Graham Lewis Herbert v Nozala Pty Ltd & 1 Or

DECISION : Order that the originating process be dismissed with costs.; Exhibits may be returned after 28 days.

CATCHWORDS : CORPORATIONS - Deregistration - Reinstatement - Plaintiff and second defendant acquired first defendant, a company, for joint venture - Dispute between plaintiff and second defendant led to plaintiff's removal as a director of first defendant - Second defendant conducted business of first defendant without assistance of plaintiff for over a decade - Contrary to second defendant's assumption, plaintiff remained shareholder of first defendant - Second defendant sought to deregister first defendant - Plaintiff did not object to deregistration - First defendant deregistered - Plaintiff sought order that Australian Securities and Investments Commission (ASIC) reinstate registration of first defendant - Where plaintiff's application for reinstatement brought in order to prosecute proceedings on behalf of first defendant against second defendant - Where foreshadowed proceedings have no reasonable prospects for success - Where plaintiff's application for reinstatement brought in circumstances of serious delay - s 601AH(2) Corporations Act 2001 (Cth) considered - Whether plaintiff a "person aggrieved" by deregistration of first defendant - Whether just that first defendant be reinstated - Application dismissed

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

In the Matter of Peter Conyers Holdings Pty Limited (1996) 14 ACLC 1835 Payne v Wizard Industries Pty Limited; Payne v Australian Securities Commission (1997) 24 ACSR 277 Casali v Crisp (2001) 165 FLR 79 CASES CITED : Daniels v Anderson (1995) 37 NSWLR 438 Belan v Casey (2003) 57 NSWLR 670 Brightwell v RFB Holdings (2003) 171 FLR 464; (2003) 44 ACSR 186 Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541

Graham Lewis Herbert PARTIES : v Nozala Pty Ltd Leslie David Sexton

COUNSEL : Plaintiff: A Giurtalis Defendants: C Harris SC

Plaintiff: Batallion Legal SOLICITORS : 1st Defendant: ASIC 2nd Defendant: Matthews Folbigg

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

3495/06 Graham Lewis Herbert v Nozala Pty Ltd & 1 Or JUDGMENT 1 HIS HONOUR: This is an application under s 601AH(2) of the Corporations Act 2001 (Cth) for an order that the Australian Securities and Investments Commission ("ASIC") reinstate the registration of the first defendant, Nozala Pty Limited ("the company"). The company was deregistered on 4 February 2001. 2 The application is made by Mr Graham Herbert. At the time of the deregistration of Nozala, he was a shareholder, holding one-third of the issued capital of the company. Whether he was the beneficial owner of those shares is a matter which is in issue on this application. 3 The application is opposed by the second defendant, Mr Leslie Sexton. He was a director of the company when it was deregistered. He was also a shareholder holding one-third of the issued shares. 4 Subs 601AH(2) provides: " Reinstatement by Court (2) 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 … (b) the Court is satisfied that it is just that the company's registration be reinstated. "

5 Mr Sexton denies that Mr Herbert is a "person aggrieved" by the company's deregistration. He also says that it is not just that its registration be reinstated. 6 Nozala was acquired as a shelf company in 1988 by Mr Herbert, Mr Sexton and a Mr Graham Coleman. Mr Coleman's shares were held for him by his son. The company was acquired for what Mr Herbert called a "joint venture business" to be undertaken by the three of them through Nozala as a corporate vehicle. In about February 1989, Nozala purchased a property at 213 Old Stock Route Road, Oakville in New South Wales for $450,000. The property was used as a reception centre. Each of Mr Herbert, Mr Sexton and Mr Coleman became directors of the company. The purchase of the Oakville property and all of the incidental costs of the purchase were fully financed by borrowings from the Advance Bank. Mr Herbert acted as manager of the business of conducting the reception centre at the Oakville property. Mr Sexton provided the catering for that business. It appears that Mr Coleman's role was to arrange finance and to deal with the financial side of the business. 7 Mr Herbert was involved in the running of the reception business for about eight months until November 1989. A company called Biyadi Pty Ltd ("Biyadi") took out an overdraft facility of $200,000 through the Advance Bank for the purpose of providing working capital for Nozala's business. There was no clear evidence as to the shareholding in Biyadi, but Mr Herbert accepted that it was acquired by the three shareholders of Nozala. Mr and Mrs Sexton gave guarantees of the obligations of Nozala and Biyadi to the Advance Bank. They gave a mortgage over their house to secure their obligation as guarantors. 8 In November 1989, Mr Sexton telephoned the Advance Bank because he had not seen any bank statements in relation to the loan. He was told by an officer of the bank that interest had not been paid on the loan. He was also told that the overdraft had been fully drawn to its limit and that Mr Herbert had transferred moneys from the overdraft account to an account of his with the State Bank in Parramatta which was not associated with either Nozala nor the business. Mr Sexton took steps to freeze all activity on the loan which Nozala had with the Advance Bank, and on Biyadi's overdraft. He directed that the unauthorised transfer of funds from the overdraft account be reversed. 9 Mr Herbert was later prosecuted in relation to this matter. He gave evidence before me that he was charged in relation to thirty-eight cheques which I infer were drawn on the account of Biyadi. His wife was also charged in relation to those matters. They were both acquitted. He gave evidence, which I accept, that the cheques drawn on the account were not signed by him and that he did not recognise whose signature was on the cheques. 10 However this incident prompted Mr Sexton to confront Mr Coleman and, he says, Mr Herbert. Mr Coleman agreed to transfer his shares to Mr Sexton's, wife Mrs Patricia Sexton, and to procure the resignation of his son as a director of the company, if Mr Sexton agreed not to take legal action against him. The shares of Mr Coleman were transferred to Mrs Sexton. 11 At this time, there were discussions between Mr Herbert and a Mr Robertson of the Advance Bank to discuss options for the refinancing of the borrowings. Mr Herbert made a presentation to the bank for finance for him to acquire the Oakville property. Mr Sexton says that Mr Herbert told him that if he, Mr Sexton, signed over the shares, Mr Herbert would take over the loan and procure a release of Mr and Mrs Sexton's guarantees. Mr Herbert denied this. However, the arrangement which he was seeking to make with Mr Robertson would seem to be consistent with some such conversation having occurred. 12 Before any such arrangements were completed, the Advance Bank threatened to exercise its rights under its securities. Mr Sexton was told by Mr Robertson in November 1989 that the Sextons' guarantee and mortgage was the only effective third party security which the bank had for its loan. Mr Herbert says he was unaware that there were any financial difficulties for the company at this time. I find it difficult to accept that evidence in the light of what was happening at the time. 13 Mr Herbert may have given a guarantee himself. He says that he signed all of the documents which the bank officers put before him for signature, and assumes that those documents would have included a guarantee. However, no call on any such guarantee was made on Mr Herbert by the bank. Mr Sexton gives evidence that he had a conversation with Mr Herbert to the following effect: " SEXTON: 'Neither you or Coleman provided a guarantee for the loan as we agreed. We were the only ones to put up our house. Now the Bank is going to take it. I want you off the Property and out of the Business. We are going to move into Oakville House and try to make a go of it. Coleman has agreed to surrender his shares to Patricia. I suggest you do the same or we will have you up on fraud charges. You also need to resign as a director. We want nothing more to do with you.' HERBERT: 'I will resign.' "

14 Mr Herbert denies that any such conversation took place. According to him, he was told by Mr Robertson that Mr Coleman's shares were to be sold to Patricia Sexton so that the refinancing could be taken over personally by the Sextons. He was told by Mr Maurice May, Mr Sexton's solicitor, that a directors' meeting would be held the following week. Mr Herbert also says that he was told by somebody, whom he cannot now recollect, that he was required to vacate the premises. He did not attend the meeting of directors or shareholders, but he was subsequently told by Mr Coleman that he had been removed as a director. From that time he left the premises. He never returned and he had no further contact with Mr Sexton. 15 It is common ground that from this time, in about November 1989, except for the fact that Mr Herbert remained on the company's register as a shareholder, he had nothing further to do with the company until 2002 when he objected to the company's deregistration. Apart from the Sextons returning his dog which was on the property, he had no further dealings with Mr and Mrs Sexton. He was not given notice of any annual general meeting of the company. He was not sent any accounts for the company. He did not ask to be given such notice. He did not ask for accounts. 16 Mr Herbert also deposed that he was told by Mr Robertson that he (apparently Mr Robertson, or the Advance Bank) had sold the property to the Sextons. It appears, therefore, that he knew that the Sextons were either seeking to refinance the loans from the Advance Bank, or had acquired the Oakville property. He did not proffer any continuing guarantee. It appears that at no time has he contributed any capital to the company. 17 On Mr Herbert's version of events he did not resign as a director. Later, he was told by Mr Coleman that he had been removed as a director. Mr Herbert was unable to say how it was that he had been removed, or what was the reason for his having been removed. However, he did not speak to Mr Sexton to ask why or how that had happened. Nor, on his version of events, did he ask why he had been told to leave the property. 18 In my view, his failure to make such inquiries is inexplicable if his version of events were correct. I have reservations as to Mr Herbert's general reliability as a witness. His answers in cross-examination were frequently unresponsive. I prefer Mr Sexton's version of these events in November 1989, and I accept Mr Sexton's evidence of the conversation to which he deposed, which I have referred to above. 19 From November 1989 until the time of the company's deregistration in February 2001, the company's business was conducted by the Sextons. They refinanced the loans from the Advance Bank. They sold their own property and used the proceeds of about $200,000 to reduce the overdraft account. The loans were refinanced through contributory mortgages arranged by their solicitor. These were interest only mortgages and they were refinanced at regular yearly or two yearly intervals. They provided their guarantees in support of that refinance. Mr Sexton also transferred to the company other catering businesses which he had carried on. 20 It was his evidence, which I accept, that he understood that Mr Herbert was no longer a shareholder in the company and that he had relinquished his shares. Mr Sexton's conduct from 1989, whereby he and his wife assumed all of the risks of the company's business and performed all of the work necessary for the conduct of that business, is consistent with his having that understanding. Mr Sexton said that he was too busy in managing the company's affairs to have time to attend to the paperwork. Hence it was that no share transfer from Mr Herbert was obtained, and Mr Herbert remained as the shareholder registered as such in the company's register of members. 21 During all of the period from November 1989 until the company was deregistered in February 2001, Mr Herbert made no complaint about his having been removed as a director. He did not assert to the Sextons that he had any continuing interest as a shareholder. This was notwithstanding that he gave evidence that he believed that the company was profitable, and that it should have paid dividends to which he was entitled. 22 His explanation for this silence was that he had obtained legal advice that it was the company's responsibility to contact him, and not his obligation to contact the company. However, that provides no explanation as to why he took no steps to assert that he had an interest as a shareholder, or to ask about company meetings, or to ask to receive company accounts when he must have been conscious that the company had not met its responsibility to contact him. Indeed, he changed his address from time to time without notifying the company of that change of address. He said that he had an address notified to ASIC where he could be contacted, which was at the address of his wife's company. I do not think that that is a satisfactory explanation for not leaving his contact details with the company, if indeed he expected the company to make contact with him. 23 His conduct during this period is entirely consistent with his having acquiesced in Mr Sexton's demand made in November 1989 that he surrender his shares. 24 His other explanation for not having had any communication with Mr Sexton over this period was because of his understanding that it was at Mr Sexton's behest that charges had been brought against him. Whilst I accept that that is a matter which is likely to have created a high degree of ill feeling, it is not a reason for his having made no endeavour to assert his continuing interest in shares in the company. Indeed, the contrary is the case. 25 Neither Mr Sexton's evidence, nor the evidence of Mrs Sexton, establishes that an express agreement was made by Mr Herbert that he would transfer his shares either to Mr or to Mrs Sexton. However, I think it is clear from the terms of the conversation deposed to by Mr Sexton, which I have referred to above and which I accept, and from subsequent events to which I have referred, that Mr Herbert must have appreciated that Mr Sexton believed that he had relinquished all rights or benefits which would attach to his shares. He cannot have thought that the Sextons would assume the burden of running the affairs of the company and assume the risk of the company being unable to meet its obligations on its loans or to other creditors, on the basis that he would be entitled to receive a third of the company's profits and accretion to the value of the company's assets if their endeavours proved to be successful. He cannot have made that assumption when he himself was not contributing to the company, did not have his assets exposed to any risk, and when he knew that the Sextons would not have been willing to act in that way for his potential benefit. 26 I think there is at least a strong case for saying that he is estopped from denying Mr Sexton's assumption that he was no longer a beneficial shareholder of the company. 27 In May 1999, the loans procured through Maurice May & Co matured. They were rolled over on a monthly basis pending refinancing. On 20 September 1999, Maurice May & Co wrote to Nozala, enclosing a valuation of the Oakville property prepared by Landmark White (NSW) Pty Limited. Landmark White assessed the market value of the freehold of the property at $500,000. Maurice May & Co advised that the value placed on the property by the valuer made it impossible for them to refinance the first mortgage which secured a principal advance of $412,000. 28 By that time, Mr Sexton had remarried. He and his wife, Mrs Joanne Sexton, were then living on the property. Mrs Joanne Sexton offered to buy the property using her money for the amount at which the property had been valued. Mr Sexton and his former wife, Mrs Patricia Sexton, were then the only directors of the company. Mrs Joanne Sexton's offer was accepted. On 30 May 2000, the Oakville property was transferred to her for $500,000. 29 On 29 June 2000, the existing mortgage was discharged in full from the proceeds of sale of the property. The total paid on discharge of the mortgage to the mortgagees was $414,781.76. Mrs Patricia Sexton transferred her shares in Nozala to Mr Sexton. She was released from all obligations under her director's guarantee. The balance of the funds were applied in reduction of the shareholders' loan account which Mr Sexton and Mrs Joanne Sexton had with Nozala. The financial statements of Nozala as at 30 June 2000 disclose that at that time it had no assets and had liabilities to shareholders of $13,077.57. It was then no longer trading. 30 On 15 November 2000, application was made to ASIC for Nozala to be deregistered. In support of that application, Mr Sexton made a declaration that: " (a) all members of the company agree to the deregistration; and

(c) the company's assets are worth less than $1000; and

(d) the company has paid all fees and penalties payable under this Law; and

(e) the company has no outstanding liabilities; and

(f) the company is not a party to any legal proceedings. " (See s 601AA(2) of the Corporations Act. )

31 The statement that all members of the company agreed to the deregistration was not correct. Mr Herbert was still a member of the company, although Mr Sexton did not regard him as such. 32 Section 601AA requires two months to pass after notice of the proposed deregistration is posted on ASIC's database and notified in the Gazette before ASIC can deregister the company. In 2000, Mr Herbert became aware of the pending deregistration. He sought legal advice in relation to it. However, no objection was made by him, or on his behalf, to the deregistration before ASIC deregistered the company. ASIC did this on 4 February 2001. No such step was taken by him until 20 May 2002. I should say in this respect that I reject Mr Herbert's evidence in para 14 of his first affidavit that it was on or about the end of 2000 that he applied to seek to have Nozala reinstated on the grounds that the application for deregistration had been made by fraud, and that he had not been informed or given his consent as a member to the deregistration. That application was made to ASIC on 20 May 2002. 33 The solicitors for Mr Sexton responded to the application made on behalf of Mr Herbert that the company be reinstated. They submitted on various grounds, to which it is not necessary to refer specifically, that any such application should be made to the Court under s 601AH(2). On 2 July 2002, ASIC refused Mr Herbert's application. ASIC's letter states: " Thank you for your letter dated 20 June 2002 concerning the complaint received by ASIC to the effect that the company should not have been deregistered. After due consideration, ASIC is not prepared to exercise its discretion under s 601AH(1) of the Corporations Act to administratively reinstate the company. If reinstatement of the company is required, the Complainant will be required to seek a court reinstatement under s 601AH(2) of the Act. "

34 Notwithstanding that advice, this application for reinstatement was not brought until 30 June 2006. Mr Herbert's explanation for the delay was that he was involved in divorce proceedings with his wife during this period, and that until he was able to settle his personal affairs, he was not able to attend to this matter. 35 Mr Herbert deposes that his purpose in seeking the reinstatement of Nozala is so that action can be taken against the company's directors for not obtaining his consent to the transfer of the Oakville property when it was sold in May 2000 to Mrs Joanne Sexton. He says that that transfer was made for a significant undervalue. He seeks to have the company reinstated so that "the directors can be held accountable for the fraud they have perpetrated against me as a shareholder of Nozala Pty Limited." 36 There is no evidence at all on the present application that any fraud was perpetrated against Mr Herbert. There is no material on this application that justifies the making of an allegation in those terms. Through his counsel Mr Herbert also said that his purpose in seeking reinstatement of the company is to obtain a proper accounting of the surplus of about $86,000 available after discharge of the mortgagees' debts on the sale of the property. 37 Two questions arise on the application. One is whether Mr Herbert is a "person aggrieved" by the deregistration. The second is whether it is just that the company's registration be reinstated. 38 Prima facie, I could infer Mr Herbert is a person aggrieved by the deregistration. He is a member of the company and the company was deregistered without his consent, when his consent was required for deregistration pursuant to s 601AA(2). However, in the context of s 601AH(2), I think more is required. It is now established that a shareholder does not ipso facto, by virtue of his or her status as shareholder, have standing under s 601AH(2). A shareholder must show that he or she is likely to be prejudicially affected by the company being deregistered. That can be shown if the shareholder can demonstrate that he or she is a creditor of the company, or that there may be a surplus of assets if the company is reinstated (In the Matter of Peter Conyers Holdings Pty Limited (1996) 14 ACLC 1835; Payne v Wizard Industries Pty Limited; Payne v Australian Securities Commission (1997) 24 ACSR 277; Casali v Crisp (2001) 165 FLR 79 at 83). 39 The evidence on this application is that unless Mr Herbert were successful in obtaining leave to bring proceedings on behalf of the company against its directors in relation to the sale of the Oakville property, and unless the company were successful in an action for equitable compensation or for damages against the directors in relation to the sale of the property, there would be no surplus of assets available for distribution to shareholders. Accordingly, even if Mr Herbert was both legally and beneficially entitled to a one-third shareholding in Nozala, I do not think he has a standing as a "person aggrieved" unless he can show that the foreshadowed claim against the directors has some prospects of success. 40 That foreshadowed claim faces significant difficulties. The first is that it is now almost six and a half years since the transfer of the property occurred. Mr Sexton has foreshadowed, as one would expect, that if any such claim were made, a defence based on the Limitation Act 1969 (NSW), or on the principle that equity would apply the Limitation Act by analogy, would be raised. Prima facie, such a defence would be available to the directors. The same facts as would be alleged in a claim for equitable compensation for breach of the directors' duties as fiduciaries would sustain a cause of action by the company against the directors in tort. That is to say, the claim against the directors, as I apprehend it, is not only that they transferred the property at an undervalue, but that they did not take reasonable steps to obtain a proper price for the property. 41 That directors owe a duty of care to a company is now established (Daniels v Anderson (1995) 37 NSWLR 438). Accordingly, equity would, at least prima facie, apply the Limitation Act by analogy to a claim for equitable compensation arising from the same facts (see Belan v Casey (2003) 57 NSWLR 670 at [149], 712-713). However, I cannot say that this is clearly an absolute bar to any such proceeding as equity retains a discretion as to whether or not to apply the statute by analogy (see Brightwell v RFB Holdings (2003) 171 FLR 464; (2003) 44 ACSR 186). 42 However, there is no material before me on the present application which suggests that the directors did sell the property at an undervalue. As I have said, they sold the property at a valuation which had been obtained by the mortgagees. In September 1999, that valuation was expressed to be a valuation of the market value of the freehold. In April 2000, the valuer from Landmark White confirmed that in his opinion the local market conditions had not changed significantly since his valuation of 3 September 1999. He said that he would not expect any change in value to have occurred since that time. Accordingly, he confirmed that the valuation remained current. 43 It was suggested at one point that I should take judicial notice that property values had substantially increased between 1989, when the property was purchased for $450,000, and May 2000. I do not accept that submission, particularly in the face of valuation evidence specifically addressed to the value of the property in May 2000. 44 It was also submitted that I could infer that the property was sold for an undervalue from the fact that its unimproved value had been assessed for land tax purposes in 2000 at $357,000. I am not able to draw any conclusion as to what implication that valuation would have for the valuation of the improved property. 45 Reference was also made to various insurance policies obtained between 1991 and 1997, which insured the buildings at $350,000, and the contents at $107,500 (in 1991) and $60,000 (in 1997). Terms of the insurance policies were not before me. The policies were obtained on the direction of the mortgagees. It may be that they were insurance for the replacement cost of the buildings if the buildings were destroyed. I do not think that they in any way displace the valuation of Landmark White. 46 In my view, the foreshadowed claim against the directors is speculative at best. 47 It also appears to me that, in any event, Mr Herbert would be estopped from asserting that he is the beneficial owner of the shares of which he is the legal owner. Accordingly, I am not satisfied that he is a person who is aggrieved by the deregistration. 48 However, if that conclusion is wrong, I am nonetheless not satisfied that it would be just to reinstate the company's registration. Whether or not Mr Herbert can be heard to say that he is the beneficial owner of the shares, it is clear that he allowed the Sextons to conduct the company's affairs at their risk for some eleven years without making any claim which might have alerted them to the fact that he might seek to claim a benefit from their endeavours. He then failed to take steps to object to the company's deregistration until May 2002. After ASIC refused his application to reinstate the company, there was a period of delay of more than four years before these proceedings were commenced. 49 Shortly after ASIC refused Mr Herbert's application for the company to be reinstated, Mr Sexton destroyed the company records which were in his possession. Some company records were produced in these proceedings in response to a notice to produce from Mr Herbert. The records produced were those of which Mr Sexton's accountant still had custody. It is clear, however, that a substantial number of documents have been destroyed. That is a particular prejudice to the directors if any claim were now to be maintained against them in relation to their conduct of the company's affairs, or in relation to their loan accounts with the company. 50 Moreover, even if a claim by the company against the directors would not be barred on the principle of the application of the Limitations Act by analogy, the passage of time since May 2000 is likely to have affected, adversely, the ability for there to be as fair a trial of any action against the directors as could have been available if any such claim had been brought promptly. As McHugh J said in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 551: "… The enactment of time limitations has been driven by the general perception that '[w]here there is delay the whole quality of justice deteriorates'. Sometimes the deterioration in quality is palpable, as in the case where a crucial witness is dead or an important document has been destroyed. But sometimes, perhaps more often than we realise, the deterioration in quality is not recognisable even by the parties. Prejudice may exist without the parties or anybody else realising that it exists. As the United States Supreme Court pointed out in Barker v Wingo , 'what has been forgotten can rarely be shown'. So, it must often happen that important, perhaps decisive, evidence has disappeared without anybody now 'knowing' that it ever existed. "

51 In my view, after the long period of delay which this present application exhibits, it would not be just that the company's registration be reinstated in order for there to be the inquiries or claims brought which have been foreshadowed. 52 The originating process sought a declaration pursuant to s 601AH(3) that the time between the deregistration of Nozala Pty Limited and the expiration of the limitation period under s 14 of the Limitation Act should not be counted. The originating process contains an admission that s 14 of the Limitation Act applies to the cause of action sought to be brought. I doubt that that admission is well based. I express no view as to whether the Court would have the power under s 601AH(3) to make the declarations sought. Even if that section extends so far, I do not consider that it would be appropriate to make such an order or declaration. 53 In my view, the policy underlying the Limitation Act is particularly apposite in the present circumstances. That policy is partly driven by the deterioration in justice where there are delays. It is partly driven by the public policy of quelling controversies which lie long in the past. The present case is of that kind. As it is, because I am not satisfied that the requirements of subs 601AH(2) are satisfied, the question of making an order under subs (3) does not arise. 54 For these reasons, I order that the originating process be dismissed with costs. The exhibits may be returned after 28 days.

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