Leralais - Case Update

The Supreme Court of New South Wales has issued a reminder that a winding up application should not be used as a debt recovery tool, refusing an application to wind up a company that was able but unwilling to pay a debt, holding that the company was solvent and that the winding-up relief was not warranted in the circumstances.

Xela Projects, a building company, entered into a contract with Leralais in June 2022 which provided for the construction of seven townhouses on land owned by Leralais in Borwal, in the Southern Highlands of NSW. Xela and Leralais had a falling out over the contract, resulting in Xela obtaining three District Court judgments against Leralais totalling $867,107.61 under the Building and Construction Industry Security of Payment Act 1999 (SOPA). Leralais has sued Xela in the District Court by way of cross-claim, alleging that it does not owe the amounts claimed by Xela.

After attempting to enforce the SOPA judgments in various ways with limited success, Xela applied to wind up Leralais in insolvency and for a freezing order. The Court considered two main issues: (1) whether there was a rebuttable presumption that Leralais was insolvent; and (2) if Leralais was not presumed insolvent, whether Xela had established that Leralais was in fact insolvent.

On the statutory presumption of insolvency, Xela argued that the various enforcement steps it took gave rise to a rebuttable presumption of insolvency under s 459C(2)(b). It relied on a garnishee order which was party satisfied by the Commonwealth Bank of Australia, as well as a writ for levy of property. The Court held the garnishee order could not ground the presumption of insolvency because the relevant part-satisfaction occurred on 26 August 2024—more than three months before the winding-up application filed on 17 December 2024.

As for the writ for levy of property, in order for s 459C(2)(b) to be engaged, the writ must have been “returned” within the meaning of Rule 39.51 of the Uniform Civil Procedure Rules 2005 (NSW). The Court found that it hadn’t—there was no evidence that Xela had made any request pursuant to the rule, or of any return of the writ to the District Court. The Sheriff’s notices showed attempted but unexecuted enforcement; they did not amount to a writ “returned wholly or partly unsatisfied”. Accordingly, no presumption of insolvency arose.

Turning to actual insolvency, the Court emphasised the cash-flow test and the distinction between a debtor who is “able but unwilling” to pay and one who is objectively “unable” to pay. Authorities such as Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; [1966] HCA 21 and Sarina v Wollondilly Shire Council [1980] FCA 138; 32 ALR 596 confirm that unwillingness alone is not enough to establish insolvency, and that creditors in that scenario should pursue execution remedies.

Here, the evidence showed Leralais could pay the judgment debts (including by resort to enforcement against its Bowral land, in which there appeared to be ample equity), but was choosing not to pending its cross-claim, so it was solvent. The Court noted that, while an “able but unwilling” debtor might in some cases be vulnerable to “just and equitable” winding up, this was not the appropriate case for such a remedy. Xela’s proper course was to pursue execution (including steps toward sale of land) rather than to invoke insolvency jurisdiction, and the winding-up and freezing applications were therefore dismissed.

Read the decision HERE.

Professionals involved:

• Roger Marshall SC and Nathan Li of Ground Floor Wentworth Chambers (instructed by Francom Group) for Leralais

• Franco Corsaro SC of Greenway Chambers and Michael Hazan of 11 St James Hall (instructed by Memcorp Lawyers) for Xela