As a general rule, insolvent companies should be liquidated
2010 case note – Case provides a useful precedent on the Court's discretion not to make a liquidation order - Insolvency, creditor, liquidation.
Companies Act 1993
Notwithstanding certain steps taken to satisfy outstanding debts, the Court was satisfied that the companies were insolvent and should be liquidated.
Impact of decision
The case provides a useful precedent on the Court's discretion not to make a liquidation order.
The Commissioner applied to liquidate Atlas Food and Beverage Ltd (Atlas), Char Char Ltd (CCL), Yellow Cross Brewing Company Ltd (YCB) and Edward J Schwartz Entertainment Inc Ltd (EJS). The four companies were part of a group.
By the time of the hearing, Atlas had paid its tax debt that was not disputable under the disputes regime. It had also issued a Notice of Proposed Adjustment (NOPA) in respect of the remaining PAYE debt of approximately $110,000.
CCL was trading at the time of the hearing. It had a tax debt of around $63,000. CCL had made a payment proposal which had been rejected by the time of the hearing.
YCB and EJS
These companies were in receivership. YCB has substantial PAYE and GST arrears. EJS had a significant GST debt.
It was argued for Atlas that as all the undisputed tax had been paid, the Commissioner was no longer a creditor, and alternatively the Court should exercise its discretion against making a liquidation order.
The Court held that the Commissioner was a creditor. As well, the case was a plain one and not one that warranted departure of the general policy that insolvent companies should be liquidated. However, the liquidation order in respect of this company was stayed pending an appeal to the Court of Appeal.
It was argued for the company that a provisional liquidation order should be made which could only come into effect if payment in full was not made within 14 days. The Court held that in the circumstances, it was not appropriate to allow the company an indulgence of a 14-day period to pay its outstanding tax and a liquidation order was granted.
YCB and EJS
It was argued for the companies (by the director exercising residual powers) that as the Commissioner's tax debt (PAYE and GST) was preferential, the receivers should have paid the debt out of the proceeds of the inventory.
The Commissioner expressed doubt as to the validity of the above argument and argued that a liquidator could evaluate the merits of any such argument. The Court was satisfied that the Commissioner's position was a reasonable one and was not prepared to exercise its discretion not to grant a liquidation order.