Background

On 10 November 2023 BECL Strategy Holding Ltd (BECL) filed two separate applications seeking orders that the following companies be wound up:

1. Mentmore 313 Pty Ltd (Mentmore); and
2. NR Pendle Pty Ltd (NR Pendle).

The applications were based upon Mentmore and NR Pendle’s failure to comply with their respective creditor’s statutory demand for payment of debt.

Both applications were heard together, with BECL and NR Pendle agreeing that the Court’s reasoning insofar as the Mentmore judgment is concerned would equally apply in the NR Pendle case, while reserving any dispute they may have, or any right of appeal they may have, regarding the correctness of that reasoning.

Issues

There were three key issues for consideration arising from the application to wind up Mentmore:

1. Whether the statutory demand was served and whether the presumption of insolvency arises;
2. What are the debts which are to be taken into account in establishing Mentmore’s solvency, in relation to which Mentmore had served an expert solvency report; and
3. Can expert evidence be used to support solvency.

There was one further issue insofar as NR Pendle was concerned, being whether Win Senior No 324 Pty Ltd (Win Senior), the secured creditor of NR Pendle, had any say in the winding up application.

Mentmore decision - service and solvency

The Court was satisfied that Mentmore ought to be wound up. In his reasoning, Justice Black made the following findings:

1. The statutory demand was properly served and the tracking record (despite being recorded by a third-party delivery service) was sufficient in the context to establish service on a particular date.
2. That Mentmore could not argue that the amount of debt claimed was not due and payable or was genuinely disputed if it failed to do so in any application to set aside the statutory demand and otherwise did not obtain leave under s 459S of the Corporations Act 2001 (Cth) (Act).
3. If Mentmore was not successful in establishing its entitlement to disregard the amount of the debt claimed by BECL in assessing its solvency, then the expert evidence on which it relied on would not be sufficient to establish its solvency.

NR Pendle decision – interest of secured creditor

As the parties agreed that the reasoning adopted in the Mentmore judgment would equally apply in this case, Justice Black only dealt with the additional issue pertaining to the secured creditor insofar as NR Pendle was concerned.

NR Pendle submitted evidence by an intervening party, Win Senior, who submitted that the winding up order should be either adjourned or deferred under s 467 of the Act because of Win Senior’s investment under a secured facility agreement with a facility limit of $30 million.

NR Pendle referred to Win Senior's intention or “present intention” to continue to make funding available to NR Pendle to use in connection with the completion of a project development until it had been completed, which was expected to occur in late 2024.

NR Pendle indicated that Win Senior had a strong preference that NR Pendle not be placed into liquidation until the completion of the development. NR Pendle expressed concern that Win Senior would incur higher costs if NR Pendle was to be placed in receivership as it would then receive a smaller return on its debt than if NR Pendle remained in control of the development.

In determining whether Win Senior’s interest should prevail over a winding up order, His Honour referred to Lechmere Financial Corporation v Aspermont Limited [2003] FCA 1138 and contemplated the defendant’s submissions that the Court has a duty when considering whether to make an order for the winding up of a company, to have regard not only to the interests of the applicant creditor, but to the interests of all creditors, particularly those who are unsecured.

His Honour’s main concern with NR Pendle’s request was the extent to which leaving NR Pendle free to trade would expose other contractors, who may in fact be retained by it to address defects of the development which Win Senior was not presently aware of, to the risk that their debts would not be met.

His Honour referred to the notion in TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 which expressed that if insolvency is established, the discretion to dismiss a winding up application would only be exercised if some good reasons were shown for doing so.

Ultimately, his Honour held that the fundamental problem with permitting NR Pendle to continue to trade would mean that NR Pendle would be trading whilst insolvent and its directors would be continuing to contravene the Act. Therefore, His Honour was not persuaded that the Court should exercise any discretion to withhold a winding up order.

Key takeaways

These cases are a useful reminder of:

1. The importance of properly considering whether to challenge a statutory demand prior to its expiry given a failure to do so may result in an inability to challenge the underlying debt in a subsequent winding up application following expiry of the demand;
2. As discussed in Lechmere, the Court has a duty when considering whether to make an order for the winding up of a company, to have regard to the interests of all creditors, particularly those who are unsecured; and
3. The existence of a secured creditor’s support is unlikely to stave off a winding up application if the company is found to be or presumed to be insolvent.

Further information / assistance regarding the issues raised in this article is available from the authors, Radhika Kanhai, Partner, Abhinav Sharma, Senior Associate, Emily Jarman, Lawyer or your usual contact at Moray & Agnew.