By Darrin Mitchell, Senior Associate at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group
Are you crazy? In the midst of litigation and you knock back full payment? Yes that’s exactly what happened and with the approval of the Supreme Court of New South Wales.
Section 465B of the Corporations Act 2001 allows for the substitution of applicants in a winding up proceeding if the current applicant is not pursuing the application “diligently enough” or for the catch all provision “for some other reason”.
Recently Justice Black, sitting in the role of Corporations Judge of the Supreme Court, was met with a creditor wanting to substitute as the applicant in a winding up application. The debtor company opposed the substitution request on the basis that the creditor was offered full payment of its debt. The creditor refused payment and sought the orders for substitution.
Waiting in the wings were other creditors of the debtor company who were owed monies sufficient to allow them to also subsequently make application to substitute as the applicant in the proceedings.
Considering the hovering creditors who had made their presence known to the Court, the creditor rejected the payment on the basis that it did not want to be the target for a well-heeled liquidator down the track chasing a preference payment.
Justice Black in one of his renowned articulate ex-tempore judgments identified the salient issues, confirmed at [10] that “… the unfair preference provisions can potentially apply to it (the applicant)”. His Honour went on to say:
“It does not seem to me that it could be suggested that A Murray was unreasonably concerned as to the application of those provisions, or was acting unreasonably in considering, for example, that it may not wish to be drawn into a later application to set aside a voidable transaction against it.”
The debtor company argued that it was solvent despite its non-compliance with a Creditor’s Statutory Demand served upon it. His Honour noted at [12] that the question of whether the debtor company was solvent was not a question for an application for substitution of applicants but moreso for during the winding up application itself.
Therefore, His Honour allowed the application for substitution confirming that the winding up application was no longer being pursued by the initial applicant and that he was also satisfied the applicant was a creditor of the debtor company with a judgment debt in its favour.
So it’s okay to say no and reject full payment of the debt owed to you and pursue substitution as the applicant in winding up proceedings before the Court.
Read the judgment here (link is external)
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Darrin Mitchell on 02 9806 7428 or darrinm@matthewsfolbigg.com.au or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
