Australia: Easy as ABC – Insolvency and the Relation-Back Day

Introduction

The Full Court of the Federal Court of Australia has rejected an argument that the applicant for an order for a company to be wound up in insolvency must prove that the company was insolvent at the "relation-back day" in addition to proving insolvency at the date of filing the application and the date of the hearing.

On 12 July 2013, the Full Court delivered judgment in CBA Corporate Services (NSW) Pty Limited v Walker and Moloney, in the matter of ZYX Learning Centres Limited (receivers and managers appointed) (in liq).¹ ZYX Learning Centres Limited (Receivers and Managers Appointed) (In Liquidation) was formerly known as ABC Learning Centres Limited (ABC). ABC and its related companies (ABC Group) conducted the well-known Australian and international childcare empire that collapsed in late 2008.

Background

Voluntary Administrators were appointed to the companies comprising the ABC Group on 6 November 2008. On the same day, Receivers and Managers (Receivers) were appointed by secured creditors, a syndicate of lenders to the ABC Group (Banks). The Banks' securities were fixed and floating charges granted by the ABC Group on and after 25 June 2008.

On 2 June 2010, by resolution of the creditors the companies entered into creditors' voluntary liquidation (CVL) and the Voluntary Administrators were appointed Liquidators of the ABC Group.

On 2 April 2012, the Liquidators applied to the Court for an order under section 459A of the Corporations Act 2001 (Cth) (Act) that each company in the ABC Group be wound up in insolvency.² Under section 459A, "the Court may order that an insolvent company be wound up in insolvency".

In this case, the effect of such an order would be to convert the CVLs to Court-ordered windings-up in insolvency. This would enable the Liquidators to pursue claims against the Banks under section 588FJ of the Act, seeking to recover for the benefit of unsecured creditors, certain company assets realised by the Receivers pursuant to the Banks' floating charges. In certain circumstances, section 588FJ renders a floating charge void against a liquidator and permits the liquidator to recover amounts paid to the secured creditor under the floating charge. Critically, the section only applies in respect of a company that is being wound up in insolvency.³

As the potential defendants in the section 588FJ proceedings contemplated by the Liquidators, the Banks were entitled to be heard on the winding up application.

First Instance Hearing and Decision

On the Liquidators' application at first instance, Nicholas J in the Federal Court⁴ ordered pursuant to section 459A that each company in the ABC Group be wound up in insolvency.

It was common ground that by operation of sections 9, 513A, 513B and 513C of the Act, the "relation-back day" for the ABC Group was 6 November 2008. The relation-back day is the date by reference to which the Act provides that certain transactions involving a company are open to subsequent challenge by its liquidator.

It was common ground that for a winding up order to be made, the applicant must prove the company was insolvent at the date the application was filed and the date of the hearing.⁵ The Liquidators gave evidence that the companies were insolvent on 2 June 2010 (the commencement of the CVL) and at 5 September 2011 (the date of initially filing the winding up application). The Banks did not contest a finding of insolvency at 5 September 2011 or any date afterwards.

However, the Banks argued that it was also necessary for the applicant for a winding up order to prove that the company was insolvent at the relation-back day (in this case, 6 November 2008). The Liquidators did not lead any evidence dealing with insolvency at 6 November 2008, as they argued this date was irrelevant to a winding up application.

Nicholas J held that the companies were insolvent at the date of filing the winding up application and the date of the hearing. His Honour held that it was not necessary for the Liquidators to prove insolvency at the relation-back day. His Honour also found that the Liquidators had not yet decided whether or not to proceed with a claim under section 588FJ against the Banks.⁶

Full Court Decision

The Banks appealed to the Full Court. The significant issue of principle on which they appealed was whether or not the Liquidators were required to prove that the companies in the ABC Group were insolvent at 6 November 2008, the relation-back day. The Full Court held that the Liquidators did not need to do so.

The Full Court held that there is no requirement in the Act, or its legislative history, that the applicant establish insolvency at the relation-back day for an order to be made under section 459A. The text of the section makes no reference to a need to establish insolvency at the relation-back day; no such requirement arises having regard to the subject matter, scope and purpose of the legislation.

Further, a requirement to prove insolvency at the relation-back day would sit uncomfortably with other provisions of the Act. For example, the presumption of insolvency under section 459C(2)(c) arising from appointment of receivers; and the right of directors to resolve under section 436A to appoint an administrator if they are of the opinion that a company is likely to become insolvent at a future time.

However, in an appropriate case, the solvency or insolvency of a company at the relation-back day may be a relevant consideration in the exercise of the court's discretion under section 459A. The Full Court (and the primary judge) gave the example of proceedings contemplated under section 588FJ. It is a defence to such a claim to prove that the relevant company was solvent immediately after it granted the floating charge that is sought to be made void. Accordingly, if the potential defendant led evidence, in the application for the winding up order, of solvency at the relation-back day or immediately after the charge was granted, solvency would be a relevant consideration for the court as there would be no good reason for ordering the company to be wound up in insolvency if the claim proposed under section 588FJ was bound to fail.

Two other key arguments advanced by the Banks in the appeal were rejected by the Full Court.

First, the Banks argued that the Court must be satisfied that a winding up order was being made "for good reason"; in this case, the Banks argued, it was a matter of mere speculation as to whether or not the Liquidators would bring a claim under section 588FJ if the winding up order were made. The Full Court held that there was no requirement of section 459A that a winding up order should only be made "for good reason"; further, the section does not impose a standard of probability or certainty of proceedings being brought by a liquidator under section 588FJ before the order can be made.

Section 459A sets out a statutory discretion and the Full Court said that substitution of other words for the terms of a statutory discretion is to be discouraged. Whether or not the discretion under the section should be exercised in any particular case turns on an assessment of all the relevant circumstances. The primary judge was conscious that the companies were already in CVL and for that reason, accepted that an order under section 459A would only be made if there was a proper basis or good reason for doing so.

However, he did not say that it was sufficient for the Liquidators to identify a theoretical possibility of a claim under section 588FJ. His Honour gave considerable weight to the potential benefit to unsecured creditors if any such proceeding was commenced and succeeded. There was evidence that section 588FJ proceedings were a distinct or rational possibility.

Secondly, the Banks argued that the Liquidators failed to explain their delay⁸ in applying to the Court for the winding up order. The Full Court held that the primary judge expressly referred to taking the Liquidators' delay into consideration and that it was not necessary for him to articulate acceptance of the Liquidators' explanation for the delay, as his express reference to factors contributing to the delay explained it adequately.

Conclusion

The Full Court confirmed that on an application for an order that a company be wound up in insolvency, it is not mandatory to prove insolvency at the relation-back day. It is orthodox practice that the applicant must prove insolvency at the date of filing the application and the date of the hearing. However, in some circumstances, the question of solvency at the relation-back day will be a consideration relevant to the exercise of the court's discretion to make the winding up order.

At a practical level, the Full Court queried why a liquidator should be compelled to spend considerable money and resources establishing the prospects of a possible section 588FJ claim unless and until it is clear that "the door has been opened" to the possibility of commencing that action by the court making a winding up order.

Footnotes

¹[2013] FCAFC 74.
²The Liquidators initially filed the application on 5 September 2011. A fresh application, relying on the same evidence, was filed on 2 April 2012.
³A winding up in insolvency means a winding up by the court – see, for example, Carter v New Tel (2003) 44 ACSR 661.
⁴Walker and Moloney v CBA Corporate Services (NSW) Pty Limited [2012] FCA 328.
⁵Ann Street Mezzanine Pty Ltd (in liq) v Beck (2009) 175 FCR 532.
⁶The section 588FJ proceedings against the Banks have since been commenced.
⁷Citing Hua Wang Bank Berhad v Commissioner of Taxation [2013] FCAFC 28.
⁸As explained above, the Liquidators were appointed in the CVL on 2 June 2010; the winding up application was filed on 5 September 2011.

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