By Shamsiya Hussainpoor
The winding-up case involving the Lysterfield Islamic Society of Melbourne Eastern Region Inc. has recently come to a close, with the court making a significant decision that highlights the challenges not-for-profit organisations face when handling financial insolvency and legal obligations.
This case sheds light on the interplay between corporate governance, financial solvency, and the complex process of winding up a company under the Corporations Act.
The ruling was issued in the Supreme Court of Victoria on 28 February 2025.
The defendant (Islamic Society of Melbourne Eastern Region), an organisation running an aged care facility, was confronted with an unpaid judgement debt following a default judgement entered by the plaintiff.
The plaintiff, a supplier of goods or services to the defendant, filed a statutory demand for the payment of $257,199.61 – despite this demand, the defendant failed to apply to set aside the statutory demand under section 459G of the Corporations Act.
The primary issue in the case revolved around whether the defendant was solvent, a key factor that would determine if it should be wound up. According to Section 459A of the Corporations Act, a company may be wound up if it is insolvent, and the presumption of insolvency arises when a statutory demand is not complied with. The defendant’s legal team contended that the debt owed to the plaintiff was genuinely disputed, and thus, the company should not be considered insolvent.
However, the court found this argument insufficient, particularly due to the lack of solid financial evidence from the defendant. One of the most significant concerns raised by the court was the defendant’s failure to rebut the presumption of insolvency. Despite ample opportunity to do so, the defendant’s legal team failed to provide compelling evidence to show that the company was solvent.
The court pointed out that the defendant’s evidence was not enough to convince the court that it could meet its debts, particularly when comparing its liabilities with its cash flow.
Supreme court of Victoria judge Fiona Steffensen said in a statement that the defendant’s failure to prove solvency weighs heavily in favour of a winding up order.
The court also criticised the defendant for not providing any clear financial documentation to support its claim of solvency. Legal representatives for the defendant argued that the dispute over the debt owed to the plaintiff should be material to proving solvency, but the court found these arguments to be vague.
The defendant did not draw a direct connection between the debt and its financial position, which left the court with insufficient evidence to decide whether the company was truly solvent.
“The defendant made no attempt to draw a connection between the quantum of the debt and the financial position of the defendant,” Ms Steffensen said.
The defendant’s failure to apply for the statutory demand to be set aside was another key issue in the case. The statutory demand was issued in July 2024, yet it wasn’t until much later in the year that the defendant’s legal team began taking any action.
Ms Steffensen remarked the defendant’s conduct in not filing an application to set aside the statutory demand was “unexplained.” This failure to act was critical because it left the court with little choice but to apply the presumption of insolvency and rule in favour of the plaintiff’s winding-up application.
Even though the judgement debt had been set aside by the County Court, this did not impact the presumption of insolvency. The defendant’s failure to apply to set aside the statutory demand left the plaintiff with standing to proceed with the winding-up application.
Further in the statement, Ms Steffensen said, “The fact the judgement debt has been set aside by consent is a factor which weighs in favour of refusing to wind up, but it does not preclude the application of the presumption of insolvency.”
The defendant also attempted to argue that the plaintiff’s claim had been irregularly obtained. The defendant pointed to defects in the plaintiff’s statement of claim and suggested that the plaintiff had been unprofessional by entering the judgement without prior warning to the defendant’s solicitors.
However, the court found this argument unconvincing, stating that the defendant had ample opportunity to respond to the plaintiff’s claims. The court noted that the plaintiff had sent several letters to the defendant’s solicitors, but received no responses.
“At the time the plaintiff entered judgement on 25 July 2024, no correspondence had been received from the defendant’s solicitors since April 2024. It was therefore reasonable for the plaintiff to enter judgement without further warning to the defendant’s solicitors,” Ms Steffensen said.
In the court’s view, the defendant’s business model, which relied heavily on government subsidies to support its aged care facility, did not provide sufficient grounds to prevent winding up.
The defendant argued that it operated a vital service and that the subsidies it received were reliable, but the court found this claim to be unsupported by evidence.
There was no information provided as to how the subsidies were earned or whether they would continue to be available.
“Even had the Court been satisfied that the income source was safe and reliable, this must be balanced against the failure to rebut the presumption of insolvency and the public interest in ensuring that insolvent entities are not permitted to trade and incur further debts,” Ms Steffensen said.
The defendant’s legal team also proposed that the court could refuse the winding-up order on the condition that the debt be paid to the plaintiff. However, the court found this argument lacking, as there was no substantive explanation for why the debt had not been paid already.
Additionally, the court noted that even if the debt were paid, the supporting creditor, Comficare Pty Ltd, which was owed over $1 million, could still proceed with the winding-up application.
“The existence of the supporting creditor is a significant factor which weighs in favor of winding up the company,” the judge said.
In light of these findings, the court ultimately decided to grant the winding-up order.
“The focus of the Court’s attention must be on the question of solvency, and on the evidence, I find the defendant’s failure to provide compelling evidence of solvency means that the company should be wound up,” Ms Steffensen said.
The defendant’s failure to rebut the presumption of insolvency, combined with the lack of evidence regarding its solvency and the existence of a supporting creditor, left the court with little choice but to order the company’s dissolution.
The court’s decision serves as a powerful reminder to not-for-profit entities about the importance of transparency in financial matters.
While the Lysterfield Islamic Society of Melbourne Eastern Region ran an aged care facility providing essential services, the failure to adhere to legal processes and provide clear financial evidence ultimately led to its downfall.
The case underscores the critical role that financial solvency plays in determining whether an organisation can continue to operate, regardless of its service-oriented nature.
As a result of the court’s ruling, the Lysterfield Islamic Society of Melbourne Eastern Region will be officially wound up, with Manuel Hanna appointed as the liquidator.
The decision will have significant ramifications for the organisation’s future, but it also serves as an important lesson for other not-for-profit entities that face similar financial and legal challenges.
The public interest, as Ms Steffensen concluded, “requires that an insolvent company be wound up to prevent it from incurring further debts.”
