Tom Michael Oates v Consolidated Capital Services Pty Ltd & 1 Or [2007] NSWSC 680 | Case summary

1021/07 Tom Michael Oates v Consolidated Capital Services Pty Ltd & 1 Or JUDGMENT 1 HIS HONOUR: In these proceedings, the plaintiff, Mr Oates, seeks an order that the Australian Securities and Investments Commission ("ASIC") reinstate the registration of Consolidated Capital Services Pty Ltd ("CCL Australia") pursuant to s 601AH(2) of the Corporations Act 2001 (Cth). 2 Mr Oates also seeks leave pursuant to s 237 of the Corporations Act to bring proceedings under s 236 of the Corporations Act in the name of CCL Australia against four defendants, namely, Mr Garrick Hawkins, Mr Scott Tyne, Consolidated Capital (Holdings) Ltd, and Bluejay Services Ltd. Consolidated Capital (Holdings) Ltd and Bluejay Services Ltd are both incorporated in the United Kingdom. 3 Mr Oates also seeks an order that he be given leave to act on behalf of CCL Australia to cause it to bring derivative proceedings in the name of Consolidated Capital Ltd ("CCL UK") against those defendants. CCL UK is incorporated in the United Kingdom. 4 CCL Australia and CCL UK were named as defendants to the proceedings. CCL Australia does not presently exist as it was deregistered on 7 August 2005 pursuant to s 601AA of the Corporations Act. 5 Mr Oates is a former director of CCL Australia and CCL UK. He resigned as a director on 18 August 2004. CCL UK was a wholly owned subsidiary of CCL Australia. 6 The holding company of CCL Australia was Consolidated Capital Acceptances Ltd ("CCL Ireland"). CCL Ireland was incorporated in Ireland. There were one hundred issued shares in CCL Ireland. Mr Oates was beneficially entitled to twenty percent of the issued shares in CCL Ireland. CCL Ireland was dissolved on 21 July 2006 for failure to lodge statutory returns. 7 Messrs Hawkins and Tyne were both directors of CCL Australia and CCL UK. Their nominees were beneficially entitled to seventy percent of the issued shares in CCL Ireland. A Mr Mallin was beneficially entitled to the remaining 10% of the shares in CCL Ireland. 8 Mr Oates deposed that the business of the "Consolidated Capital Group" was to provide "structured finance" products for the United Kingdom market. There was a number of such products which Mr Oates says constituted intellectual property belonging to CCL Australia and CCL UK. They were described as innovative ways of structuring large financing transactions to obtain tax or accounting benefits. Messrs Oates and Tyne had both worked as solicitors specialising in taxation and structured finance. Mr Hawkins was an investment banker specialising in such transactions. Mr Oates described four types of structured finance product. The details are not presently relevant. Some involved the borrower obtaining finance at lower interest rates because of taxation benefits that flowed to the lender. Some involved annuity products under which moneys invested in the annuity would be tax deductible, but the annuity would be received tax-free. Some involved the transfer of assets which had what Mr Oates described as "an embedded tax liability" to a transferee who could accept or mitigate the tax liability implicit in the asset. 9 Mr Oates deposed that, during 2004, he and Messrs Hawkins and Tyne had extensive discussions with Merrill Lynch in London with a view to Merrill Lynch acquiring or using structured finance proposals formulated by one or more of the companies in the Consolidated Capital Group. The proposal described by Mr Oates was that a Merrill Lynch client would transfer an in-the-money interest rate swap to a special purpose company, that the Consolidated Capital Group or its nominee would accept the tax liability of the special purpose company, and that that tax liability would be off-set, reduced or mitigated through tax benefits offered by one or more of the Group's structured finance products. Mr Oates deposed that Mr Hawkins conducted the negotiations with Merrill Lynch for the fees that would be payable by Merrill Lynch to the Consolidated Capital Group. Mr Oates deposed that he was told by Mr Hawkins that the fee agreement under discussion was that Merrill Lynch would receive as a fee half of the tax saved by its client and that fee would in turn be split equally with the Consolidated Capital Group or its nominee. 10 Mr Oates deposed that, although such structured finance products were developed by the Consolidated Capital Group, no transactions were finalised prior to his resigning as a director on 18 August 2004. He said that, as well as the discussions with Merrill Lynch, he and Messrs Hawkins and Tyne had had a number of meetings and discussions with representatives of Deutsche Bank and Hong Kong and Shanghai Banking Corporation. He says that at the time of his resignation, the Consolidated Capital Group had business prospects with all three of those organisations. When he resigned he gave as his reason that, despite the best efforts of himself and Messrs Hawkins and Tyne, they had not been able to "get anything over the line". He wrote that "I know there are great opportunities for the company here, and I'm sure you will pull it off, but I have just run out of puff." 11 Following his resignation as a director, there were discussions between Messrs Hawkins and Tyne and Mr Oates relating to his retirement. Messrs Hawkins and Tyne proposed, amongst other things, that he transfer his beneficial shareholding in CCL Ireland to them or their nominees, and that there be mutual releases. However, his evidence is that no agreement was concluded and that he remained a beneficial shareholder in CCL Ireland. 12 Mr Oates deposed that, on 24 August 2004, Messrs Hawkins and Tyne provided him by email with a scanned copy of a deed signed by them and purportedly executed in their individual capacities and in their capacity as directors of CCL UK, CCL Australia and CCL Ireland. Mr Oates said that he did not consent to their execution of the deed. The document recited that Messrs Hawkins, Tyne and Oates had together conducted an investment banking business, and that Mr Oates had resigned without warning from that business, thus motivating the capital restructure contemplated by the deed, the cessation of the existing business and the establishment of a new business involving Messrs Hawkins and Tyne. It recited that the old business had been funded by way of loans made for or on behalf of Messrs Hawkins and Tyne to CCL Ireland, and that CCL Ireland was indebted to them on account of such loans in the sum of ₤625,000. It recited that CCL Australia and CCL UK had guaranteed those loans. It also contained a purported acknowledgement that all of the "financial structures and concepts developed in the Old Business and all documents and economic models produced in the context of the Old Business (together the "Intellectual Property") are the sole and exclusive property of CCL Ireland". The deed then provided for releases by Messrs Hawkins and Tyne of the obligations of CCL Ireland, CCL Australia and CCL UK to repay the loans, and for the assignment by CCL Ireland to Messrs Hawkins and Tyne of the Intellectual Property and of CCL Ireland's shareholding in CCL Australia. The deed provided that CCL Australia assigned to Messrs Hawkins and Tyne its shareholding in CCL UK and its right (if any) to the Intellectual Property. The deed also provided for CCL UK to assign to Messrs Hawkins and Tyne all of its right (if any) to the Intellectual Property. The deed provided that Messrs Hawkins and Tyne would conduct the new business through a new corporate structure. 13 Mr Oates disputes a number of the facts asserted in the deed. He disputes the existence of the alleged loans and guarantees. He disputes that the Intellectual Property was the sole and exclusive property of CCL Ireland. He claims that Messrs Hawkins and Tyne breached their duties as directors in causing the companies to enter into the deed, and that the deed is liable to be set aside. 14 Mr Oates deposed that in October 2004 Messrs Hawkins and Tyne established a new United Kingdom company called Consolidated Capital (Holdings) Ltd. He says that he heard during 2005 that Messrs Hawkins and Tyne, through Consolidated Capital (Holdings) Ltd, conducted a number of swap novation transactions with Merrill Lynch and that transferred taxable income was sheltered in those transactions using the structured finance products developed by the Consolidated Capital Group. He deposed that other companies established by Messrs Hawkins and Tyne in the Cayman Islands and in Jersey entered into various swap transactions with Merrill Lynch, Invest Bank (UK) Ltd and the Royal Bank of Scotland using the structured finance products which had been developed by the Consolidated Capital Group. 15 Mr Oates deposed that there is reason to believe that millions of pounds in income and fees were derived from these transactions which, he says, exploited the intellectual property and corporate opportunities which properly belonged to the Consolidated Capital Group. He also says that he now believes that, at the time of his resignation, Merrill Lynch had won, or was about to win, a mandate for a swap novation transaction with the Royal Bank of Scotland and Abbey National. Special purpose companies that participated in those transactions with the Royal Bank of Scotland were, he says, incorporated on 3 September 2004 and 18 October 2004. He believes that at the time of his resignation, Messrs Hawkins and Tyne knew that Merrill Lynch had won, or was about to win those mandates, and that they did not disclose that information to him. 16 CCL Australia was deregistered on 7 August 2005 by ASIC on application made by Messrs Hawkins and Tyne on 2 May 2005. On deregistration, it ceased to exist (Corporations Act, s 601AD(1)). Its property, including its share in CCL UK, was then vested in ASIC (s 601AD(2)). 17 Mr Oates deposed that, on 23 August 2005, Messrs Hawkins and Tyne applied to have CCL UK struck off the register and that that company was struck off the Companies House Register on 24 January 2006. The filing report for that company says that it was "dissolved via voluntary strike off" on 24 January 2006. It was restored to the register on 13 September 2006. 18 Mr Oates deposed that CCL Ireland was dissolved by the registrar in Ireland on 21 July 2006 as a result of its failure to lodge statutory returns since Mr Oates' resignation. 19 Mr Oates wishes to have CCL Australia reinstated so that it can bring proceedings for itself and on behalf of CCL UK against Messrs Hawkins and Tyne and against Consolidated Capital (Holdings) Ltd and its holding company (Bluejay Services Ltd). He wants CCL Australia to make a claim for an account for profits derived from those parties' use of the intellectual property and business opportunities of companies in the Consolidated Capital Group, for damages, and for declarations that the assets, business and undertakings of Consolidated Capital (Holdings) Ltd and Bluejay Services Ltd are held on constructive trust for CCL Australia, or presumably (although this is not yet claimed in the proposed statement of claim), on constructive trust for CCL UK. He seeks an order pursuant to s 237 of the Corporations Act for leave to bring such proceedings on behalf of CCL Australia. Joinder of CCL UK 20 CCL UK is joined as a defendant to the originating process. Part of the relief claimed was that Mr Oates, or alternatively, Mr Oates acting on behalf of CCL Australia, should have leave to bring derivative proceedings in the name of CCL UK against the proposed defendants. Counsel for Mr Oates contended that on this application, he needed leave to proceed against CCL UK. Counsel submitted that, notwithstanding that CCL Australia was the sole shareholder of CCL UK, and not a minority shareholder, CCL Australia could bring derivative proceedings on behalf of CCL UK under the fifth exception to the rule in Foss v Harbottle (1843) 67 ER 189. Counsel also submitted that New South Wales is not a clearly inappropriate forum for such proceedings. 21 However, the point has not yet been reached where these questions arise. 22 The first question is whether Mr Oates is a person aggrieved by the deregistration of CCL Australia, and if so, whether it is just that the registration of that company be reinstated. If CCL Australia is reinstated, the next question is whether, on the present application, I can and should deal with the application that Mr Oates have leave pursuant to s 237 of the Corporations Act to bring proceedings on behalf of CCL Australia. Leave may be given under s 237 for Mr Oates to bring proceedings on behalf of CCL Australia. However, leave cannot be given under that section for him to bring proceedings on behalf of CCL UK. CCL UK is not a "company" within the meaning of the section. The question whether CCL Australia can bring derivative proceedings on behalf of CCL UK raises a question of substantive law to be resolved in any such application that CCL Australia may make. Mr Oates might be given leave to bring such proceedings on behalf of CCL Australia if there is a serious question to be tried that CCL Australia could bring such derivative proceedings on behalf of CCL UK and the other criteria in s 237(2) are satisfied. However, the substantive question of whether CCL Australia can bring such derivative proceedings cannot be determined on this application. 23 To recapitulate, if CCL Australia is reinstated, and if, either on the present application, or at a further hearing after service on CCL Australia following its reinstatement, Mr Oates is given leave to bring proceedings on behalf of CCL Australia, CCL UK would then be joined as a defendant in substantive proceedings brought by CCL Australia. CCL Australia would then claim to be entitled to bring a derivative action on behalf of CCL UK against the other defendants. The question of whether CCL Australia could maintain derivative proceedings on behalf of CCL UK against the other defendants, and whether New South Wales is not a clearly inappropriate forum for such proceedings, would only fall for determination in those proceedings. Those questions do not presently arise. 24 CCL UK was not a necessary or proper party to the present application. The relief sought that CCL Australia can bring derivative proceedings in the name of CCL UK against the other defendants is premature. Application for Reinstatement of CCL Australia 25 Subsections 601AH(2), (3) and (5) of the Corporations Act provide: "601AH Reinstatement

... (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 (ii) a former liquidator of the company; and (b) the Court is satisfied that it is just that the company's registration be reinstated. (3) 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. Note: For example, the Court may direct ASIC to transfer to another person property vested in ASIC under subsection 601AD(2). ... Effect of reinstatement (5) If a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered. A person who was a director of the company immediately before deregistration becomes a director again as from the time when ASIC or the Court reinstates the company. Any property of the company that is still vested in ASIC revests in the company. If the company held particular property subject to a security or other interest or claim, the company takes the property subject to that interest or claim. " 26 It was submitted for Mr Oates that he is a person aggrieved by the deregistration of CCL Australia because he is beneficially entitled to twenty percent of the shares in CCL Australia's holding company (CCL Ireland), and because he wishes to bring proceedings on behalf of CCL Australia and, as a former director of CCL Australia, has standing under s 236 of the Corporations Act to apply for leave to do so. 27 There is a preliminary hurdle for Mr Oates to overcome. Section 114 of the Corporations Act provides that a company needs to have at least one member. When CCL Australia was deregistered and ceased to exist, the share held by CCL Ireland in CCL Australia also ceased to exist. CCL Ireland was itself subsequently dissolved. If CCL Australia is reinstated, it will be taken to have continued in existence as if it had not been deregistered (s 601AH(5)). Hence, for the purposes of Australian law, it will be taken that at the time CCL Ireland was dissolved, it held property consisting of its share in CCL Australia. If that share were vested in somebody on CCL Ireland's dissolution, or is to be taken to have been vested in somebody, then that person will hold the share. The requirement that the company have at least one member would not be an obstacle to reinstatement. After I raised this question, the plaintiff adduced evidence that on the dissolution of CCL Ireland its property became "State property" by virtue of s 28(2)(b) of the State Property Act 1954 (Ireland) and vested in the Irish State. The plaintiff submitted that, as the share is located in Australia, it would be vested in ASIC on the reinstatement of CCL Australia. I do not accept that that is so. The share in CCL Australia is not property of CCL Australia. But I do accept that CCL Australia will have a member, namely the State of Ireland, until CCL Ireland is itself reinstated. 28 The expression "person aggrieved" is not to be narrowly confined. Mr Oates has an arguable claim to be given leave under s 237 of the Corporations Act to bring proceedings on behalf of CCL Australia which, if successful, would be of considerable benefit to that company. He would not be directly entitled to receive a distribution of that property on a winding-up of CCL Australia. However, CCL Ireland could be restored, and presumably would be restored, in order to receive a distribution by way of dividend or return of capital or on a winding-up of CCL Australia. Alternatively, the Irish State would presumably recognise Mr Oates' beneficial interest in 20% of any dividend or return of capital received by it from CCL Australia. Notwithstanding the dissolution of CCL Ireland, as a beneficial shareholder in CCL Ireland, Mr Oates has a real, although indirect, interest in recovering compensation, damages or assets for CCL Australia. I accept that he is a person aggrieved. 29 If it is arguable that Mr Oates should be given leave to bring proceedings on behalf of CCL Australia and that there is a serious question to be tried that CCL Australia may be entitled to recover compensation, damages or assets, then prima facie, it would be just for the company to be reinstated in order that Mr Oates can proceed with his application for leave to bring such proceedings on its behalf. Without at this stage determining the application for leave, I accept that the facts to which he deposes establish such an arguable case. 30 The only obvious countervailing consideration is that, on reinstatement, the directors would be obliged to continue to provide statutory returns and otherwise fulfil their duties as directors unless the company were wound up. The directors were not personally served with the present application. They are interested parties. Notice of the application was given to them at their last known email addresses and at their residential addresses. The correspondence was not returned. There was no appearance for them on the application. 31 In my view, considerations of what is just favour reinstatement of the company in order to permit Mr Oates to pursue his application for leave to bring proceedings on its behalf. I will therefore make an order under s 601AH(2) requiring ASIC to reinstate the company. Application for Leave to Bring Proceedings on Behalf of CCL Australia 32 Until that order is made, CCL Australia does not exist. It has not been served with Mr Oates' application for leave to bring proceedings on its behalf. It is a necessary party to the application under s 237. The originating process which combines the application under s 237 with the application for reinstatement was left at an address which was the company's registered office when it existed. It was returned with the envelope marked "return to sender - left address/unknown". 33 It was submitted for Mr Oates that, upon reinstatement, the company will be taken to have continued in existence as if it had not been deregistered (s 601AH(5)). Therefore, it was submitted, it can be taken to have been duly served at its registered office even though it was not in fact in existence at the time the document was served, and even though the occupier of its registered office did not know of the company. 34 In my view, that is not the effect of subs 601AH(5). Whilst the company is taken to have continued in existence as if it had not been deregistered, not all of the incidents or attributes of the company are taken to have been so continued. Thus, the directors only resume office from the time the company is reinstated. The company's property is only revested in it from the time the company is reinstated. The company was not properly joined as a defendant to the present application because it did not exist when the application was made. The proper defendant was ASIC who is the person against whom an order is sought, whilst the former directors of the company were interested persons to whom notice was given. 35 Whilst, on the making of the order for reinstatement, the company will be taken to have continued in existence, I do not accept that it is to be taken to have continued to have a registered office, when in fact it did not, and when there was no-one who could have acted for it or have received documents on its behalf. (See by analogy White v Baycorp Advantage Business Information Services Ltd (2006) 24 ACLC 969 at 989-991 [115]-[127].) I say nothing as to whether, on reinstatement, its former registered office will be taken to again be its registered office. 36 I do not accept that I should treat the purported service of the originating process on the company as having been sufficient to give the company notice of the application under s 237 for leave to bring proceedings on behalf of CCL Australia, and deal with the application ex parte by making appropriate orders under s 601AH(3). If the directors were aware of the application, they may justifiably have taken the view that, until the company was reinstated and they resumed office as directors, there was nothing they could or should do to respond to the application under s 237. It may well be that the directors will take a different view in responding to the application once the company has resumed its existence and they resume their office as directors. 37 As the company is deemed to have continued in existence, it can now be said that the originating process was filed naming CCL Australia as a defendant and seeking leave pursuant to s 237. However, that application should be served. Personal service on CCL Australia may be effected in a manner provided for by r 10.22 of the Uniform Civil Procedure Rules 2005 (NSW). It will be a matter for the plaintiff and his legal adviser to decide whether they are content to rely on future service on the company at its last notified registered office as being effective service. Clearly, it would be preferable for the originating process, together with the supporting affidavit and these orders, to be served by being left with one or both of the directors. If it is necessary for the plaintiff to obtain an order for substituted service, or an order confirming informal service as personal service, under r 10.14, the plaintiff will have to show that steps were taken for the purpose of bringing the documents to their notice. 38 The proposed draft statement of claim does not include a claim by CCL Australia to bring derivative proceedings on behalf of CCL UK against Mr Hawkins, Mr Tyne, Consolidated Capital (Holdings) Ltd or Bluejay Services Ltd. Presumably the draft statement of claim will be amended before the return of the application for leave under s 237. 39 The prospective defendants to a claim by CCL Australia are not, in that capacity, proper parties to the application for leave under s 237 (Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 245 at [16]-[17]). That is not to say that the directors would not be entitled to be heard on the application. But that is because, as directors, they have an interest in the question as to whether, in the due administration of the affairs of the company, it is in the company's best interests for the proceedings to be brought. They would be entitled to be heard on that question irrespective of who were the prospective defendants. It does not seem to me that on the only application that can properly be considered, namely the application under s 237, CCL UK is a proper party to the proceedings. Orders 40 For these reasons, I make the following orders:

Tom Michael Oates v Consolidated Capital Services Pty Ltd & 1 Or

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