Armed with sufficient information, not only can an applicant for a winding up order secure the protection of a company's assets by applying for either a freezing order against the company or the appointment of a provisional liquidator pending the determination of the winding up application, but it can also seek to preserve the value of claims which may be brought by a liquidator (once appointed) against third parties by obtaining a freezing against those prospective defendants as well.
Introduction
Maintaining the value of a company’s assets by way of a provisional liquidation is a well understood regime. Its purpose is to ensure the preservation of those assets pending the determination of a winding up application. For a provisional liquidator to be appointed, the Court needs to be satisfied that:
- there is a good arguable case for the winding up of the company; and
- that the company's assets are at risk in the sense that they are being dealt with in a way so as to avoid the consequences of a liquidation.
What of the case that the value of claims which might be made by a liquidator are at risk?
That was the circumstance considered by Black J. in re HPack Investments Pty Limited [2020] NSWSC 1638.
Background
The Deputy Commissioner of Taxation had began winding up proceedings against HPack in respect of unpaid tax in the amount of some $20,000,000.
On the basis of the Commissioner's investigation into the affairs of HPack and, shortly stated, it appeared that:
- its directors may have breached their duties to the company by arranging for the payment of substantial amounts either to themselves or for their benefit; and
- thereafter the directors have made payments of similarly substantial amounts both to their relatives and to offshore accounts.
Relying on that evidence the Commissioner argued that claims which a liquidator of HPack could pursue against its directors maybe frustrated because they had transferred the benefit of these payments to third parties and outside Australia.
The relief sought by the Commissioner was a freezing order in respect of the directors’ assets.
Freezing orders
So far as concerns the making of a freezing order, Black J summarised the relevant principles (at[37]) as follows:
"a freezing order is intended to prevent the abuse or frustration of the processes of the Court by preventing a defendant from disposing of its' assets so as to deprive a plaintiff of the fruits of any judgement obtained in the proceeding";
and
"a freezing order is to preserve the status quo, rather than to change it in favour of the plaintiff, and a freezing order should not be directed to prevent expenditures by a defendant, but rather to prevent expenditures that are not legitimate, having regard to the plaintiff's interest in ensuring that there is no dissipation of assets by the person against whom a judgement may be entered".
Jurisdiction to make freezing orders
HPack argued that, in the circumstances, there was no jurisdiction to make a freezing order as there were no current proceedings against the directors. Rather, they argued, that there was no such jurisdiction as the only proceedings then being pursued were for a winding up order.
As to that, Black J (at [48]) concluded:
"…the Court does have requisite jurisdiction to make … a freezing order that will preserve the claims that may be brought by a liquidator appointed to HPack …. That order is, in my view, directed to preventing the frustration or inhibition of the Court's winding up process by seeking to meet a danger that a prospective judgement that could be obtained by a liquidator consequent on that process will be wholly or partly unsatisfied".
Exercise of jurisdiction
The Court has to undertake a two step process to determine whether or not it will exercise its jurisdiction to make a freezing order.
It has to assess the likelihood of both a winding up order being made and a liquidator obtaining judgement in proceedings against the directors. In each circumstance it has to be satisfied that there is a good arguable case for the relevant relief.
Beyond those matters, the applicant for a freezing order must also demonstrate that, absent such an order, there is a danger that assets will be disbursed in a way which would frustrate a liquidator when it came to the enforcement of any judgement against the directors.
Authors: Richard Fisher (Consultant), Tony Ryan (Partner) and Michael Sloan (Partner).
