SMAC Developments Pty Ltd (SMAC) was incorporated on 1 July 2004 for the purpose of property development.
SMAC was deregistered on 27 November 2016 pursuant to s 601AB of the Corporations Act 2001 (Cth) for failure to pay fees.
At the time of deregistration, the shareholders of SMAC were the plaintiffs, Mr Kevin Smith and Mrs Valerie Smith. The company had no directors, Mr Smith having resigned as the sole director on 12 September 2012.
SMAC owned certain land at Mittagong at the time of deregistration. Although SMAC acquired the land for the purpose of development in 2004, it has simply held the land since about mid-2006. Notwithstanding the deregistration of SMAC and the provisions of s 601AD(2) of the Corporations Act, the Mittagong land remains registered in the name of SMAC.
Australian Competition and Consumer Commission v Australian Securities and... [2021] NSWSC 724 | Case summary | Zoe
SMAC has not conducted any activities, other than holding the Mittagong land, since mid-2006.
In about 2008, the plaintiffs issued a statutory demand to SMAC to recover moneys they had paid to the company for the purpose of the development of the Mittagong land which was not proceeding. SMAC did not pay the statutory demand, and the plaintiffs subsequently commenced winding up proceedings against it.
On 3 February 2009, the plaintiffs, Mr and Mrs Smith and SMAC entered into a deed pursuant to which the plaintiffs agreed for the winding up proceedings to be dismissed, Mr Smith undertook to take all necessary action to lodge a development application for the Mittagong land and the parties agreed that the land would then be sold with the benefit of the development approval and the amounts claimed by the plaintiffs against SMAC would be paid from the proceeds of sale (the Deed).
Mr Smith did not cause any development application to be lodged in relation to the Mittagong land, which continues to be owned by SMAC. The plaintiffs have not received the payment contemplated by the Deed.
The plaintiffs wish to pursue a claim against SMAC for breach of the Deed.
For that purpose, and to enable SMAC to deal with the Mittagong land to realise funds to pay the plaintiffs' claim, the plaintiffs commenced these proceedings seeking an order under s 601AH(2) of the Corporations Act that the Australian Securities and Investment Commission (ASIC) reinstate the registration of SMAC together with an order that Mr Smith be the director of SMAC upon reinstatement, and an order pursuant s 601AH(3)(d) that the limitation period in respect of any claim to be made by the plaintiffs against SMAC is suspended during the period of deregistration (or alternatively from the date of commencement of these proceedings for reinstatement until the date of reinstatement).
The matter has had an unfortunate history. It was listed for final hearing on 23 April 2021 but was adjourned part-heard on that occasion because the plaintiffs had not adduced any evidence concerning whether SMAC would be solvent if its registration were to be reinstated. Ms Cui, solicitor, who appeared for the plaintiffs on that occasion did not articulate any reason why the registration of SMAC should be reinstated if the company would be insolvent. The plaintiffs were not, at that stage, seeking an order that SMAC be wound up on reinstatement.
When the hearing resumed on 24 May 2021, the plaintiffs pressed for an order for reinstatement (without an order for winding up), relying on further evidence they had filed and served since the first hearing. That evidence fell a very long way short of establishing that SMAC would be solvent on reinstatement.
In summary, the evidence before the Court on that occasion established the matters referred to at [4]-[8] above. For the purpose of the reinstatement application, the plaintiffs asked the Court to accept that SMAC is solvent on the basis of a kerbside valuation of $1,000,000 for the Mittagong land and statements made by Mr Smith to his solicitors concerning SMAC's financial position or his belief about its financial position, including that the debt secured by a registered mortgage against the Mittagong land was approximately $216,000 in February 2021. The plaintiffs asked the Court to overlook that Mr Smith had ceased to be a director of SMAC in 2012 in circumstances not explained by the evidence, that no financial statements had been prepared for SMAC since 2006 and that there was no evidence of any tax returns having been lodged by SMAC. No attempt was made to address the contrast between the plaintiffs' contention that SMAC was insolvent in 2008 due to its failure to pay a debt said to be owing to the plaintiffs, and their contention that it is solvent in 2021 despite not having made any payment to the plaintiffs under the Deed.
Mr Bateman of counsel, who appeared for the plaintiffs on 24 May 2021, ultimately accepted that this was a case in which the Court may take the view that an order for reinstatement is appropriate only if accompanied by an order that the company be wound up immediately upon its reinstatement. The plaintiffs tendered a consent of a registered liquidator, Mr Schon Gregory Condon, obtained during a short adjournment of the hearing on that day. That consent was for appointment as provisional liquidator, but Mr Condon's consent to be appointed as liquidator was subsequently filed by the plaintiffs on 9 June 2021.
As a matter of procedural fairness, it was necessary that Mr and Mrs Smith be notified of this potential outcome in case they should wish to be heard in relation to the proposed winding up order about which they had not previously been notified. Mr and Mrs Smith were notified and subsequently filed an interlocutory process seeking leave to be heard pursuant to r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW) together with an affidavit of Mr Smith and a short written submission consenting to an order pursuant to s 601AH(2) of the Corporations Act that ASIC reinstate the registration of SMAC and an order pursuant to ss 461(1)(k) and 601AH(3) of the Corporations Act that SMAC be wound up and that a liquidator be appointed. Mr and Mrs Smith also consented to the proposed order that Mr Smith be the director of SMAC upon reinstatement, and stated that they do not oppose an order pursuant s 601AH(3)(d) suspending the limitation period in respect of any claim to be made by the plaintiffs against SMAC.
I am satisfied that it is appropriate to grant leave to Mr and Mrs Smith pursuant to r 2.13 of the Supreme Court (Corporations) Rules.
In his affidavit, Mr Smith deposes that the only liabilities incurred by SMAC since mid-2006 are associated with its holding of the Mittagong land, that those liabilities have been paid by Mr Smith and his wife and that the financial position of SMAC most recently agreed between its shareholders is the position set out in financial statements for the year ended 30 June 2006. Those financial statements show a loss of a little over $300,000 for that year and a similar loss the previous year, and a net asset deficiency. This evidence suggests that SMAC is either insolvent, or that its solvency is dependent on the continued willingness and ability of Mr and Mrs Smith to financially support SMAC by meeting its liabilities. There is no evidence of their willingness or ability to do so, or the terms on which they may be willing to do so. It may be that any form of ongoing financial support is simply substituting one form of indebtedness for another and does not render SMAC solvent.
I am satisfied that the plaintiffs are persons aggrieved by the deregistration of SMAC within the meaning of s 601AH(2): Re Austral Bronze Pty Ltd; In the matter of John Darlington Pty Limited; In the matter of John Darlington Pty Limited (No. 2) [2020] NSWSC 1633 at [127] and the authorities there referred to.
In assessing whether it would be "just" to reinstate the registration of a company, factors which the Court must consider include the circumstances in which the company came to be deregistered, the purpose in seeking reinstatement, whether any person is likely to be prejudiced by the reinstatement, whether, if the order were made, good use could be made of it, and whether it is in the public interest generally: Re Austral Bronze Pty Ltd (supra) at [127] and [131]-[132] (Rees J), citing Australian Competition and Consumer Commission v Australian Securities and Investments Commission (2000) 34 ACSR 232; [2000] NSWSC 316 at [27] (Austin J); Re ERB International Pty Ltd (deregistered) (2014) 98 ACSR 124; [2014] NSWSC 200 at [5] (Brereton J).
There is no satisfactory explanation of the circumstances in which SMAC came to be without a director for four years and ultimately deregistered for failure to pay fees. However, the evidence suggests that the company owns an asset of some value and good use will be made of a reinstatement order in that the company will be in a position to realise that asset. The proceeds of realisation will then be available to pay any creditors, including the plaintiffs to the extent that their claims against SMAC are either accepted or established, and shareholders in the event that there is a surplus after paying any creditors.
There is no evidence to suggest that any person will be prejudiced by the reinstatement if the company will be wound up immediately after reinstatement. The only other shareholders of the company, Mr and Mrs Smith, consent to the reinstatement and an order for winding up. In such circumstances, the company will not be in a position to be incurring debts. It will be under the control of a liquidator, thereby removing the problem that it lacked management for some four years prior to its deregistration due to Mr Smith's resignation as a director in 2012. That lack of management, the uncertainty concerning the company's solvency on the basis of the very limited evidence before the Court, and the purpose for which reinstatement is sought, make this an appropriate case for a winding up order under s 461(1)(k) of the Corporations Act in addition to an order for reinstatement: see Re Regional Planners Developments Co Pty Ltd (2015) 110 ACSR 457; [2015] NSWSC 1996 at [13] (Brereton J). Reinstatement together with a winding up order will afford the plaintiffs, and any other creditors, the opportunity to pursue their claims against SMAC by lodging proofs of debt in the winding up.
Although the plaintiffs proposed, and Mr Smith consented to, an order that he be appointed as a director of SMAC upon its reinstatement, I do not consider that it would be appropriate to reappoint the person who left the company rudderless without any director for some four years. It is therefore unnecessary for me to consider whether the power under s 601AH(3)(d) of the Corporations Act extends to the making of an order appointing a director, although I note that Rees J concluded that it did In the matter of Garfox 86 Pty Limited [2019] NSWSC 442.
The jurisdiction under s 601AH(3)(d) of the Corporations Act extends to the making of an order suspending the limitation period in respect of any action that the plaintiffs may have against the Company: Re Regional Planners (supra) at [15]-[28]. In this case, the plaintiffs' evidence reveals that they took no steps towards making a claim against SMAC in relation to the alleged breaches of the Deed until 30 September 2019, some three years after the company had been deregistered. In my opinion, the appropriate period of suspension of the limitation period is therefore from 30 September 2019 until the date of the reinstatement of the company's registration. That is the period during which the deregistration of the company practically prevented the plaintiffs from instituting proceedings in respect of the alleged breach of the Deed.
ASIC has been notified of the plaintiffs' application and does not oppose the relief sought by the plaintiffs.
For the reasons above, I have decided to make an order for reinstatement under s 601AH(2) and an order for winding up under ss 461(1)(k) and 601AH(3)(d) of the Corporations Act, and a further order under s 601AH(3)(d) suspending the limitation period applicable to any action by the plaintiffs against SMAC during the period from 30 September 2019 until the date of reinstatement of the registration of the company.
I now turn to the question of costs.
The plaintiffs did not seek any order for costs. In their written submissions, Mr and Mrs Smith drew attention to the fact that, if a winding up order is made in conjunction with the application for reinstatement, the plaintiffs' costs of these proceedings may be reimbursed by the liquidator out of the property of SMAC pursuant to s 466(2) of the Corporations Act unless the Court orders otherwise.
Mr and Mrs Smith submitted that the plaintiffs' costs will be disproportionate to the outcome achieved.
I accept that submission. Until the very end of the hearing on 24 May 2021, the plaintiffs pressed the submission that SMAC was solvent in the absence of evidence supporting that submission, and also failed to address whether the circumstances that led to its deregistration would be repeated if it were reinstated to the register. In the particular circumstances of this case to which I have referred above, the application for reinstatement was hopeless unless an order for reinstatement was to be accompanied by an order that SMAC be wound up immediately upon reinstatement.
Mr and Mrs Smith submit that the appropriate costs order is that 75% of the plaintiffs' costs of the proceedings, as agreed or assessed, be reimbursed pursuant to s 466(2) of the Corporations Act.
I consider that Mr and Mrs Smith's proposed costs order is unduly generous to the plaintiffs in circumstances where the plaintiffs first embraced the alternative of reinstatement together with winding up in oral submissions at the very end of the second hearing, despite having had ample time to consider the matter prior to the first hearing and during the adjournment between the first and second hearings. If any of the plaintiffs' costs of the proceedings can be attributed to the winding up application, it is only a minute proportion of those costs.
Although the plaintiffs did not seek an order for costs in their originating process, they filed written submissions in response to the submissions of Mr and Mrs Smith contending that the Court should make a costs order in their favour. The plaintiffs' submissions do not refer to s 466(2) of the Corporations Act and appear to contend that an order should be made for payment of their costs under s 601AH(3)(d) on the basis that both the plaintiffs and Mr and Mrs Smith stand to benefit from the reinstatement of SMAC and that the proceedings were necessary to achieve that reinstatement.
I do not consider that the matters relied on by the plaintiffs warrant a costs order in their favour in circumstances where the majority of their costs are attributable to the highly unsatisfactory manner in which they conducted these proceedings, as referred to above.
In my opinion, the appropriate order is that the plaintiffs must pay their own costs of the proceedings.
[2]
Orders
I make the following orders:
1. Grant leave pursuant to rule 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW) to Mr Kevin Smith and Mrs Valerie Smith to be heard in these proceedings without becoming parties to the proceedings.
2. Order pursuant to s 601AH(2) of the Corporations Act 2001 (Cth) that the Australian Securities and Investments Commission reinstate the registration of SMAC Developments Pty Limited (ACN 109 838 815) (the Company).
3. Order pursuant to s 601AH(3)(d) of the Corporations Act 2001 (Cth) that the limitation period in respect of any action by the plaintiffs against the Company be suspended during the period from and including 30 September 2019 until the date of reinstatement of the registration of the Company in accordance with order 2 above.
4. Order pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) that the Company be wound up.
5. Order that Schon Gregory Condon, registered liquidator, be appointed as liquidator of the Company.
6. Order that the plaintiffs pay their own costs of the proceedings.
[3]
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Decision last updated: 18 June 2021