LAURA KEILY | Barrister | Creditor’s right of recovery under section 588M against a company in the deregistration process
Laura Keily is a barrister and a fearless advocate who advises on the full gamut of business disputes in Australia.
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Creditor’s right of recovery under section 588M against a company in the deregistration process

Creditor’s right of recovery under section 588M against a company in the deregistration process

International Greetings UK Ltd v Stansfield [2010] NSWSC 1357, New South Wales Supreme Court, Barrett J, 24 November 2010

(a) Summary

This decision involved a creditor claiming compensation for loss or damage suffered as a result of insolvent trading under section 588M(3). At the time the creditor commenced proceedings for recovery, the company against which the claim was made was in the process of being deregistered and the final step had been taken by the liquidator (but not by ASIC). Barrett J held that the fact that the liquidator had lodged an application for deregistration when the creditor commenced proceedings meant that the company was not ‘being wound up’ within the meaning of section 588M(1)(d). This failure to satisfy the conditions for recovery specified in section 588M(1) meant that the creditor was precluded from claiming compensation under section 588M(3).

The decision leaves open several questions about how the provision should be applied at various stages in the winding up process.  In particular, his Honour left open the question at what point a company ceases to be ‘being wound up.’

(b) Facts  

Oz Wrap (International) Pty Ltd (Oz Wrap) was a company which had been trading while insolvent within the meaning of section 588G(3) of the Corporations Act 2001. On 26 February 2008, Oz Wrap began a creditors’ voluntary winding up under the Corporations Act. On 30 May 2008, after the affairs of the company were fully wound up, the liquidator convened a final meeting of creditors and members under section 509(1), which was adjourned until 20 June 2008 to allow the plaintiff International Greetings UK Ltd (International Greetings), a creditor of the company, to investigate pursuing a preference claim. Following this final meeting, on 26 June 2008, the liquidator made a lodgement with ASIC under section 509(4). After this lodgement, ASIC deregistered the company in accordance with section 509(5) on 26 September 2008. After this deregistration, Oz Wrap ceased to exist as a company.

Rather than pursuing a preference claim, International Greetings elected to apply under section 588M(3) for compensation for loss or damage they had suffered as a result of Oz Wrap trading while insolvent. As is required by section 588R, the liquidator gave their consent to International Greetings to bring these proceedings, and this consent was given on 20 June 2008, just prior to the final meeting of members and creditors. By the time that International Greetings commenced proceedings on 25 August 2008, the final statement required to be lodged by the liquidator in the application for deregistration had already occurred (in the form of the lodgement with ASIC on 26 June 2008).  The deregistration of Oz Wrap had not therefore occurred on 25 August 2008.  However, according to the procedure set down in section 509, the “affairs of the company had been fully wound up”.

(c) Decision 

Section 588M(1) sets out several conditions which must be satisfied before compensation under section 588M(3) can be recovered. The relevant condition in this case was section 588M(1)(d), which imposes a requirement that, in order to recover compensation, it is essential that the company against whom the claim is proceeding ‘is being wound up’. The key question for decision was therefore whether section 588M(1)(d) was satisfied in this case, that is, whether the fact that Oz Wrap had ceased to exist by the time proceedings were commenced prevented it from being a company which ‘is being wound up’. If Oz Wrap was not a company which ‘is being wound up’, the conditions for an application under section 588M(3) would not be satisfied and International Greetings would be precluded from recovering compensation.

International Greetings argued that section 588M(1)(d) imposes no requirement for a winding up to continue to be in force when a creditor commences proceedings for recovery under section 588M(3). In particular, it relied on the fact that section 588M(1)(d) does not impose any conditions on recovery beyond the fact that the company ‘is being wound up’ when proceedings are commenced.  Barrett J noted the merit in this argument, and observed that the scheme set up by section 588M and section 588R, which allows creditors to proceed with a compensation claim outside the administration of the winding up, appeared to be designed to facilitate claims for compensation in situations such as the facts of this case, namely, where the liquidator does not wish to proceed with recovery.

Nonetheless, Barrett J ultimately rejected this interpretation of section 588M(1)(d), on the basis that it was inconsistent with the wording of the legislation.  The opening words of section 588M(1) are that ‘this section applies where’.  The words ‘the Company is being would up’ are one of four conditions set out thereafter.  Accordingly, the wording of section 588M(1)(d) is such that the entitlement of a creditor to recovery under section 588M(3) is available only when a company ‘is being wound up’. Conversely, a creditor cannot recover under section 588M(3) when the company is not being wound up. Barrett J then concluded that, as a consequence, Oz Wrap is not now a company that ‘is being wound up’ and, accordingly, the creditor had no right to claim under section 588M(1)(d).

This was because a lodgement under section 509(4) had been made with ASIC.  Barrett J also noted that as Oz Wrap does not now exist, it will not be open to the court to award International Greetings a remedy under section 588M(3) and, in particular, it will not be possible for the court to award a judgment in the nature of a debt judgment in favour of the plaintiff.

However, Barrett J left open the question at what point a company ceases to be in the state of ‘being wound up.’ It therefore remains unclear whether a company ceases to be ‘being wound up’ after the final meeting of creditors under section 509(1) is held when “the affairs of the company are fully wound up”, or only after the company is formally deregistered.

 

Co-authored by Annika Holden.

Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.