Where do you stand on company wind ups? Standing to bring a just and equitable winding up application
Stefano Calabretta
f you want to seek a winding up order on the grounds that it is just and equitable to do so, you must first establish that you the have standing to bring the application.
This was an issue that arose in the case of Etna Developments Pty Ltd [2023] NSWSC 1239 where before making any winding up order, the Court first considered whether the parties had standing.
Facts
The plaintiffs, ADCF Investments Pty Ltd (ADCF) and Pyramids Builders Pty Ltd (Pyramid Builders), sought a winding up order of Etna Development Pty Ltd (Etna) under s 461(1)(k) of the Corporations Act 2001 (Cth) (the Act).
Etna was the registered proprietor of land in Gosford, New South Wales (the Land), subject to a registered mortgage in favour of Manda Capital Holdings Pty Ltd (Manda).
On or around 6 October 2020, Etna (as principal) entered into a construction contract for the development of the Land for a fixed price of $19.8 million.
On or around 23 December 2020, Manda (as lender), Etna (as borrower) and Mr Lagan (as guarantor) entered into an agreement for a $24.4 million loan (Loan Agreement) for the purpose of developing the Land. Under the terms of the Loan Agreement:
Manda was granted some control over the development and how the Loan funds would be used for the development; and
in the event of default by Etna, Manda had a right to enforce the securities, enter into possession and management of the Land.
Etna requested Mr Abdelbadie’s (the sole director and shareholder of ADCF and Pyramid Builders) assistance in providing labour and other services. Mr Abdelbadie engaged Pyramids Builders to provide the services.
On or around 18 December 2021, Mr Lagan (the sole director and shareholder of Etna) entered into an agreement for the sale of 49% of the shares in Etna to ADCF for $1.5 million.
In 2022, ADCF and Mr Abdelbadie commenced proceedings against Mr Lagan and Etna to rescind some of the agreements for alleged breaches of warranty and seeking an order that Etna pay $287,165 to ADCF by way of restitution for the costs incurred by Pyramid Builders (2022 Proceedings).
In August 2023, Manda appointed a receiver and manager to Etna.
Issues
There are two key issues that Court must determine in these types of cases:
whether a party has standing to apply for a winding up order under s 461(1)(k) of the Act. Under s 462 of the Act a creditor has standing; and
whether it was ‘just and equitable’ for the company to be wound up.
ADCF and Pyramid Builders sought the winding up based on a ‘reasonable inference’ that Etna was in default and Manda would take possession of the Land to sell it.
Judgment
ADCF and Pyramid Builder’s counsel submitted that both plaintiffs have standing as creditors. Williams J noted that contingent and prospective creditors have standing under s 462. However, Williams J rejected that Pyramid Builders was a creditor as it was Mr Abdelbadie who engaged Pyramid Builders to provide the services. As such, Pyramid Builders would instead be a creditor of Mr Abdelbadie. On the other hand, Williams J accepted that ADCF was a contingent creditor for its claim for restitution in the 2022 Proceedings.
Williams J noted that ‘just and equitable’ is a broad concept that does not have an exhaustive definition and will depend on the facts of each case. However, the winding up order must be just and equitable for all parties, not just the applicant. Williams J found that the reason’s provided by ADCF in support of winding up Etna were instead the result of ADCF’s position as an unsecured contingent creditor in circumstances where there is a secured creditor with a registered mortgage over the Land. Therefore, Williams J held that justice and equity do not require that Etna be wound up to allow an unsecured creditor an opportunity to influence decisions through a liquidator that a secured creditor is entitled to make in their own interests.
Therefore, the proceedings were dismissed.
Impact
This case serves as a reminder that only parties with standing can bring applications and while this includes contingent and prospective creditors, the court will carefully consider whether a party falls into one of those categories. Additionally, this case also highlights that while ‘just and equitable’ is a broad concept, the Court will consider the effect on all parties and not just the applicant.