FEDERAL COURT OF AUSTRALIA Diamond Hill International Pty Limited v Xu [2001] FCA 531 FEDERAL COURT OF AUSTRALIA- practice and procedure in original jurisdiction – setting aside orders that have been entered – where orders made subsequently to the issue of certificates of taxation – where party affected by order was deregistered at all relevant times but later reregistered – whether orders valid – where orders made in the absence of a party – discretion to set aside under O 35 r 7(2)(a) of the Federal Court Rules Corporations Law s 119, s 601AD(1), s 601AH Federal Court Rules O 35 r 7(2)(a) DFC of T v Action Workwear Pty Ltd (1996) 14 ACLC 1,335 considered Joro Pty Ltd v State Bank of New South Wales (1992) 5 BPR 11,709 distinguished Autodesk Inc. v Dyason [No. 2] (1993) 176 CLR 300 followed De L v Director – General, NSW Department of Community Services [No 2] (1997) 190 CLR 207 at 215 followed Autistic Association of New South Wales v Dodson [1999] FCA 852 followed DIAMOND HILL INTERNATIONAL PTY LIMITED v HUMPHREY JIAN XU N 8059 OF 1999 STONE J 7 MAY 2001 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8059 OF 1999 BETWEEN: DIAMOND HILL INTERNATIONAL PTY LIMITED APPLICANT AND: HUMPHREY JIAN XU RESPONDENT JUDGE: STONE J DATE OF ORDER: 7 MAY 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. the applicant's notice of motion filed in Court on 24 April 2001 be dismissed; 2. the applicant pay the costs of Eric Fung & Co, Peter Huntington, Parish Patience and Clarence J Stevens QC in relation to the above motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8059 OF 1999 BETWEEN: DIAMOND HILL INTERNATIONAL PTY LIMITED APPLICANT AND: HUMPHREY JIAN XU RESPONDENT JUDGE: STONE J DATE: 7 MAY 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 21 June 2000, Hely J ordered that the applicant, Diamond Hill International Pty Limited, pay the expenses reasonably incurred by certain persons in complying with subpoenas for production issued by the applicant on or about 14 March 2000. Bills of costs were subsequently assessed pursuant O 62 r 46(3)(a) of the Federal Court Rules. Certificates of taxation were issued on 18 January 2001 and were served on the solicitor for the applicant on about 24 January 2001. The taxed amounts were not paid and, on 2 March 2001, orders made pursuant to O 62 r 45(3) were entered requiring the applicant to pay amounts as follows: (a) $4,832.76 to Eric Fung & Co (b) $3,188.93 to Peter Huntington (c) $5,929.97 to Parish Patience (d) $3,440.97 to Clarence J Stevens QC. Those amounts remain unpaid. 2 By notice of motion filed on 10 April 2001, the persons to whom the above amounts were to be paid ("Subpoenaed parties") sought leave to issue a Writ for Levy of Property on the applicant. The proposed writ related to certain property registered in the name of the applicant. The matter came before Emmett J as duty judge on 24 April 2001. The applicant obtained leave to file in Court a notice of motion seeking to have both the orders entered on 2 March 2001 and the certificates of taxation set aside. The notice of motion was returnable on 1 May 2001 and on that date came before me. Before Emmett J, the applicant gave an undertaking that it would not deal with the property before 1 May 2001 or until sooner discharge. 3 The applicant claims that the orders and certificate of taxation should be set aside because at relevant times it was deregistered. The sequence of events was as follows: · 21 June 2000 – the applicant was ordered to pay the subpoenaed parties' costs · 11 October 2000 – the company was deregistered for failure to lodge annual returns · 18 January 2001 – the certificates of taxation were issued · 2 March 2001 – the orders were entered · 23 April 2001 – the company was reregistered. 4 It was submitted for the applicant that, because the taxation of costs (which led to the certificates of taxation and the relevant orders) had been carried out while the applicant was deregistered, the certificates and the orders were invalid. Mr Young, counsel for the applicant, drew my attention to two letters written by the solicitor for the applicant to the taxing officer advising her that the applicant was deregistered and submitting that the taxation could not proceed while this was the case. Mr Young submitted that because the applicant was deregistered at the relevant time there was no one who was able to make objections in relation to the bills of costs which the applicant claimed were grossly in excess of what was reasonable in the circumstances. In particular, Mr Young relied on the fact that the solicitors for the Subpoenaed parties were aware at this time that the company was deregistered. 5 A company only "comes into existence" as a body corporate at the beginning of the day on which it is registered and "ceases to exist" on deregistration; Corporations Law ss 119 and 601AD(1). The reregistration of a deregistered company is retrospective so that, under s 601AH(5) of the Corporations Law, "the company is taken to have continued in existence as if it had not been deregistered". Mr Young, relying on the decision of Senior Master Mahony in DFC of T v Action Workwear Pty Ltd (1996) 14 ACLC 1,335 ("Action Workwear"), argued that reinstatement under s 601AH(5) was not retrospective for all purposes. 6 Action Workwear concerned the failure of a deregistered company to pay group tax instalments. The company was deregistered because of its failure to lodge annual returns. While it was deregistered, the Deputy Commissioner of Taxation served a statutory demand on the company for the amount of the tax. Subsequently he also served a penalty notice on the former directors of the company. The former directors challenged the penalty, arguing that because of the deregistration they were no longer directors and could not cause the company to pay the tax. The Commissioner then applied to have the company reregistered and wound up in insolvency. The directors opposed the reregistration on the grounds that the retrospectivity of reregistration would deprive them of their defence against the penalty. 7 It is important to note that the legislative provisions applicable in Action Workwear were not identical to those that presently apply. The provision providing for retrospective reregistration was s 574(4) which stated that on reregistration, "the company shall be deemed to have continued in existence as if its registration had not been cancelled". This is similar to s 601AH(5) which provides "If a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered". Section 574(4) was, however, supplemented by s 574(5) which provided that the court also could "give such directions and make such provisions …. as seem just for placing the company and all persons in the same position, as far as possible, as if the company's registration had not been cancelled". There is no current equivalent to subs (5). For this reason, much of the discussion in Action Workwear concerning whether the court should make a special order to protect the directors' defences to the penalty imposed by the Commissioner in separate proceedings is not relevant here. 8 Another point of distinction is that Action Workwear concerned the failure of the company to comply with an obligation. This was also the case in Joro Pty Ltd v State Bank of New South Wales (1992) 5 BPR 11,709. That case concerned the failure of a deregistered company to comply with a notice requiring the company, as mortgagor, to remedy certain defaults identified in the notice. The notice was a pre-condition to the mortgagee having power to sell the mortgaged property. In the Supreme Court of New South Wales, Young J stated that at the time when the notice was given "there could be no failure by the customer to remedy defaults because the customer did not exist and had no duty to do anything because it did not exist". This must be correct. In this case, however, no question of the company not having complied with an obligation arises. Rather, the applicant complains of a lost opportunity to make submissions concerning the bills of costs that were the subject of the taxation process. While s 601AH(5) deems the company, once reregistered, to have had a continuous existence, it clearly cannot in any sensible way deem the company to have had the opportunity to make submissions in a proceeding that concluded before reregistration. 9 The Court's power to set aside orders which have been entered arises under O 35 r 7(2)(a) of the Federal Court Rules which provides that the Court: "…may if it thinks fit vary or set aside a judgment or order after the order has been entered where: (a) the order has been made in the absence of a party, whether or not the absent party is in default of appearance or otherwise in default and whether or not the absent party had notice of the motion for the order…" 10 Much has been said about the need to exercise this power with caution and only in exceptional circumstances; Autodesk Inc. v Dyason [No 2] (1993) 176 CLR 300. It is necessary to weigh the competing considerations that there is a public interest in final orders of the Court being attended with certainty and in the avoidance of injustice; De L v Director-General, NSW Department of Community Services [No 2] (1997) 190 CLR 207 at 215. There is unlikely to be an injustice if the situation complained of has been brought about or significantly contributed to by those seeking to have orders set aside; Autistic Association of New South Wales v Dodson [1999] FCA 852. It is therefore relevant to consider whether the inability of the applicant to make submissions during the taxation process can be attributed to the actions or inaction of the applicant or those associated with it. The question arises whether the long delay in reregistering the company could have been avoided and whether the assistance of the Court in postponing the taxation of costs could have been obtained. 11 It is not disputed that the applicant was deregistered because of its neglect to lodge its annual returns. The chronology in par [3] above indicates that the company was deregistered for a period of more than 6 months. By his own admission, the applicant's solicitor was aware of the deregistration by 20 November 2000. It is not clear to me exactly when the application for registration was lodged, but from Mr Junn's evidence, it must have been some time after 28 February 2001. Mr Young explained this delay by pointing out that between November 2000 and January 2001 the applicant's solicitor was attempting to negotiate a settlement of the dispute over the Subpoenaed parties' costs and also that it was necessary to obtain a statutory declaration from Ms Liu who was out of the country. Neither of those explanations appear to me to be sufficient in the circumstances. It is not uncommon that parties caught up in settlement negotiations neglect to take formal steps to protect their interests in case those negotiations fail. It is, however, common for parties to regret having done so. The comments of Senior Master Mahony in Action Workwear, in a passage not referred to by Mr Young, are pertinent: "If, on the other hand, there were some disadvantage, it is to [be] recalled that they brought their current position on themselves by failing to perform their duty as directors and ensure the continued existence of the company; and failing to perform their consequential duty to remedy the situation when, through their breach of the first and fundamental duty, the company was deregistered. The delay and inaction of persons in their position is a relevant factor…" 12 It was not disputed that all necessary notices in connection with the taxation of costs were served on the solicitor for the applicant. That solicitor is also solicitor for Ms Helen Liu, the director of the applicant, who must be taken to be aware that the taxation was proceeding. Moreover the letter dated 10 January 2001 from the applicant's solicitor to the Deputy District Registrar conducting the taxation indicates that the solicitor was also aware that the Registrar did not agree to suspend the taxation. The letter states: "We note that you indicated that it would be open to the writer, we assume on instructions from Diamond Hill International Pty Limited (which has ceased to exist) seeking relief to stop the issue of a certificate of taxation." 13 The writer goes on to say that he does not have standing to make any such application in his own right and that the only party capable of making such an application would have been Diamond Hill International Pty Limited, which had ceased to exist. He further stated that the former directors did not have any jurisdiction to do so. Despite this expressed view I note, from par (8) of Mr Junn's affidavit of 24 April 2001 that on 18 January 2001 he advised the former director that the company would have to be reinstated and she accepted his advice and instructed him to attend to this matter. As a former director Ms Liu had the authority to apply to ASIC for reregistration of the company. As a person "aggrieved by the deregistration", she also had standing under s 601AH(2) of the Corporations Law to approach the Court for an order that ASIC reregister the company. While it is not necessary for me to decide the issue, I see no reason, in the light of the above, why she would not have had standing to move this Court for an order restraining the taxation process until reregistration had been effected. 14 For the above reasons, I decline to exercise my discretion in the applicant's favour and dismiss the motion with costs. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 7 May 2001 Counsel for the Applicant: Mr M W Young Solicitor for the Applicant: Dixon Holmes du Pont Solicitor for the Subpoenaed parties: Deacons Date of Hearing: 1 May 2001 Date of Judgment: 7 May 2001