TGIF 29 July 2022 – Court appoints provisional liquidator after relationship breakdown

In a recent decision of the Supreme Court of New South Wales (In the matter of C.V. Joint (Aust) Pty Ltd [2002] NSWSC 981), a provisional liquidator was appointed by the Court to a company primarily due to an ongoing dispute between the directors and shareholders. The case is a useful reminder of the relevant principles that apply when seeking to have a provisional liquidator appointed.

Key takeaways

• When deciding whether to appoint a provisional liquidator, the court will ask whether the company is likely to be wound up in due course and consider whether the balance of convenience favours the appointment.
  
  
• While not necessarily a part of the test the court applies in deciding whether to appoint a provisional liquidator, any significant breakdowns in working relationships within a company will be given weight and this can have a critical effect on the final decision.
  
  
• The court will consider the wide-ranging impacts of appointing a provisional liquidator, but the mere fact it may increase the likelihood of winding up or affect parallel proceedings on foot is insufficient to deter such appointment.

Background

The Plaintiff in this case was the director and 70% shareholder in C.V. Joint (Aust) Pty Ltd (the Company). The other directors of the Company were the first Defendant, who held 10% of the shares in the Company and was the former wife of the Plaintiff, and the second Defendant, who held 20% of the shares in the Company and was the brother of the first Defendant.

There had been a severe breakdown in relations between the parties following the separation and divorce of the Plaintiff and first Defendant in 2020. Among other things, the Plaintiff alleged the Defendants had improperly passed resolutions regarding their salaries and improperly retained cash from cash sales.

The Plaintiff admitted to diverting the Company’s revenue from online sales into a separate account without the Defendants’ knowledge and to using the funds from this separate account to purchase stock from a company owned by his sons.

Additionally, in May 2022, the Company’s lease for the premises on which it conducted business had been terminated for failure to pay rent. Although the Company had not ultimately vacated the premises, it was renting it on a month-to-month basis and only had around $1,000 in its bank account.

The application

The Plaintiff sought to have the Company wound up and, separately, a provisional liquidator appointed per s 472 of the Corporations Act 2001 (Cth) (the Act). However, as the Plaintiff had failed to comply with a Notice to Produce, Stevenson J refused to hear the application for winding up and confined his consideration to the appointment of a provisional liquidator.

The first Defendant did not oppose this application, however, the second Defendant did and argued the Company was still engaging in profitable operations according to its financial reports, and that the application was designed to nullify relief sought in the related oppression proceedings.

Applicable law

Stevenson J noted the appointment of a provisional liquidator is a drastic intrusion into the affairs of a company and is not to be contemplated if other measures will be adequate to preserve the status quo.

His Honour identified the two main questions that must be answered in determining whether to make the appointment:

• Are there good prospects of the plaintiff obtaining a winding up order in due course?
  
  
• Does the balance of convenience require the appointment of a provisional liquidator, particularly in order to preserve the assets of the company?

His Honour also highlighted that an important consideration for the purposes of this case would be the need for external intervention given the breakdown in relations between the parties.

What did the Court decide?

The Court ordered that a provisional liquidator be appointed.

Although Stevenson J considered some of the Plaintiff’s allegations regarding misapplication of funds lacked evidence, the circumstances were such that it was appropriate to intervene. In particular, his Honour pointed to the fact that the Company was in deadlock due to the complete breakdown of the working relationship between the parties.

These factors, combined with the Company’s precarious and complicated financial situation and unstable tenure at the leased premises, caused his Honour to conclude that there was a real prospect the Company would be wound up on a final basis. His Honour also determined the appointment of a provisional liquidator would secure the Company’s assets and provide some stability.

Stevenson J did not consider the parties’ arguments about the Plaintiff’s motivation to be of significance. Further, his Honour pointed to the fact the Plaintiff had undertaken not to rely on the appointment of the provisional liquidator alone as a basis for denying the second Defendant relief in the related oppression proceedings.

Comment

This case is a useful restatement of the two key questions the Court will ask when determining whether to appoint a provisional liquidator: namely, whether eventual winding up is likely and whether the balance of convenience favours the appointment.

This case also emphasises the importance of contextual factors such as the relations between the parties and the ability of those parties to carry on the business of a company. These contextual factors influence both the likelihood of winding up and the need for third-party intervention in the company’s affairs.

Additionally, although the court recognises that intervention in a company’s affairs is a serious matter and may have wide-ranging impacts, this will not alone deter it from appointing a provisional liquidator where the circumstances are appropriate. As such, parties seeking to take up oppression proceedings should consider the possibility that the company may be wound up or have a provisional liquidator appointed, as these outcomes may influence any such proceedings.