In a recent Federal Court decision, the Receivers of Zhong Ao Zhi Hong Investment Holding Pty Ltd obtained judicial confirmation of their approach to distributing surplus funds following the sale of the company’s sole asset.

Zhong Ao Zhi Hong Investment Holding Pty Ltd (‘the Company’) was a single-purpose entity whose sole business was the ownership and operation of the Aitken Hill Property located at 20 Dunhelen Lane, Craigieburn. On 6 July 2021, Martin Ford and Daniel Walley were appointed as Receivers and Managers under a suite of complex financial instruments tied to an intercompany loan structure involving the HNA Group and its subsidiaries.

The Receivers successfully sold the property for AUD 142 million (plus GST), and after satisfying secured debts and verified unsecured creditors, they were left with a surplus of AUD 490,776.

The legal issue

The Receivers sought the Court’s direction regarding how to distribute the remaining funds, given conflicting obligations under the Subscription Agreement dated 23 December 2020—specifically clause 2.6(d)(i)(C). This clause stipulates that any surplus (termed “Additional Proceeds”) must be distributed to the shareholder unless doing so would cause directors to breach any fiduciary or statutory duty.

The Receivers had conducted extensive steps to identify and contact all creditors. Despite these efforts, a small subset of “unresponsive creditors” (totaling AUD 171,967 in claims) never submitted substantiating documentation by the set deadline of 25 July 2022. The current sole director, Mr Fei Xiao, remained disengaged from company affairs, and no meaningful assistance was received from former directors either.

Court’s findings

Judicial Registrar Gitsham held that:

• The Receivers had undertaken a comprehensive and adequate process to identify, notify, and settle with legitimate creditors.
• There was no practical utility in appointing a liquidator, given that the company is solvent and a winding up would unnecessarily consume resources without altering the distribution outcome.
• The residual obligation under clause 2.6(d)(i) of the Subscription Agreement—to remit surplus funds to the shareholder (P.T. Ltd)—was valid, provided there was no breach of directors’ duties.

Final Order

The Court ruled that the Receivers are justified in distributing the remaining funds of AUD 490,776 in accordance with clause 2.6(d)(i) of the Subscription Agreement, and declined to order a liquidation.

Key takeaways

This decision highlights the value of receivers seeking directions under s 424 of the Corporations Act where legal uncertainty may arise. It also demonstrates the Court’s pragmatic approach in circumstances where:

• creditors have been properly identified and notified.
• company directors are disengaged.
• a liquidation would only impose unnecessary costs without changing the distribution outcome.

For insolvency practitioners, the ruling serves as a reminder that proactive creditor management and early recourse to court directions can provide certainty in the final stages of receivership.

Contact Lisa McNichols, Special Counsel, Madgwicks Lawyers.

The information provided in this article is general in nature and cannot be relied on as legal advice, nor does it create an engagement. Please contact one our Lawyers listed above for advice about your specific situation.