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Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related policy and law reform, in Australia and internationally. No legal advice is offered or given.

Winding up a company for a $1,000 debt

” … the issue of proportionality between the amount of indebtedness and the deployment of an application to wind up a debtor company is one for the creditor and liquidator. Absent the prospect of an abuse of the court’s processes, the issue of proportionality is not a relevant consideration for the court in the determination of the application”.

At a time when it is understood that Australia is reviewing the $5,000 threshold for bringing a bankruptcy petition, the NZ Court of Appeal has re-emphasised the law applicable to its $1,000 threshold in company liquidations,[1] allowing an appeal from the dismissal of a winding up application because it was based on a debt of ‘only’ $1,000.[2]

The trial decision

The Associate Judge had noted that the proposed liquidator’s charge-out rates were from $500 an hour to $145. He considered that

‘liquidation of a company for a $1,000 debt as disproportionate. It only needs two hours work by the liquidator for the amount of the debt to be consumed by the cost of liquidation’.

The Judge said that his own experience was that

‘remuneration for a liquidation was rarely less than $10,000 and even if $5,000 … The plaintiff should take other steps to recover the debt’.

The appeal decision

The NZ Court of Appeal disagreed and relied upon these comments in Feltex Carpets v N&I Investments:[3]

‘The discretion to refuse to put a company into liquidation is to be sparingly exercised … Even if it is unlikely that there will be any assets available for distribution to unsecured creditors, the Court regards the liquidator as serving useful functions in the investigation of the company’s affairs and acting as a guardian of the interests of unsecured creditors …’.

The Court of Appeal said that

‘there may be cases where one might wonder at the economic rationality of doing so’

but subject to limited exceptions,

‘that need not be the concern of the court presented with the creditor’s application’.

Here, the sole director had emigrated from New Zealand with no plans to return, and the company had in the meantime been deregistered.

‘It is for the creditor and the liquidator to exercise the prudential judgement as to whether the cost of pursuing the matter is outweighed by the prospect of the debt ultimately being recovered. That is not something which creditors or their legal advisers are able to accurately assess in advance of the liquidation’.

The Court of Appeal saw no potential for abuse of the court’s process in the conduct of the liquidation. In any event, instead of the liquidator proposed by the applicant, the court could prefer to appoint the Official Assignee as liquidator in which event s 254(b) would apply. That section provides that the Official Assignee is not required without the minister’s consent to do any work in a liquidation if that would involve incurring any expense.[4]

‘Hence the prospect of the court’s processes being successfully rorted seems remote’.

Under Australian law

The same outcome would be likely under Australian law. If parliament has set the winding up threshold at $2,000, and $5,000 for bankruptcy, a creditor is entitled to be able to rely on the relevant threshold, other things being equal.

Some differences between our laws are:

  • The Court of Appeal refers to the fact that the Official Assignee is not required to do work in a liquidation and thereby incur expenses if there are no assets; that does not apply to a private liquidator. In contrast, Australia has no government liquidator and the concession to working for no fee is given in limited terms by s 545 Corporations Act.
  • Also, Australia’s section 467(2)(b) provides that a court must not refuse a winding up application merely because the company has no property.

In bankruptcy, the absence of assets is no reason to refuse a sequestration order. This has extended in Australia to a finding that a member of a religious order who had made a vow of poverty should nevertheless be made bankrupt.[5]

In that case, the Full Federal Court of Australia referred to the well cited English law  comment that

‘[a] man may indeed be too poor to be made bankrupt: but the burden of proof is heavy’.[6]

The Full Court nevertheless

‘suspect[ed] that in the end this sequestration will prove to be a fruitless, time wasting and unmeritorious exercise which has little to do with the public interest. However on the principles established in the cases …’

the bankruptcy was allowed to stand.

————————————-

[1] Australia’s is AU$2,000; New Zealand also has a $1,000 threshold in bankruptcy. Dollars are either AU or NZ depending on the context.

[2] 90 Nine Limited v Luxury Rentals NZ Limited [2019] NZCA 424

[3] Feltex Carpets Ltd v N&I Investments Ltd [2006] NZHC 1568 at [38].

[4] That does not apply to a private liquidator.

[5] Re Patrick Michael Darcey v the Pre-Term Foundation Appeal [1988] FCA 165

[6] In Re Field (A Debtor) (1978) Ch 371.

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