No Second Chances: Court Discretion To Revive Companies In Winding Up - Insolvency/Bankruptcy

This week's TGIF considers the recent ruling of the Queensland Supreme Court in Re Gulf Aboriginal Development Company Ltd [2021] QSC 310, where the Court dismissed an application to terminate the winding up of Gulf Aboriginal Development Company Limited (Gulf).

Key Takeaways

In assessing whether to exercise the discretion to revive a company in liquidation, the Court may take into account the views of all stakeholders including the liquidator, any administrators, current creditors and creditors whose debts have been discharged in the course of the liquidation.
An important consideration is the company's future prospects. Where a company's debts have been paid and there is some prospect that the company will return to profitability, the Court may be prepared to revive a company. However, where the company will remain insolvent and there is no compelling evidence about positive future prospects, this will be a strong factor against revival.
Historical mismanagement of a company in winding up is an important factor telling against the revival of the company. In the absence of cogent evidence about previous mismanagement or a business plan for future management, the mere replacement of old management with new management is unlikely in itself to weigh in favour of revival.

Background

In February 1997, Century Zinc Ltd (Century) (now called Century Mining Ltd) entered an agreement with the State of Queensland and four native title groups: the Waanyi peoples, the Mingginda peoples, the Gkuthaarn peoples and the Kukatj peoples (the Native Title Groups). Under that agreement, Century was required to make certain payments for the benefit of the Native Title Groups in set proportions.

The agreement contemplated that Gulf would be created, and would receive and distribute the payments on behalf of the Native Title Groups. In that role, Gulf received administration fees each year from Century. While Gulf also had various other functions including lobbying for and protecting the interests of the Native Title Groups, the extent to which Gulf actually performed those roles was not clear from the evidence.

There was evidence before the Court that, in the financial years prior to Gulf falling into liquidation, Gulf had poor performance, poor governance and a failure to actively represent the Native Title Groups in a meaningful way. Gulf incurred considerable losses from at least 2013 and its income derived almost exclusively from Century.

The agreement between the Native Title Groups and Century empowered each Native Title Group to elect a different representative body to receive the moneys payable from Century instead of Gulf. Before Gulf fell into liquidation, a meeting of the Waanyi Native Title Aboriginal Corporation (which is entitled to receive 60% of the payments from Century) unanimously voted in favour of the payments being paid directly to Waanyi's eligible bodies, rather than through Gulf as an intermediary.

Following the liquidation of Gulf, it was unanimously resolved at community meetings of the Gkuthaarn, Kukatj and Mingginda native title groups that Gulf should no longer represent them for the purposes of the agreement with Century. Century and the Native Title Groups had been operating without the services of Gulf as an intermediary since that time.

Gulf in liquidation

In November 2019, the company was ordered to be wound up in insolvency. Its creditors totalled roughly $645,000 and there was only about $40,000 in assets (which was entirely consumed by the liquidator's fees and expenses). The liquidation was affected by the lack of cooperation from directors and the lack of proper records for the company's transactions.

By a slight majority in number and amount, the creditors resolved to enter a Deed of Company Arrangement (DOCA). Under the DOCA, the creditors were divided into 'subordinated', and 'ordinary' creditors. The ordinary creditors 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. The amount of $93,000 was available to ordinary creditors, and resulted in a payment to ordinary creditors of approximately 28.62 cents in the dollar.

The subordinated creditors, who comprised related companies, 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, reducing Gulf's remaining debts to $60,000, which was a 'significant sum' in the context of this company.

Applicable law

The liquidator brought an application asking the Court to terminate the winding up under section 482(1) of the Corporations Act 2001 (Cth), which provides: 'At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.'

An order to stay or terminate a winding up is a discretionary matter for the Court. In exercising its discretion the court will take into account factors including, among others:

the attitude of creditors, contributories and the liquidator;
the trading position and solvency of the company;
any non-compliance by directors with the duties to give information or furnish a full statement of affairs;
the background leading up to the winding up; and
the business of the company, particularly whether the conduct of the company was contrary to 'commercial morality' or the 'public interest'.

What did the Court decide?

The Court held that the applicant had the onus to make out a positive case for the exercise of the discretion in circumstances where, among other things:

the Native Title Groups, who were the intended beneficiaries of the payments from Century, were against the idea and had made other arrangements with Century which involved direct payments to the Native Title Groups;
before its demise, Gulf traded at a loss and the allegations of mismanagement had not been fully investigated; and
there was no independent report on solvency or a business or other plan which demonstrated that Gulf could trade profitably into the future (and so discharge the trailing A$60,000 debt).

The application was supported by the subordinated creditors and opposed by the ordinary creditors. Despite the fact that the ordinary creditors had had their debts discharged under the DOCA and were no longer creditors of the company, the Court held that the views of the ordinary creditors should be taken into account as relevant to the exercise of the Court's discretion.

Importantly, the Native Title Groups opposed the application. Each group had resolved that they no longer wished for Gulf to represent them under the agreement and they wished to deal with Century directly. His Honour held that the views of those Native Title Groups deserved considerable respect.

While the revival of Gulf would not preclude the Native Title Groups dealing with Century directly, Gulf would have little income other than an uncertain entitlement to administration payments from Century – payments which Century was proposing to continue paying to the Native Title Groups. Despite the deed poll entered by the subordinated creditors, the company would remain indebted in the amount of $60,000, with assets of only $35,000. If the liquidation was terminated, the company would remain insolvent. This was a 'factor of some significance'.

Finally, the applicant produced evidence that the former management of the company had been removed and, were the company to be revived, it would start again under entirely new management. The Court held that the new management was an entirely neutral factor. It did not assist or tell against the application. On the other hand, the failure to provide a detailed, expert or independent examination of the company's affairs or solvency, and the absence of a business plan for the future, meant that the revival of Gulf would lead to considerable uncertainty.

On weighing these factors, the Court held that the winding up should not be terminated. The Court refused to exercise the discretion and dismissed the liquidator's application.

Comments

The Court may take a broad range of factors into account in assessing whether to exercise its discretion to terminate a winding up and this discretion will be exercised having regard to the public interest. If the company is likely to remain insolvent after its revival, this will be a significant factor weighing against terminating the winding up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.