Catto & Ors v Hampton Aust Ltd (in Liq) & Anor No. Scgrg-98-731 Judgment No. S6594

[1998] SASC 6594

ROBERT JOHN CHARLES CATTO AND MARY GRAHAM NEILD AS EXECUTORS OF THE ESTATE OF JOAN ISOBEL STEWART CATTO AND BATOKA PTY LTD  V  HAMPTON AUSTRALIA LIMITED (IN LIQUIDATION) AND KALGOORLIE LAKEVIEW PTY LTD

[1998] SASC S6594

1. JUDGE BURLEY.     The plaintiffs’ application for injunctive relief has been made returnable before me this morning.  They seek an order that the liquidator be restrained from distributing certain assets of the first defendant.  Mr Kourakis QC appeared for the plaintiffs, Mr Wells QC for the first defendant and Mr Whitington QC and later Mr Mills for the second defendant.

2. The plaintiffs’ case is that at a meeting of the members of the first defendant a resolution was passed that the company be wound up. It has been assumed, at least for the purposes of argument before me to date, that the resolution was passed pursuant to the provisions of s491(1) of the Law which provides:

   “Subject to s490, a company may be wound up voluntarily if the company so resolves by special resolution.”

3. Pursuant to that resolution a liquidator was appointed and his administration has proceeded to a point where he intends to distribute the assets of the company.  The proposed distribution is to take place on or shortly after 22 October 1998.  The plaintiffs, the minority shareholders in the first defendant, contest the proposed distribution.  They assert that the passing of the resolution for the voluntary winding up of the first defendant constituted a fraud on a minority.

4. At the outset Mr Wells raised a preliminary point, namely, that these proceedings were commenced by the plaintiffs without the leave of the court contrary to s500(2) of the Corporations Law (“the Law”). Mr Wells submitted that the plaintiff was unable to pursue an interlocutory application of any nature unless and until such leave was granted. He conceded that leave could be granted nunc pro tunc. 

5. I thought it appropriate to deal with the argument raised by Mr Wells as a preliminary point.  I proceeded to hear submissions limited only to that point.

6. Section s500(2) of the Law is as follows:

“After the passing of the resolution for voluntary winding up, no action or other civil proceedings shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court imposes”. 

1. It is common ground that, if s500(2) of the Law is otherwise applicable, these proceedings come within the phrase “action or other civil proceeding”. However, Mr Kourakis contended that s500(2) of the Law only applied to a creditors’ voluntary winding up under s497 of the Law.

2. In order to understand the submissions of counsel it is necessary to refer briefly to the provisions of Divisions 1, 2 and 3 of Part 5.5 of the Law. It is apparent from these provisions that a distinction is to be made between a voluntary winding up where the company is solvent and one where the company is insolvent. If the company is solvent at the time of the passing of the resolution pursuant to s491(1) of the Law, and if the directors make a written declaration pursuant to s494(1) of the Law that in their opinion the company is solvent, the liquidation of the company proceeds as a members’ voluntary winding up without the need for the calling of a creditors’ meeting, unless the liquidator forms a contrary opinion and resolves to convene a meeting of the company’s creditors pursuant to the provisions of s496(1)(c) of the Law.

3. I have used the word “insolvent” as a shorthand expression to describe the opposite of the concept referred to in s494(1) of the Law, namely “that the company will be able to pay its debts in full within a period not exceeding twelve months after the commencement of the winding up”.

4. According to my understanding of the interrelationship of Divisions 1, 2 and 3, the creditors’ voluntary winding up only comes into play where there has been no declaration of solvency by the directors prior to a resolution being passed pursuant to s491(1) of the Law, or where the liquidator invokes the provisions of s496(1) of the Law.

5. It should also be mentioned that by virtue of amendments made to the Corporations Law in 1992, specific reference in s500(2) to a creditors’ resolution that the company be wound up was replaced by the phrase “resolution for voluntary winding up”.

6. Mr Wells submitted that the amendments effected in 1992 to s500(2) of the Law meant that Parliament must have intended the stay to operate both to a members’ voluntary winding up and to a creditors’ voluntary winding up, but, for the reasons which follow, I do not think that that is the correct approach to be taken to s500(2) of the Law.

7. During the course of the hearing I gave leave to Ms Francas, counsel for the Australian Securities Commission, to present a brief submission.

8. Ms Francas referred me to the definition section (s9) in the Corporations Law, which defines the phrase “resolution for voluntary winding up”. She submitted, correctly in my view, that the definition applied to the same words used in s500(2) of the Law. The phrase means “The special resolution referred to in s491”.

9. Mr Wells submitted that if one incorporates the definition of a “resolution for voluntary winding up” into s500(2) of the Law, it must follow that the provisions of s.500(2) of the Law extend to the circumstances where a company is wound up by virtue of its own special resolution under s491(1) of the Law.

10. In response to that Mr Kourakis submitted that one had to look not only at the provisions of ss491 and 500 of the Corporations Law, one also had to consider the effect of s497 of the Law, which dealt with creditors’ voluntary winding up. He put to me that the proper sequence of events as contemplated by Part 5.5 was that the voluntary liquidation process was initiated by a special resolution of the company under s491. There was then a requirement under s497 for the company to convene a creditors’ meeting.

11. It is helpful to set out the terms of s497(1) of the Law. It is as follows:

    “497(1)     The company shall cause a meeting of the creditors of the company to be convened for the day, or the day next following the day, on which there is to be held the meeting at which the resolution for voluntary winding up is to be proposed, and shall cause notices of the meeting of creditors to be sent by post to the creditors simultaneously with the sending of the notices of the meeting of the company.”

12. He argued that the liquidation process was constituted by two resolutions: the first by the company under s491 and the second, if the creditors thought it appropriate, by resolution of the creditors at a meeting convened pursuant to the provisions of s497(1) of the Law.

13. If such an approach is taken, it was argued, the reference to the passing of the resolution for voluntary winding up in s500(2) of the Law is not meant to define the process by which s500(2) applies, but merely the time from which it operates.

14. As part of that argument, Mr Kourakis submitted that the fact that s500 of the Law came within Division 3 of Part 5.5 (which relates to the creditors’ voluntary winding up) was important, because the effect of taking into account the definition in s9, the provisions of s491, the provisions of s497 and the provisions of s500 led to the conclusion that s500(2) was only meant to operate in relation to the creditors’ voluntary winding up as opposed to the members’ voluntary winding up.

15. I would add a refinement to Mr Kourakis’ submission. I think his analysis is correct where the company is insolvent. In other words, if the company is able to pay its debts within the relevant twelve month period, the provisions relating to a creditors’ voluntary winding up do not come into play. The question at issue therefore becomes: where, as in this case, the company was not insolvent at the time of the passing of the resolution pursuant to s491(1) of the Law, do the provisions of s500(2) of the Law apply?

16. It seems to me that the dispute is to be resolved by reference to the need for a provision such as s500(2) of the Law to apply to a members’ voluntary winding up. The contrast of the position with the insolvent company is instructive. Insolvency means that all of the creditors will not receive full payment in respect of their just debts. There therefore needs to be a mechanism for the distribution, pari passu, of the company’s monies to the creditors. That is achieved by the liquidator allowing all justified proofs of debts submitted by the creditors and distributing the available funds rateably amongst them. The essence of such a procedure is the requirement that creditors may not sue for their debt; they may only lodge a proof of debt. These considerations do not apply, in my opinion, where the company is not insolvent at the time that the special resolution is passed and thereafter. In those circumstances I think the proper interpretation of s500(2) of the Law is that the reference to “resolution for voluntary winding up” is not meant to define the process by which s500(2) of the Law applies. On the contrary, it defines the time from which the sub-section takes effect.

17. Although it is not determinative of the point, I am of the view that the fact that s500 forms part of Division 3, which deals with creditors’ voluntary winding up, and is not part of Division 4, which deals with voluntary winding up generally lends support to the contention that s500(2) only applies to a creditors’ voluntary winding up.

18. I have also taken into account the decision of Zeeman J in Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (In Liquidation) (1993) 11 ACSR 516, where his Honour granted leave to proceed against a company which was in liquidation pursuant to the company’s special resolution. Contrary to Mr Wells’ submission, I do not think that his Honour had before him the point which fell for decision on the preliminary argument before me. It seems, from my reading of the case, that either the case involved a creditors’ voluntary winding up or his Honour assumed without deciding that leave was necessary in the case of a members’ voluntary winding up.

19. For these reasons, I have come to the conclusion that where there is a winding up effected in accordance with a special resolution under s491 of the Law and the company is not insolvent, s500(2) does not apply. Since the plaintiffs did not need leave to commence these proceedings, they may proceed with the application for injunctive relief if it is otherwise properly constituted.