- Courts will frown on a winding up application if they think that it is being made as for an ulterior purpose, such as trying to stifle legitimate litigation.
Threatening to have a bad debtor wound up is part of the hurley-burley of business life. But at what point does a winding up application cross the line into unacceptable behaviour?
Two recent decisions by the NSW Supreme Court provide examples of the use of winding up proceedings to achieve something other just the repayment of a debt - and the Court's reaction.
Be careful what you say
The first case involved a longrunning commercial dispute between Evans & Tate Premium Wines, a winemaker, and Australian Beverage Distributors (whose business is self-evident).
That commercial dispute gave rise to a considerable amount of litigation. One outcome of one piece of that litigation was that Evans & Tate was ordered to pay court costs to ABD. Following this, there was more litigation:
- Evans & Tate applied for a court order to prevent ABD from enforcing the costs order;
- ABD made separate applications to wind up both Evans & Tate and its parent company.
Evans & Tate and the parent company successfully applied to have the winding up applications dismissed. In both cases, an important part of the Court's reasoning was based on the interconnectedness of the winding up applications and Evans & Tate's application to have the costs order set aside.
After lodging its winding up applications, ABD had issued a media release about them. Among other things, this said:
"Australian Beverage Distributors Pty Ltd has issued the winding up proceedings in response to Evans & Tate Premium Wines Pty Ltd refusing to pay costs orders arising from previous proceedings between the parties. Evans & Tate Premium Wines Pty Ltd are in separate proceedings seeking to restrain Australian Beverage Distributors Pty Ltd from enforcing those costs orders."
Having drawn a connection between the two sets of legal proceedings, ABD could hardly have been surprised when the judge took the connection one step further. He said that the media release was an "admission" that the purpose of the winding up proceedings in direct response to the litigation that Evans & Tate had begun against ABD. He identified two possible motives for the winding up application.
The more straightforward of these was that ABD was simply trying to kill off Evans & Tate's court action against ABD's costs order, in one of two ways:
- pressuring Evans & Tate (and its parent) to drop the litigation; or
- if the winding up application succeeded, persuading the liquidator to drop the litigation.
The alternative possibility was somewhat more primal:
"[T]he claim may simply have been retaliation for [Evans & Tate]'s having sought orders to stay enforcement of the costs order."
Either possibility would have constituted an abuse of process and justified the dismissal of the winding up applications.
To add to ABD's woes, it was ordered to pay the parent company's costs on an indemnity basis.
Be careful what you pay
The second case involved three parties to a real estate development:
- Youma was the developer;
- Magnate Projects was hired by Youma to market the development
- Mr Bungey was apparently retained by Magnate as a real estate agent to sell units in the development.
To cut a long story short, Magnate sued Youma for allegedly unpaid fees and Mr Bungey sued Magnate for allegedly unpaid sales commission. The proceedings between Mr Bungey and Magnate resulted in a consent judgment and an order for costs in his favour. However, Magnate had no money, so that Mr Bungey's ability to recover from Magnate depended upon the success of its suit against Youma.
Before Magnate's case against Youma was heard by a Court, Mr Bungey had had a meeting with Youma. That meeting produced a written agreement, under which:
- Youma agreed to pay money to Mr Bungey; and
- Mr Bungey agreed to serve a statutory demand on Magnate (for the unpaid costs order), and then to proceed to a winding up application.
Mr Bungey was apparently quite open about the fact that he was making the winding up application as a direct result of this agreement. This led the Court to the unsurprising conclusion that the winding up application was in Youma's interest, and that interest was not a legitimate purpose of a winding up application:
"[Youma] has a commercial interest in the making of a winding up order, in the sense that if the order is made, it is likely that the present hearing dates [for Magnate's claim against Youma] will be abandoned, and the vigorous prosecution of Magnate's claims in the Commercial List proceeding will be rendered less likely, at least in the short term. But that commercial interest is not the interest of a creditor, as such, to be taken into account as a reason for making a winding up order. It is an interest in using the winding up proceeding to stifle the Commercial List proceeding, and is not an interest that the court should advance in the exercise of its discretion."
Accordingly, the Court ordered the stay of the winding up application until after Magnate's claim against Youma was determined.
It is noticeable that both these cases arose out of commercial disputes that had some "history" behind them. This suggests that a winding up application may have been seen by one side as a circuit-breaker that would bring some resolution to that side's advantage.
In each case, however, that "history" also told against the winding up application. Although Australian courts are as concerned as anyone with avoiding lengthy court proceedings, they frown on the use of winding up applications to achieve ulterior objectives, particularly if that objective includes the stifling of legitimate litigation.
Part of the reason for this is that, in the world of corporate litigation, a winding up application is the equivalent of a nuclear bomb. A successful winding up application means that the company goes out of business and ceases to exist. Even the news that a winding up application has simply been made can have fatal consequences for a company: nervous creditors may start withdrawing credit or supplies and customers may think twice before placing orders.
A winding up application will, therefore, place huge pressure on a company. There is usually no issue when that pressure is being applied by a bona fide creditor - but the courts will be less sanguine if there's evidence (as in these two cases), that there's more to the story.
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.