Australia: How the Court assesses competing applications for substitution in winding up applications

Pointon Partners regularly appears for creditors at winding up applications in the Supreme Court of Victoria.

Creditors owed debts by companies subject to winding up proceedings commenced by others may appear at such hearings as 'supporting creditors'.

Commonly, a company attempting to stave off being wound up, will source funds to pay the creditor who has brought the winding up application (the Petitioning Creditor). It is then up to the supporting creditors to decide whether they would like to be 'substituted' in place of the Petitioning Creditor, in accordance with section 465B of the Corporations Act 2001 (The Act).

One of the key benefits to a supporting creditor is the ability to seek orders that a liquidator of their choosing be appointed by the Court to administer the winding up of the debtor company.

Matters become complex where there are numerous supporting creditors, and competing applications for substitution are made.

A recent case in which Pointon Partners acted for a successful supporting creditor (In the matter of Erfanian Developments Pty Ltd [2018] VSC 342) sets out the relevant principles that the Court will consider when there are competing applications for substitution.

The Facts

An application was made to wind up the debtor company by an unpaid subcontractor, following the expiry of a statutory demand. Pointon Partners acted for another unpaid subcontractor.

Since the winding up application was commenced, the original petitioning creditor's debt was acquired by a company carrying on a pre-insolvency consulting business (the Adviser) for its full face value together with costs. The Adviser had previously provided accounting services to the debtor company.

When it became clear that the debtor company would not oppose the winding up application, the Adviser indicated that it would be seeking the appointment of a liquidator chosen by it.

Given the Adviser's pre-existing relationship with the debtor company and concerns over the commerciality of the Adviser's purchase of the petitioning creditor's debt, Pointon Partners were instructed to make a competing application for substitution and put forward alternative liquidators.

The Decision

Where there are competing applications for substitution, the Court has discretion to decide which application will be successful.

Judicial Registrar Hetyey's decision set out the following relevant principles:

  1. There is a clear public policy in insolvent companies being wound up promptly, protecting existing and future creditors.
  2. The winding up procedure established by the Act should not be used as a debt collection mechanism, and the Court should not encourage the acquisition of an insolvent company's debts for a collateral purposes.
  3. That in exercising its discretion, the Court may have regard to the attitude of the remaining supporting creditors.

In his decision, JR Hetyey indicated that he was perplexed as to the Adviser's motive for acquiring the original petitioning creditor's debt (for full value plus costs) where it was already owed money by the debtor company, winding up proceedings were on foot and numerous supporting creditors had appeared at the first return. This indicated a possible collateral motive of the Adviser (it is important to note, that JR Hetyey in his decision, and Pointon Partners in this article, make no concluded findings about the Adviser's motives).

JR Hetyey sought the opinions of the remaining 9 supporting creditors, many of whom were also unpaid subcontractors of the debtor company. All 9 of the supporting creditors supporting the substitution application made by Pointon Partners' subcontractor client, and the appointment of its nominated liquidators.

JR Hetyey noted that this preference should be afforded significant weight and ultimately made orders providing for the substitution of our client, the winding up of the debtor company, and costs.

Key Takeaways

The key takeaways from this update are:

  1. It is generally worth appearing as a supporting creditor - supporting creditors who are substituted avoid the cost of filing fees and professional costs associated with preparing the initiating documents. Supporting creditors who appear are generally awarded costs.
  2. Where competing applications for substitution are made the Court will consider the circumstances of the parties seeking to be substituted. Where there is or appears to be evidence of a creditor acting in furtherance of a collateral purpose (whether that be debt collection or control of the liquidation), the Court may prefer the competing creditor's application.
  3. Supporting creditors' representatives should discuss what is in the best interests of the companies' creditors prior to the hearing of a winding up application, to ensure the body of creditors' views are put to the Court before orders are made.

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.

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