Court dismisses application to terminate the winding up of a company
In the decision of Re Gulf Aboriginal Development Company Ltd [2021] QSC 310, the Queensland Supreme Court (Freeburn J) dismissed an application to terminate a winding up order after concerns were raised about the viability of the company. This case helps to understand the Court’s limits when exercising the discretion to revive a company.
Background
In February 1997, Century Mining Ltd (Century) entered an agreement with the State of Queensland and four different Native Title groups. Under this agreement, Century was required to make payments for the benefit of the Native Title groups in certain proportions.
The agreement contemplated that Gulf Aboriginal Development Company Limited (Gulf) would receive and distribute these payments on behalf of the Native Title groups. Gulf received administration fees from Century and also played a lobbying role, representing any cultural or environmental concerns of the Native Title groups.
The evidence before the Court was that in the years prior to liquidation, Gulf had poor management practices and failed to represent the Native Title groups in a meaningful way. They began to incur considerable losses from 2013 and their income almost exclusively came from Century.
The Court raised significant concerns with how Gulf operated. Gulf’s status as a charity was revoked in 2016 (backdated to 2013) following a review of their governance practices by the Australian Charities and Not-for-Profits Commission. The Court also outlined how Gulf’s directors spent large sums of money on things like flights and accommodation, but without a clear benefit to members. They also did not keep records of all transactions, as required to do so.
As a result of this mismanagement, the Native Title groups who were parties to the agreement resolved that they do not wish to be represented by Gulf and that Gulf should no longer be receiving payments on their behalf.
By the time a liquidation order was made on 28 November 2019, Gulf had amassed debts of over $600,000, as well as a debt owed to the Australian Taxation Office of $44,590.
Gulf in liquidation
Once Gulf was placed in liquidation, there was only $40,133 in assets, which was entirely consumed by the liquidator’s remuneration and expenses as well as legal fees and the petitioning of the creditor’s costs.
The creditors resolved to enter a deed of company arrangement (DOCA). This DOCA split the creditors into two classes. The first class of creditors were the ordinary creditors who were entitled to receive a dividend in the ordinary way and in accordance with priorities, as would be the case in a winding up, and their debts would be discharged once a dividend was received. On the Court’s calculation, the payment to ordinary creditors totalled $93,000 and represented a payment to each ordinary creditor of approximately 28.62 cents in the dollar.
The second group were the subordinated creditors who were entitled to subsequently recover their deferred debts and remained entitled to 100 cents in the dollar under the DOCA. The subordinated creditors subsequently executed a deed poll agreeing to reduce their debts to 20% of their admitted amounts, to operate in the event that the Court made an order terminating the winding up. This would equal $60,000.
Should the winding up order be terminated?
The liquidator brought an application asking the Court to terminate the winding up order under section 482(1) of the Corporations Act 2001 (Cth).
In such an application, the onus is on the applicant to make out a positive case that favours the terminating of the wind-up order. The application was made in circumstances where:
- the Native Title groups were against the application and had made other arrangements to receive payment from Century directly;
- allegations of fund mismanagement by directors had not been properly investigated; and
- there was no independent report about the solvency of the business.
The evidence also was that:
- Gulf would have little income other than an uncertain entitlement to the Century administration payments as Century was proposing to continue paying these to the Native Title groups directly; and
- the company would also be indebted to creditors for $60,000 with assets of only $35,000, meaning Gulf would automatically be insolvent if winding up was terminated.
The liquidator had provided evidence that the former management of Gulf had been removed and that they would start again under new management. The Court held that this was a neutral factor but that the absence of an independent business plan meant that Gulf’s revival would lead to considerable uncertainty.
On weighing up the factors, the Court held that the winding up should not be terminated.
This case illustrates some of the factors that will be taken into consideration when deciding whether to terminate a winding up order and that courts will be hesitant to revive companies that will be insolvent after revival.
