Casali v Crisp

Judgment 1By Summons filed on 16 April 1014, Ms Sara Kovarfi sought an order reinstating Kata-Lyn Pty Ltd ("Company") under s 601AH(2) of the Corporations Act 2001 (Cth). She was represented, by leave, in that application by her daughter-in-law, Ms Edith Kovarfi. That Summons was made returnable in the Corporations Motions List on 21 July 2014 and referred to me by the Judge then hearing the Corporations List in circumstances to which I will refer below. By my judgment delivered on that day ([2014] NSWSC 1082), I declined to make an order reinstating the Company in circumstances that it would, in my view, be insolvent and no liquidator was sought to be appointed to it. 2By Notice of Motion filed on 7 August 2014, Ms Sara Kovarfi, again represented by leave by Ms Edith Kovarfi, now brings an application under r 36 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") and seeks an order that the Court should allow her "to properly represent all relevant evidence about the [alleged] fraud" committed by the Defendants and its directors and that the Court should consider "how the public interest is served better by allowing the Company to be reinstated and allo [sic] it to start a fresh proceeding" or by allowing the Defendants and its directors "to continue fraudulent trading without proper penalty". She also seeks declarations as to the manner in which the alleged fraud was discovered by the Company. It does not seem to me that such declarations, which are matters of final relief, are properly sought in an Interlocutory Process brought in the Corporations List for reinstatement of a company. 3The application is supported by an affidavit of Ms Edith Kovarfi dated 5 August 2014. Ms Kovarfi's evidence is that the Judge then hearing the Corporations List "forced" her to a hearing of her application to reinstate the Company when she contended she was not ready, had been ill over the previous three weeks and had sought a two week adjournment. The transcript of that application is in evidence and does not, in my view, support Ms Kovarfi's claim as to the circumstances in which the matter was referred to me. Ms Kovarfi had drawn the attention of the Judge then hearing the list to the fact that she was ill and not properly prepared at that stage. His Honour had inquired whether there was any urgency with the application, and Counsel for the Defendants had properly acknowledged that there was no urgency, but had also noted that the Defendants had been back in respect of the application on several occasions and had no prospect of recovering any costs of further adjournments. Both aspects of that submission were correct. The proceedings had initially been heard before Campbell J on 14 February 2014, then there had been further directions before a Registrar on 15 May and 21 July 2014, before the matter was referred to the Corporations Judge on that date, and Ms Kovarfi's evidence before me on that date made clear that there was little prospect of the Defendants recovering costs from either the Applicant, Ms Sara Kovarfi or Ms Edith Kovarfi, both of whom were dependent upon the pension. 4The Judge then hearing the Corporations List had then offered Ms Kovarfi the option of deferring a hearing to the following Friday, which she did not take up since she lives a substantial distance from Sydney, a full day's travel is required for her to reach Sydney and she understandably did not wish to travel back home and then back to Sydney within the same week. His Honour had also offered the option of a hearing on the next day, which Ms Kovarfi did also not take up since she did not wish to stay in Sydney for another night. When neither of those options were taken up by Ms Kovarfi, an exchange occurred as follows: His Honour: "That all seems like a compelling reason to hear the case today, doesn't it? Ms Kovarfi: I think I go ahead and do the application. I can say what I remember and get it over with. His Honour: I will refer the matter to Justice Black for hearing today." 5As I read the transcript, his Honour had sought to balance the relevant considerations involved in the overriding objective of the just, quick and cheap resolution of the real issues in dispute, as required by s 56 of the Civil Procedure Act 2005 (NSW), which required reference not only to Ms Kovarfi's interests but also the need to allow the Defendants an opportunity to address the merit of the application, and to minimise the further unrecoverable costs that would be imposed upon them by a further adjournment. His Honour had explored two alternative hearing dates with Ms Kovarfi before referring the matter for hearing before me, and the suggestion that he refer the matter for hearing before me was plainly accepted by Ms Kovarfi, so the order referring the matter for hearing was made with her express consent. 6Ms Kovarfi also complains that she did not understand that the matter was likely to go to hearing when it was referred to the Corporations Judge on 21 July and that the Corporations Registrar had not made that clear at an earlier directions hearing on 15 May 2014. I am unable to accept that submission. The Registrar had made directions on 15 May 2014 for the filing of any evidence by Ms Kovarfi by 4 July 2014 and any evidence in reply by the Defendants by 15 July 2014, so that the matter would be ready for hearing on 21 July 2014. It was, after all, Ms Sara Kovarfi's application and the Court was entitled to proceed on the basis that she did not need to be advised that it would be heard as soon as possible after she was ready for hearing which is, in the ordinary course, what an applicant for a company's reinstatement would seek. 7After the matter was referred to me on 21 July, Ms Kovarfi led evidence and made detailed submissions, and the Defendants also led evidence and made briefer submissions. By my judgment delivered on that day ([2014] NSWSC 1082), I declined to order reinstatement on the basis that the Company was insolvent and no liquidator could be appointed absent consent to such an appointment and any ability to pay a liquidator's costs of the liquidation or the proposed proceedings. In the course of that judgment, I reviewed the principles applicable to an application for reinstatement. I summarised the circumstances in which the Company had suffered loss in respect of the development of a property in Queenscliff in 2004 and the steps which had subsequently been taken to assign the Company's rights to other parties and to deregister it. I referred to the result of other proceedings previously brought by Ms Edith Kovarfi as a purported assignee of rights from the Company and subsequently by Ms Kovarfi, her husband and Ms Sara Kovarfi. I also reviewed the evidence led by Ms Kovarfi in support of the application for reinstatement of the Company, so that it could pursue a claim in fraud against the Defendants, which she contended would not be barred by the limitation period under s 55 of the Limitation Act 1969 (NSW). I noted that it did not seem to me that a serious question as to fraud had been established, at least on the evidence then before me, although I ultimately did not decide that application on that basis. I noted that the fundamental difficulty with the application, which was sufficient to determine it, was that the Company would plainly be insolvent if it were reinstated and the Court could only reinstate it if a liquidator could be appointed prior to the reinstatement. However, a liquidator could not be appointed to the Company, because no consent of a liquidator to appointment had been obtained, and the evidence indicated that neither Ms Sara Kovarfi nor Ms Edith Kovarfi could pay the costs that would be incurred by a liquidator or could fund a liquidator to bring the proceedings which the Company was sought to be reinstated to bring. 8I noted in my earlier judgment (at [4] and [24]) that: "In order to reinstate a company under s 601AH(2) of the Corporations Act, it is necessary the Court be satisfied that it is just that the company's registration be reinstated. Relevant matters recognised in the case law include, for example, the purpose of the reinstatement; importantly, for present purposes, the company's solvency; whether any person is likely to be prejudiced by the reinstatement and the public interest generally: WorkCover Authority of NSW v Picton Truck and Trailer Repairs Pty Ltd (de-registered) [2004] NSWCA 371; (2004) 51 ACSR 102; Wedgewood Hallam Pty Limited v ASIC [2011] FCA 439 at [5]. Importantly, a company cannot be reinstated for a limited purpose and reinstatement is an "all or nothing affair": Re Anglo Coal (Drayton Management) Pty Ltd [2004] NSWSC 604; (2005) 23 ACLC 82 at [6]. The effect of reinstatement is therefore to place a company in a position where it can conduct business with members of the public, even if that is not the subjective intention of the person who proposes reinstatement. In some circumstances, the Court may reinstate an insolvent company, but it will typically only do so where a liquidator is appointed prior to the reinstatement and the Court has power to make a winding-up order, prior to the company's reinstatement, to take effect when the reinstatement takes place: ACN 078 272 867 Pty Ltd (in liq) v Deputy Commissioner of Taxation [2011] HCA 46; (2011) 282 ALR 607. ... It seems to me that the fundamental difficulty with this application - and it is sufficient to determine the application on this basis alone - is that the Company will plainly be insolvent if it were reinstated. I have noted above there is a long list of authorities as to the importance of solvency in an application for reinstatement. Those authorities are cited, for example, in Austin and Black's Annotations to the Corporations Act [5A.601AH]. Mr Williams refers to the decision in Re Immunosearch Pty Ltd (1990) 2 ACSR 455 at 460, where Brooking J noted that solvency was a material consideration in such an application, although Ms Kovarfi distinguishes that decision on the basis that it also referred to misconduct by the relevant shareholders. That distinction may well be well-founded, so far as the particular case is concerned, but his Honour had there referred (at 460) to the other cases in the long line of authority which emphasised the importance of this matter, commencing with Re Mascot Home Furnishers Pty Ltd (in liq) [1970] VR 593 and Re Data Homes Pty Ltd [1971] 1 NSWLR 338." 9I should add, to the authorities to which I had referred in my judgment in respect of the relevance of solvency in a reinstatement application, that in Casali v Crisp [2001] NSWSC 860; (2001) 165 FLR 79 at [31], Young CJ in Eq (as his Honour then was) noted that: "The authorities show that, normally, it is not just to reinstate an insolvent company so that issues can be litigated which were not clearly signalled at the time of deregistration a fortiori when such reinstatement would increase its debt; see eg Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277, 284-5; cf Denis v McMahon (1989) 7 ACLC 283." In that case, his Honour also observed (at [46]) that it would not be just to order reinstatement where it would: "permit an insolvent company to mount speculative litigation against the defendants over an event many years old with little prospect of financial reward to the plaintiff at the end of the day". I do not rely on the latter aspect of his Honour's reasoning in this case, since I have not assessed the prospect of success of the claim, or the likely recovery if it were successful, and do not consider it appropriate to do so. 10In Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277, White J, in dealing with an application to reinstate a company for the purposes of it being wound up, so that proceedings could be taken to recover property of the company, similarly emphasised that "[i]t would not ordinarily be appropriate to reinstate an insolvent company to the register, to enable it to carry on business" but held that the company in issue in that case could be reinstated where it would be wound up. That course is not available in this case. The decision in Casali v Crisp above was in turn cited by Sifris J in Re Brockweir Pty Ltd [2012] VSC 225 where his Honour noted (at [39]) that the fact that there was no indication that a proceeding of the kind then sought to be agitated was "clearly signalled" at the point of deregistration was a factor tending against reinstatement. In that case, his Honour also referred to delay as another factor that tended against reinstatement. In the present case, no such intention was indicated when the Company was deregistered, after it had assigned its claims to Ms Kovarfi, and there has been many years delay in bringing the application for reinstatement. 11Ms Kovarfi relies, first, on r 36.15 of the UCPR which provides that a judgment or order of the Court in proceedings may, on sufficient cause being shown, be set aside by order of the Court if the judgment was given or entered or the order was made irregularly, illegally or against good faith. A judgment may be set aside on the ground of irregularity or illegality if, for example, misconduct or dishonourable conduct is established, or there is some substantial defect in the judgment. As the authors of Ritchie's Uniform Civil Procedure NSW observe, the words "sufficient cause" have the effect that a judgment should not be set aside for slight or merely contentious causes, reflecting the principle of finality of judgments. It does not seem to me that any irregularity, illegality or lack of good faith is shown by the matters to which I have referred above. Even if Ms Kovarfi had led further evidence as to the alleged fraud of the Defendants, and had established an arguable, strong or very strong claim on the Company's part, that would not have affected the fact that the Company was insolvent and could not be reinstated without the appointment of a liquidator which could not be achieved in the relevant circumstances. 12The further evidence led by Ms Kovarfi today does not address the question of the Company's solvency and would not, if led on the previous occasion, have made any difference to the outcome on that occasion. The further evidence led by Ms Kovarfi today is intended to establish that the Defendants and its directors prepared a fraudulent "cost to complete" report to conceal an overpayment from the Company and the guarantors. The argument put before me was one that, in substance, had already been put before Campbell J, in respect of a differently constituted claim sought to be brought by Ms Edith Kovarfi, her husband and Ms Sara Kovarfi, which was summarised by Campbell J ([2014] NSWSC 100 at [18]) as follows: "So far as a claim is said to be available in fraud it is said ... that having discovered an earlier mistake in approving more than the builder was entitled to, the valuer sought to deliberately conceal their mistake from the Bank by providing the report of May 2004 to justify the amounts advanced by the Bank already thereby demonstrating that the available funds were insufficient to complete the development." 13Ms Kovarfi's affidavit attaches pictures of the development at the time the builder's contract was terminated and the Defendants issued their Progress Payment Report No 13. She asks the Court to infer from those pictures that the position stated in Progress Claim No 13 was incorrect, so far as it recorded some matters as more complete than the photographs indicate, or more complete than a report prepared by another quantity surveyor, presumably on the Company's behalf, indicated in May 2004. She submits that the "cost to complete" report subsequently prepared by the Defendants, in May 2014, sought to conceal the Defendants' error in its earlier report by shifting amounts which had been overpaid to the builders, on the basis of Progress Claim No 13, into other items such as preliminaries. She contends that the Company and she had discovered that the "cost to complete" report was fraudulent after 9 September 2010. 14There may well have been real difficulty in the Court drawing inferences, without expert assistance, from photographs of the development and competing expert reports, where neither expert was called, that the "cost to complete" report involved fraud. However, that question is not in issue before me in a reinstatement application, because the authorities make clear that such an application is not the proper forum to determine the prospects of the proceedings sought to be brought by the Company that is sought to be reinstated. The Courts have emphasised that it will often not be appropriate for prospective defendants to a proposed proceeding to be permitted to make submissions as to the merits of the proposed action on the reinstatement application and, in that situation, a decision plainly cannot be made as to those merits: Chalker v Clarke [2008] VSCA 92 at [33]. In Pilarinos v Australian Securities & Investment Commission [2006] VSC 301 at [29], Gillard J noted that it would usually not be appropriate to assess the merit of a potential claim in a reinstatement application, and that: "the proper venue for the cause of action to be heard and determined is a court or statutory tribunal. The parties will then have every opportunity to fight the case in a proper setting, to test the other party's case and to properly present their cases". 15The position is a fortiori in the present case since, even if I were to assume that the Company had a strong case of fraud, for the sake of argument only, that would not alter the fact that it is insolvent; no liquidator has consented to appointment; and there is no suggestion that Ms Sara Kovarfi or Ms Edith Kovarfi have the ability to fund a liquidation or to fund the liquidator to commence the proceedings which they wish to have the Company reinstated to bring. For these reasons, it does not seem to me that a basis to set aside the judgment under UCPR r 36.15 is established. 16Ms Kovarfi also refers to r 36.16 which provides that the Court may set aside a judgment if a notice of motion for the setting aside or variation of a judgment or order is filed within 14 days after the judgment or order is entered. In the present case, that requirement is not satisfied, because the judgment or order was entered on the Court's computerised record system on 22 July 2014 and UCPR r 36.11 provides that, unless the Court orders otherwise, a judgment or order is taken to be entered when it is recorded on that system. Ms Kovarfi's notice of motion seeking to set aside the judgment was dated 5 August 2014, although not filed until 7 August 2014 and was therefore filed after those 14 days. In any event, even if r 36.16 was otherwise available, r 36.16(3A) permits the Court to set aside or vary a judgment or order "if appropriate", and does not require the Court to do so. It would not be appropriate to do so because, as I noted above, no evidence has been filed to establish the Company's solvency, or address the difficulty that a liquidator cannot be appointed where, as I noted above, no liquidator has consented to appointment and Ms Sara Kovarfi and Ms Edith Kovarfi are unable to fund a liquidator's costs of the winding up or the proposed proceedings. 17I raised the possibility with Ms Kovarfi, in the course of argument, that the Court might adjourn the matter to allow her an opportunity to seek the consent of a liquidator to be appointed, to address the issues noted above. Ms Kovarfi responded that she might be able to persuade a liquidator to be appointed, if the Court were to deliver a judgment finding that she had established her case of fraud against the Defendants. As I noted above, a reinstatement application brought on an interlocutory basis, in which the Defendants have, appropriately, not sought to defend the substantive case sought to be brought against them by a Company which is presently deregistered, is not an appropriate forum in which to reach findings of fraud on a final basis and I do not propose to do so. I have ultimately concluded that no useful purpose would be served by adjourning the matter on that basis. This application is, of course, interlocutory in character and, if there is a significant change of circumstances, for example because Ms Kovarfi is able to obtain the consent of a liquidator to appointment, after that liquidator has reviewed the merits of the claim she seeks to have the Company bring and explored the opportunities of litigation funding for it, then she could renew the application for reinstatement. I should make clear that such an application could not, in the ordinary course, be renewed without a change of circumstances, where the bringing of successive interlocutory applications on the same facts may well amount to an abuse of process. 18For these reasons, Ms Sara Kovarfi's Notice of Motion filed on 7 August 2014 must be dismissed. Ms Edith Kovarfi had offered an undertaking to accept liability for costs of the application, to the exclusion of Ms Sara Kovarfi, in seeking to represent her in the application. In these circumstances, I order, consistent with the usual principle that costs follow the event, that Ms Edith Kovarfi pay the costs of the motion, as agreed or as assessed. 19Accordingly, I make the following orders: