Foxman v Credex National Australian Trade Exchange Pty Ltd (in liq)

[2007] NSWSC 1422

CITATION:	Foxman v Credex [2007] NSWSC 1422
HEARING DATE(S):	01-02/11/07
JUDGMENT DATE :	12 December 2007
JURISDICTION:	Equity Corporations List
JUDGMENT OF:	White J
DECISION:	See para 72 of judgment.
CATCHWORDS:	WINDING UP – Examination – Liquidator – Application to set aside summonses for examination – Whether summonses relate to “examinable affairs” – Whether summonses sought for improper purpose – Where liquidator has reason to apprehend that deregistered company’s trade exchange scheme was transferred to, or continued to be conducted through, other entities, after deregistration – Whether persons funding liquidator, who claim to be creditors, could be creditors of the company if their claims arose from participation in trade exchange scheme after company’s deregistration – Operation of Part 5A.1 of the Corporations Act 2001 (Cth) does not lead to necessary result that no person may be taken to have acquired any rights against, or to have become subject to any liability, to the company during the period of deregistration – Held that investigation into whether, and if so, when, asserted claims against the company may have arisen, whether before or after deregistration, is within the legitimate scope of examinations under s 596A or s 596B of the Corporations Act. - CORPORATIONS – Reinstatement of deregistered company under s 601AH(2) of Corporations Act 2001 (Cth) – Measure of retrospective validation, under s 601AH(5), of acts carried out by persons purporting to act as officers of deregistered company. - CORPORATIONS – Application to restrain creditor from accessing records of examination – Statutory regime entitling creditors of a company to access written records of examination – Section 597, Corporations Act – No basis for restricting such access. - (CTH) Corporations Act 2001, ss 596A, 596B, 597, 601AH
LEGISLATION CITED:	Corporations Act 2001 (Cth) Company Law Review Act 1998 (Cth) Companies (Consolidation) Act 1908 (UK) Companies Act 1948 (UK) Second Corporate Law Simplification Bill 1996 (Cth)
CASES CITED:	Mitzev v Foxman [2007] NSWCA 273 Morris v Harris [1927] AC 252 Tyman’s Ltd v Craven [1952] 2 QB 100; [1952] 1 All ER 613 R v Heilbronn [1999] QCA 095; (1999) 30 ACSR 488 Tyman’s Ltd v Craven, Re Otway Coal Co Ltd [1953] VLR 557 Re Lindsay Bowman Ltd [1969] 1 WLR 1443 Jekos Holding Pty Ltd v Australian Horticultural Finance Pty Ltd (No 2) [1995] 1 Qd R 612 Ash Street Properties Pty Ltd v Pollnow (Court of Appeal, 1 September 1995, unreported) White v Baycorp Advantage Business Information Services Ltd (2006) 24 ACLC 969 CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd (2006) 201 FLR 296 Oates v Consolidated Capital Services Pty Ltd [2007] NSWSC 680 GIO General v Sabko [2007] NSWSC 251; (2007) 25 ACLC 935 New Cap Reinsurance Corporation Holdings Ltd v The Corporations Law [2001] NSWSC 835
PARTIES:	Application of Peter Allan Rowlands Clinch & 4 Ors v Pino Fiorentino as official liquidator of Credex National Australian Trade Exchange Pty Ltd & Anor; Marsha Foxman v Credex National Australian Trade Exchange Pty Ltd (in liquidation)
FILE NUMBER(S):	SC 3743/06
COUNSEL:	Applicants: V Bedrossian 1st Respondent: J Svehla 2nd Respondent: G Pulsford
SOLICITORS:	Applicants: Clinch Neville Long 1st Respondent: Steven Agosta 2nd Respondent: Lexington Law Group

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

WHITE J

Wednesday, 12 December 2007

v Credex National Australian Trade Exchange Pty Ltd (in liquidation)

JUDGMENT

1 HIS HONOUR: This is an application to set aside examination summonses issued on the application of the liquidator of Credex National Australian Trade Exchange Pty Ltd (“CNATE”) and associated relief.

2 On 15 November 2007, I ordered that the substantive claims for relief be dismissed. These are my reasons.

3 The applicants are persons who have been ordered to attend for examination about the examinable affairs of CNATE. Orders have also been made for them to produce documents in connection with those examinations.

4 The applicants contend that the predominant purpose of the liquidator in applying for the issue of examination summonses was to advance the private interests of the various persons who claim to be creditors of CNATE, in particular, the second respondent, Ms Foxman, in relation to claims that they have, or may have, against third parties. The applicants also contend that the examinations would constitute an abuse of process as they are incapable of yielding any tangible benefit for CNATE or its creditors or contributories, were undertaken without any proper consideration by the liquidator of the likely costs and benefits of the examinations, and have the predominant purpose of providing a forensic advantage in other proposed litigation of persons including Ms Foxman.

5 I should say at once that there is no substance to the allegations that the liquidator acted for an improper purpose.

6 CNATE was incorporated on 19 August 1997. The object for which it was established was carrying out a trade and barter exchange operation (Memorandum of Associate clause 2). It was a company limited by guarantee. The liability of its members to contribute to the debts and liabilities of the company was limited to an amount not exceeding $10. Contrary to the applicants’ submissions, it was not a company which had no members (although no members were disclosed on the company returns lodged with ASIC). It had two classes of members. The subscribers to the Memorandum of Association were the “A” class members. The Articles provided for the company to have a “Committee” which was comprised of the “A” class members of the company and which was to be the board of directors and governing council of the company. The Articles provided that the Committee could admit to “B” class membership any applicant for “B” class membership, provided that such applicant agreed to be bound by the Articles and the Trading Rules. “A” class members were entitled to vote and to stand for office as a director and to become a member of the Committee and to carry on trading business with other members of the company, and to hold “B” class membership. “B” class members were entitled to carry on trading business with the “Manager” and with other members of the company. The “Manager” meant the person appointed by the Committee from time to time to fill the role of Manager pursuant to a Deed of Management and Trust to carry out the management of the trading scheme.

7 The liquidator has not located the Deed of Management and Trust. That may be one of the areas for inquiry in the examinations.

8 The Committee was required to keep proper accounting records. These were to be audited. No such records have been provided to the liquidator.

9 The applicants submitted that:

“ CNATE had an involvement, though tangential at most, in the operation of a barter exchange system known as Credex Trade Exchange (‘the Trade Exchange’). ... The company that was involved in the day-to-day management of the Trade Exchange, being also the company with the sole capacity to engage in trade with other members of the Trade Exchange, was Credex Australian National Management Company Pty Ltd (now known as CAN Management Pty Ltd) (‘CANMC’). It was CANMC (and only CANMC) that engaged in trade or derived any revenue from trading activity. It charged a fee for transactions that it supervised. ”

10 CANMC has also been wound up. The liquidator of CNATE, Mr Fiorentino, is also the liquidator of CANMC. The applicants have been served with examination summonses and orders for production in relation to CANMC. The applicants conceded that the examinations which the liquidator proposed could properly be carried out in the liquidation of CANMC, but disputed that the examinations could be carried out in relation to the examinable affairs of CNATE. This submission was based on the assumption that CNATE did not operate the Trade Exchange and that transactions engaged in by members of the Trade Exchange were engaged in only between themselves and CANMC, and that CANMC operated as principal and not as agent for CNATE.

11 Whilst the material available to the liquidator in relation to the operation of the Trade Exchange is far from complete, (which itself is a good reason for the examinations), there was no basis for these assumptions.

12 The liquidator has obtained a number of different versions of brochures prepared by an entity calling itself “Credex Australia” whose managing director was described as Mr Valentino Kovacic. Attached to these brochures were applications for membership of the CNATE Trading Program and the “Credex – Rules of Trading”. The essence of this program was that it provided a barter process for exchanging goods and services where, instead of one trader trading goods or services in exchange for the goods or services of another, the trader could provide goods or services to other members of the program, or to the Manager, and be credited with “Credex dollars”. A member with a credit balance in Credex dollars could use Credex dollars to acquire goods, land or services from other members. Credex dollars thus provided liquidity for the program of barter exchange between members, or between members and the Manager. The rules of the program allowed members to have debit balances. The rules provided for the Manager, in the name of CNATE, to recover debit balances in Australian dollars (Rules 11.3 and 27.2). The Trading Program was described in the membership agreement, consistently with the Articles of Association of CNATE, as being a trading program operated by CNATE under management by CANMC under a deed of management. As I have said, the liquidator has not been successful in obtaining the deed of management. However, prima facie, the Manager’s operation of the Credex Trading Program was carried out on behalf of CNATE.

13 Articles 4 and 5 of CNATE’s Articles of Association provided for “B” class members to pay entrance fees and annual membership fees to CNATE. Article 5.2 provided that the maximum annual membership fee should be no more than $750 payable in advance and should be payable partly in trade dollars, which should be debited to the member’s account by the Manager, and partly in cash. No more than 55% of the membership fee could be paid in trade dollars. In addition, CNATE was entitled to a transaction fee upon the authorisation of a transaction by the Manager. Clause 3.2.2 provided that the selling member’s account should attract the transaction fee at the date of authorisation. This was an account held with CNATE, although administered by the Manager. A selling member was charged with a transaction fee of ten percent of the trade purchase price, payable in cash, and a further two percent was debited in Credex trade dollars from the selling member’s account. A member who had a net credit position in its account with CNATE was entitled to obtain goods or services to the value of that credit from members with a net debit balance in their accounts. The rules provided that the Manager, on behalf of CNATE, was authorised to enforce the respective entitlements and obligations created on behalf of the members or, on behalf of CNATE, to defer or postpone the immediate obligations on the part a member to redeem in cash, goods or services the debit incurred (Rule 3.1.10). The rules of trading appear to have established “multi-party contracts” between the members themselves and between the members and the Manager. The Manager was also entitled to trade, and the rules envisaged that the Manager could incur debit balances. Such balances would have been incurred by the Manager acquiring goods or services from members and crediting the members’ accounts, thus providing liquidity for the scheme. It was not clear from the rules whether the transaction fees payable by selling members were payable to the Manager in its own right or on behalf of CNATE.

14 The articles and trading rules are not consistent with the applicants’ contention that CNATE had little involvement, or only tangential involvement, in the Credex Trade Exchange Scheme.

15 The company search of CNATE recorded that after 7 September 1999 its only director was Ms Bromley-Smith of Victoria. However, counsel for the liquidator submits that the liquidator has good reason to inquire as to who were the de facto directors. On 7 September 1999, an agreement was made between CANMC, CNATE, a company called Credex Australia Management Pty Ltd (“Management”), Mr Petkoff, Mr Swan and Ms Bromley-Smith. Mr Petkoff, Mr Swan and Ms Bromley-Smith were then the directors of CNATE. The agreement provided for the sale by Management to CANMC of the business of managing and administering the Trade Exchange and of assets used in connection with that business. The agreement recited that Mr Petkoff, Mr Swan and Ms Bromley-Smith had all agreed to resign as directors. It provided for three persons to be nominated in their place by “New Co”. “New Co” appears to be a reference to CANMC. The consideration for the sale was that CANMC would agree to act as Manager of the Trade Exchange Scheme, CANMC would enter into a consultancy agreement with Management, Management would resign as Manager and terminate all management agreements between itself and CNATE, and CANMC would assume a trade dollar deficit of Management in the Trade Exchange Scheme of a sum up to 2,000,000 trade dollars.

16 It appears from this agreement that CANMC, having the right to nominate the “A” class members and directors of CNATE, was in a position to control CNATE. Between 25 August 1999 and 15 May 2002, the directors of CANMC were Mr Valentino Kovacic and Mr George Magafa. After 15 May 2002, Mr Kovacic was recorded as the sole director of CANMC (then called CAN Management Pty Ltd). Mr Magafa is one of the applicants. Neither Mr Kovacic nor Mr Magafa has produced any documents or completed any report as to affairs in relation to CNATE. The liquidator does not have the books and records which ought to exist of CNATE. Primary accounting records and such fundamental documents as records of members, including the “B” class members, are missing. In the returns lodged with the Australian Securities and Investments Commission (“ASIC”), the company did not disclose the “A” and “B” class members.

17 CNATE was deregistered on 18 February 2002. It was deregistered pursuant to s 601AB of the Corporations Act 2001 (Cth). The ground of deregistration would have been that the company had failed to lodge required documents, and that ASIC had no reason to believe that the company was carrying on business. The liquidator believes that the reason for deregistration was the company’s failure to lodge annual returns for the 1998, 1999 and 2000 financial years. It is likely, having regard to the notices ASIC was required to give of the proposed deregistration (s 601AB(3)), that notice of the proposed deregistration would have come to the attention of those administering the company’s affairs.

18 In fact, the company was continuing to carry on business. Ms Foxman attended a meeting at the Hakoah Club in Bondi on 10 or 11 December 2001 in which Mr Kovacic described the Credex Trade Exchange Scheme. On 17 December 2001, she was provided with a “Credex Handbook”. She was told that there were about five thousand members. She was told that the Exchange company did not incur liabilities, whereas the Management company did, and that the Management company handled all the day-to-day expenses. She completed an application form and became admitted as a member.

19 In May 2002, a trustee of her family trust contracted to sell land at Jindabyne. Part of the consideration payable by the purchaser, Mr Mitzev, was Credex dollars. Ms Foxman was unaware that CNATE had been deregistered on 18 February 2002. Since the completion of the sale of the Jindabyne property on 28 May 2002, she has been unable to use the Credex dollars. She did not learn of the deregistration of CNATE until February 2005.

20 Ms Foxman brought proceedings against Mr Mitzev in relation to that transaction. Her claim was ultimately unsuccessful (Mitzev v Foxman [2007] NSWCA 273).

21 Notwithstanding the deregistration of CNATE, the liquidator has reason to apprehend that the Trade Exchange Scheme has continued, but has been conducted through other entities. On 24 January 2005, Wallabie Holdings Pty Ltd became registered as the owner of the business name, Credex Trade Exchange, for the business of “reciprocal trade exchange of goods and services”. A Ms Tracy Kovacic was the director of that company from 18 March 2003 until 20 August 2006 when it was deregistered, also pursuant to s 601AB. One of the examinees, Mr Peter Clinch, who is a solicitor, and who had previously acted for Mr George Magafa, gave evidence that Wallabie Holdings Pty Ltd had provided Credex Trade dollars. Although it is deregistered, there is some entity, whose identity Mr Clinch said he did not know, which is presently conducting a Credex Trading Scheme using Credex dollars.

22 Mr Magafa gave the following evidence:

“ Q. Did you or any company or entity in which you were involved ever become a member of the Credex Trading program?

A. I don’t remember.

Q. Is that possible?

A. I can’t remember.

His Honour:
Q. Can you explain why you have no memory?

A. I don’t know which company he is referring to. ”

23 Mr Magafa went on to give evidence that, whilst he was never a member of the Credex Trade Exchange, he bought property through a trade exchange. He said the name of the trade exchange in question was CAN Management or Credex but, from memory, was called CAN Management. He said that he paid for the land, in part, using Credex dollars which he was paid by “Credex Management” for having introduced a property developer to “Credex”.

24 One of the purposes of the proposed examinations is to obtain information with respect to the circumstances in which the “Credex Trading Program” or the “Credex Trade Exchange” continued to operate after CNATE was deregistered in February 2002, and whether the “Credex Trading Program” or “Credex Trade Exchange” were transferred to, or carried on by, other entities. If so, one of the purposes of the proposed examinations is to obtain information as to the circumstances in which that occurred. These are proper areas of inquiry. There is no substance to the applicants’ contention that such matters do not form part of the examinable affairs of CNATE because CNATE had no role, or only a tangential role, in relation to the Credex Trading Program and Credex Trade Exchange.

25 In their points of claim, the applicants contended that the “Credex Trading Program” was a “two-tier” level of organisation. The applicants contended that this meant that there were two separate corporations or entities involved in the operation of the scheme. They contended:

“ Membership of one of the entities gave those members the right to participate in the trading program. The other corporation was solely involved in the management and day-to-day operation of the scheme.

7.1 In the Credex Trading Program, membership of CNATE conferred upon those members the right to participate in the scheme. CNATE was not involved in any aspect of the management or day-to-day operations of the Credex Trading Program. CNATE did not derive any revenue or profits by reason of its involvement in the operation of the Credex Trading Program. CNATE was not involved in any transactions directly or indirectly associated with any aspect of the Credex Trading Program.

7.2 In the Credex Trading Program, CANMC was responsible for the management and day-to-day operations of the Credex Trading Program. It derived revenue or profits from its involvement in the operation of the Credex Trading Program. ”

26 The applicants adduced no evidence to support the contention that CNATE was not involved in any aspect of the management or day-to-day operations of the Credex Trading Program or in any transactions associated with it, and did not derive any revenue or profits from the operation of the Credex program, but that such revenue or profits was derived wholly by CANMC. The fact that the applicants were prepared to make those assertions suggests that they, or at least some of them, may have knowledge or information about the operation of the program and the application of revenue derived from it which could materially assist the liquidator in his inquiries.

27 CNATE was reinstated by the Court pursuant to s 601AH(2) of the Corporations Act on 18 September 2006 on the application of Ms Foxman. The applicants relied upon evidence of statements made by Ms Foxman to them or to others to impute to the liquidator the improper purpose of holding examinations in order to provide Ms Foxman with a forensic advantage in other litigation or proposed litigation by her against others.

28 It is common ground that Ms Foxman has been involved in the provision of funding to the liquidator. CNATE is, at present, wholly without funds. The liquidator, Mr Fiorentino, and his partner first met Ms Foxman and a number of other persons who were introduced to them by Mr David Purcell of Purcell Insolvency Lawyers on 7 March 2006, that is, before the company was reinstated. At that meeting, Mr Fiorentino was told of the existence of some twenty-three persons claiming to be creditors of CNATE for amounts totalling in excess of $5,000,000. The persons present indicated that they would put the liquidator’s firm in funds to undertake some preliminary investigations.

29 Mr Fiorentino was told that the persons who had lost money by being a member of the Credex Trading Program or by providing goods or property paid for in Credex dollars wanted an investigation to be carried out to see if any redress were available. He advised them that, if CNATE were reinstated and a liquidator appointed, the liquidator would be able to investigate CNATE’s affairs and, through this, could conduct public examinations. They were advised of the effect of s 564 of the Corporations Act whereby creditors who provide funding to a liquidator may be given priority over non-contributing creditors from the fruits of any litigation they have funded. The persons present indicated that they were prepared to put up $9,000 to enable the liquidator’s firm to undertake such preliminary investigations. No retainers were entered into at that time. The liquidator received $8,150 prior to his appointment as liquidator on 18 September 2006 and has since received a further $13,517. From time to time, legal representatives provided their services to the liquidator on the basis that they would only be paid if assets become available for that purpose. There was no impropriety in these arrangements.

30 In their points of claim, the applicants contended that the predominant purpose of Ms Foxman’s providing funding for the activities of the liquidator was to obtain the benefit, not otherwise available to her in the proper conduct of litigation, of collecting what she believed would be evidence to enable her, and perhaps others, to commence proceedings for the recovery of moneys said to have been lost, or damages said to have been incurred, in their private capacities as a consequence of their involvement in trading activities in the Credex Trading Program. The applicants contended that neither Ms Foxman nor the other persons who might be funding the liquidator were, or had ever been, contributories or creditors of CNATE. It was said that Mr Fiorentino’s predominant purpose in seeking the examinations was to confer a private benefit upon Ms Foxman and other persons who had been involved in funding his activities as liquidator. It was contended that he knew, or ought to have known, that Ms Foxman’s predominant purpose was to allow proceedings to be brought against CNATE, or to confer upon her the benefit of having a liquidator gather information or evidence in order to attempt to support separate litigation for her benefit, but in a way which was not capable of conferring any benefit upon CNATE, CNATE’s creditors, or CNATE’s contributories.

31 There was no evidence that either Ms Foxman or Mr Fiorentino had any improper purpose. Ms Foxman urged Mr Magafa and Mr Mitzev to provide all information they had to the liquidator. She asserted to Mr Mitzev that she had information concerning one of the applicants, being that he had been involved in a huge fraud of which she and Mr Mitzev were victims. But none of this suggested any improper purpose on her part, let alone any improper purpose on the part of Mr Fiorentino. Mr Fiorentino rejected the suggestion, put in cross-examination, that his predominant purpose in obtaining the examination summonses was to assist Ms Foxman and those other persons who provided him with funding to obtain information that they could use to sue, in a private capacity, other people. I accept that denial. He deposed that his predominant purpose in seeking to hold the examinations, and for obtaining orders for production of records, was to be able to get a full picture of the affairs of the company. I accept that evidence.

32 The only basis for the applicant’s submission that the liquidator was motivated by an improper purpose was that the persons funding the liquidator, who claimed to be creditors of CNATE, could not have been creditors of CNATE if their debts or claims arose from their participation in the Credex Trade Exchange after CNATE was deregistered. It was submitted that such persons could not have a claim against CNATE if CNATE did not exist at the time the claim was said to arise. Therefore, it was said, the liquidator’s seeking to investigate the circumstances giving rise to such alleged claims could not be for any proper purpose of CNATE, its creditors or contributories, but rather is to advance the private interests that such persons might have in being able to bring proceedings against other persons who might be identified as operators of the Credex Trade Exchange.

33 That submission fails on a number of grounds. First, as Mr Fiorentino was at pains to point out, he does not know who were the creditors of CNATE or what claims they might have, or when those claims arose. One of the purposes of the examinations is to investigate those matters. Secondly, it is not factually accurate to say that Ms Foxman could not have any claim against CNATE because her claim could only have arisen from her contract for sale of the Jindabyne land entered into in May 2002. A proper matter for investigation could be the circumstances in which she applied for membership of CNATE on or about 17 December 2001. This was before the company was deregistered, but would have been after, or at least at about the time, ASIC gave notice to the company and its directors of the proposed deregistration. One of the purposes of the liquidator’s examinations would be to ascertain, whether and when any claims against the company may have arisen.

34 I do not accept that it would not be legitimate for the liquidator to inquire into transactions effected after CNATE’s deregistration. One of the avowed purposes of the liquidator conducting the examination is to investigate whether, following CNATE’s deregistration, persons involved in the management of the Credex Trading Program continued to represent to a number of the program’s participants that the program was still operating without any relevant change. The liquidator deposed that there were a “network of possible claims, being claims by participants in the Credex Trading Program against CNATE; claims by such participants against those behind CNATE; and by CNATE against its directors or officers for breach of ss 183 and 184 of the Corporations Act.”

35 The submission of counsel for the applicants was that this was misconceived, and that because there was an obvious misconception, it should be inferred that the liquidator had a different and improper purpose. The reason it was said the liquidator’s position was misconceived was because, it was said, although the effect of reinstatement was that CNATE was taken to have continued in existence as if it had not been deregistered, this did not mean that any person could have acquired any right against CNATE or become subject to any liability to CNATE during the period of deregistration.

36 For the reasons below, that may well be the effect of s 601AH(5) of the Corporations Act. But that does not mean that these are not legitimate areas for inquiry. If necessary, it would be open to an aggrieved person, including the liquidator himself, to apply for an order under s 601AH(3) to the effect that the company is to be taken to have the same rights and to be subject to the same liabilities, as it would have had if it had not ceased to exist on deregistration.

Effect of Deregistration and Reinstatement

37 The applicants’ submissions highlight the unsatisfactory drafting of s 601AH. Sections 601AA, 601AB, and 601AC describe three broad classes of circumstances in which a company may be deregistered. Section 601AA allows the company, a director or member of the company, or a liquidator, to apply for deregistration. The circumstances in which such an application can be made are limited and include that the company not be carrying on business. But deregistration would be effective, whether the applicant for deregistration complied with s 601AA by truly stating the company had ceased to carry on business or not.

38 Section 601AB permits ASIC to deregister a company if the company is at least six months late in providing a response to a return of particulars given to the company and if it has not lodged any other documents required to be lodged in the preceding eighteen months. ASIC may also decide to deregister a company under s 601AB if the company’s review fee is not paid for at least twelve months. Notice must be given by ASIC to the company, its directors, the liquidator (if any), and be published on ASIC’s database and in the Gazette. ASIC must have no reason to believe that the company is carrying on business. But ASIC may well have no information as to whether the company is or is not doing so.

39 Under s 601AC, ASIC is required to deregister a company in certain cases, one of which is that the liquidator in a voluntary winding-up has fully wound up the affairs of the company and provided an account showing how the winding-up has been conducted and the property of the company disposed of. After the convening of the last meeting of members or creditors, as the case might be, the liquidator is required to lodge a return attaching the account and ASIC is required to deregister the company three months after the return is lodged (subss 509(1), (4), (5)).

40 The effect of deregistration is that the company ceases to exist (s 601AD(1)). On deregistration, all the company’s property vests in ASIC (s 601AD(2)).

41 Section 601AH deals with reinstatement. It provides:

“ 601AH Reinstatement
Reinstatement by ASIC
(1) ASIC may reinstate the registration of a company if ASIC is satisfied that the company should not have been deregistered.
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 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).
ASIC to give notice of reinstatement
(4) ASIC must give notice of a reinstatement in the Gazette. If ASIC exercises its power under subsection (1) in response to an application by a person, ASIC must also give notice of the reinstatement to the applicant.
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. ”

42 It is far from clear what is the intended effect of reinstatement under s 601AH(5). The first sentence of s 601AH(5) re-enacts language which had a settled meaning in earlier legislation. Consistently with the meaning attributed to those words in earlier cases, and on the plain language of the sentence, one would expect that as the company, on reinstatement, is taken to have continued in existence as if it had not been deregistered, and as a company has shareholders and directors, the effect of reinstatement would be that the company is taken to have continued in existence with directors and shareholders, and that those things purportedly done by or on behalf of the company, or by third parties in relation to the company, should have the effect they would have had if the company had remained in existence. But as the authorities recognise, it is difficult to maintain that construction in the face of the sentences which follow. In particular, the second sentence appears to mean that the company is not taken to have had directors during the period of deregistration. As it is the directors who have the power to manage the affairs of the company, if the company, although taken to have been in existence, is not taken to have had directors, even though there were persons who may have purported to act as directors during the period of deregistration, then it is difficult to see how anyone could be taken to have had authority to act on behalf of the company. Prima facie, the third sentence suggests that property which revests in the company is property which is still vested in ASIC immediately before reinstatement. Again, that suggests that, notwithstanding the first sentence of s 601AH(5), although the company is taken to have continued in existence as if it had not been deregistered, it is not taken to have continued to have had the property which it had immediately before deregistration, or to have dealt with the property in a way it may purportedly have appeared to deal with it. The authorities on s 601AH(5) show that the first sentence is indeed qualified by the following sentences.

43 The results could be remarkable. As is suggested in the present case, persons who may have thought they were dealing with a company, although it was deregistered, could have no claim against the company, even after its reinstatement, for the price of goods or services which the person thought he or she was supplying to the company. A person who thought he or she was employed by the company, when, to all appearances, he or she continued to be so employed, could have no claim against the company or against its insurer if he or she were injured when the company was deregistered, even though to all appearances the person’s employment by the company had continued uninterrupted. If a company, immediately before its deregistration, had an account in credit with a bank, say in a sum of $50,000, that asset would vest in ASIC. If, to all appearances, the company continued trading and its account with the bank was reduced to zero, on the company’s reinstatement, the debt of $50,000 vested in ASIC would revest in the company. If, purportedly, the company traded profitably during the period of deregistration, it would not be taken to have traded. Even though it would be taken to have continued to exist, it would not be liable to pay tax on the profits derived during that period. Presumably some other persons would be taken to have derived the income earned during the period of deregistration, become subject to liabilities incurred during that period, and be entitled to assets brought into existence during that period, even though no-one believed that they were trading in their own right.

44 These consequences would appear to flow unless the Court made a validating order, or some other appropriate order, under s 601AH(3). However, a court could only make an order under that subsection if it also made an order for reinstatement under s 601AH(2). If the company were reinstated by ASIC, because ASIC was satisfied that it should not have been deregistered, the Court would not be empowered to make an order under s 601AH(3).

45 Prior to the amendments made by the Company Law Review Act 1998 (Cth), ss 571 to 579 of the Corporations Law provided two separate paths for reinstating a dissolved company. The first path was where a company was dissolved in circumstances corresponding to s 601AC(1)(b) or (c), that is, after a formal process involving the completion of a winding-up. The Court was empowered to declare such dissolution to have been void and, by the order, to give such directions and make such provisions for the retransmission of property vested in the Commission as seemed just for placing the company and all other persons in the same position as nearly as may be as if the company had not been dissolved (s 571(1)). This section had a long legislative history. In Morris v Harris [1927] AC 252, the House of Lords considered the effect of an order avoiding a dissolution of a company pursuant to s 223 of the Companies (Consolidation) Act 1908 (UK). That section provided that:

“ Where a company has been dissolved the Court may ... make an order, upon such terms as the Court thinks fit, declaring the dissolution to have been void, and thereupon such proceedings may be taken as might have been taken if the company had not been dissolved. “

46 The House of Lords, by majority, held that the effect of an order declaring the dissolution of the company to have been void did not validate things done during the period of dissolution. Hence, an award in an arbitration against the dissolved company was void, and was not validated by an order avoiding the dissolution of the company (per Lord Sumner at 258-259, with whom Viscount Dunedin agreed; per Lord Blanesburgh at 268-269). The reasoning of the majority was substantially based upon the fact that the dissolution to which the section applied was a dissolution arising three months after the liquidator had rendered his final accounts when it was unlikely, in the ordinary course of events, that anyone would have dealings with the company (per Lord Sumner at 258; per Lord Blanesburgh at 268-269). Lord Blanesburgh picturesquely described the position as follows (at 269):

“ The company is restored to life as from the moment of dissolution but, ... it remains buried, unconscious, asleep and powerless until the order is made which declares the dissolution to have been void. Then, and only then, is the company restored to activity. ”

47 The second path was under s 574 of the Corporations Law, which dealt with the entirely different case where the Australian Securities Commission deregistered a company because it had reason to believe that it was not carrying on business or it was not in operation or, if the company was being wound up, where the Commission had reason to believe that no liquidator was acting and the affairs of the company had been fully wound up, but the liquidator had been in default in lodging his or her final return, or there was no property or insufficient property available to pay the costs of obtaining an order of the Court dissolving the company after the company had been fully wound up. In such a case, the Commission was authorised to cancel the company’s registration, whereupon, the company was dissolved. Subsection 574(2) provided that if the Commission was satisfied that the registration of the company had been cancelled in error, the Commission could reinstate its registration,

“ and thereupon the company shall be deemed to have continued in existence as if its registration had not been cancelled. ”

48 Subsection 574(3) provided that if a person were aggrieved by the cancellation of the registration of the company the Court, if satisfied that the company was then carrying on business or in operation, or otherwise satisfied that it was just that its registration be reinstated, could order the reinstatement of the registration of the company. Subsection 574(4) provided that:

“ On the lodging of an office copy of an order under subsection (3), the company shall be deemed to have continued in existence as if its registration had not been cancelled. ”

49 These provisions also had a long history. Their effect was authoritatively stated by the English Court of Appeal in Tyman’s Ltd v Craven [1952] 2 QB 100; [1952] 1 All ER 613. The Court of Appeal by majority held that the effect of a like provision in s 353(6) of the Companies Act 1948 (UK), (which stated that the company should be “deemed to have continued in existence as if its name had not been struck off”), was that the “re-animation of the company” was retroactive in its effect, so that things done and engagements entered into by individuals purporting to act as directors or officers of the company during the period in which the company was dissolved should be taken to have been valid as they would have been had the company then been in existence.

50 Section 353 of the UK Companies Act dealt with the same circumstances as those dealt with by s 574 of the Corporations Law, namely, where the regulatory authority had reasonable cause to believe that the company was not carrying on business or in operation, it could cancel the company’s registration. Lord Evershed MR said that the difference between what was then s 352(1) of the UK Companies Act (broadly corresponding with s 571 of the Corporations Law) and s 353(6) of the UK Companies Act (broadly corresponding with s 574(3) and (4) of the Corporations Law) was marked both by different language and by the fact that the two provisions dealt with different and distinct sets of circumstances (2 QB 100 at 106-107; 1 All ER 613 at 616). One provision dealt with a company’s dissolution following its being wound up where, ex hypothesi, there could be no question of its having conducted trading or business operations. The other provision was specifically directed to cases where a company had failed in the performance of its statutory duties such that it appeared to the regulatory authorities to be defunct, but had nonetheless continued to trade and to transact business and enter into numerous engagements with third parties (at 616).

51 In Tyman’s Ltd v Craven, the company applied for the grant of a new tenancy of shop premises. It had limited time in which to make the application. At the time it made the application, it had been struck off the register and did not exist. It was subsequently reinstated. The question was whether the words in s 353(6) of the Companies Act 1948 that “the company shall be deemed to have continued in existence as if its name had not been struck off” meant that what had purportedly been done on the company’s behalf when it did not exist was to be treated as having had the same validity as if the company had then existed. The majority of the Court of Appeal held that that was the effect of the words. Morris v Harris was distinguished because of the different wording of the relevant provisions, and because the provisions dealt with different circumstances. Lord Evershed MR said (at 112; 619) that, unlike the case of a dissolution following the completion of a liquidation, s 353 was:

“ directed to the case (like the present) when during the period, possibly of long duration, of the company’s dissolution, many acts will have been done and many engagements entered into by individuals purporting to act as directors or officers of the company and in its name. In this regard the subsection operates in reference to circumstances wholly different from the circumstances relevant to an order under s 352, and such as make it at least reasonable and sensible to expect that the reanimation of the company should be retroactive in its effect. ”

52 His Lordship and Hodson LJ held that the effect of the words “the company shall be deemed to have continued in existence as if its name had not been struck off” was to achieve, to the fullest extent, the “as you were position” (at 120, 126; 619, 628).

53 Jenkins LJ dissented. His Lordship took the view that the effect of those words was merely to restore the company to its original corporate status and preserve its identity as the same company and the same legal person as was previously dissolved. His Lordship considered that there was “no justification for holding that the notional continuation of the company’s existence retrospectively brought about by the subsection does any more than restore and preserve ... the corporate existence and identity of the company.” (at 116; 622). His Lordship said that without such a retrospective notional continuance of the company’s existence, there would be obvious difficulties as to “incorporation, membership, share capital, and so forth ... , and if the resuscitated company was brought into being as a legal entity distinct from the dissolved one, claims by and against the resuscitated company in respect of the pre-dissolution dealings of the dissolved company would not be maintainable.” (at 116; 622).

54 Tyman’s Ltd v Craven was consistently applied in Australia up to the introduction of the amendments made by the Company Law Review Act. One of the significant decisions relevant to the construction of s 601AH(5) is R v Heilbronn [1999] QCA 095; (1999) 30 ACSR 488. In that case, a director was convicted of contravening s 232(6) of the Corporations Law in making improper use of his position as an officer or employee of a corporation, to gain an advantage for himself, or to cause detriment to the corporation. At the time of the offence, the corporation did not exist, having been deregistered. That was part of the fraud. As the Queensland Court of Appeal observed (at 491):

“ In some circumstances, there are advantages in conducting business under a name of a company that, because of its dissolution, has ceased to exist. Liabilities cannot be validly incurred on behalf of a non-existent entity; nor can it be sued to judgment: see Lazard Bros and Co v Midland Bank Ltd [1933] AC 289. That state of affairs is capable of being reversed by an order for reinstatement of the company; but, unless assets are likely to be forthcoming, the cost and delay incurred in obtaining such an order serve as a powerful disincentive to any creditor contemplating that step; and, unless and until carried through to completion, the advantage of having, controlling, using and disposing of the assets in the meantime remains with the person who happens to be in possession of them, which, in this instance was the appellant. ”

55 If the deregistered company had existed, the breach of s 232(6) consisted in transferring the company’s assets to a new company without providing for the discharge of its liabilities. That is an all too common fraud perpetrated on a company’s creditors. It is exacerbated where debts are apparently incurred by a company when it has been allowed to be deregistered.

56 In R v Heilbronn, it was argued for the director that s 574(4) of the Corporations Law, deeming the company to have continued in existence as if its registration had not been cancelled, could not retrospectively fix him with a criminal liability under s 232(6), because at the time of the alleged offence the company did not exist and therefore he was not a director of it. The Queensland Court of Appeal applied Tyman’s Ltd v Craven, Re Otway Coal Co Ltd [1953] VLR 557 at 562, Re Lindsay Bowman Ltd [1969] 1 WLR 1443, Jekos Holding Pty Ltd v Australian Horticultural Finance Pty Ltd (No 2) [1995] 1 Qd R 612, and Ash Street Properties Pty Ltd v Pollnow (Court of Appeal, 1 September 1995, unreported), in holding that s 574(4) meant what it said. Once the company was resurrected, its corporate existence was to be regarded as if it had never been interrupted (at 496-497). The Court observed (at 497) that:

“ For contravening s 232(6) the appellant was liable to prosecution and conviction. Such proceedings might or would have been frustrated by the fortuitous dissolution of [the company] under s 574(1). Section 574(4) restores the position to what it was, or would have been, apart from dissolution. No element of retrospective criminal liability or sanction is involved. ”

57 It would be highly surprising if Parliament, or the Task Force charged with simplifying the Corporations Law, intended to reverse this position which obtained up to 1998. Provisions corresponding with those in the current Chapter 5A of the Corporations Act were introduced by the Company Law Review Act, which in 1998 amended the Corporations Law, although those changes had first been introduced into Parliament by the Second Corporate Law Simplification Bill 1996 (Cth). Those amendments, prepared in 1995 by the Task Force, went well beyond rendering into plain English what had hitherto been clear. The Act made substantive changes to the existing law. The circumstances in which ASIC could deregister a company were substantially widened. The draftsman might have been expected to take into account that this would be likely to extend the opportunities for a company to be deregistered when many acts may have been done, and engagements entered into, by individuals purporting to act as directors or officers of the company and in its name where it would be reasonable to expect that the reanimation of the company would validate acts done by persons who, if the company had existed, would have had authority to bind it (Tyman’s Ltd v Craven at 619, 622).

58 The Task Force report commented that:

“ Current sections 574 and 576 establish the consequences of deregistration, but this information is obscured by the multiple issues that are dealt with in these sections. Bill section 601AD clarifies the effect of deregistration ...

The new provisions give the ASC clear powers to reinstate companies which have been inadvertently deregistered even though they are still carrying on business. This will avoid the cost of a court application for reinstatement (Bill subsection 601AH(1)).

At present, the ASC may only reinstate a company which has been deregistered if it was deregistered as a result of an error on the part of the ASC. Bill subsection 601AH(1) clarifies the ASC’s reinstatement power and will allow it to reinstate any company that should not have been deregistered, irrespective of the reason for the erroneous deregistration. However, it is envisaged that the ASC will only exercise this power when no dealings with the property of a deregistered company have been carried out during the intervening period, which give rise to third party rights. Where third parties have become involved, it is expected reinstatement will generally proceed via the Court.

The Court reinstatement power has been preserved (Bill subsection 601AH(2)). As under the current Law, the court will be able to make such ancillary orders as are just for putting the company and any other person in the same position, so far as is possible, as if the company had not been deregistered ...

Bill subsection 601AH(5) states the effect of reinstatement and will suspend directors’ liability during the period of deregistration until reinstatement. The property of the deregistered company that has vested in the ASC will revest in the company upon reinstatement. ”

59 Why it should have been thought appropriate to suspend directors’ liability during the period of deregistration is a mystery. However, the intention is clear. It does not appear that the Task Force thought there would be any difficulties for any person if a company which carried on business were deregistered and reinstated, even if the reinstatement were effected by ASIC. The only circumstances in which the Task Force envisaged that the ASC would not exercise its power of reinstatement would be if third parties had acquired rights as a result of dealings with the property of the deregistered company. The adoption in the first sentence of subs 601AH(5) of language to the same effect as in the formers subss 574(2) and (4) prima facie indicates that it was intended that reinstatement should have the same consequences as had been the case under the former provision.

60 However, the remainder of subs 601AH(5) indicates a contrary intention, particularly by the provision that persons who were directors immediately before deregistration become directors again only from the time of reinstatement, so that the company is not taken to have had directors during the period of deregistration.

61 In White v Baycorp Advantage Business Information Services Ltd (2006) 24 ACLC 969, Campbell J (as his Honour then was) observed that subs 601AH(5) provided only a limited measure of retrospectivity concerning title to the property of the company. The company’s property is restored to it not from the moment it lost its property on deregistration but only as at the date of reinstatement (at 989, 991). His Honour concluded that it was not possible for a purported agent to have exercised a contractual power to which the company was entitled before deregistration, the benefit of which contract was vested in ASIC and was not taken to have been revested in the company on reinstatement with effect from the time of deregistration. In CGU Workers Compensation (NSW) Ltd v Rockwall Interiors Pty Ltd (2006) 201 FLR 296, Barrett J held that purported service of a statutory demand upon a non-existent company during the period of its deregistration was not given retrospective validity on the company’s being reinstated. His Honour followed the judgment of Campbell J in White v Baycorp Advantage Business Information Services Ltd in holding that subs 601AH(5) created only a limited form of retrospectivity and that it did not give efficacy to active steps taken in relation to a company which, because of the company’s non-existence, were, when taken, devoid of legal effect (at 300). It would only be if an order validating the service of the supposed statutory demand were made under subs 601AH(3) that such service would be effective. His Honour observed (at 300-301 [18]-[19]) that:

“ In the relatively common case where the company’s controllers are unaware of the deregistration and continue to conduct the company’s business, s 601AH(3) might be used to put beyond doubt the validity of transactions supposedly undertaken by the company during the period of non-existence by means of things actually done purportedly by and for it.
It seems to me, however, that s 601AH(5) (scil s 601AH(3)) would not, in general, be appropriately used to visit adverse effects upon the company by reason of the inactivity necessarily stemming from its non-existence. ”

62 I followed this line of authority in Oates v Consolidated Capital Services Pty Ltd [2007] NSWSC 680 in holding that reinstatement of a deregistered company did not mean that originating process delivered to an office, which had been the company’s registered office prior to deregistration, was to be taken retrospectively to have been effectively served (at [32]-[36]).

63 In Mitzev v Foxman, the Court of Appeal held that if CNATE had operated a trading exchange up to the time of its deregistration, its reinstatement did not mean that it continued, by some fictional means, to carry on the business which in fact was not being carried on (at [25]).

64 That does not deny the possibility of orders being made under s 601AH(3), either to validate the effect of particular transactions, or to make any other order considered appropriate. Where, to all appearances, the company has continued to carry on business and third parties would be prejudiced if they were not able to prove in a liquidation for claims apparently arising against the company during the period of deregistration, or if the company could not recover debts apparently incurred during the period of deregistration, then it may well be appropriate to make an order pursuant to s 601AH(3)(b) that the company be taken to have such rights and be subject to such liabilities as it would have had had it not ceased to exist on its deregistration.

65 Section 601AH is a law reform measure itself in need of reform. Whilst the adverse consequences of there being only a limited measure of retrospectivity could be cured, or at least partially cured, in an appropriate case by an order under s 601AH(3), (although not so as to render a person liable as a director for acts purportedly done by him or her as a director during the period of deregistration), there is no such power if the company is reinstated by ASIC rather than by the Court. That suggests that if there is any prospect of the company having carried on business during the period of its deregistration, reinstatement should be effected by the Court rather than by ASIC. That may defeat the purpose of s 601AH(1), which was to avoid the cost of a court application for reinstatement where a company had been inadvertently deregistered even though it was still carrying on business. However, that may be the only prudent course to take, given that, consistently with the authorities to which I have referred, and the balance of subs 601AH(5), the effect of the first sentence of that subsection appears to have the same limitations that Jenkins LJ, who dissented in Tyman’s Ltd v Craven, would have given to s 353(6) of the UK Companies Act. That is, the effect of the first sentence may be merely to preserve the identity of the company as the same legal personality as that which was previously dissolved so that the legal effect of dealings prior to deregistration can be resuscitated. An example of such resuscitation is GIO General v Sabko [2007] NSWSC 251; (2007) 25 ACLC 935, in which Austin J held that the legal effect of a contract, entered into prior to deregistration, was resuscitated upon reinstatement of the company. A debt arose from renewal of a contract for insurance which was entered into prior to the company’s deregistration, in circumstances where the policy automatically renewed. That is, under the terms of the pre-existing contract a liability accrued, without more, by the effluxion of time.

66 It is also unclear what would happen to property held by a company on a joint tenancy (Conveyancing Act 1919 (NSW) (s 25)) on the company’s deregistration and reinstatement.

67 I see no reason why an order could not be made under s 601AH(3) after an order for reinstatement was made under s 601AH(2). There is nothing in the legislation that suggests that the former order must be made contemporaneously with the order for reinstatement. Having regard to the purposes behind s 601AH(5) and the possibility, or even likelihood, of appropriate orders being made to recognise that CNATE should have such assets and liabilities as it would have had had it not ceased to exist by reason of its deregistration, the transactions purportedly carried out in its name, albeit during the period of deregistration, form part of its examinable affairs. The same transactions in any event would concern the business affairs of CANMC which themselves form part of the examinable affairs of CNATE. CANMC was a “connected entity” of CNATE within the meaning of s 64B(1) of the Corporations Act as CANMC could control, or influence materially, the activities or internal affairs of CNATE based on its power under the deed of 7 September 1999 to appoint the “A” class members and directors of CNATE.

68 For these reasons, I do not accept that the proposed investigations go beyond the legitimate scope of examinations under s 596A or 596B.

Ancillary Orders Sought

69 Amongst the numerous ancillary orders sought by the applicants were orders that Ms Foxman be excluded from access to any records of the examination conducted by the liquidator, and that Mr Fiorentino be restrained from providing her or others with access to such information as he might obtain.

70 I see no proper basis for making any such orders. The examinations are to take place in public unless the Court otherwise orders. Prima facie, members of the public, including persons claiming to be creditors of the company, are entitled to hear the questions asked and the answers given. The Court may at any time give directions about access to records of the examination. In New Cap Reinsurance Corporation Holdings Ltd v The Corporations Law [2001] NSWSC 835, Santow J said (at [32]) that the power of direction in s 596F is wide enough to permit a creditor to be represented at the hearing, there being nothing to preclude that in s 597. The legislative scheme allows creditors of a company, without fee, to be entitled to access to the written record of examination (s 597(14A)). That record is to be open for inspection by anyone else on paying the prescribed fee (s 597(14A)(b)). There is no basis for restricting access by Ms Foxman or others to the material.

71 It is not clear to me why Ms Foxman was joined as a respondent to the proceedings. The applicants’ affidavits disclosed no plausible ground for any claim against her. It seems that the substantial reason for the applicants having brought the application was that, for a time, the liquidator was using the services of the same counsel who had appeared for Ms Foxman in the proceedings against Mr Mitzev. There was no reason that the liquidator should not have retained the services of counsel who had had a prior acquaintance with the Credex Trade Exchange Scheme. In my view, there was no proper basis in the evidence relied upon by the applicants for the attack on the propriety and good faith of the liquidator or Ms Foxman.

Conclusion

72 The applicants sought an extension of time within which to make the application to set aside the examination summonses and orders for production of documents and ancillary relief. The matter was fully argued and it is appropriate to grant the extension sought. However, for these reasons all of the substantive claims for relief in the applicants’ interlocutory process should be dismissed. It is for these reasons that I made orders on 15 November 2007 dismissing paras 6-21 of the interlocutory process.

73 I will hear the parties on costs.

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