Partners v Sampson

COUNSEL : Mr R. Glasson - Plaintiff Mr K.R. Eassie - Defendants SOLICITORS : Nash O'Neill Tomko - Plaintiff Yandell Wright Stell - Defendants CATCHWORDS : CORPORATIONS - application by creditor for reinstatement of deregistered company - questions of standing considered - reinstatement just where purpose is to permit winding up in insolvency - no grounds for staying winding up LEGISLATION CITED : Corporations Law 2001 (Cth) Corporate Law Review Act 1998 Australian Competition and Consumer Commission v Australian Securities and Investments Commission (2000) 34 ACSR 232 Re Botar-Tatham Pty Ltd (2001) 52 NSWLR 680 Re Cambridge Coffee Room Association Ltd [1952] 1 All ER 112 Casali v Crisp [2001] NSWSC 860 Re Dormo Constructions Pty Ltd (1979) ACLC 32,229 CASES CITED : Re Great Eastern Cleaning Services Pty Ltd (1978) 3 ACLR 886 Hunter Valley Community Investments Pty Ltd v Bell (2001) 37 ACSR 326 Re Morton; Ex parte Mitchell Products Pty Ltd (1996) 21 ACSR 497 Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277 Re Proserpine Pty Ltd [1980] 1 NSWLR 745 Scott v Janniki Pty Ltd (1994) 14 ACSR 334 Re Williams United Mines Pty Ltd (1992) 8 ACSR 627 DECISION : Registration reinstated; winding up ordered; stay of winding up refused.

• 5 - IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION

2034/02 - PARTNERS IN ENTERPRISE PTY LTD v SAMPSON & ANOR

1 The plaintiff seeks, in the first instance, an order under s.601AH(2) of the Corporations Act 2001 (Cth) reinstating the registration of Adapt Technologies Pty Limited ("the company"). Dependent upon the outcome of that application, the plaintiff seeks an order that the company be wound up in insolvency. Both these applications are opposed by, effectively, the persons who were the directors and shareholders of the company when it was deregistered, Mr Sampson and Mr Lloyd. They also foreshadow that, if a winding up order is made, they will seek a stay of the winding up under s.482. 2 The originating process filed by the plaintiff names the company as sole defendant. That is not a satisfactory position, given the stark words of s.601AD(1): "A company ceases to exist on deregistration." 3 The effect of an equivalent predecessor provision upon the entity's capacity to be party to legal proceedings was stated by Sackville J in Re Morton; Ex parte Mitchell Products Pty Ltd (1996) 21 ACSR 497: "A company registered under the Corporations Law is, inter alia, capable of suing and being sued and of holding property: s.123(2)(c), (e). But upon dissolution the company ceases to be a legal person: it becomes a 'non existent person': United Service Insurance Co Ltd (in liq) v Lang (1935) 35 SR (NSW) 487 (FC), at 495, per Jordan CJ. Under the Corporations Law , the property (including choses in action) of the dissolved corporation vests in the Australian Securities Commission: s.9 (definition of 'property'), s.576(1). Upon the court becoming aware that the plaintiff or applicant is a non existent person, it will not allow the action to proceed: United Service , at 497. See also Sweeney &I Vandeleur Pty Ltd v BNY Australia Ltd (1993) 11 ACSR 356 (SC(NSW), Cole J), at 359-360; P E Von Nessen, 'The Dissolution and Reinstatement of Companies' (1993) 67 ALJ 427."

As Sackville J later confirmed in Hunter Valley Community Investments Pty Ltd v Bell (2001) 37 ACSR 326, the same position prevails under the current provisions introduced by the Corporate Law Review Act 1998. A deregistered company thus cannot be a party to legal proceedings. 4 For these reasons and because Mr Eassie of counsel made it clear that his instructions were coming from Mr Sampson and Mr Lloyd who wished to be heard on the reinstatement question, I directed that they be made defendants. 5 The essential facts are not in dispute and may be stated briefly. The company was formed to develop and exploit technology associated with air valves. It entered into a contract with the plaintiff under which the plaintiff was to assist in the raising of venture capital. This agreement became exhibit A. The plaintiff served on the company a statutory demand under s.459E in respect of moneys said to be due and payable by the company under that agreement. The company did not comply with the statutory demand within the applicable 21 day period. An application by the company under s.459G for an order setting aside the statutory demand was dismissed by consent. A few days after the expiration of the 21 day period, ASIC deregistered the company pursuant to s.601AB in consequence of failure to lodge returns. 6 The first issues to be addressed are issues of standing. Mr Sampson and Mr Lloyd say that the plaintiff lacks standing to initiate and pursue the s.601AH reinstatement application; while the plaintiff, for its part, contends that Mr Sampson and Mr Lloyd have no standing to be heard on that application. 7 I am satisfied that the plaintiff has standing under s.601AH(2)(a)(i) as "a person aggrieved by the deregistration". This is so for two reasons. First, the plaintiff was a party to the capital raising agreement in exhibit A and that agreement, even though purportedly terminated, makes it clear that certain financial obligations, whatever they may be, survive termination. The plaintiff may therefore have contractual rights which are prejudiced by the company's having ceased to exist. The second basis for the view that the plaintiff is a person aggrieved (which is really an extension of the first) is its being the person by whom an unsatisfied statutory demand was served and who thereby became entitled, before deregistration intervened, to pursue an application for a winding up order. 8 The nature of the interest sufficient to make someone a person aggrieved and to distinguish them from an officious bystander or mere busybody is very much a matter to be judged in context. The nature of the interest in this kind of context is discussed in a number of cases. A recent examination of them appears in the judgment of Young CJ in Eq in Casali v Crisp [2001] NSWSC 860; see also Re Proserpine Pty Ltd [1980] 1 NSWLR 745. 9 A contractual counterparty wishing to pursue some financial claim and who, on the basis of that claim, serves a statutory demand with a view to grounding winding up proceedings on the statutory presumption of insolvency has a clear interest in avoiding the legal consequence produced by s.601AD(1). This is particularly so when it is remembered that, in general terms, a party who has served an unsatisfied statutory demand has a prima facie entitlement to proceed to apply for winding up on the basis of the resulting statutory presumption of insolvency, that being a course of action which may be expected to have more beneficial results for that party than statutory destruction of the company concerned. 10 I am also satisfied that Mr Sampson and Mr Lloyd are properly regarded as persons who should be heard on the reinstatement application. They were shareholders in the company before it went out of existence. Their property, in the form of their shares, has been destroyed by s.601AD(1). It may be that their shares have no value and should be ignored, but there is also the possibility that there is some residual value and I do not think it appropriate, in the present state of the evidence, to preclude their arguing their position on the reinstatement application. As they are not the applicants for reinstatement, they do not need to come within the "person aggrieved" specification, although the considerations will be very much the same. The remarks of Needham J in Re Dormo Constructions Pty Ltd (1979) ACLC 32,229 make it clear, I think, that these matters are not to be approached in a narrow or restrictive way. 11 Subject to anything counsel may have to say, I propose now to hear submissions from both sides on the reinstatement application plus, at the same time, whatever there is to be said on the winding up application. It is appropriate that those aspects be addressed together since the purpose of the reinstatement application is merely to pave the way for the winding up application. It is by no means clear that, under the current legislation, there is jurisdiction to wind up a company which has been deregistered: compare Re Williams United Mines Pty Ltd (1992) 8 ACSR 627, a decision of McLelland J on the differently worded provisions of the Corporations Law in their original 1991 form. Furthermore, if the case is one of insolvency, reinstatement which would allow the resurrected company to return to the control of its directors and shareholders and trade again will be denied on policy grounds: Re Great Eastern Cleaning Services Pty Ltd (1978) 3 ACLR 886. Young CJ in Eq put the matter succinctly in Re Botar- Tatham Pty Ltd (2001) 52 NSWLR 680: "The general policy of this Court is that no insolvent company must be enabled to go out into the marketplace and trade." 12 The reinstatement and winding up applications must therefore proceed hand in hand.

[Further submissions] 13 It is appropriate that I deal first with the merits of the winding up application. On that, there is little to be said. The evidence shows that the statutory demand was served and was not complied with and that an application to have the demand set aside was dismissed by consent. The statutory presumption of insolvency therefore arose and, in the light of s.459S, the grounds of opposition at this stage are severely curtailed. In particular, no ground that could have been asserted in an attempt to have the statutory demand set aside may be used, except with the leave of the court; and it is not open to the court to grant leave unless satisfied that the ground to be asserted is material to proving solvency. This means the whole thrust of the enquiry, once matters have reached this stage, is directed towards solvency and that, in the absence of evidence counteracting the statutory presumption of insolvency, a winding up order should be made. Nothing to gainsay that course has been shown here. 14 As far as reinstatement is concerned, a case has been made out for the exercise of the jurisdiction created by s.601AH(2). It is just that reinstatement occur so that there can be imposed in relation to this company the statutory regime embodied in the winding up provisions. That course is clearly correct in principle since, if the deregistration is not reversed, the company's obliteration by force of s.601AD will continue and such property as it had will remain vested in ASIC under provisions which, subject to what s.601AE(3) calls "liabilities imposed on the property under a law", eventually see that property disposed of pursuant to Part 9.7 in the same way as unclaimed moneys. The winding up regime, in contrast, is one that exists to ensure an orderly collection and realisation of assets and their application to meet, insofar as they extend, the claims of creditors and as to any surplus to be paid to contributories. That is the normal order of events and the one which sees private rights properly dealt with and not preempted or stultified by the destruction of the company and the statutory vesting of its property in a government agency. This general thinking is, I believe, consistent with the approach taken to s.601AH(2) by Austin J in Australian Competition and Consumer Commission v Australian Securities and Investments Commission (2000) 34 ACSR 232. 15 The appropriate course in this case is that taken in Payne v Wizard Industries Pty Ltd (1997) 24 ACSR 277, namely, to revive the company for the express purpose of making an order for its winding up in insolvency (see also Re Cambridge Coffee Room Association Ltd [1952] 1 All ER 112). Some latitude on procedural compliance is appropriate in such cases: Scott v Janniki Pty Ltd (1994) 14 ACSR 334. Because imposition of winding up is just, so too is reinstatement to allow that to happen. The criterion prescribed by s.601AH(2) is therefore satisfied. Furthermore, the effect of s.601AH(5) is that reinstatement causes the company's existence to be regarded as having continued as if the deregistration had not occurred, so that non-compliance with the prior statutory demand may still form the basis for a winding up order. 16 There has been filed the consent of Mr Geoffrey McDonald of Hall Chadwick to act as liquidator. There was some debate before me as to whether Mr McDonald, having obviously been approached by the plaintiff to give his consent and, to that extent, having had contact with the plaintiff, is the appropriate appointee. All I can say on that is that, under the current system where it is for the plaintiff to present to the court the liquidator's consent, it would become impossible to proceed if the contact necessary to obtain that consent was somehow seen as a factor which should call in question the suitability of the person who, in response to the approach, had given consent. I see no ground on which I should, for a moment, think that Mr McDonald is not an appropriate person to be liquidator. 17 I make orders 1, 2 and 3 in the originating process filed on 26 March 2002. I shall now hear the foreshadowed s.482 application. Leave is given to Mr Sampson and Mr Lloyd to file in court their interlocutory process.

[Further submissions] 18 Mr Sampson and Mr Lloyd, as contributories, seek under s.482 a stay of the winding up which has just been ordered. They wish to have time to explore avenues for commercial exploitation of the valve process which, on the evidence, appears to be the subject of patent applications by one of them but which, it is said, is an asset of the company. It is said that they need a period of six months in which to achieve something tangible and that during that period they would undertake not to allow the company to incur debts and to keep it in a static position. 19 Against that there is the point that the company has been wound up because of the presumption of insolvency, so that the first concern should be with the interests of its creditors. Those interests would not be served by a long period - and I certainly regard six months as long - of what amounts to suspended animation of this company, with the directors still operating it to the limited extent allowed by the conditions of the proposed stay. It was through inattentiveness to matters of company administration that deregistration of the company occurred and also that the application seeking to set aside the statutory demand was not proceeded with. There can be no confidence that there would be any greater level of attentiveness in the future. 20 The interests of the creditors must take center stage at this point. Unless it is seen that those interests will somehow be served by a stay, as distinct from the stay being merely an opportunity to investigate nebulous possibilities, the stay is not warranted. The liquidator, after all, has a duty to get in the assets and, within the limits dictated by his functions, to make the most of them that can reasonably be made. There is no reason why Mr Sampson and Mr Lloyd, who as contributories have an interest in maximising the surplus in the hands of the liquidator after creditors have been satisfied, should not give to the liquidator such information as might be of assistance in identifying leads that could prove to be useful to orderly realization by the liquidator. 21 There is also the point that if solvency, which is the prime concern on any s.482 application, can at some point be shown so that it is appropriate for the company to be restored to its former administration, such an application can be made at any time. 22 An alternative sought by Mr Sampson and Mr Lloyd is an adjournment of the stay application and a direction that the liquidator prepare a report assessing the value to the company of commercial opportunities arising from the patent applications to which I have referred. It has been submitted by Mr Glasson, I consider correctly, that it is really the function of the liquidator, in any event, to follow up such matters, so that there is no need for any such direction to the liquidator or for any adjournment. 23 There will be no stay of the winding up. I shall now hear counsel on costs.

[Further submissions] 24 The appropriate costs orders are, first, that the costs of the applicant for winding up, incurred in connection with the application for the winding up order, be dealt with in accordance with s.466 and s.556(1)(e); second, that the costs of the applicant for reinstatement of the deregistered company be paid by the defendants to that application; and, third, that the costs of the respondent to the s.482 stay application should be paid by the applicants on that application. I so order. 25 The exhibits may be returned.

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