IP Solutions International Pty Ltd

In the matter of *IP Solutions International Pty Ltd* [2023] NSWSC 1170, Justice Condon of the Supreme Court of New South Wales considered an application by the liquidators of IP Solutions International Pty Ltd (in liquidation) for directions regarding the distribution of surplus assets. The liquidators sought to distribute these surplus assets to the holders of certain convertible notes, but the company's sole director and shareholder, Mr. David John Smith, objected to this proposed distribution. Mr. Smith contended that the surplus assets should instead be distributed to him as the sole shareholder.

The central legal issue before the Court was the proper characterisation of the rights of the convertible noteholders and Mr. Smith in relation to the surplus assets of the company upon its liquidation. Specifically, the Court had to determine whether the convertible noteholders had a proprietary interest in the surplus assets that took precedence over the rights of the sole shareholder, or whether the surplus should be treated as available for distribution to the shareholder after all debts, including those owed to noteholders, had been satisfied.

Justice Condon reasoned that the terms of the convertible notes were critical to determining the rights of the parties. The notes contained provisions that, upon liquidation, entitled the holders to receive repayment of their principal amount plus accrued interest, and importantly, a pro-rata share of any surplus assets remaining after all other debts and liabilities had been paid. The Court found that these provisions created a right for the noteholders to participate in the surplus assets, effectively giving them a proprietary claim that ranked ahead of the shareholder's claim to any residual surplus. The Court distinguished this from a situation where noteholders were merely creditors entitled only to repayment of their debt.

Consequently, Justice Condon directed that the liquidators were entitled to distribute the surplus assets of IP Solutions International Pty Ltd in accordance with the terms of the convertible notes, meaning the surplus was to be distributed to the noteholders and not to Mr. Smith as the sole shareholder.