High Court finds that in some circumstances a company can be wound up on a disputed debt

On 1 June 2011 the High Court handed down its decision in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2011] HCA 18. This involved an appeal by ASIC from a decision by the Full Court of the Federal Court relating to proceedings brought by ASIC to wind up Lanepoint. At first instance, Lanepoint had been wound up by Gilmour J of the Federal Court, but the company had then successfully appealed to the Full Court.

The application to wind up Lanepoint was made by ASIC alleging Lanepoint’s insolvency. Central to the case was s 459C(2)(c) of the Corporations Act (added in 1993) which, creates a rebuttable presumption of insolvency for the purposes of an application to wind up a company in insolvency brought under s 459P,and is in these terms:

The Court must presume that the company is insolvent if, during or after the 3 months ending on the day when the application was made a receiver, or receiver and manager, of property of the company was appointed under a power contained in an instrument relating to a floating charge on such property, except so far as the contrary is proved.

A receiver and manager had been appointed over assets of Lanepoint under a floating charge, and that had occurred less than 3 months before ASIC’s winding up application. ASIC relied on the presumption under s 459C(2)(c) to prove Lanepoint’s insolvency.

The receiver and manager was appointed by Westpoint Management (“Westpoint”), who claimed a debt of some $6.6 million. Lanepoint had other debts in the order of $1.7 million and assets in the order of $5.7 million. Before Gilmour J, Lanepoint disputed Westpoint’s debt, arguing that the debt to Westpoint was some $5 million less than claimed. Gilmour J did not accept that argument, found that Lanepoint had failed to prove its solvency, and that hence the presumption under s 459C(2)(c) applied. His Honour then wound up Lanepoint in insolvency.

The Full Court accepted the majority of Gilmour J’s findings, but overturned his decision on two bases. The main reason for this was that the Full Court found that winding up proceedings were an inappropriate vehicle to determine questions as to Lanepoint insolvency, based on the principle that “ordinarily a company would not be wound-up on the basis of a disputed debt”, and “where a disputed debt is relied upon as being demonstrative of insolvency, that dispute should be resolved outside of the winding-up process.”

Although ASIC was not a creditor of Lanepoint, and the case did not involve a disputed statutory demand, the Full Court adopted a similar approach to that adopted when a creditor served a statutory demand to seek payment of a disputed debt. In such cases a court will set aside the statutory demand, and require the dispute to be litigated and resolved, in proceedings not part of the winding up process.

On appeal from the Full Court, the High Court found that the principle that the court would not order a winding up on the basis of a disputed debt arose did not apply in a s 459C(2)(c) case brought by ASIC. The joint judgment of the High Court stated:

The principle was based upon the potential abuse, by creditors, of the winding up process to compel a solvent company to pay a genuinely disputed debt. On that basis alone it could have no application to ASIC, which did not claim the status of creditor and did not seek winding up on the basis of a debt owed. It brought its application under the statutory entitlement given by s 459P and in reliance upon the presumption of insolvency in s 459C(2)(c), which operates on the fact of the appointment of receivers and managers. More fundamentally, because the principle has no application in the case of an insolvent company, it cannot apply in the context of the current Pt 5.4, where the statutory presumption of insolvency operates.

The second ground on which the Full Court had granted the appeal was because it had found that Gilmour J had failed to stay the winding up proceedings. The High Court confirmed that a court has the discretion to grant such a stay, and that it can be exercised in a case in which the court determines that the underlying dispute can be more conveniently decided in other proceedings. No application for adjournment was made before Gilmour J, however, until final submissions, and when the application was made Lanepoint could not identify any further evidence that would need to be given in order to determine whether the debt was due, but submitted that there needed to be other proceedings brought to determine the issue, with other interested persons as parties, including the liquidator of Westpoint.

The High Court considered that as all the relevant evidence was already before Gilmour J when the application for adjournment was made, it was appropriate for him to proceed to determine the case rather than to postpone that determination, resulting in unnecessary costs. The High Court found that there was no necessity for Westpoint, or any other person to be a party to the proceedings, as the decision whether to wind up Lanepoint only indirectly impacted on other parties, and did not affect their rights and liabilities.

The High Court granted the appeal, setting aside the orders of the Full Court, and thus reinstating Gilmour J’s decision to wind up Lanepoint.

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