The NSW Court of Appeal has recently discussed the standing rules for applicants seeking a winding up order in Treadtel International Pty Ltd v Cocco [2016] NSWCA 360. This decision raises important issues regarding who is a creditor and who is a contributory.

The facts of the case

Mr Cocco commenced legal action against Treadtel and a Mr Crosher and then sought to amend his statement of claim which was approved by the court at first instance. The defendants appealed this decision.

The plaintiff claimed rights in one of the two issued shares in Treadtel (which were owned by Mr and Mrs Crosher in the form of one share each). My Cocco produced an undated trust deed recording his beneficial interest in Mrs Crosher share. Mrs Crosher subsequently transferred the share to Mr Crosher as part of Family Court consent orders. Mr Crosher acknowledged the trust but claimed that Mr Cocco had relinquished any interest in Treadtel in exchange for an interest in a foreign company and various assets in Europe assigned to him by Mr Crosher under the terms of an agreement between the men in Italy. The parties disputed the nature and effect of this agreement. Mr Cocco alleged that the agreement included an undertaking by Treadtel to pay for the cost of winding up certain European entities controlled by Treadtel by Mr Cocco and a further cash payment said to be owed by Mr Crosher for the transfer of the beneficial interest in Mrs Crosher’s former share in Treadtel.

Mr Cocco sought rectification of the Treadtel share register, orders for oppression under s232, a buy out order or winding up under s461. These grounds required confirmation of Mr Cocco’s standing as a member (and hence a contributory) or as a contingent or prospective creditor of Treadtel. The court at first instance held that it was arguable that Mr Cocco was a member, a contributory and a contingent or prospective creditor.

Mr Cocco claimed that as he had a pecuniary claim against Treadtel for an alleged breach of contract he was a contingent or prospective.

Although the case is only concerned about permission to amend a statement of claim, the court gives detailed consideration and helpful analysis of a number of important themes in corporate insolvency law relating to winding up applications and to company law in respect of standing as a member for minority oppression proceedings.

The reasoning of the court

The court rejected Mr Cocco’s claim to contingent or prospective creditor status. The judgment of the court was given by Barrett AJA (with Gleeson and Leeming JJA agreeing). Justice Barrett reviewed the tensions in the authorities between the NSWSC (see: Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311) and the Federal Court (see: Commissioner of Taxation v Simionato Holdings Pty Ltd [1997] FCA 125). The former line of authorities have rejected claims by those with merely unliquidated damages to the status of contingent or prospective creditor, while the latter line of authorities have accepted that such claims may confer standing and any concerns about the voracity of the claims can be addressed by the requirement to seek leave of the court.

Barrett AJA stated (at [57]):

“The view to be taken of a contingent or prospective creditor will, in my opinion, differ according to the purpose for which the creditor’s position is under consideration. Recognition as someone qualified to be heard on another applicant’s winding up petition or as someone whose claim should be taken into account in judging solvency is one thing. Recognition as someone who may initiate winding up proceedings is another. It is a well-established rule of practice that a person who claims to be a creditor but whose debt is disputed on genuine grounds will not be permitted to initiate or pursue a winding up application.”

His Honour went on to confirm (at [58]) that: “a creditor will not be permitted to apply for winding up unless there is an existing obligation of the company (as required by the decision in Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455), which obligation can be viewed with a high degree of assurance as a source of financial liability.”

In this case the basis of Mr Cocco’s claim was genuinely disputed by the parties and so it could not be said to give rise to standing as a contingent or prospective creditor. Similarly, his claim to the share allegedly held on trust was subject to a dispute as to whether Mr Cocco could call for it to be transferred to him. As such he did not have standing under s462 as a contributory because he was not a member until the share subject to the trust was transferred legally into his name. The court gave an clear and concise explanation of the law relating to the rights of a beneficiary to commence proceedings in respect of a right attaching to the trustee where the trustee holds the trust property as a bare trustee.

Takeaways

The Treadtel case is a useful case for insolvency lawyers and for company lawyers more generally as it clarifies perceived tensions existing between the NSWSC and FCA decisions on standing to seek a winding up order. There is also a detailed discussion of the rights of a beneficiary to take legal action in respect of rights attaching to shares held in a bare trust.