Supreme Court New South Wales Medium Neutral Citation: Smith v Australian Securities and Investments Commission [2018] NSWSC 1695 Hearing dates: 5 November 2018 Date of orders: 09 November 2018 Decision date: 09 November 2018 Jurisdiction: Equity - Corporations List Before: Parker J Decision: Adjourn the proceedings to allow the plaintiff, Michael John Morris Smith, to consider these reasons for judgment. Catchwords: CORPORATIONS – deregistration – application to reinstate company – company in liquidation at the time of deregistration – whether liquidator at the time of the company's deregistration should be re-appointed – where liquidator enters into an agreement with former creditor of the company to sell property which was discovered after the company's deregistration – where agreement potentially gives a particular creditor an advantage over other creditors of the company – where agreement potentially fetters liquidator's duties under the Corporations Act 2001 (Cth) – suitability of re-appointment CORPORATIONS – deregistration – application to reinstate company – suspension of limitation periods – whether order under Corporations Act 2001 (Cth), s 601AH(3)(d) should be made to suspend limitation period – order not necessary Legislation Cited: Corporations Act 2001 (Cth), ss 9, 473, 513A, 532, 563B, 601AB, 601AD, 601AH Corporations Regulations (Cth), reg 5.6.70A Judiciary Act 1903 (Cth), s 79 Limitation Act 1969 (NSW), s 63 Cases Cited: Fiorentino v Australian Securities and Investments Commission (2014) 283 FLR 223; [2014] NSWSC 200 Donmastry Pty Ltd v Albarran (2004) 49 ACSR 745; [2004] NSWSC 632 J P Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu (2008) 167 FCR 212; [2008] FCA 433 Pagnon v WorkCover Queensland [2001] 2 Qd R 492; [2000] QCA 421 Ramantanis v G & M Excavations Pty Ltd (2003) 22 ACLC 22; [2003] NSWSC 1250 Re Donald Kenyon Ltd [1956] 1 WLR 1397 Re Regional Planners Developments Co Pty Ltd (2015) 110 ACSR 457; [2015] NSWSC 1996 Rizeq v Western Australia (2017) 91 ALJR 707; [2017] HCA 23 Category: Principal judgment Parties: Michael John Morris Smith (Plaintiff) Australian Securities and Investments Commission (Defendant) Representation: Solicitors: Keypoint Law Pty Ltd (Plaintiff – appearing ex parte) File Number(s): 2018/299829 Publication restriction: Nil Judgment 1. Michael John Morris Smith, the plaintiff, is a registered liquidator who formerly acted as liquidator of a company called Technology Information Pty Ltd ("the Company"). The liquidation was completed (as it was thought) and the Company was deregistered in 2009. In these proceedings, Mr Smith applies to have the registration of the Company reinstated, for himself to be reappointed as liquidator, and for consequential orders. ASIC was joined as the defendant to the proceedings. ASIC does not oppose the orders sought and has not participated in the hearing. 2. Unless otherwise stated, section references in this judgment are to the Corporations Act 2001 (Cth) and references to regulations are to the Corporations Regulations 2001 (Cth). 3. Mr Smith was originally appointed as liquidator of the Company by order of the Court in September 2006. The winding up order was made on the application of Allianz Australia Workers Compensation (NSW) Ltd ("Allianz"). The debt to Allianz on which the application was based was approximately $7,000, presumably for unpaid workers compensation obligations of the Company. As the successful applicant for a winding up order, Allianz was also entitled to payment of its costs (in the sum of approximately $3,000) out of the assets of the Company. 4. As liquidator, Mr Smith was unable to identify any property of the Company. The debts to Allianz remained unpaid. So did Mr Smith's fees, which he says were approximately $11,000. In April 2009, Mr Smith lodged a notice of ceasing to act as liquidator (apparently he resigned under s 473). He then lodged his final accounts and an application to ASIC to deregister the Company under s 601AB(2)(c) on the ground that the Company's affairs had been fully wound up and the Company had no property to cover the costs of obtaining a court order for its deregistration. The deregistration was effected by ASIC in July 2009. 5. It has now emerged that the Company is the registered proprietor of a one-fifth share of a residential property at North Turramurra. The property is the home of an elderly couple, Peter Andrew Sharland and Barbara Ann Sharland. Mrs Sharland is the registered proprietor of the other four-fifths of the property. The Sharlands wish to sell the property and it is as a result of this that the Company's ownership of the one-fifth share came to attention. 6. The Company was incorporated in January 1992, apparently as a shelf company. The initial directors were Mr Sharland and two other unrelated persons. Those two persons were replaced by Mrs Sharland in July 1992. The Company had forty-five ordinary shares and one B Class share. Mr Sharland and Mrs Sharland each owned fifteen (one-third) of the ordinary shares. The other fifteen ordinary shares were held, as to five each, by members of their family. The B Class share was held by Shirly Collison; there is nothing in the evidence to identify who Ms Collison was or what her connection with the Company was. 7. The North Turramurra property was purchased and registered in the names of Mrs Sharland and the Company in May 1995. The price shown on the transfer was $605,000. At this time, the Company was under the Sharlands' control. 8. In April 2004, Mr and Mrs Sharland resigned as directors of the Company in favour of Michael Joseph Longhurst. All of the ordinary shares and the B Class share in the Company were also transferred to Mr Longhurst. In his affidavit in these proceedings, Mr Smith stated that he was unable to make contact with Mr Longhurst and never received any information from him about the Company or its affairs. Mr Longhurst died in 2012. 9. Mr Robert Napoli is the Sharlands' solicitor. Mr Napoli made contact with Mr Smith in July 2017. Mr Napoli gave Mr Smith the following history, based on his instructions from the Sharlands: (1) The Company was acquired by the Sharlands to hold an interest in a company which conducted a computer business in which Mr Sharland worked. (2) The purchase of the North Turramurra property was financed with an inheritance of $350,000 received by Mr Sharland from his mother's estate, a loan of $160,000 from the National Australia Bank and "personal savings" (the Sharlands sold their former residence for $310,000 at about the same time). The Company did not contribute any monies to the purchase and at that time would have had no assets. (3) Mr Sharland was retrenched from the computer business in 1997 and thereafter used the Company as a vehicle for contracting work. (4) In September 2003, Mr Sharland and Mr Longhurst purchased a café business at Crescent Head on the North Coast of New South Wales in the name of the Company. Each of Mr Sharland and Mr Longhurst made a $15,000 loan to the Company to cover the cost of the purchase. (5) By early 2004 it was clear that the café business could not support two families. Mr Sharland was offered work in Sydney and the Sharlands decided to dispose of their interest in the café. (6) When the shares in the Company were transferred to Mr Longhurst in April 2004 and the Sharlands resigned as directors, no monies were paid for the shares. Mr Sharland believes that at the time the Company's bank account would have held $2,000 at the most. 1. The Sharlands obtained a valuation of the property by a registered valuer. The valuation was undertaken in May 2018. It was expressed to be undertaken on a fair market value basis, for capital gains tax purposes. The valuation was $1.7 million. 2. Following investigations by Mr Smith, and negotiations with Mr Napoli, the Sharlands and Mr Smith entered into a written agreement in August this year concerning the transfer to the Sharlands of the Company's one-fifth share of the property. 3. The agreement recites that at the time the Sharlands transferred their shares in the Company to Mr Longhurst, the Company owed Mr Sharland "approximately $136,000" ($121,000 for one-fifth of the purchase price of the property, plus $15,000 for the café establishment loan). 4. The agreement provides for the Sharlands to pay, upon the Company being reinstated: Mr Smith's legal costs (estimate $11,000) and disbursements; the capital gains tax payable on the sale of the Company's one-fifth share of the property (estimate $30,000); Mr Smith's original liquidation costs (approximately $11,000); Allianz' debt and costs (approximately $10,000); and Mr Smith's further professional fees of reinstating the Company, transferring the property, completing the administration and preparing necessary tax returns (estimate $11,000-$17,000). In return, Mr Smith agrees that, taking into account amounts payable by the Company to Mr Sharland as creditor, the Sharlands will have paid in full for the Company's one-fifth share of the property. Mr Smith agrees to transfer the share of the property to Mrs Sharland. 5. Mr Smith's application to reinstate the Company is made under s 601AH, which relevantly provides: Reinstatement … 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 (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: (a) ASIC reinstates the registration of a company under subsection (1) or (1A); or (b) the Court makes an order under subsection (2); the Court may: (c) validate anything done during the period: (i) beginning when the company was deregistered; and (ii) ending when the company's registration was reinstated; and (d) 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 the Commonwealth or 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. 1. The effect of reinstatement on a company which has previously been the subject of a winding up was discussed by Brereton J (as his Honour then was) in Fiorentino v Australian Securities and Investments Commission (2014) 283 FLR 223; [2014] NSWSC 200, where his Honour reviewed the earlier authorities. His Honour said that all authorities agree that a company in liquidation, upon a reinstatement order being made, continues in liquidation: at [20]. There was a conflict in the authorities as to the effect of reinstatement on the former liquidator; his Honour concluded that a reinstatement order does not automatically restore the former liquidator to his or her office as liquidator, and a fresh appointment is required: at [40]. 2. His Honour's reasoning applies a fortiori in the present case where Mr Smith formally resigned as liquidator before applying to have the Company deregistered. At the time the Company was deregistered, there was a vacancy in the office of liquidator. The subsequent reinstatement of the Company could not overcome the effect of Mr Smith's earlier resignation. 3. Under s 532(2)(b), a person must not, except with the leave of the Court, seek to be appointed, or act, as liquidator of a company if that person is, otherwise than in his or her capacity as liquidator, a creditor of the company in an amount exceeding $5,000. In the present case, Mr Smith claims to be a creditor of the Company for his fees for previously acting as liquidator in the sum of $11,000. I think the exemption for indebtedness to Mr Smith in his "capacity as liquidator" applies only to a new appointment. This means that the Court's leave is required for Mr Smith to pursue his application to be reappointed. 4. A major advantage of reinstating the Company would be the prospect of funds being obtained from the realisation of the one-fifth interest in the property for the benefit of the Company's creditors. If all creditors are paid their principal debts in full, interest will then be payable to those creditors at the prescribed rate from the "relevant date": s 563B. The "relevant date" is the date of the winding up order: ss 9, 513A. The prescribed rate is eight per cent: reg 5.6.70A. 5. Mr Addison, who appeared for Mr Smith on the application, expressed concern about the expiry of the limitation periods for the creditors' claims against the Company during the period of its deregistration. Mr Addison suggested that creditors of the Company might be left unable to recover their debts. Mr Addison also suggested that the entitlement to interest might also be limited to the period after reinstatement. Orders are sought under s 601(3)(d) to address these problems. An order is sought that the period between the date of dissolution and the date of reinstatement is not to be counted for the purposes of any statute of limitations: Re Donald Kenyon Ltd [1956] 1 WLR 1397. I will refer to this as a "Donald Kenyon" order. A further order is sought that the "relevant date" for the purpose of s 563B be fixed at the date of commencement of the original liquidation, 19 September 2006. 6. In Pagnon v WorkCover Queensland [2001] 2 Qd R 492; [2000] QCA 421, McPherson JA, speaking for the Queensland Court of Appeal, referred to the authorities on the making of Donald Kenyon orders. His Honour considered that in an appropriate case such an order could be made, despite doubts which had earlier been expressed by McLelland J in Solla v Scott [1982] 2 NSWLR 832: at [15]. In Re Regional Planners Developments Co Pty Ltd (2015) 110 ACSR 457; [2015] NSWSC 1996 at [23], [25]-[28], Brereton J accepted McPherson JA's approach as applying under s 601AH(3)(d). 7. Donald Kenyon orders arose in England, where the legal system is unitary rather than federal. The statute of limitations which would apply to claims by creditors against the Company in this case is the Limitation Act 1969 (NSW), a State Act. But the Corporations Act is a Commonwealth Act. State limitation provisions do not apply directly in proceedings under the Corporations Act, but only to the extent they are picked up by the Judiciary Act 1903 (Cth), s 79. As the High Court recently emphasised in Rizeq v Western Australia (2017) 91 ALJR 707; [2017] HCA 23 at [91], the Commonwealth's powers in this area are limited to powers necessary for the effective determination of matters in Commonwealth jurisdiction. There may be an interesting question as to whether there are any limits to orders being made by a court exercising federal jurisdiction under the Corporations Act, which would alter the effect of the Limitation Act (and in particular s 63) for the purposes of State law generally. 8. But it is not necessary to consider this further in the present case. As McPherson JA pointed out in Pagnon at [10], the winding up of a company stops the running of time under the Limitations Act. If in this case the Company is reinstated, then by s 601AH(5) the Company will be deemed to have continued in existence as if the deregistration had not taken place, and it will be deemed to have continued in liquidation. Strictly speaking, the office of the liquidator will have been vacant from April 2009, but that will not affect the deemed continuation of the liquidation itself. Accordingly the suspension of limitation periods will continue unaffected. Also, the commencement date of the liquidation, namely 19 September 2006, will be undisturbed. No orders under s 601AH(3)(d) would be necessary. 9. The discovery of a substantial asset which would allow creditors of the Company to be paid would usually be itself a sufficient reason to order the Company's reinstatement. And where a company was previously in liquidation and has been deregistered, the usual course is to appoint the former liquidator so as to secure continuity: J P Morgan Portfolio Services Ltd v Deloitte Touche Tohmatsu (2008) 167 FCR 212; [2008] FCA 433 at [8], citing with approval the decisions of Barrett J in Ramantanis v G & M Excavations Pty Ltd (2003) 22 ACLC 22; [2003] NSWSC 1250 and Donmastry Pty Ltd v Albarran (2004) 49 ACSR 745; [2004] NSWSC 632. 10. But I have some concerns about the present case. Those concerns arise out of the undertakings given by Mr Smith in the agreement with the Sharlands. 11. In his affidavit in support, Mr Smith stated that the effect of his agreement with the Sharlands would be that "all known creditors" of the Company would be likely to receive payment of their debts in full, "perhaps" with a "significant component" of interest as well. Mr Addison pressed me with the same submission. But the agreement between Mr Smith and the Sharlands requires the Sharlands only to pay for the liquidator's costs and the amount owing to Allianz. It does not mention interest and it does not mention the $15,000 debt to Mr Longhurst's estate. The agreement does not provide for the Sharlands to contribute any more money to the liquidation. It is not clear to me how the debt to Mr Longhurst's estate, or interest, would be paid. 12. On the estimates in the agreement, the amounts to be paid by the Sharlands will total $79,000. In return, the Sharlands will receive one-fifth of the property which on the current valuation is worth $340,000. There is a net benefit to the Sharlands of $261,000. This exceeds the amount said to be owing to Mr Sharland of $136,000 by $125,000. As I understood Mr Addison, Mr Smith takes the view that Mr Sharland would be entitled to interest at eight per cent, and this would increase the set-off sum so as to reduce or eliminate the shortfall. I have not myself done the calculations, but I think in any event the approach is problematic. By allowing Mr Sharland an amount for interest when there is no allowance for interest in favour of Allianz, (or, indeed, any allowance for principal or interest in the case of the debt to Mr Longhurst's estate), the agreement would appear to give Mr Sharland an unfair priority. 13. But there is a more fundamental problem. The Sharlands' story is a somewhat strange one. In his initial letter to Mr Smith, Mr Napoli said that it was "not known" why a share of the property had been put in the Company's name. That is a surprising statement, given that it was Mr Napoli's clients, the Sharlands, who presumably arranged the purchase in that way in the first place. 14. Furthermore, there is no evidence before the Court of any formal loan agreement from Mr Sharland to the Company. For reasons given below, it is questionable whether there is any relationship of creditor or debtor at all. But if there is, it would presumably be because of monies had and received or some sort of implied loan. Given that the monies were provided more than a decade before the winding up began, Mr Sharland's claim might well have become statute barred by then. 15. What all this underlines is that the agreement involves Mr Smith having accepted claims made by the Sharlands which are untested. Should the Company be reinstated and Mr Smith be reappointed as liquidator, he would have a statutory obligation to distribute the assets of the Company in accordance with the provisions of the Corporations Act and, for this purpose, to scrutinise the Sharlands' claims properly. The result would not necessarily accord with the agreement Mr Smith has made with the Sharlands. 16. Of course, it is not open to Mr Smith by private contract to fetter the performance of his duties as liquidator. I doubt that the provisions which purport to require how he should conduct the administration if reappointed could be enforced against him. Whether the other provisions of the agreement are enforceable is also questionable. But I do not think that I should do anything which runs the risk of embarrassing or impeding a liquidator in the discharge of his or her duty. Before I proceed to appoint Mr Smith, I would need to be satisfied that both he and the Sharlands accept that if he is appointed he will have to conduct the administration strictly in accordance with the law and irrespective of any provisions in the agreement. If this cannot be secured, then if I am to reinstate the Company at all, it would be better to appoint a new liquidator. 17. For these reasons I am not at present satisfied that it would be appropriate to appoint Mr Smith as liquidator. But the prospect of the agreement between Mr Smith and the Sharlands being unenforceable gives rise to wider questions. 18. At present, there is no actual evidence before the Court to establish that Mr Sharland funded the purchase of the property. There is only a statement from his solicitor, unsupported by any documentary evidence. But if in fact Mr Sharland did pay the purchase price, then on the face of it a resulting trust could arise. Mr Sharland would be presumed, in the absence of evidence to the contrary, to have intended to retain a beneficial interest in the property, so that the Company would have acquired its share as bare trustee for him. On that analysis, on deregistration of the Company its share of the property would have vested in the Commonwealth subject to the same trust: s 601AD(1A). Mr Sharland would be entitled to call on the Commonwealth to transfer the property to him as beneficial owner. There would be no need for the Company to be reinstated at all. 19. It is not clear to me whether this possibility has been considered by the Sharlands' legal advisers. It is, of course, not the Court's role to give them legal advice. But if, as appears likely, the Sharlands are unable to enforce their agreement with Mr Smith, then they may be free to propound their own claim to the Company's share of the property which would not require them to have the Company reinstated and, in effect, to purchase its share of the property from it. I do not think I can ignore the fact that under the agreement it is the Sharlands who are financing this application. I do not think that I should proceed to make a reinstatement order which may prove to be futile if the Sharlands take another course. 20. I will adjourn the proceedings for a short time until Mr Smith and the Sharlands have considered these reasons for judgment. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 November 2018