Staying winding up orders: Can directors stop the clock?

Articles, Restructuring + Insolvency

In the recent decision of Deputy Commissioner of Taxation v NRA Engineering Pty. Ltd. (in liq) [2019] FCA 1567, Justice Anderson of the Federal Court of Australia dealt with an application made by the director of a liquidated company seeking to stay the winding up order made against the company. The case serves as a reminder of the relevant factors a court will take into consideration before exercising its discretion to make such orders.

Relevant Background

 On 21 June 2019, NRA Engineering Pty. Ltd. (in liquidation) (ACN 006 400 433) (NRA Engineering) was wound up and a liquidator appointed.

On 17 July 2019, the director of NRA Engineering, Mr Brian Andrew Sutcliffe (Mr Sutcliffe) filed an application seeking to set aside the winding up orders made and subsequently sought an order staying the winding up order.

Following the granting of several adjournments to allow for Mr Sutcliffe to obtain legal representation, the matter was listed for a case management hearing before Anderson J on 20 September 2019.

Liquidator’s position

 The Liquidator sought to rely on an affidavit filed 5 September 2019 in which he deposed to, among other things, the following:

  1. Mr Sutcliffe’s ongoing failure to provide him with NRA Engineering’s books and records.
  2. Mr Sutcliffe’s failure to verify a report on the company’s activities and property (ROCAP).
  3. Correspondence exchanged between Mr Sutcliffe and the Liquidator in which Mr Sutcliffe maintained that the Liquidator had no power to act.
  4. Mr Sutcliffe’s interference in the company’s affairs during the liquidation, including instructing stockbrokers to purchase an option over certain shares on behalf of the company in its capacity as trustee of a trust.
  5. His inability to determine whether the penalty of $494,694 imposed on the company by the Australian Taxation Office (ATO) could be challenged.

Considerations of the Court in staying winding up orders

 Justice Anderson noted that the exercise of the Court’s discretionary power to grant a stay pursuant to sections 23 or 35(6) of the Federal Court Act 1976 (Cth) was one to be made “in light of all of the circumstances of the case” (see also HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd (2002) 44 ACSR 169 and Australian Securities and Investment Commission v Aviation 3030 Pty Ltd (No 2) [2019] FCA 391).

In the statutory context of Part 5.4 of the Corporations Act 2001 (Cth), Anderson J opined that such power is to be exercised:

“…with caution so as not unduly to delay the liquidator or hinder his or her capacity to carry out the duties imposed by the statute”.

As such, Anderson J opined that there was a clear onus on the applicant to establish a positive case as to why the Court should stay winding up orders.

Citing both recent and earlier authorities, Justice Anderson listed specific considerations relevant to the cautionary exercise of the Court’s discretionary power in the context of staying winding up orders including:

  1. any detriment or risk of detriment to creditors or contributories flowing from the stay;
  2. the merits of the proposed review;
  3. the current trading position and solvency of the company;
  4. the prejudice to the company if a stay was refused; and
  5. the legislative policy against delay from the liquidation.

Decision

Justice Anderson ultimately dismissed Mr Sutcliffe’s application, finding that there would be a risk of detriment to the company’s creditors if a stay were granted for the following reasons:

  1. He had not established a positive case for a stay of the winding up, and there was no evidence challenging the ATO’s imposition of the penalty.
  2. There was no evidence that NRA Engineering was solvent.
  3. He had refused to comply with his statutory obligations by failing to provide the Liquidator with the company’s books and records and verify a ROCAP.
  4. He sought to deliberately interfere with the Liquidator’s responsibilities as liquidator of NRA Engineering.
  5. Mr Sutcliffe gave instructions to stockbrokers to purchase an option on shares on behalf of the company during its liquidation.

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