Blazai Pty Ltd v Gateway Development

CATCHWORDS : CORPORATIONS - deregistered corporation - reinstatement of registration - "person aggrieved" - genuine grievance - whether the court is satisfied that it is just the registration be reinstated - effect of reinstatement - prejudice caused by delay - limitation period - strength of case

LEGISLATION CITED : Corporations Act 2001 (Cth) Limitation Act 1969

Australian Competition & Consumers Commission v Australian Securities and Investments Commission [2000] NSWSC 316; (2000) 174 ALR 688 Callagher v Australian Securities and Investments Commission (2007) 239 FLR 749 CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd [2006] NSWSC 690 Danich Pty Ltd v Re Cenco Holdings Pty Ltd [2005] NSWSC 293; (2005) 53 ACSR 484 Donmastry Pty Ltd v Albarran [2004] NSWSC 632 CASES CITED : Graham Lewis Herbert v Nozala [2006] NSWSC 1437 Newfront Pty Ltd (Deregistered) [2008] SASC 127 Pagnon v Workcover Queensland [2000] QCA 421 Pilarinos v Australian Securities and Investments Commission [2006] VSC 301; (2006) 24 ACLC 775 Promnitz v Australian Securities and Investments Commission [2004] FCA 22; (2004) 22 ACLC 108 Work Cover Authority of NSW v Picton Truck & Re Austral Group Investment Management Ltd [1993] 2 NZLC 692 Trailer Repairs Pty Ltd (Deregistered) [2004] NSW 371; (2004) 51 ACSR 102

Blazai Pty Limited ACN 075 060 052 (Subject to Deed of Company Arrangement) (Plaintiff) PARTIES : Gateway Development (St Marys) Pty Limited ACN 097 639 677 (deregistered) (First Defendant) Justin Palasty (Second Defendant)

COUNSEL : B Hull (Plaintiff) N Allan (Second Defendant)

SOLICITORS : Martin Legal (Plaintiff) Ziman and Ziman Solicitors (Second Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5531/2008 BLAZAI PTY LIMITED ACN 075 060 052 V GATEWAY DEVELOPMENT (ST MARYS) PTY LIMITED ACN 097 639 677 & ANOR

JUDGMENT 1 HIS HONOUR: This is an application by the plaintiff ("Blazai") for an order that ASIC under s 601AH of the Corporations Act 2001 (Cth) ("the Act") reinstate the registration of the defendant ("Gateway"). 2 Section 601AH relevantly provides: " Section 601AH(2) Reinstatement by Court The Court may make an order that ASIC reinstate the registration of a company if: (a) an application for reinstatement is made to the Court by: (i) a person aggrieved by the deregistration; or (ii) a former liquidator of the company; and (b) the Court is satisfied that it is just that the company's registration be reinstated. Section 601AH(3) [Powers of the Court] If the Court makes an order under subsection (2), it may: (a) validate anything done between the deregistration of the company and its reinstatement; and (b) make any other order it considers appropriate." (Emphasis added) 3 The plaintiff also seeks orders: that the defendant be wound up, that the period between the date of deregistration of the defendant and the date of reinstatement not be counted for the purposes of the Limitation Act 1969 (NSW), or for the purpose of any applicable statute of limitation, and finally an order validating the commencement of the proceedings against the deregistered defendant. 4 The only issue presently before me is whether the application for reinstatement should be granted. 5 The purpose of the proposed reinstatement is to enable the plaintiff to wind-up Gateway under s 461(1)(k) of the Act on the just and equitable ground to enable proceedings to be taken against a deemed director, Mr Justin Palasty, for recovery of loss or damage. The basis of the claim is that when he was a director, Gateway incurred a debt when it was insolvent when he was aware that there were reasonable grounds for him to suspect that the company was insolvent or would become insolvent: see s 588G of the Act.

6 I am informed that ASIC has been notified of the application for reinstatement and on 11 December 2008 indicated that it would abide by the order of the Court and it has not sought to appear. 7 The defendant was incorporated on 27 July 2001 when the director was Ilona Horvat who was the grandmother of Justin Palasty. She was also the secretary of the defendant, Gateway. 8 On 3 August 2001, the plaintiff entered into a contract for sale of land with Gateway. The contract provided for a deposit of $150,000 and a monthly payment, of which only $50,00 of the deposit was paid. 9 On 22 August 2001, Mr John Palasty was appointed a director of Gateway and Mr Justin Palasty was appointed secretary of Gateway. The date for completion stipulated by the contract was 15 January 2002. On 14 January 2002, Justin Palasty was appointed a director of the defendant and on 15 January 2002, Blazai served a notice to complete on Gateway requiring completion on 29 January 2002. On 23 January 2002, Gateway served a notice of termination on Blazai who treated the notice as a repudiation and indicated that it would seek damages for breach of contract. On 21 November 2002 administrators were appointed to Blazai. 10 On 23 March 2005, Blazai wrote to ASIC notifying it that it was compiling the necessary documents to institute proceedings against Gateway (which was then registered) noting that proceedings must take place prior to August 2007, which was referred to as the statutory deadline. The letter stated that, according to Mr Tony Loiero, a principal of Blazai, it was understood that Gateway had a financial obligation in respect of the contract for sale of land on 3 August 2001 in the order of $1.2 million and that Mr Loiero believed Gateway may consider a voluntary deregistration process to evade the obligation. Subsequently, Mr Loiero requested ASIC to refrain from allowing the deregistration to occur until the "court matter was finalised". Blazai thereafter entered into a company arrangement which permitted its directors to take legal action with respect to the property the subject of the 2001 contract. 11 On 15 January 2006, Gateway was deregistered by ASIC and on 3 August 2007 Blazai commenced proceedings by summons against John Palasty and Judith Palasty alleging that they had negotiated the contract for sale of land with the plaintiff and had guaranteed the obligations arising from that contract. A statement of claim was filed in that proceeding on 28 May 2008. On 17 February 2009 Smart AJ struck out the claim against Judith Palasty and ordered she be removed from the proceeding. 12 On 22 September 2007, Blazai wrote to ASIC that it had become aware that Gateway had become deregistered and requested ASIC to reinstate the registration of the defendant. This request was rejected by ASIC on 8 October 2007. 13 Originating process in this proceeding to reinstate was filed on 5 November 2008. On 11 December 2008, ASIC indicated that it would abide by the Court's order. 14 Blazai submits that it is a person "aggrieved" by the deregistration because it has a "legal grievance", namely, that it is deprived by the deregistration of its right to pursue Mr Justin Palasty for breach of the director's duty to prevent insolvent trading in circumstances where there are reasonable grounds to suspect that the company was insolvent at the time the contract for sale of land in August 2001 was entered into: see Danich Pty Ltd v Re Cenco Holdings Pty Ltd [2005] NSWSC 293; (2005) 53 ACSR 484 per Barrett J. And the cases there cited, Work Cover Authority of NSW v Picton Truck & Trailer Repairs Pty Ltd (Deregistered) [2004] NSW 371 at [13] per Sheller JA with whom Mason P and Ipp JA agreed.

15 Blazai also submits that the circumstances are such that the courts will be "satisfied that it is just that the registration should be reinstated." It says this is because it has a good cause of action against Mr Palasty. They claim that he is liable as a director (although not appointed director until after the debt was contracted) because he had acted in the position of a director or was a person in accordance with whose instructions the directors of the company were accustomed to act within the meaning of s 9 of the Act. 16 Blazai asks the Court to take into account the circumstances in which Gateway came to be deregistered, namely a failure to lodge a return and that no person is likely to be prejudiced by the reinstatement: see Australian Competition & Consumers Commission v Australian Securities and Investments Commission [2000] NSWSC 316 at [27]-[28] per Austin J; CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd [2006] NSWSC 690 at [8]; Pilarinos v Australian Securities and Investments Commission [2006] VSC 301 at [103]. 17 Blazai says that in this case the prima facie position is that reinstatement would be just to enable it to pursue its right: Re Austral Group Investment Management Ltd [1993] 2 NZLC 692. Blazai emphasises the fact that no misconduct is attributable to it leading to the deregistration. Generally, it says a court is not reluctant to resuscitate a company which has been removed for administrative reasons: see Donmastry Pty Ltd v Albarran [2004] NSWSC 632. 18 Blazai submits there is no meaningful prejudice to any party caused by reinstatement of the registration save that the directors may be pursued by the plaintiffs for insolvent trading. They claim that this is not of itself prejudice which would make the registration "unjust." 19 However, Blazai acknowledges that the Court may have some reservations in relation to the delay in this matter. In Graham Lewis Herbert v Nozala [2006] NSWSC 1437 at [52]-[53] White J observed that the policy underlying the Limitation Act was particularly significant in the circumstances of that case having regard to the deterioration in justice from delay. He referred to the strong public interest in quelling controversies and putting an end to disputes which lie in the past. Although his Honour did not specifically rule on the issue of delay in that case his observations are apposite in the present case. Blazai in response says that delay should not be a controlling factor in the present case because in November 2002 it was placed into voluntary administration until 12 January 2006 when control was returned to its directors. They claim that the plaintiff was then enabled to institute proceedings against the defendant and Justin Palasty. It is alleged that the plaintiff has commenced proceedings in a prompt fashion. However no satisfactory explanation is given as to why no action was taken before January 2006. In the alternative, it is said that the delay is not great when compared to delays in other cases. 20 Blazai also refers to the very broad power of the Court under s 601AH(3) of the Act to make any orders it considers appropriate and says that even if the limitation period has expired, in the circumstances it is open to the Court to make an order under this very wide power that the time between deregistration and the expiration of the limitation period under the Limitation Act 1969 (NSW) should not be counted against the plaintiff: see Pagnon v Workcover Queensland [2000] QCA 421 at [15]. In that case it is worth noting that McPherson J, with whom Thomas JA and Muir agreed, set out at [11]: "Applications and orders to resurrect a dissolved company in this fashion have often been made. Some have been refused where , for example, the application was made a contributory or director seeking to avoid personal liability for insolvent trading or by a creditor aiming to enforce liability against both the company and former officer . Applications are, however, commonly granted where the applicant is "a would-be plaintiff attempting to recover damages or compensation, in respect of which the company was insured , for personal injury sustained before dissolution." (Emphasis added) 21 In summary, Blazai claims that it has a reasonably arguable case against Mr Justin Palasty in respect of insolvent trading by Gateway and that it would be "unjust" not to reinstate the registration because that would frustrate the legal right claimed by him.

22 The expression "person aggrieved" is of wide import and should be construed liberally and includes a person who has been damaged or injured in a legal sense: Callagher v Australian Securities and Investments Commission (2007) 239 FLR 749. 23 It excludes a person who is a mere busybody, who has no genuine interest in the outcome of a decision. A person aggrieved has a genuine grievance as a result of a decision which prejudices his or her interest: see Australian Competition and Consumers Commission v Australian Securities and Investments Commission (2000) 174 ALR 688 at [24]-[25] per Austin J; Newfront Pty Ltd (Deregistered) [2008] SASC 127 and the cases cited therein. This interest must be real and direct and can result from a person being subject to legal burden by a decision: Callagher v Australian Securities and Investments Commission (2007) 239 FLR 749. 24 Blazai claims to have indirectly a cause of action against Mr Justin Palasty of which he says he has been deprived by the deregistration of Gateway. In my view Gateway comes within the definition of a "person aggrieved."

Is it just to reinstate? 25 The expression "satisfied that it is just that the company's registration be reinstated" confers wide discretion on the Court. In Promnitz v Australian Securities and Investments Commission [2004] FCA 22; (2004) 22 ACLC 108, Goldberg J at [20] stated: "The requirement that the Court be satisfied that it is just that the company's registration be reinstated is not constrained by any particular criterion. However, the cases make it clear that there are a number of matters which ought to be taken into account, namely the circumstances in which the company came to be deregistered, the future activities of the company if an order be made and also whether any particular person is likely to be prejudiced by the reinstatement." 26 In Callagher and Anor v Australian Securities and Investments Commission (2007) 239 ALR 749, Lander J at [55] stated: "ACMF came to be deregistered because of the default of its direction in failing to pay an ASIC fee. It has by its director undertaken to remedy that default. ASIC does not object to the reinstatement of the registration of ACMF. ASIC's attitude should be taken into account. It should be clearly understood that a company which has been deregistered for failing to comply with its statutory obligations could not be expected to be reregistered as of right. More is required. The court must be satisfied that it would be just to order the reinstatement of the registration. The words of the section give the court a very wide discretion. In exercising that discretion, which must remain unfettered, the court will ordinarily have regard to the circumstances in which the company's registration lapsed; the party seeking the order; the reasons for seeking the order; the utility of making any order; the prejudice which any party including the company which is sought to be the subject of the order for reinstatement of the registration might suffer; and any other circumstances which would bear upon the making of an order which in all the circumstances would be just… . In making the order it must also be steadily borne in mind that the company's registration is not to be reinstated for a particular purpose but the company's registration will be reinstated for all purposes… ."

27 At [62] he continued: "It is necessary to have regard to the prejudice that any person might suffer by reason of the reinstatement. There is no suggestion that anyone apart from the applicant might be prejudiced by the reinstatement of ACMF's registration. Of course, the applicant argued that he would suffer prejudice if the company were reregistered because he would need to defend the proceedings which are presently in abeyance in the District Court. However, when the proceedings were commenced in the District Court, ACMF was registered and entitled to bring the proceedings. By reason of inadvertence, ACMF has become deregistered. In my opinion, although the applicant would suffer the prejudice of having to continue to defend that proceeding, it is not prejudice of the kind which would make it unjust to order the reinstatement of ACMF." 28 In the circumstances of this matter I am not satisfied that it is "just" that Gateway's registration be reinstated. There are several interrelated reasons for this conclusion. The first is the lengthy delay of the plaintiff in pursuing its alleged rights. The second is the contingent and speculative nature of the proceeding against Mr Justin Palasty, the director of the defendant. The third is the prejudice to and the difficulties likely to arise on the part of Mr Palasty having regard to the lapse of time. 29 In relation to the first matter, the delay on the part of the plaintiff is substantial and it has not been satisfactorily explained. There is no sufficient explanation why no action was taken before January 2006, or why after that date no check was made as to the registration of Gateway. Nor is there any explanation as to why this reinstatement application was delayed from September 2007 to November 2008 after becoming aware of the deregistration. 30 The defendant was deregistered almost four and a half years after the time when the debt was contractually due. The plaintiff was unaware of the deregistration until September 2007 and has taken no steps to commence proceedings against Mr Palasty for registration in that period. It had been aware of the possibility of ASIC deregistering the company in May 2005 but apart from writing a letter it took no action to investigate what was happening. By 3 August 2007, the six year limitation period had expired. Yet, even after notification in September 2007, it only filed the present application for reinstatement on 5 November 2008, some thirteen months later. The duration of the inactivity during the six year limitation period and the failure to commence proceedings against Gateway is an important factor in this reinstatement application. 31 A second matter is the policy behind the Limitation Act 1969 which is designed to provide certainty in relation to exposure to liability and to quell controversies after a substantial lapse of time. In the present case for the plaintiff to succeed it will be necessary to overcome a substantial number of legal and factual hurdles in the course of which records may no longer exist, witnesses may be unavailable or recollections are likely to have faded to the prejudice of Mr Palasty. 32 At the relevant time when the debt was said to be incurred Mr Palasty was not an appointed director and it will be necessary to show that he acted in the position of a director or that the directors were accustomed to act in accordance with his instructions or wishes. It will therefore be necessary to examine the conduct, records and activities of Mr Palasty and the way the company was conducted more than eight years ago. Further, in order to obtain the winding-up on the just and equitable ground it will be necessary to persuade the Court that such grounds are made out. 33 In pursuing Mr Justin Palasty for beach of his duty in relation to insolvent trading it will be necessary to show that in 2001 the plaintiff was insolvent or became insolvent by incurring the debt and that there were reasonable grounds for suspecting the company was insolvent or would become insolvent. Again, this is a case where records, recollection and documents will be of central importance and it is likely that because of the delay in bringing the proceedings and seeking reinstatement of registration that Mr Palasty could be substantially prejudiced in the efficient conduct of the defence. To recover compensation it will be necessary to establish that the plaintiff has suffered loss or damage under s 588M of the Act. It will also be necessary to prove the nature and extent of the loss or damage and for Mr Palasty to defend that claim. This may involve him raising defences under s 588H of the Act. His ability to do so may be prejudiced by the failure to pursue the action against him in a timely manner. Furthermore, the limitation period having expired, it may be necessary for Mr Palasty to persuade the Court to order that time between deregistration of Gateway and the expiration of the limitation period should not be counted against Blazai in the circumstances in this case. 34 In my opinion, the prejudice likely to be caused by Mr Palasty by reason of the delay in this case is sufficiently clear and strong to make it "unjust" to reinstate the registration. 35 A third consideration is that I am not persuaded that the plaintiff's proceeding against Mr Palasty is sufficient to raise a reasonably arguable case given the lapse of time given the matters which need to be established in light of the evidence before me. For example, the fact that the full deposit was not paid in accordance with the contract and the subsequent termination of the contract in 2001 and 2002, which is relied on by Blazai, does not provide, of itself, any sufficient basis to substantiate an allegation of insolvency in 2001. I am of the opinion on the material before me that the case is not reasonably arguable and this supports the conclusion that it would not be just to reinstate registration to enable the foreshadowed claim to be brought. 36 Given the passage of time during which no action was taken against Mr Justin Palasty, it is likely that he has ordered his affairs and records on the basis and in reliance on the fact that it does not have any liability to meet a claim by Blazai as contemplated in the present proceedings. In these circumstances, it would be unjust and unfairly prejudicial to now subject him to legal proceedings in circumstances where Blazai has neglected to act in a timely and reasonable way in relation to pursuing lengthy and complex proceedings against him where memories have faded and relevant document may be very difficult to locate. 37 For the above reasons, the application for reinstatement of registration of the first defendant is dismissed with costs.

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