Chahwan Pty Ltd v Euphoric Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - winding up by the court in progress for ten years - application by all contributories for termination of winding up - contributories purport to pass resolution removing existing directors and appointing new director - whether such resolution may effectively be passed while winding up continues - alternative approach preferred under which winding up is terminated on the contributories' undertaking to reconstitute the board immediately after termination

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 2F.1A, ss 201A(1), 249A, 482,

Chahwan Pty Ltd v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 227 FLR 43 Commissioner of Taxation v Linter Textiles Australia Ltd [2005] HCA 20; (2005) 220 CLR 592 CASES CITED : Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 Re HDT Special Vehicles (Aust) Pty Ltd (1991) 6 ACSR 5 Re Sound Consolidated Industries Pty Ltd (1992) 6 ACSR 647

Pine Forests of Australia (Canberra) Pty Ltd - First Plaintiff PARTIES : Peter Charles Hicks as liquidator of Pine Forests of Australia (Canberra) Pty Ltd - Second Plaintiff Pine Forests of Australia Pty Ltd - Third Plaintiff Syfind (Finances) Pty Ltd - Fourth Plaintiff

COUNSEL : Mr G Lucarelli - Plaintiffs Mr J Ferguson - Deputy Commissioner of Taxation

SOLICITORS : Johnson Winter & Slattery - Plaintiffs ATO Legal Services Branch - Deputy Commissioner of Taxation

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/242928 PINE FORESTS OF AUSTRALIA (CANBERRA) PTY LTD & 3 ORS JUDGMENT 1 Following publication of reasons on 1 October 2010 (Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127), the plaintiffs filed an amended originating process. 2 When the amended claims came before it on 2 November 2010, the court made an order terminating the winding up of Pine Forests of Australia (Canberra) Pty Ltd ("PFC"). It did so upon an undertaking given to the court. I quote from the record of proceedings: "1. I note the undertaking of Pine Forests of Australia Pty Ltd and Syfind (Finances) Pty Ltd given by them to the court through their counsel that they will within seven days act under s 249A of the Corporations Act 2001 (Cth) to pass a resolution of Pine Forests of Australia (Canberra) Pty Ltd in the terms set out in paragraphs 2, 3, 4 and 5 of the Annexure "B" to the affidavit of Zenon Alexander sworn 29 October 2010 and filed herein.

2. Upon that undertaking, I order that the winding up of Pine Forests of Australia (Canberra) Pty Ltd ACN 002 042 015 be terminated this day 2 November 2010. …

4. I direct that these proceedings be listed before me at 9.30am on 9 November 2010 for mention but if there is filed by delivery to my Associate before that time an affidavit of Zenon Alexander establishing that the said undertaking of Pine Forests of Australia Pty Ltd and Syfind (Finances) Pty Ltd has been duly performed, that listing shall be vacated." 3 I indicated that I would (as I now do) give reasons in relation to one aspect of the matter, other issues referred to in the earlier reasons having been resolved. It concerns the composition of the board of directors of PFC. 4 After publication of the reasons of 1 October 2010, the plaintiffs adopted a new approach to the matter of reconstitution of PFC's board (something which, under the original proposal, had been approached by reference to s 482(3)). On 20 October 2010, Syfind (Finances) Pty Ltd ("Syfind") and Pine Forests of Australia Pty Ltd ("PFA"), the two shareholders of PFC, executed a document in the following terms: "Pine Forests of Australia (Canberra) Pty Limited A.C.N 002 042 015 Notice of Resolution pursuant to section 249A of the Corporations Act 1. That the following resolutions take effect immediately upon the Supreme Court of New South Wales making an order for the termination of the liquidation of Pine Forests of Australia (Canberra) Pty Limited A.C.N 002 042 015, and not otherwise. 2. That Daria Read be removed as a director of the Company. 3. That Michelle Therese Kerdel be removed as a director of the Company. 4. That Zenon Alexander be appointed a director of the Company. 5. That the number of directors be reduced to one. Executed by all shareholders entitled to vote: The common seal of PINE FORESTS OF AUSTRALIA PTY LTD (ACN 001 345 997) was affixed by authority of its sole director in the presence of (sgd) Z. Alexander Zenon Alexander Common Seal Sole Director/Sole Secretary The common seal of SYFIND (FINANCES) PTY LTD (ACN 001 961 940) was affixed by authority of its sole director in the presence of (sgd) Z. Alexander Zenon Alexander Common Seal Sole Director/Sole Secretary Dated: 20 October 2010" 5 The intention was, clearly enough, to take advantage of s 249A of the Corporations Act which applies to resolutions of the members of a proprietary company that the Act or the company's constitution requires or permits to be passed at a general meeting. Section 249A(2) provides: "A company may pass a resolution without a general meeting being held if all the members entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution set out in the document. Each member of a joint membership must sign." 6 It is clear that resolutions in terms of paragraphs 2, 3, 4 and 5 of the document of 20 October 2010 are resolutions that the constitution of PFC permits to be passed at a general meeting; also that Syfind and PFA are "all the members entitled to vote on" each such resolution. 7 It was submitted on behalf of the plaintiffs that there was no obstacle to a resolution in terms of paragraphs 2, 3, 4 and 5 expressed, by means of words of the kind included in paragraph 1, to have effect upon the happening of a particular event, even if the event is one that may never happen. Because of the matter I am about to mention, there is no need to deal with that submission. 8 It was also submitted that it was open to the members, by collective action under s 249A(2), to bring about the passing of a resolution of PFC even though the company remained subject to winding up by the court. This must be doubted. 9 In Re HDT Special Vehicles (Aust) Pty Ltd (1991) 6 ACSR 5, Senior Master Mahony said (at 8): "The members of a company which is being wound up by order of the court cannot hold meetings and pass resolutions of the type which may be held and passed by the members of companies which are not being so wound up. Section 479 deals in part with the functions of the members in general meeting in the context of a winding up, but it is sufficient for my present purposes to observe that unless and until such a winding up is terminated, any resolution of the members of a company being wound up by the court, if valid, must be a resolution with respect to the purposes of the winding up. The members have no power to pass, independently of the liquidator, a special resolution changing the name of the company. They may, of course, purport to pass such a resolution, but, if so, it will be null." 10 Senior Master Mahony expressed the same opinion in Re Sound Consolidated Industries Pty Ltd (1992) 6 ACSR 647. 11 More recently, McHugh J said in Commissioner of Taxation v Linter Textiles Australia Ltd [2005] HCA 20; (2005) 220 CLR 592 at [171] - [173]: "The consequences of the making of a winding up order under the Companies Code and the Corporations Law (as they then stood) were that members ceased to be called 'members' and became 'contributories'. General meetings of the company could only be held if the court required and ordered them. Calls of any uncalled capital could be made on contributories. Transfers of shares after the winding up order were void as against the company unless the court ordered otherwise. The liquidator assumed custody and control of the company and its assets and was given the discretion to manage the affairs and property of the company and the distribution of the company's property. The company could no longer declare or pay dividends to members. On a winding up order being made, the members lost the power to pass resolutions in general meeting about what the company should do. Without a court order directing that a general meeting occur prior to a stay or termination of a liquidation, there was no provision for the members to hold a general meeting.

Under the Companies Code and the Corporations Law, however, the liquidator was required to convene a meeting of contributories for the purpose of ascertaining their wishes if requested to do so by at least one-tenth in value of contributories. The liquidator was required to have regard to any directions given by resolution of the contributories at any general meeting, but the contributories lost the power to pass resolutions in general meeting that could effect a change in the management of the company. Any voting power that the contributories exercised did not extend to the control of the company in relation to the appointment of officers or the distribution of property or assets.

The statutory regime provided that the court 'may' have regard to the contributories' wishes in relation to all matters pertaining to the winding up of the company. Moreover, the court might direct that meetings of contributories be convened for the purpose of ascertaining those wishes. But the contributories could not control the company in any real sense. Although the court 'may' have regard to the contributories' wishes (and 'shall' have regard to the number of votes conferred on the contributory by the company's constitution), it was not compelled to act on the contributories' wishes." 12 The position under the present Corporations Act is the same. 13 The statutory scheme is such that, while winding up is in progress, the liquidator is the company's decision-maker. There is no scope for decisions affecting the company to be made by others, except, perhaps, decisions that contribute to the orderly progress of the winding up. Indeed, so strong is the claim of the liquidator to be the company's decision-maker during winding up that statutory provisions allowing a member (among others) to bring proceedings on a company's behalf if so authorised by the court (Part 2F.1A of the Corporations Act) do not apply to a company subject to winding up, even though the provisions are expressed to apply to all companies, without any distinction as to status: Chahwan Pty Ltd v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 227 FLR 43. 14 There is accordingly substantial doubt as to whether it was open to the members of PFC, while the winding up continued, to pass any effective resolution to change the composition of the board of directors, even a resolution expressed to "take effect" only upon termination of the winding up. In addition, the power of the company in general meeting to pass such resolutions did not devolve upon the liquidator. A liquidator has only such powers as the Corporations Act confers. There is no explicit power for a company to do by or through its liquidator things that, in the absence of a liquidator, it can do by or through its members in general meeting. 15 Upon a s 482 application, the court has a clear interest in seeing that one or more directors able and willing to act will be in office immediately after the winding up is terminated. This is recognised in s 482(3). Part of the court's function is to ensure that the company is able to function in the ordinary way. In the present case, the winding up order was made on 8 June 1999 and the winding up therefore continued for more than ten years. After the lapse of such a long period, any court asked to terminate the winding up would wish to see positive evidence that the directors in office at the commencement of the winding up (if still suitable persons to be directors) were willing to function anew, failing which some other suitable governance arrangements would have to be placed before the court and found acceptable. 16 It was because they could not show that the persons who were directors on 8 June 1999 were willing to take up the reins again and because of their own desire, as the holders of all the issued shares, that those persons should, in any event, be replaced, that Syfind and PFA (two of the three applicants for termination of the winding up, the other being the liquidator) took steps towards removing the existing directors, appointing one new director and reducing the number of the directors to one (as is now permitted in the case of a proprietary company: s 201A(1)). 17 Given the substantial doubt as to whether the action of 20 October 2010 referred to at paragraph [4] above was effective, Syfind and PFA ultimately resorted to the regime outlined at paragraph [2] above. That regime depended on an undertaking given to the court. The undertaking was not, however, open to the objection noted in Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646. This is because of its short duration and the mechanism to review compliance created by item 4 at paragraph [2] above - added to which Syfind and PFA have a clear commercial incentive to honour the undertaking, given their obvious desire to see the person chosen by them replace the existing directors. **********

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