Sevior v Morgan [2012] VSC 480 (22 October 2012) : termination of winding-up, public interest, ‘commercial morality’, insolvent trading, section 482(1) Corporations Act 2001

November 1, 2012 |

In Sevior v Morgan [2012] VSC 480 Sifris J terminated a winding up  under section 482(1) of the Corporations Act 2001 (the “Act”). His Honour undertook a detailed a detailed consideration of public interest and commercial morality in the exercise of the court’s discretion.

 

FACTS

The company was incorporated on 7 September 1994 to operate the electrical business of Mr Sevior (“Sevior”).  It operated until 25 September 2009 after which time it entered into a license deed with two other companies and then ceased trading [5].  The liquidator, Mr Morgan, raised concerns about alleged Phoenix activity. On 11 December 2009 the company was placed into liquidation [6]. More than two years later Sevior proposed a deed of company arrangement [8].  In his report dated 11 April 2012, under section 439(A) of the Act, Morgan stated:

– there is a potential preference claim against the Deputy Commissioner of Taxation in the amount of $191,415;

– there is a potential claim against Mr Sevior in respect of director related transactions in the amount of $115,923;

– there is a possible claim against Mr Sevior for trading whilst insolvent in the amount of $283,153;

– Mr Sevior may have breached his duties as a director of the Company in various respects; and

– Mr Sevior may have engaged in alleged phoenix activity.

While Morgan referred his concerns about breaches of duty in Phoenix activity to ASIC it took no action and did not oppose the application. Sevior swore an affidavit that the creditors of the company had been paid and had accounted for the assets that he is assigned to another company. He also took steps to deal with the breaches of directors duties and alleged Phoenix activity [11].

 

DECISION

His Honour reviewed the authorities in summarising the principles applicable in terminating a winding up under section 482 (1) of the Act, which are notably:

  1. the solvency of the company is to be demonstrated by the applicants who bear the onus to do so by leading the ‘fullest and best’ evidence of the company’s financial position [14];
  2. the Court is unlikely to be persuaded to act on the evidence of a single director/shareholder without external confirmation. That confirmation is typically obtained either from the liquidator of the company, if he has carried out sufficient investigations so as to put himself in a position to express an informed opinion, or from the evidence of an external accountant (quoting QBE Workers’ Compensation Pty Ltd v P Russel Enterprises Pty Ltd)[14]
  3. regard not merely to the interests of creditors but to the public interest, including whether granting the order would be detrimental to commercial morality.  In that context the trading operations of the company had been ‘fair and above board’ and that there was not ‘an ugly side to the picture’ [14]
  4. considerations of commercial morality are not narrow.  There will be an investigation of misconduct in the affairs of the company and the pecuniary interests of existing and future creditors [14]
  5. commercial morality and public interest could be used to describe a situation where a company was perhaps technically solvent due to an agreement with creditors, but where its liabilities greatly exceeded its assets [17]
  6. A stay order will usually be made if all creditors are paid out, the liquidator’s costs and expenses are covered and the members agree. It may be accepted that there will be exceptional cases where it would not be appropriate to stay the winding up of a company simply because it is solvent [17].
  7. there may be a lack of commercial morality where an insolvent company fails to perform statutory obligations [17]

His Honour concluded his analysis stating, at [18]:

..the critical focus of the application is on the future of the company and in particular the risk of danger to future creditors. Previous issues of non-compliance and breach by a company and its directors are relevant to the intended future operation of the company, particularly where the breach or non-compliance is sufficiently serious or persistent to the extent that the court can have no confidence that the restored company will continue to operate as a good ‘corporate citizen’ according to law.

His Honour found that solvency was not in issue in this application [27].  Regarding public interest and commercial morality his Honour the relevant factors to be the failure to pay tax, possible trading while insolvent and alleged phoenix activity associated with the new entity [28].  After reviewing the reports and affidavit material (see [29][35]) he stated, at [36]:

..although some aspects of the conduct of Mr Sevior and the Company are peculiar, unexplained, and indeed fail to measure up to the standard required, there is, given the present structure and circumstances, no risk to future creditors of the Company. Further, in my opinion and in the circumstances referred to, there is no real or sufficient risk that past breaches of duty by Mr Sevior and non-compliance of the kind exposed by the Liquidator will be repeated. Further, I take some comfort from the fact that ASIC, being aware of all the relevant facts, did not oppose the application.

and, at [40]:

In many of the cases where the termination of a winding up has been refused there have been persistent and usually serious breaches and issues of solvency. It is usually these matters of past conduct that have caused courts to conclude that so far as the future is concerned there is a risk to creditors and the public if the company continues to trade. This is not the case with the Company. There is no real risk to creditors. In particular the following matters are relevant and should be emphasised:

(a) Following the debt for equity swap the Company will become solvent.

(b) The Company does not propose to trade.

(c) There is no allegation that Mr Sevior has breached any duty in relation to the conduct of the winding up itself.

(d) There is no allegation of failure to lodge documents with ASIC or to file income tax returns and business activity statements.

(e) While Mr Sevior has frankly acknowledged some past failings, he has addressed these in a variety of ways:

(i) he has engaged a new accountant to assist him in the future running of the Company including implementing better management systems.

(ii) Mr Sevior has addressed the matters identified by the Liquidator/administrator by the purchase of the Company’s assets including its name for market value; and

(iii) creditors’ claims have been dealt with by a DOCA entered into in accordance with Part 5.3B of the Act.

(f) Neither ASIC nor any creditor has applied to set aside the DOCA.

(g) Parliament contemplated that:

(i) a company in liquidation may execute a deed of company arrangement in accordance with Part 5.3B of the Act; and

(ii) a company that was subject to a DOCA entered into during the liquidation may apply to terminate the winding up.

(h) The objects of Part 5.3A of the Act is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(i) maximises the chances of the Company, or as much as possible of its business, continuing in existence; or

(ii) if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the Company.

(i) The DOCA itself represents a statutorily mandated resolution of the claims arising in the winding up of the Company.

(j) The administrator recommended that all creditors resolve to execute the DOCA and creditors resolved to execute the DOCA.

 

ISSUE

 Bringing an application under section 482(1) requires the court to undertake a detailed examination of the circumstances of the application to wind up, the history of the company and the proposals as to future activities in the event the termination is stayed. His Honour undertook such an analysis in this proceeding and provide a very useful summary as to the relevant considerations regarding public interest and commercial morality. It is difficult to set out in specific terms the factors that a court takes into account as the discretion is broad and the circumstances dictate the nature of the enquiry. Past poor behaviour is a factor but not determinative. It is also clear from this decision that it is important to provide a robust proposal for the future as well as attending to the touchstone issues of solvency, compliance with legislation.

 

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