Australian Competition and Consumer Commission v Australian Securities and Investments Commission

The proceedings relating to the Company

1. The application is brought to assist Mr Galic and Mr Samia in pursuing proceedings that have already been brought in this Court, proceedings 206085 of 2016. By the Originating Process filed in those proceedings, the Plaintiffs, Mr Galic and Mr Samia, bring claims for breach of directors' statutory duties against Mr Napier and the Company (in its deregistered, and non-existent, capacity) is joined as Second Defendant. Although that document is titled Originating Process, parts of it take the form of a pleading.
2. The first of the claims brought by Mr Galic and Mr Samia is identified as a claim under s 79 of the Corporations Act that Mr Napier failed to disclose the proceeds of sale of a particular property and knowingly diverted such proceeds to his personal use or that of another person. However, s 79 of the Corporations Act does not seem to me to be capable of supporting such a claim, since it is no more than a definition of the concept of "involved in a contravention" which is used in other sections of the Act.
3. Claims are then made that Mr Napier failed to act with due diligence in breach of s 180 of the Corporations Act and that he improperly used his position to gain advantage or caused detriment contrary to s 182 of the Corporations Act. The statutory claims that are made under ss 180 and 182 of the Corporations Act are claims that are only available to the Company and not to the Plaintiffs individually and could only be bought by the Plaintiffs on behalf of the Company if they either obtained leave to bring a derivative action under s 237 of the Corporations Act in the case of a solvent company or, more likely in the present case, if they obtained leave in the Court's inherent jurisdiction, so far as the company is presently likely to be insolvent, as I will find below.
4. The Originating Process, although it takes the form of a pleading in part, provides little identification of the material facts relied on to support the claims, and that is likely to be relevant to whether the Court should grant leave to bring a derivative action in the form provided for in that Originating Process. To put that proposition another way, it would seem to be difficult to see that the Court would grant leave to bring a derivative action either in its statutory or inherent jurisdiction on the basis that it was in the best interests of the Company to bring that action, unless it can be satisfied that the material facts relied on provide at least an arguable basis for that claim. I will return to those matters below having identified the evidence that is led in the application.
5. A further claim is made that Mr Napier failed to disclose the books and accounts to the shareholders in breach of s 191 of the Corporations Act. That section deals with disclosure of a material personal interest in order to permit directors to participate in decisions that relate to the Company's affairs. That section is not a statutory provision dealing with the provision of books and accounts to shareholders, the purposes for which it appears to be invoked in these proceedings.
6. These difficulties with the Originating Process and claims in proceedings 206085 of 2016 are significant, so far as the reinstatement of the Company is sought to pursue the proceedings in that form.

The affidavit evidence

1. Mr Galic relies on his affidavit dated 4 May 2017 which refers to circumstances in which he made certain investments in connection with the Company. I put that proposition in that way because the circumstances of those investments are complex and contested. It appears clear that Mr Galic applied $550,000 to the purchase from third party vendors of two properties at Leichhardt which were to be developed by the Company. On Mr Galic's account, a substantial amount of that amount, $300,000, was in the nature of a loan to Mr Samia, and that is supported by the fact that a deed exists, signed the day before the payment was made, which appears to record the terms of such a loan. Mr Galic appears to contend that the remaining $250,000 was for shares in the Company, issued to himself and his former wife. There is evidence that 60 shares were issued to Mr Galic, although it seems unlikely that the amount of $250,000 could properly be treated as applied to the subscription for those shares, where the Company's balance sheet as at 20 June 2007 recorded that amount as an amount due by way of loan to Mr Galic and his former wife. It is more plausible that the amount was treated as a loan, consistent with loans by other shareholders recorded in the Company's balance sheet, than as a subscription of capital in a very large amount to a proprietary company. Little may turn on that for present purposes, so far as it appears to be uncontested that Mr Galic was a shareholder of the Company, prior to its deregistration. The proceedings which Mr Galic seeks to bring are, on the submission of Mr Barber, who appears for the Plaintiffs, a claim by the Company against Mr Napier, not a claim against the Company in respect of any suggested loan to it.
2. Mr Galic also refers to the Company's deregistration in November 2015, and to his having become aware of that deregistration in June 2016. He refers to sales of two units at Leichhardt, and the manner in which the relevant funds were disbursed, in late 2011 and early 2012. The relevant events would, to the extent the claims focus on those matters, still be within the six-year limitation period.
3. Mr Galic also refers to steps which have been taken to seek to obtain an accounting for use of the relevant funds, and his affidavit suggests he has had little satisfaction in obtaining such an accounting. Some documents were produced, in the course of the application today, under notice to produce, which provide some further information as to the disbursement of the funds. Mr Barber's submissions as to the manner in which those funds were disbursed, as recorded in those documents, do not seem to be consistent with the allegations made by Mr Galic in his affidavit, where he suggested that those funds were funds to a person associated with Mr Napier.
4. The Defendants in turn called, on subpoena, Sergeant Babb of the New South Wales Police Force, who was responsible for an earlier investigation in respect of potential fraud in relation to the Company's affairs, which does not appear to have resulted in a prosecution. Sergeant Babb identified documents that were produced in the course of that investigation, including banking records of the Company, its accounts, shareholder documentation, a draft statement of Mr Galic and interviews with other persons associated with the Company's affairs. Sergeant Babb accepted, in his evidence, that Mr Samia, one of the two Plaintiffs in this application, was a person of primary interest in the police inquiry, so far as complaints had been made by at least one shareholder in respect of disbursements of the Company's funds that he was alleged to have made.

The parties' submissions

1. Both parties refer, in their written and oral submissions, to the factual background to the Company's activities. The Plaintiffs refer to the fact that it appears Mr Napier was appointed as a director of the Company, in 2008, or possibly 2009, in place of Mr Samia, in circumstances that other shareholders appear to have become discontent with Mr Samia's management of the Company. Mr Barber also refers, in submissions, to Mr Galic's concern that the distribution of funds obtained by the Company, from the sale of at least two units in the Leichhardt project, was made to some shareholders to Mr Galic's exclusion. Mr Galic also complains, in submissions, of his inability to receive a statement of account from Mr Napier or from solicitors acting for the Company in respect of the sale of the property.
2. Mr Barber appears to approach the matter on the basis that Mr Galic stands to lose a large sum of money, being his investment in the Company, unless the Company is reinstated. That proposition does not seem to be tenable, so far as Mr Galic's investment in the Company appears to have been lost by reason of the difficulties in its financial performance to which I refer below. To the extent that any claim is available, it is presumably the Company's claim in respect of any breach of duty by Mr Napier, and shareholders will only benefit from that claim to the extent that any recovery of funds by the Company creates a surplus that could potentially be distributed to shareholders, on a reduction of capital or winding up, after creditors' claims were discharged.
3. Mr Allan, who appears for Mr Napier, in turn makes detailed submissions as to the Company's history and points to the fact that Mr Samia, one of the Plaintiffs, has not led evidence in the application and to his involvement in the matters which were the subject of the police inquiry. Mr Allan refers, with considerable force, to the factual uncertainty of events surrounding the Company, which appears to have conducted itself in a manner that gave little attention to legal or accounting requirements, and dealt with investors in a manner which was, at best, highly informal, as well as to have applied moneys that were raised to several projects and not only the Leichhardt project for which it had been incorporated.
4. Mr Allan in turn submits that the Company should not be reinstated for several reasons. He contends that Mr Galic is not a person aggrieved, in the relevant circumstances; there would be a lack of utility in reinstating the Company, given the time that has passed; there was delay in the application for reinstatement, and delay in any claim by the Company, which would render it unjust; there are issues as to how the Company is to be controlled if it is reinstated; and the commencement of proceedings by the Company would lead to defences and cross-claims, provoking what Mr Allan describes as a "war" between its former shareholders. The question of any claims by former shareholders against each other is perhaps a matter of less concern than the difficulties with the present formulation of the claim brought by the Plaintiffs, in proceedings 206085 of 2016, implicitly to be pursued on the Company's behalf.
5. Mr Barber in turn responds that the Company should be reinstated because Mr Galic invested a substantial amount in it, which will be lost unless it can be recovered, and submits that any issues as to the Company's financial position could be addressed by Mr Samia's promise to invest $10,000 in it if it is reinstated and Mr Galic is appointed as its director. Mr Barber submits that any issues as to the present form of the claim in proceedings 206085 of 2016 could be addressed by an undertaking to file an amended pleading. I will return to those matters below.

Applicable legal principles

1. I should now turn to the matters which are relevant to an application for reinstatement. Section 601AH(2) of the Corporations Act provides that the Court may make an order that ASIC reinstate the registration of a company if an application for reinstatement is made to the Court by a person aggrieved by the deregistration and the Court is satisfied that it is just that the company's registration be reinstated.
2. Mr Allan points out, and I accept, that the fact that Mr Galic was a shareholder of the Company, prior to its reinstatement, is not sufficient in itself to establish that he is a person aggrieved by its deregistration: Casali v Crisp [2001] NSWSC 860; (2001) 165 FLR 79. However, the concept of "person aggrieved" extends to a person who has a genuine grievance because the Company's dissolution has extinguished a right of some value or potential value, including a right to bring proceedings against the Company or, potentially, to bring a claim by the Company against a third party.
3. In the present case, it is not suggested that Mr Galic seeks to bring proceedings against the Company in respect of his dealings with it, at the time he subscribed for shares or made a loan to Mr Samia. Any such claim might face substantial difficulties, including limitation issues because of the time that has elapsed since the relevant transactions. It is suggested that Mr Samia and Mr Galic (presumably, on the Company's behalf) would bring proceedings against Mr Napier, which, as I have noted above, appear to be within time, and proceedings 206085 of 2016 are of that character, although not expressly brought on the Company's behalf. It seems to me that, if those proceedings were properly pleaded, and if there were any reasonable prospect that the Court would grant leave to bring them as derivative proceedings, whether in its statutory jurisdiction or in its inherent jurisdiction, then Mr Galic might well be a person aggrieved for the purposes of s 601AH(2) of the Act.
4. It does not seem to me that he constitutes such a person at this stage, because the proceedings that are brought, in their present form, are formulated in such a manner that there is little prospect that the Court would grant leave to pursue them as a derivative claim in their present form, and the claim cannot be said to be of some value or potential value, if Mr Galic cannot pursue it in his own capacity, because the alleged statutory duties are not owed to him, and cannot pursue it in the name of the Company, because it is not formulated in a manner that would allow the Court to grant leave to pursue it.
5. The observations I have made above overlap with the question whether the Court can be satisfied that it is just that the Company's registration be reinstated. The case law indicates that that criterion involves a judicial discretion to be exercised by the Court and relevant matters include the circumstances in which the Company was deregistered, the purpose of the reinstatement, the Company's solvency, whether any person is likely to be prejudiced by the reinstatement, and the public interest generally: Australian Competition and Consumer Commission v Australian Securities and Investments Commission [2000] NSWSC 316; (2000) 174 ALR 688; WorkCover Authority (NSW) v Picton Truck and Trailer Repairs Pty Ltd [2004] NSWCA 371; (2004) 51 ACSR 102.
6. It seems to me that a number of those factors do not support an order for reinstatement, and the Court could not presently be satisfied that it is just that the Company's registration be reinstated. I recognise that the purpose of the reinstatement is to pursue proceedings, which could only be brought by the Plaintiffs in the name of the Company against Mr Napier, but I have referred above to the difficulties as to the manner in which those proceedings are formulated, and, more fundamentally, the effect of those difficulties upon the likelihood that any leave to bring a derivative action would be granted.
7. The position as to the solvency of the Company also seems to me to cause considerable difficulty. There is no information before the Court that indicates that the Company is, or that there is any prospect that it would be, presently solvent. Its last financial accounts in evidence, for the year ended 30 June 2008, show substantial accumulated losses, in excess of $919,000, and a significant operating loss and accumulated losses in that year. Its balance sheet as at 30 June 2008 shows negative shareholders' equity of nearly a million dollars. At that point, the Company was recorded as owing substantial shareholder loans to a number of shareholders, and was owed an amount by Mr Samia, one of the Plaintiffs, of in excess of $1,111,428, and there is no evidence that loan has either been repaid or is recoverable. The inquiries made by the police suggest there were significant cash payments to Mr Samia, during the relevant period, from the Company's accounts, and a letter from the Company's then solicitor, John Orford & Associates, to Mr Samia, dated 16 April 2008 also raised issues in respect of the Company's management, and emphasised that the matter was then developing into a "very serious matter."
8. The premise of the Plaintiffs' case is that, to the extent the Company had any funds prior to its deregistration, they were diverted to Mr Napier. I express no view as to whether that allegation is correct or incorrect, because the evidence does not seem to me to allow a conclusion as to that matter, which in any event would not properly be decided in an application of this kind. However, if that allegation were correct, it would emphasise that the Company is presently without funds to meet its debts as and when they fall due.
9. In those circumstances, it seems to me clear that the Court would not reinstate the Company other than on the basis that a liquidator was appointed. I raised that matter with Mr Barber, at the commencement of the hearing, but no consent of a liquidator to appointment has been obtained, and no arrangements have been made to put a liquidator in funds to conduct a liquidation in which the claims of creditors may be investigated, to the extent appropriate. As I noted above, Mr Samia seeks to address this issue by an offer of contributing an amount of $10,000 to the Company, if it is reinstated. The inadequacy of that proposition is self-evident. If the Company's position is now as it was in 2008 as recorded in the last financial statements in evidence before me, then the Company owes loans to shareholders of nearly $2 million, and is owed an amount in excess of $1 million by Mr Samia. There is no suggestion that the Company could presently discharge those loans and there is no reason to think that they are not presently due to shareholders. In those circumstances, it is self-evident that a contribution of $10,000 to the Company would not restore its solvency.
10. To the extent it is suggested that Mr Galic would be appointed as the Company's director, at Mr Samia's suggestion, I could also not be satisfied that the public interest is likely to be served by the Company's reinstatement. It seems to me that, given the Company's history, and the issues that surround it, any reinstatement could only properly take place on the basis that an independent insolvency practitioner, who could adjudicate the Company's and its creditors' claims, was appointed. It would be inappropriate that the Company were reinstated in a manner that would potentially leave Mr Samia controlling it or in a position of influence over it, where one of the Company's claims appears to be a substantial claim against Mr Samia for amounts that were, at best, lent by it to him.
11. Relevant factors in respect of reinstatement also include whether any person is likely to be prejudiced by the reinstatement and the public interest generally. It seems to me that, so far as reinstatement is sought to pursue a claim against Mr Napier in the form presently pleaded, then he would potentially be prejudiced by the reinstatement. That prejudice could be reduced, and possibly eliminated, if the claim were properly formulated, so that he would have a fair opportunity to know the allegations that are put against him and to respond to them. So far as the public interest is concerned, the matters to which I have referred above suggest that the Company should not be reinstated other than in circumstances that a liquidator is appointed to it.
12. I should note that Mr Allan also draws attention to other matters, to some of which I have referred above, which may tend against the Company's reinstatement, including the delay in bringing of claims by the Company and a suggested lack of utility in reinstating it. I recognise that both of those matters are relevant to the exercise of the Court's discretion whether to reinstate a company, as was noted by Tamberlin AJ in Blazai Pty Ltd v Gateway Development (St Marys) Pty Ltd [2009] NSWSC 800. In the present case, there has plainly been a significant delay in respect of the application for reinstatement, since the Company was deregistered and since deregistration came to Mr Galic's knowledge. The question whether there is utility in reinstating the Company would depend, in substantial part, upon whether the Plaintiffs are able to formulate a case against Mr Napier in a way that identifies its factual components with greater clarity than the case presently formulated. As matters stand, it seems to me there would be no utility in reinstatement, given the difficulties with the claim as it stands, but it is preferable that I express no view as to the position that would exist if such a claim were properly and clearly formulated.
13. In these circumstances, I am satisfied that an order should not be made under s 601AH(2) of the Corporations Act to reinstate the Company as matters stand. Mr Barber approached the matter, in submissions, on the basis that a refusal to reinstate the Company would, in effect, leave Mr Galic unable to vindicate any rights he (or, correctly, the Company) may have against Mr Napier. That does not seem to me to be the position, where the difficulties that presently exist are within Mr Galic's control. It is within Mr Galic's control, with the assistance of his legal representatives, to prepare an adequate pleading in proceedings 206085 of 2016, and it is not too much to ask that he should do so, if he seeks to make (on the Company's behalf) serious allegations of breach of directors' duties against Mr Napier.
14. It is also within Mr Galic's control to obtain the consent of a liquidator to appointment, so that any application for reinstatement can be considered on the basis that the Company will be placed under the control of an independent insolvency practitioner, in circumstances that it appears to be insolvent and has been the subject of questionable transactions in the past. It is therefore within Mr Galic's control whether he has the opportunity to bring, on the Company's behalf, the proceedings that he seeks to bring, but he may only do so if he properly pleads them and if he is content to have a liquidator appointed to the Company, if it is to be reinstated in a condition of insolvency.
15. Consistent with those views, it seems to me that the preferable course is to make orders, today, that are consistent with my judgment, but to stay their operation for a period, against the contingency that Mr Galic may prepare a proper pleading and may obtain the consent of a liquidator who is prepared to be appointed to the Company, such that a reinstatement order could then be made on that basis.
16. Accordingly I make the following orders:
17. The Originating Process in proceedings 2016/243306 seeking reinstatement of the Second Defendant under s 601AH of the Corporations Act be dismissed with costs.
18. Stay Order 1 until 4pm, 4 July 2017.
19. Any application by the Plaintiffs to reopen the question of reinstatement to be filed and served by 4pm 26 June 2017, returnable before Black J at 2pm on 3 July 2017.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 July 2017