TGIF 8 November 2019: Putting the Kart before the Company: winding up application fails as director found to lack standing

This week’s TGIF considers a recent decision of the Supreme Court of Western Australia regarding an application for a company to be wound up under s 459P of the Corporations Act or, alternatively, on just and equitable grounds. 

What happened?

On or about September 2016, a company (Kart Co) was set up to carry on a business of indoor go kart racing and entertainment. As a result of a relationship breakdown between two directors, an application was brought by one of them for orders that Kart Co be wound up on the grounds of insolvency or, alternatively, just and equitable grounds.

That application was challenged by one of Kart Co’s other directors on the basis that the plaintiff director had not been validly appointed under the company’s constitution and did not have standing to make the application. Under s 459P of the Corporations Act 2001 (Cth) (the Act), an application to wind up a company in insolvency may be brought by, relevantly, a director or creditor of that company.  

The following issues arose for determination:

• whether the plaintiff was a director with standing to bring the application;  
• whether the plaintiff was a creditor of Kart Co; and
• whether Kart Co was insolvent or, alternatively, it was just and equitable to order that it be wound up.

Was the plaintiff validly appointed as a director? 

The evidence revealed that, while there were no formal appointment documents or minutes of Kart Co which referred to the plaintiff as a director, he was recorded on the ASIC register as a director.

Citing s 1274B(2) of the Act, the Court noted that a written record prepared by ASIC was admissible as proof of a matter in the absence of evidence to the contrary.  However, it was observed this presumption, insofar as it concerned the directorship of a company, is capable of rebuttal if evidence demonstrates the appointment was not strictly in accordance with the relevant company’s constitution.

Kart Co’s constitution required the appointment of a director to occur by way of ordinary resolution.  Given the absence of any resolutions in Kart Co’s records regarding the appointment of the plaintiff as a director, it was contended that a separate shareholders’ agreement provided the plaintiff with the right to appoint a director and, as such, he was entitled to appoint a director in whatever manner desired.   However, the Court found, to the extent the shareholders’ agreement could be relied on, the plaintiff had failed to satisfy the requirements in that document for a director’s appointment to be effective.

As a consequence, it was determined that a lack of documentation appointing the plaintiff, together with a failure to comply with both the company constitution and its shareholders’ agreement, rebutted the presumption he was a director by virtue of the ASIC record alone.

Having failed to prove he was a director, the plaintiff was found to lack standing to bring the application for winding up under s 459P(1)(d) of the Act. The plaintiff also failed to provide any conclusive evidence that he, or his related company, was a creditor of the company which would otherwise afford standing under s 459P(1)(b) of the Act.

Was the Company nevertheless insolvent?

Having held the plaintiff lacked standing to bring the winding up application, the Court considered, if it were wrong on that issue, whether Kart Co was insolvent or a wind up should be ordered on just and equitable grounds.  

Ultimately, there was found to be an insufficient basis to order a wind up on either basis.  This was principally due to the fact that:

• the Court was not satisfied certain loans recorded in Kart Co’s balance sheet should be taken into account;
• Kart Co had access to finance which could be loaned and not called upon until Kart Co was in a position to repay; and
• there was no deadlock as the plaintiff was not a director such that his complaints as to the decisions of the company were not relevant to the application.

Takeaways 

This decision  is a useful reminder to insolvency practitioners and their advisers that while information recorded on the ASIC register is prima facie evidence of the matters stated, such facts are capable of rebuttal by leading evidence to the contrary.  

When the validity of a director’s appointment is in doubt, resort should be had to both ASIC data and the corporate records of the company.