New South Wales Supreme Court rejects bid to advance small business restructuring

7 March 2024
Guy Edgecombe, Partner, Brisbane

In a proceeding brought by Mr Curran, in his capacity as the trustee for June Ellen Investment Trust (Plaintiff), to wind up Fitzgerald Housing Limited (formerly known as Kay Fitzgerald Housing Charity Limited) (Defendant), the New South Wales Supreme Court considered whether it was necessary to adjourn the winding up proceeding to allow the Defendant to advance a small business restructuring process (Restructuring).

The Defendant sought an adjournment to the winding up proceeding pursuant to section 453Q of the Corporations Act 2001, which provides that an application to wind up a company is to be adjourned if the company is under a Restructuring and the Court is satisfied it is in the interests of the company’s creditors for the company to continue under Restructuring, rather than by appointment of a liquidator.

The Restructuring framework is a debt restructuring process established in 2021. It enables eligible small companies to restructure existing debts under the supervision of a Small Business Restructuring Practitioner (SBRP).

The Defendant relied on the evidence of its SBRP (Mr Tromboli) in support of its application to adjourn the winding up proceeding. The evidence submitted by Mr Tromboli estimated a recovery of 27 cents in the dollar for unsecured creditors under the Restructuring, as opposed to an estimated recovery of only 2 cents in the dollar if the Defendant was wound up.

The estimated recovery of 27 cents in the dollar under the Restructuring was based on an expectation that the directors of the Defendant would, under a proposed Restructuring plan, agree to waive debts owed to them by the Defendant and inject funds into the company. Crucially, there was no evidence that Mr Tromboli had made any enquiries to determine the nature of the debts said to be owed by the Defendant to the directors, and whether the directors had or could raise those funds. No evidence was submitted by the directors in that regard.

In adjudicating the merits of the adjournment, the Court confirmed the relevant principles were those stated in Re Brew Still Pty Ltd (admin apptd) [2023] NSWSC 256. These principles required the Court to have regard to the risk that a (voluntary administration) or a restructuring may be embarked on as a “last resort” in response to a winding up proceeding and to exercise a degree of caution where an application to adjourn had been brought late, as it was in this case.

After having regard to Mr Tromboli’s evidence, Justice Black pointed to the absence of investigation by Mr Tromboli regarding the existence of the debt said to have been owed by the directors and the absence of any evidence by the directors to establish an ability to raise the funds to pay the Defendant. Due to this lack of evidentiary support, Justice Black was not satisfied that it was in the interests of the Defendant’s creditors to continue the Restructuring, rather than by appointment of a liquidator.

Whilst the Defendant was not successful in its application to adjourn the winding up proceeding, it separately sought leave under section 459S of the Corporations Act 2001 to oppose the winding up application on grounds that the Plaintiff did not have standing to bring the winding up application.

In rejecting this separate argument, the Court affirmed the previous NSWSC judgment of Re Pegasus Capital Management Pty Ltd [2011] NSWSC 570, in which the Court said that a company cannot bring an unsuccessful application under section 459S and seek to rely on the very matters on which it was not permitted to rely in the application in order to oppose a winding up application

Finally, Justice Black found no evidence had been led to prove the Defendant’s solvency and made an order winding up the Defendant in insolvency.

Key takeaway

In the matter of Fitzgerald Housing Ltd (Restructuring Practitioner Apptd) [2023], the New South Wales Supreme Court provided helpful commentary on the interplay between the insolvency regime and the small business restructuring process, and a timely reminder of the necessity of providing detailed and comprehensive evidence when contesting any winding up application.

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Authored by:

Guy Edgecombe, Partner
Beau Foley, Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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