Australian Cherry Exports Ltd v Commonwealth Bank of Australia

• Corporations Act 2001 (Cth) - s.601AB, s.601AD(1), s.601AD(2), s.601AE(3), s.601AH(2) LEGISLATION CITED : - Farm Debt Mediation Act 1994 (NSW) - s.5(2), s.8, s.9(1A), s.10

• Australian Cherry Exports Ltd v Commonwealth Bank of Australia (1996) 39 NSWLR 337 - Australia & New Zealand Banking Group Ltd v Barns (1994) 13 ACSR 592 - Boxco Ltd, Re [1970] 1 Ch 442 CASES CITED : - Commonwealth Bank of Australia v Trellis Holdings (1996) 19 ACSR 319 - Scott v Janniki Pty Ltd (1994) 14 ACSR 334 - Shaw v Goodsmith Industries Pty Ltd (2002) 41 ACSR 556 - Waldcourt Investment Co Pty Ltd, Re (1986) 11 ACLR 7

National Australia Bank Ltd - Plaintiff PARTIES : Philip Martin - Intervener

J.M. Hennessy - Plaintiff COUNSEL : A. Friedlander (Sol) - Intervener

Dibbs Abbott Stillman - Plaintiff SOLICITORS : McMahons National Lawyers - Intervener

1 A bank seeks an order reinstating the registration of an insolvent company which was deregistered for failing to file annual returns. The bank needs the company re-registered so that it may more conveniently enforce loan securities against it. 2 A director of the company opposes re-registration because if the company were re-registered it would have to be wound up immediately. The company carried on a farming business and the director seeks a mediation between the company and the bank pursuant to the Farm Debt Mediation Act 1994 (NSW) ("the FDM Act") before the bank enforces its security. However, the FDM Act does not apply to a farming company which is in liquidation. 3 Should the Court refuse to revive the company because the company, if revived, will not have the right to mediate with the bank? The facts

4 Trim Perfect Australia Pty Ltd ("the Company") is the registered proprietor of a substantial property known as Booma North at Barooga in New South Wales ("the Property") on which it carried on a dairy farming business. 5 During 1998 the National Australia Bank Limited ("the Bank") made substantial loans to the Company. The loans were secured by a registered mortgage over the Property, a charge over the Company's assets, and a guarantee by the director of the Company, Mr P. Martin, and his wife, which was supported by a mortgage over certain real estate in New Zealand. 6 The Company went into default under its loans from the Bank. As at 8 August 2005 it owed the Bank in excess of $3,250,000. 7 On 25 August 2003, the Australian Securities & Investments Commission ("ASIC") deregistered the Company pursuant to s.601AB of the Corporations Act 2001 (Cth) ("CA") for failing to file annual returns for the years 2001 and 2002. Apparently, the Bank did not discover that the Company had been deregistered until July 2005. 8 On 11 August 2005, the Bank filed an Originating Process seeking an order under CA s.601AH(2) that ASIC reinstate the registration of the Company and an order that the Company, upon reinstatement, be wound up on the just and equitable ground or on the ground that it had suspended business for more than a year. 9 On 9 September 2005, Mr Martin gave to the Bank a purported notice under s.9(1A) of the FDM Act. 10 The relevant provisions of the FDM Act are as follows: "8(1) A creditor to whom money under a farm mortgage is owed by a farmer must not take enforcement action against the farmer in respect of the farm mortgage until at least 21 days have elapsed after the creditor has given a notice to the farmer under this section. … 9(1A) A farmer who has not been given notice under section 8 but who owes money to a creditor in relation to a farm debt may notify the creditor in writing that the farmer requests mediation concerning the farm debt involved. A farmer may request mediation under this subsection whether or not the farmer is in default. … 10(1) Once a farmer has given a creditor a notification in accordance with section 9 requesting mediation, the creditor must not take enforcement action in respect of the farm mortgage concerned unless a certificate is in force under section 11 in respect of the farm mortgage.

10(2) This section does not invalidate any statutory enforcement notice or other process given, served or executed in order to fulfil a condition precedent to the taking of any enforcement action, but operates to prohibit the taking of the action concerned, or the enforcement by a court or tribunal of any such process, except as provided by section 11 (6)." 11 Section 5(2) of the FDM Act relevantly provides as follows: "5(2) This Act does not apply in respect of: … (c) a farmer, being a corporation, that is an externally administered corporation within the meaning of the Corporations Act 2001 of the Commonwealth."

An "externally administered corporation" is defined in the dictionary to the Corporations Act as including a company that is being wound up. 12 There is no dispute that:

• for the purposes of the FDM Act, the Company was a "farmer" at all relevant times, the debt of the Company to the Bank was a "farm debt" and the Bank's mortgage over the Property was a "farm mortgage";

• the Bank did not give a twenty-one day notice to the Company or to Mr Martin pursuant to s.8(1) before filing its Originating Process to reinstate registration of the Company and have the Company wound up;

• no certificate under s.11 is presently in force, for the purposes of s.10(1). Mr Martin's submissions

13 On the hearing of the application Mr J. Hennessy of Counsel appeared for the Bank and Mr A. Friedlander, Solicitor, appeared for Mr Martin. Mr Friedlander did not dispute that:

• as a creditor, the Bank was "a person aggrieved" by the deregistration of the Company and had standing to make the application under CA s.601AH(2)(a)(i);

• if the registration of the Company were reinstated, the Company would have to be placed in liquidation. 14 Although the Bank did not rely upon insolvency as a ground for winding up in its Originating Process, it submitted that, by reason of default under the Bank's mortgage, the Company was insolvent. Mr Friedlander did not dispute insolvency. Nevertheless, it is clear that as the Company has not been in existence since August 2003 if it is reinstated it is liable to be wound up on the ground that it has suspended its business for more than a year. 15 Mr Friedlander submitted that:

• the Bank's application for reinstatement of the Company's registration and for the Company's liquidation constituted "enforcement action" for the purposes of the FDM Act;

• the Bank's application was prohibited because the Bank had not given notice to the Company in accordance with s.8(1);

• the Bank's application was prohibited by s.10(1) because the Company had given a notice under s.9(1A) and no s.11 certificate was in force;

• the Court should, in its discretion, refuse the application to reinstate the Company because the Company would then have to be placed in liquidation and would be deprived of any right to mediate under the FDM Act. Whether reinstatement and liquidation is "enforcement action"

16 Section 4(1) of the FDM Act relevantly defines "enforcement action in relation to a farm mortgage" to mean: "… taking possession of property under the mortgage or any other action to enforce the mortgage, including the giving of any statutory enforcement notice, or the continuation of any action to that end already commenced …"

The question which arises is whether the Bank's action in seeking reinstatement and liquidation of the Company constitutes taking "any other action to enforce the mortgage" . 17 The meaning of "enforcement action in relation to a farm mortgage" under the FDM Act has been considered in two authorities. In Commonwealth Bank of Australia v Trellis Holdings (1996) 19 ACSR 319, McLelland CJ in Eq held that where a "farm debt" is secured by a "farm mortgage" action by the secured creditor to recover the debt by issuing a statutory demand and seeking to have the "farmer" corporation wound up is not an "action to enforce a farm mortgage" within the definition of "enforcement action" because such a means of recovering the "farm debt" is not dependent upon the existence of the mortgage. His Honour's decision and his reasoning in support of it were upheld, by a majority, by the Court of Appeal: Australian Cherry Exports Ltd v Commonwealth Bank of Australia (1996) 39 NSWLR 337. 18 Mr Friedlander submits that, in the present case, reinstatement of the Company is "enforcement action" because the Bank in its own affidavit says that such action is necessary so that it can effectively enforce its mortgage securities against the Company. 19 I have no doubt that the Bank, in seeking to reinstate the Company, intends to facilitate exercise of its security rights under its mortgage. Such an intention, however, is not to the point. An action is "enforcement action" according to its inherent legal character, not according to the subjective classification put upon it by the initiator or because the action is a necessary or desirable antecedent to the performance of an act which is, by its inherent legal character, "enforcement action". 20 The Bank's right to seek reinstatement of the Company does not depend upon the existence of the Bank's mortgage. The Bank's right to seek reinstatement under s.601AH(2)(a)(i) depends upon its status as "a person aggrieved". It has that status because it was a creditor of the Company at the time of deregistration, not because it was a creditor which also had a mortgage security: see e.g. Australia & New Zealand Banking Group Ltd v Barns (1994) 13 ACSR 592; Re Waldcourt Investment Co Pty Ltd (1986) 11 ACLR 7, at 12. 21 I conclude that the Bank's application to reinstate the Company is not "an enforcement action" within the meaning of the FDM Act. Accordingly, the Bank was not required by s.8(1) of the Act to give notice of the application and the application itself is not prohibited by s.10(1) of the FDM Act. 22 However, even if a reinstatement application could properly be classified as "an enforcement action" because it was a necessary or desirable prelude to exercise of the Bank's powers of sale under the mortgage, s.8(1) could have had no application in the present case because at the time that the application for reinstatement was made there was no "farmer" to whom the required notice could have been given. By virtue of its deregistration, the Company had ceased to exist: CA s.601AD(1). Section 10(1) of the FDM Act could not be construed so as invalidate a proceeding for failure to perform an antecedent act which was, at the relevant time, impossible of performance. Whether reinstatement should be refused on discretionary grounds

23 The Court has a discretion to grant or refuse reinstatement of a deregistered company according to the justice of the particular case and it may order reinstatement on terms, if necessary, in order to avoid any injustice or prejudice which would otherwise be caused: CA s.601AH(2)(b), (3)(b); Re Boxco Ltd [1970] 1 Ch 442, at 444; Re ANZ Banking Group v Barns (supra). 24 There are three known creditors of the Company in addition to the Bank. Each of them has been given notice of this application and has either consented or takes a neutral position. No prejudice or injustice to creditors of the Company will be caused if the application is granted. 25 However, Mr Martin says that reinstatement of the Company will cause injustice to the Company itself because, upon reinstatement, it will have to be placed in liquidation and, as an "externally administered corporation", it will not have the benefit of the FDM Act: s.5(2)(c). I think that this will, indeed, be the consequence of reinstatement but I do not think that that consequence makes reinstatement unjust. 26 First, to refuse reinstatement means that the Company remains in a state of non-existence, all of its property being vested in ASIC, subject to the Bank's security rights: s.601AD(2) and (3), s.601AE(3). If the Company's property is to be realised by ASIC and the proceeds of sale are to be distributed to the Bank as a secured creditor, there may well be in that process "an enforcement action" taken but because the Company remains in a state of non-existence there would be no "farmer" to whom anyone could give a notice under s.8(1) FDM Act. Further, no one can engage in mediation with someone who does not exist. In such a situation, the "non-existent company" would be no better off than if it were to be restored to existence and immediately placed in liquidation. 27 Second, the fact that a company in liquidation does not have the benefit of mediation under the FDM Act is a matter of legislative policy enacted in s.5. It cannot work relevant injustice for the purposes of this application to give effect to a legislative policy which appears in the FDM Act itself. Orders

28 As I have noted, Mr Martin concedes that the Company, if reinstated, must be wound up as insolvent. As the Company has not been in existence for two years and is to be wound up immediately upon reinstatement, I dispense with the formalities of advertisement of the application: see e.g. Shaw v Goodsmith Industries Pty Ltd (2002) 41 ACSR 556; Scott v Janniki Pty Ltd (1994) 14 ACSR 334. 29 The Bank has tendered the consent of an official liquidator to act in the winding up of the Company. 30 The orders of the Court are as follows:

i) order that the Australian Securities & Investments Commission reinstate the registration of the Company pursuant to s.601AH(2) of the Corporations Act ;

ii) order that the Company, forthwith upon reinstatement, be wound up pursuant to s.461(1)(k) of the Corporations Act and that Gregory Winfield Hall, c/- PricewaterhouseCoopers of 201 Sussex Street, Sydney, be appointed liquidator of the Company. 31 I will hear the parties as to costs.

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