, the liquidators disclaimed the option agreement. On 3 June 2015, the plaintiffs commenced the substantive proceedings, in which they sought to have the disclaimer set aside and the option agreement specifically enforced, and alternatively to recover the $130,000 they had paid. They also challenged the secured claims of Cinzia and Lillian Hanna, contending that they did not hold valid security having priority over the plaintiffs' claim, or if they did that it was not for the amount they asserted; the plaintiffs disputed that Cinzia and Lillian had in fact advanced funds to Classic as they claimed, and that their mortgage was a sham. 5. The substantive proceedings were, after several robustly contested interlocutory disputes, referred for mediation, and were ultimately settled by an agreement made on 27 July 2016. Consent orders disposing of the substantive proceedings were provided to the Court on 10 October 2016 and will be made contemporaneously with the disposal of the present application. 6. The terms of settlement include agreement by all parties that the fourth and fifth defendants may apply to have the winding up of Classic terminated. The shareholders now no longer wish to have the Greenacre property sold in its present condition, but to develop it before sale. Essentially to enable that, they apply by interlocutory process filed on 10 October 2016 for the termination, pursuant to (CTH) Corporations Act 2001, s 482, of the winding up. 7. Section 482 does not apply of its own force and effect to a voluntary winding up, but is made applicable pursuant to Corporations Act, s 511(1)(b), which empowers the court to exercise, in a voluntary winding up, any power which it could exercise if the company was being wound up by a court order. [1] On an application for termination of a winding up, the court ordinarily needs to be satisfied that the circumstances which warranted or required that the company be wound up no longer obtain (which typically includes satisfaction that the company is and is likely to remain solvent), and that the company can safely be returned to the management of its directors (which conventionally includes consideration of questions of commercial morality). [2] 8. The circumstances in which the company went into liquidation are that, faced with the threat of litigation by the plaintiffs to enforce their claim, the shareholders and director consulted lawyers and an insolvency practitioner. The company had no source of income; the shareholders were not prepared to fund the costs of the anticipated litigation, which they expected would be substantial; and they desired that the Greenacre property be sold and the proceeds realised and distributed. They say that they were advised by the insolvency practitioner that in those circumstances the company was insolvent and must be placed in external administration, and that it was on that advice that it was resolved that the company be wound up. I must say that this is somewhat surprising: as the company was not trading, it would not incur debts in contravention of s 588G; and as the only creditors were the shareholders and a related corporation, there was no obvious requirement for the company to be placed into external administration. 9. The Greenacre property is now valued at $2.36 million (as per an offer for purchase received on 30 June 2016). Hannas Contracting has forgiven its debt. Cinzia and Lillian have funded the settlement with the plaintiffs (and thereby increased their secured debt), but have agreed to forgo their debt to the extent that it exceeds the value of the security property. On that basis, the company has fixed assets of $2.36 million, and a secured liability over its only asset to Cinzia and Lillian for an equivalent amount. 10. The circumstance that the winding up was a voluntary and not a compulsory one renders the task of the applicants less onerous. That the applicants are also the only remaining creditors also weighs in support of their application. In short, every person or entity who has any present interest in the company supports the termination of the winding up. 11. However, that is not conclusive; the court would not normally terminate the winding up of a company that was not solvent. A member of the liquidators' firm has prepared a "Solvency Report" dated 28 September 2016, which concludes that the company is not insolvent. As I indicated when the matter came before the court on 17 October 2016, if this is correct, then it is only barely technically so: the net assets were nil, with the property being encumbered by a mortgage to Cinzia and Lillian to the full extent of its value, and the company had no other assets. Thus as soon as the company incurred a debt, it would be insolvent. In those circumstances, I was not prepared to terminate the winding up. [3] That was all the more so where the shareholders, in their capacity as secured creditors, would have priority over any unsecured creditors to the proceeds of the company's only asset. 12. Since then, the applicants have indicated that they are prepared to subscribe $100,000 in share capital. This would then provide a fund from which the company could meet liabilities as they are incurred. In addition, they are contemplating converting their loan accounts into equity. If they proceed with a development of the property and raise finance from a lender to fund it, they will presumably either have to convert their loans to equity, or at least postpone their security to that required by the financier. I have given close consideration to whether a term should be imposed requiring them to convert their loans to equity, but have concluded that it is unnecessary to go so far – sufficient protection for unsecured creditors will be provided by the subscription of $100,000 fully-paid share capital, and financiers of any development project will be in a position to insist on terms they consider adequate for their own protection. 13. I have not been untroubled by questions of commercial morality. Where directors and members of a company have deliberately decided to withdraw their support for the company when faced with a contentious claim, and to seek the protection of liquidation, courts should not too readily accede to applications to restore them to their former position once the threat passes. However, the practical effect in this case is that if the liquidation is not terminated, then the liquidator will sell the property and distribute the proceeds to Cinzia and Lillian as secured creditors; whereas if the liquidation is terminated, the company will instead develop the property before sale, with the net proceeds ultimately being distributable to the same individuals, whether as secured creditors or contributories. In circumstances where the substantive litigation has been settled, there is no good reason to deprive the applicants of the potential benefits of having the property developed before sale, where the interests of potential unsecured creditors will be adequately protected by the subscription of capital of $100,000.. 14. It is not proposed that Mr Bates resume acting as a director, but that Lillian be appointed in his place. Mr Bates appears to have become a director as part of the response to the plaintiffs' claim, so as to have a director "independent" from the secured creditors. In any event, there is no evidence of any consent on his part to continue to act upon reinstatement of Classic. Corporations Act, s 482(3) provides that where the Court has made an order terminating a winding up, it may give such directions as it thinks fit for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members to elect directors to take office upon the termination of the winding up. Such an order can be made, requiring election of directors before the date of reinstatement, even where there is a remaining director in office whose powers would otherwise be revived by reinstatement. [4] 15. Under (NSW) Supreme Court (Corporations) Rules 2001, r 2.8, notice of an application under s 482 must, unless the court otherwise orders, be given to ASIC. As no such notice was initially given, and absent any submission or reason for dispensing with the requirement, on 2 November 2016, I adjourned the proceedings to 14 November and made directions, which have now been complied with, for joinder of and service upon ASIC. ASIC has now indicated that it does not propose to appear or make submissions, and regards the matter as appropriately left to the Court. 16. Accordingly, subject to the subscription of $100,000 fully-paid share capital, there is no reason why this company must remain in liquidation. There are no outstanding claims against it, save for those of Cinzia and Lillian. With the contribution of $100,000, and with their claim as secured creditors limited to the value of the security, the company will have sufficient resources to meet foreseeable liabilities as they fall due. 17. In the substantive proceedings, the Court notes the matters recorded in notations A, B, C, D, E and F of the document entitled "Short Minutes of Consent Orders and Notations" signed by the solicitor for the plaintiffs, initialled by me, dated this day and placed with the papers, and by consent orders that: 1. The proceedings be dismissed, with no order as to costs to the intent that each party bear its own costs. 1. On the interlocutory process filed on 10 October 2016, upon the undertaking of the applicants Cinzia Hanna and Lillian Hanna that they will (a) limit their claim as creditors of the company to the value of the security property, and (b) within 28 days subscribe $100,000 in fully-paid share capital in the company, the Court orders that: (2) Pursuant to (CTH) Corporations Act 2001, s 482(1) and s 511(1)(b), the winding up of Classic Corporation Pty Limited ACN 157 681 055 be terminated on 25 November 2016; (3) Pursuant to (CTH) Corporations Act 2001, s 482(3), a meeting of the members of the company be convened by one day's notice in writing by the applicants, to be held on 24 November 2016, to elect a director or directors to take office upon termination of the winding up; (4) Pursuant to (CTH) Corporations Act 2001, s 482(5), the applicants lodge a copy of this order with ASIC by 2 December 2016; (5) The applicants lodge with my associate an affidavit proving compliance with undertaking (b) and order (3) above by 16 December 2016. ********** Endnotes 1. Carter v New Tel Ltd (in liq) (2003) 44 ACSR 661; [2003] NSWSC 128; McKern v Pacific Edge Corp Pty Ltd (in liq) (2004) 51 ACSR 602; [2004] NSWSC 1150. 2. Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [15]-[18]. 3. Cf Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3]. 4. McAusland v Deputy FCT (1993) 47 FCR 369; 118 ALR 577; 12 ACSR 432. 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: 18 November 2016