Liquidation: When to terminate?
In the case of Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq)  VSC 577 the Supreme Court of Victoria considered the issue of when a liquidation may be terminated.
The defendant, Charterarm Investments Pty Ltd (Company), a small building company, was wound up pursuant to a creditors petition on 22 September 2010. The Company was effectively the persona of its sole director (Director). On 28 April 2011, Comsport Pty Ltd, a shareholder of the Company, applied to the Court for the termination of the winding up of the Company under s 482(1) of the Corporations Act 2001 (Cth).
Prior to entering into liquidation, the Company had commenced proceedings in the Victorian Civil and Administrative Tribunal (VCAT) seeking payment of $358,000 it was owed from a construction job. Despite the appointment of liquidators to the Company, the Director continued the VCAT litigation on the Company’s behalf.
In determining whether to exercise its discretion under s 482, the Court may consider a range of factors, including:
- whether the Company was sufficiently solvent that future creditors would be protected; and
- whether the conduct of the Company had been contrary to “commercial morality” and the “public interest”.
The evidence was that the Company was technically solvent. The debt that was owed to the petitioning creditor, had since been paid. However, Ferguson J accepted that the Company’s past performance was the best indicator of how it would perform in the future. It was clear that the Company’s prior history in complying with taxation and other statutory obligations was, at best, patchy.
Her Honour then turned to the issue of whether it was in the public interest to terminate the winding up. The Court had regard to issues of commercial morality and refused to terminate the winding up, making particular reference to:
- the Director’s conduct in continuing the VCAT proceeding on behalf of the Company after the liquidation began;
- the Director’s conduct in failing to provide all requested books, records and information to the liquidator; and
- the Company’s history of failing to comply with statutory obligations, such as tax and employee superannuation payments.
Her Honour commented that it was no excuse for the Director to claim that he did not understand his obligations in respect of the liquidation, stating that he should have inquired as to the exact limits of his power during the liquidation.
This case reiterates that a failure by a director to appreciate his/her obligations and powers in relation to a company in liquidation is no excuse.
Moreover, even though the Court found that the Company was technically solvent, the historical performance of the Company in complying with its statutory obligations was a key factor in refusing to terminate the winding up.