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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Winding up a company for $2,000?

A court has suggested that the minimum debt amount for which a creditor can proceed to apply to wind up a debtor before the court be increased from the present $2,000, an amount which

“has remained frozen at this level for more than a quarter of a century”.

And when courts make law reform suggestions, we should respond, and not, as in an example given, wait 15 years to do so.

 

Concern was raised recently in relation to media reports that the minimum amount upon which a creditor may apply to bankrupt a debtor – $5000 – was too low. A figure of $50,000 was suggested. The amount had been $2,000 for many years before being raised to $5,000 in 2010.

However, the corporate insolvency equivalent to wind up a company remains at a low $2,000.[1]

The Victorian Supreme Court has suggested that this amount be raised in the context of a dispute before it about a winding up demand for $2,372.

The 1988 Harmer Report[2] said that the

”amount should not be so high that it precludes small creditors from initiating a claim, but it should be high enough to remove the likelihood of trivial claims”. It set the amount of $2,000 but it recommended that the statutory minimum ”should be fixed by regulation so that it may be increased without the necessity for amendment by legislation”. That further recommendation was not ultimately adopted”.

No changes to the statutory minimum have been made since the commencement of the 1992 Act in 1993. The Court contrasted this with the Bankruptcy Act’s $5,000 for bankruptcy notices and creditor’s petitions having been increased from $2,000 by the Bankruptcy Legislation Amendment Act 2010 (Cth). One of the justifications for the increase was to ”lessen the opportunity to use bankruptcy procedures as a debt collection process“.

The Court said that while there is a clear policy mandate in Par 5.4 of the Corporations Act that insolvent companies should be promptly wound-up as a matter of public interest, at the same time, statutory demands and winding up proceedings should not be used as mechanisms for debt collection.

“A winding up proceeding is not ordinary inter partes litigation in which a party may pursue a debt and recover a judgment. Rather, it is a proceeding brought for the benefit and protection of all creditors of the company, including existing and future creditors. Contested winding up proceedings can be complex, time consuming and costly. So are applications to set aside statutory demands. The consequences of a winding up order are also significant and can affect the rights and interests of a company’s creditors, employees, shareholders, directors, customers and suppliers”.

As the Court went on to say at [98]:

“… on one view, a company that is unable to comply with a statutory demand for $2,000 is arguably just as much (or more) insolvent than a company which cannot pay a debt for a far larger sum. However, it is equally possible that the company may be experiencing a temporary lack of liquidity. During periods of economic downturn and constrained availability of credit, companies experiencing short-term cash flow problems may be more exposed to winding up proceedings for smaller debts than in more prosperous times. Further, a low statutory minimum may render the statutory demand and winding up regime more susceptible to being abused as a debt collection process”.

All courts have “overarching purposes” in relation to the conduct of their civil proceedings to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute, including to pursue proportionality.

“Parties and practitioners may be challenged in meeting the obligation of proportionality in winding up proceedings which relate to debts of only slightly more than the statutory minimum”.

The Court’s law reform suggestion

The Court suggested that Parliament might review the current amount of $2,000 and the method by which it is set. Fixing the amount by reference to regulation rather than the Act may increase the ease by which it can be adjusted in the future to keep pace with the value of money.

In the matter in hand, which involved related proceedings between the parties in the Federal Court, and where the debtor had in fact paid the money into court, the winding up proceeding was, as a matter of discretion, dismissed: In the matter of Vitamin Co Pty Ltd (ACN 614 680 367) [2019] VSC 540.

Comment

The Court has a point that if a company, or a debtor, cannot pay $2,000 it may be well and truly insolvent. At the same time, an increase seems warranted. Given the private nature of winding up demands, we would not know how many were served for amounts under, say, $5,000. But if $2,000 were an acceptable figure in 1993, then $5,000 or more should be the statutory minimum in 2019.

It should be noted however that New Zealand has thresholds of NZ$1,000 for both bankruptcy and winding up; and England £750 for both as well.

When courts raise law reform matters

When courts suggest law reform changes, it is wise to listen and respond to the suggestion.

In 2002 the Victorian Supreme Court made an important law reform suggestion – to change a jurisdictional requirement in corporate insolvency from a large C court to a small c court, and thereby relieve the superior courts from minor claims. Fifteen years later, under the Insolvency Law Reform Act 2016, that change was implemented.

[1] See s 459E of the Corporations Act and the relevant definition in s 9.

 

[2] ALRC 45

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One Response

  1. This issue was dealt with by the Court of Appeal in New South Wales in FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (No 2) (1988) 14 NSWLR 643; (1988) 14 a CLR 285 in circumstances where the court at first instance had made commentary in relation to similar value limitations in the Companies (New South Wales) Code: s. 364 referring to the English historical foundation of the £10 rule: at NSWLR 648, the change to the $$2000 rule: at NSWLR 649 and the need to apply the legislation in accordance with its terms: at NSWLR 653.
    What must be remembered is of course the public policy consideration of not permitting an insolvent corporation to continue to trade.

    In bankruptcy the threshold both for a Bankruptcy Notice and a Creditor’s Petition is $5000.00 even though there was some suggestion several years ago about increasing that amount to $10,000.00. The same public policy considerations existing under the Corporations Act 2001 do not apply.

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