In the matter of Cardiff Coal Company
[2014] NSWSC 1590
•12 November 2014
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Cardiff Coal Company [2014] NSWSC 1590 Hearing dates: 13 October 2014 Decision date: 12 November 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Liquidator would not be justified in distributing surplus on basis that Mr Lunn is the sole shareholder in the company.
Catchwords: CORPORATIONS - External administration - winding up - winding up of joint stock company incorporated under private Act of 1863 - liquidator's applications - application for directions - whether liquidator entitled to distribute surplus on basis that the interests of all but one shareholder had ceased or could be disregarded - held, not entitled to so proceed - whether liquidator entitled to be released - held, liquidator has not yet settled list of contributories or determined to whom surplus is properly payable Legislation Cited: (CTH) Corporations (Ancillary Provisions) Act 2001
(CTH) Corporations Act 2001, 478, 488, 601AD, 601AE
(CTH) Corporations (New South Wales) Act 1990, s 85
(Cth) Corporations Regulations 2001, reg 5.6.71
(NSW) Cardiff Coal Company's Incorporation Act of 1863, s 5
(NSW) Supreme Court Rules 1970, r 32, 35, 46
(NSW) Supreme Court (Corporations) Rules 1999, r 7.5, 7.9, 7.10
(NSW) Companies (New South Wales) Code, 378, 379, 381, 382, 386, 389, 422, 425
(NSW) Companies (New South Wales) Regulations, regs 183, 184Cases Cited: Re Autistic Therapy Society of Qld Ltd (1981) 5 ACLR 658; (1981) CLC 40-735
Re Budget Floor Coverings Pty Ltd (in liq) (1982) 6 ACLR 657; 1 ACLC 312
City West Water Ltd v Mr D Investments Pty Ltd (2002) 43 ACSR 622
In the matter of John L Norris Holdings Pty Limited (in liq) [2013] NSWSC 2005
National Australia Bank Ltd v Australian Securities Commission (1991) 5 ACSR 453
Savage v Lunn [1998] NSWCA 203
Lunn v Cardiff Coal Company [2002] NSWSC 1247; (2002) 171 FLR 430
Lunn v Cardiff Coal Company; and Lunn v Cardiff Coal Company (No 2) [2003] NSWSC 25
Lunn v Cardiff Coal Company (No 3) [2003] NSWSC 789; (2003) 47 ACSR 79Category: Principal judgment Parties: Brian Silvia (Applicant) Representation: Counsel:
P. Hewitt (solicitor) (Applicant)
Solicitors:
Hewitts (Applicant)
File Number(s): 2002/64464 (formerly 2002/5095)
Judgment
HIS HONOUR: On 7 October 2003 - pursuant to a judgment delivered on 29 August 2003 - Barrett J, as his Honour then was, ordered that the Cardiff Coal Company be wound up on the just and equitable ground pursuant to Part XII of the Companies (New South Wales) Code ("the Companies Code") and appointed the present applicant Mr Silvia as liquidator [Lunn v Cardiff Coal Company (No 3) [2003] NSWSC 789; (2003) 47 ACSR 79]. By notice of motion filed on 29 August 2014, the liquidator seeks directions pursuant to Companies Code, s 379(3), on certain questions to which I shall later return; an order pursuant to Companies Code, s 381, that he be released; and an order that the company be dissolved.
Background
The extraordinary features of the background to this proceeding have previously been noted [see Savage v Lunn [1998] NSWCA 203; and Lunn v Cardiff Coal Company [2002] NSWSC 1247; (2002) 171 FLR 430, on which the following, abbreviated, summary is based]. The Company was established as a joint stock company by a Deed of Settlement dated 1 October 1862, which governs the rights and obligations of the shareholders. It was incorporated in 1863 by the (NSW) Cardiff Coal Company's Incorporation Act of 1863 ("the Incorporation Act"). It acquired land, which it mined for coal, at Green Point, Lake Macquarie.
In 1910, Belmont Colliery Proprietary Limited ("Belmont") was granted a lease of the Green Point land, and remained in occupation at least in the early 1970s, by when it had long since ceased to pay rent; it had a possessory title but could not obtain a registered title [see Savage v Lunn]. In 1973, Carrington Holdings Pty Ltd - a company controlled by Mr Leslie Savage - acquired the issued capital in Belmont. Mr Savage obtained possession of the share register of the Company in 1976 (and retained it until 1994) and - he says - from it came to understand that Belmont (apparently) held shares in - and was indeed the controlling shareholder of - the Company. From 1977, Mr Savage (together with his wife Jocelyn Savage and their son Robert Savage) purported to act as the directors of the Company, although they were not qualified to do so, not being registered as shareholders.
In fact, the Company's share register (and other documents) had been altered, by an elaborate fraud, probably at some time between 1939 and 1976, though just when and by whom has not been determined. However, it was as a result of that fraud that the share register came to record Belmont as the holder of 1725 shares. The judgment of the Court of Appeal in Savage v Lunn establishes that Mr Blackwood (who ostensibly transferred 1725 shares to Belmont on 6 April 1938) had not acquired 1550 of those shares (as the Register purported to record) in 1916:
A finding that Cardiff shares were sold to Blackwood in 1916 would be contrary to the overwhelming weight of the evidence at the trial which has since been strengthened by the further evidence. Hence we affirm the Judge's finding that no transfers of shares to Mr Blackwood had been authorised by Cardiff and find that he did not purchase and pay for such shares either.
The same judgment also establishes that Belmont had not acquired those shares, in 1938 or subsequently:
Between 1938 and 1973 Belmont acted as if it had no interest in Cardiff although it was in possession of its land. It is impossible to imagine any reason why the takeover of Cardiff by Belmont in 1938 could have been forgotten so completely if it actually occurred.
The proceedings that culminated in Savage v Lunn were instituted in 1989 by Mr William Lunn, as administrator of the estate of James Lunn, who had become the proprietor of 100 shares in 1885 and died in 1912 while still registered as a shareholder. Mr Lunn claimed to be entitled to the 100 shares of which James Lunn had formerly been the registered holder (of which Belmont had become the registered holder), and contended - successfully - that the estate had not alienated its shareholding. An order was made (on 6 September 1996):
That the share register of Cardiff Coal Company be rectified so that William Herbert Lunn, the administrator of the estate of James Lunn, be registered as the owner of the 100 promoters' shares previously registered in the name of James Lunn.
In addition, as there were no directors validly in office, a receiver of the property of the company was appointed.
While those proceedings were on foot, the Company - under the control and at the instance of the Savages - sold the Green Point land, for a price that totalled $2,910,000. Much of that was dissipated into accounts not controlled by the Company. In a report of August 1997, the receiver reported that the Company's estimated net assets (excluding contingent assets) amounted to $976,199; with contingent assets in the form of uncommercial transactions of $5,051,998. By 30 June 2002, the receiver had total receipts of $1,208,1010 (comprising $969,247 cash at bank at appointment date, plus interest of $238,862) and expenses of $577,187 (including $55,907 on legal fees, $141,286 on receiver's remuneration, and $364,638 on payment pursuant to costs orders), leaving $630,923 remaining.
In 2002, Mr Lunn instituted the present proceedings for the winding up of the Company on the just and equitable ground. Two attempts failed on jurisdictional grounds [Lunn v Cardiff Coal Company; and Lunn v Cardiff Coal Company (No 2) [2003] NSWSC 25], but a third - invoking the Companies Code as continued in effect by the (CTH) Corporations (New South Wales) Act 1990, s 85 (as amended by the (CTH) Corporations (Ancillary Provisions) Act 2001) - succeeded [Lunn v Cardiff Coal Company (No 3)].
Barrett J's reasons for judgment in Cardiff Coal Company (No 3) were published on 29 August 2003. However, because of issues concerning the status of a proposed liquidator, orders were not made until 7 October 2003. On 9 October 2003, solicitors for Mr Savage wrote to Barrett J's associate, with a copy to Hewitts solicitors (who acted for Mr Lunn and now act for the liquidator), claiming that their client was a director and controller of Belmont the majority shareholder in the Company, and also a director of the Company, and that although he had been given notice of the first application for winding up and was present in court for its hearing, he had not been notified of the subsequent applications, and requesting that the matter be listed for further directions. His Honour's associate replied on 10 October that if Mr Savage wished to make an application it would be necessary to file an initiating process and affidavit in the usual way. On 12 November, Barrett J's associate received a letter bearing the (probably incorrect) date 10 October from Mr Savage, advising that he was unable to afford a solicitor; that he and his wife held 100 shares in the Company; that they were not advised of the application and had only just become aware of it; and enclosing some additional material. His Honour's associate referred the correspondence to counsel who had appeared for Mr Lunn on the winding up application, noting that the matter had proceeded ex parte, in case there was anything that it was thought should be drawn to the court's attention. On 2 December 2003, Hewitts responded to the effect that Mr Savage's name did not appear in the share register, and that the original (first) winding up application had been served on Mr and Mrs Savage, who had never filed a Notice of Appearance. However, the record shows that Mr Savage was represented before the Master on 6 November 2002, and appeared in person on 22 November, though not when the application was heard by Barrett J on 16 and 20 December 2002. So far as I can ascertain from the file, nothing further transpired in that respect.
Some idea of the subsequent course of the liquidation can be gleaned from the liquidator's several applications for remuneration. A motion filed on 31 August 2004 sought remuneration in the sum of $47,814 (plus GST) for the period 7 October 2003 to 30 June 2004. As at 30 June 2004, the liquidator had received cash of $400,000, interest of $6,234, and had expended $84,250 (mainly on legal costs). He had identified no creditors, and held a balance of $321,983. That application was approved by order made on 11 October 2004.
A second application was made by motion filed on 11 January 2006, for remuneration of $23,029 (plus GST) for the period 1 July 2004 to 30 June 2005, at which date the liquidator held $267,786 - the main expense having been the remuneration which had been approved for the previous period, and legal costs. The liquidator's main activity was legal action against a firm of solicitors who had purported to act for the Company on the sale of the Belmont land. The application was approved by order made on 11 January 2006.
A third application was made by motion filed on 20 February 2007, for remuneration of $41,413 (plus GST) for the period 1 July 2005 to 31 December 2005, when the liquidator held $140,641 - the main expense having been the remuneration which had been approved for the previous period, and legal costs associated with the claim against the solicitors (of some $100,000 during the six month period), which claim was settled during this period. The application was approved by order made on 22 February 2007.
A fourth application was made by motion filed on 4 March 2008, for remuneration of $19,287 (plus GST) for the period 1 January 2007 to 31 December 2007. By then the liquidator held $319,559 - having received settlement proceeds of $200,000 in respect of the action against the solicitors - with the main expense being the remuneration which had been approved for the previous period, and legal costs The application was approved by order made on 17 March 2008.
A fifth application was made by interlocutory process filed on 21 August 2012, for remuneration of $164,578 (plus GST) for the period 1 January 2008 to 30 April 2012. The liquidator's main activity during this period was the investigation of a possible claim against a different firm of solicitors who had been instructed by the Savages to defend the proceedings brought by the Lunns, for recovery of the amounts paid to them by the Company on the basis of "knowing receipt". Ultimately, no proceedings were commenced. As at 30 April 2012, the liquidator had total receipts of $746,332 (including $400,000 cash at bank at appointment date, interest of $102,123, and the settlement proceeds of the claim against the solicitors of $200,000); and expenses of $500,791 (including $280,638 on legal fees and $139,227 on liquidator's remuneration), leaving a balance of $245,541 remaining. An order was made on 4 October 2012 approving remuneration for the period 1 January 2008 to 30 April 2012 in the sum of $164,578.
According to the liquidator's affidavit sworn on 20 August 2014 in support of the present application, assets of $77,744 remained as at 30 July 2014, and there was outstanding work in progress of $84,663, which the liquidator proposes to write off, so that the balance remaining, less legal costs of the present application, would be available for distribution to contributories as surplus, there being no creditors. Not for the first time, I record that I find it profoundly disturbing that a liquidation which at the outset received liquid cash of $400,000, and subsequently a further $200,000 from the settlement of the proceedings against the solicitors, and in which there are no creditors, has taken 12 years to this point, generated remuneration of close to $325,000 and legal costs of $280,000, so that only $77,744 remains for distribution - and that only after writing off outstanding work in progress.
Application for directions
The liquidator's application raises the following issues:
(1) entitlement to the surplus, and in particular whether the liquidator would be justified in paying the entire surplus to Mr Lunn;
(2) finalisation of the liquidation, including preparation of final account, destruction of books, release of then liquidator, and dissolution.
Entitlement to the surplus
The questions in respect of which the liquidator seeks directions include the following:
1. Is the liquidator ... justified in declaring that the rights, if any, reserved to the respective husbands, executors and/or administrators of the shareholders in the Cardiff Coal Company listed in bold at 2 below have ceased pursuant to clause 15 of the Cardiff Coal Company Deed of Settlement?
2. ...
3. Alternatively, pursuant to clause 5 of the Cardiff Coal Company's Incorporation Act of 1863, is the liquidator ... justified in determining that the liquidator is entitled not to be bound by the trust arising pursuant to section 601AE of the Corporations Act 2001 in regard to the shares listed in italics in 2 above alleged to have been held by the deregistered company Belmont Colliery Pty Limited in the Cardiff Coal Company?
4. Further and in the alternative, is the liquidator ... justified in determining that the deregistered company Belmont Colliery Pty Limited could not hold the share listed in italics in 2 above in the Cardiff Coal Company by reason of clause 18 of the Cardiff Coal Company Deed of Settlement?
5. Further and in the alternative, pursuant to clause 5 of the Cardiff Coal Company's Incorporation Act of 1863, is the liquidator ... justified in determining that the liquidator is entitled not to be bound by any trust arising by reason of that shares alleged to have been held by the deregistered company Belmont Colliery Pty Limited were held on trust for other persons?
6. Is the liquidator ... justified in determining that William Lunn is the only shareholder of the Cardiff Coal Company retaining all or any rights attaching to all or any shares he holds in the Cardiff Coal Company?
7. Is the liquidator ... justified in determining that the liquidator should pay all remaining funds less the costs of this application to William Lunn as the sole remaining shareholder in the Cardiff Coal Company?
Questions 1, 3, 4 and 5 are essentially preliminary to questions 6 and 7: the fundamental issue is whether, as the liquidator proposes, he would be justified in distributing the whole of the surplus to Mr Lunn on the basis that he is the sole known shareholder. The liquidator submits that although there are possibly other persons possibly entitled to be members of the Company, Mr Lunn is the only known member satisfying all criteria.
Section 10 of the Incorporation Act provides that the share register of the company shall at all times be prima facie evidence to show who are the proprietors for the time being of the capital thereof and the number of shares held by each proprietor. I respectfully and gratefully adopt Barrett J's analysis (in Cardiff Coal Company (No 3)) of the state of the register:
16 Based on the foregoing analysis, the persons now appearing in the share register as holders of shares are:
A. William Herbert Lunn, the present plaintiff, whose name was entered in the register in 1996.
B. Belmont Colliery Proprietary Limited, the name of which was entered in the register in 1938.
C. "Est Wm Bullard", under an entry made in 1938.
D. "A W Henderson & Ors", under an entry made in 1916.
E. "Est G A Lloyd", under an entry made in 1910.
F. "Thos Fenwick", under an entry made in 1909.
G. "Est L E Threlkeld", under an entry made in 1909.
H. "E Apps Smith", under entries made in 1863.
17 No doubt or difficulty arises in relation to the first two entries (A and B), so far as the message appearing on the face of the register is concerned. Mr Lunn is living and has been recognised by order of the court as having the status of a holder of 100 promoters shares. Belmont Colliery Proprietary Limited, being itself a body corporate, must be presumed to exist in the absence of evidence that it has been dissolved.
18 In relation to items C, E and G (recording "Est", or the estate of a deceased person), the entries seem to recognise no more than the death of the person named as holder in an earlier entry. In the case of "Est Wm Bullard", it appears that Wm Bullard himself went on to the register in 1909, so that it should be inferred that he died some time between 1909 and 1938. In the case of "Est G A Lloyd", the corresponding inference is that death occurred between 1886 and 1910. In the case of "Est L E Threlkeld", the inference is that death occurred between 1862 and 1909.
19 Item D - "A W Henderson & Ors" - is presumably intended to indicate that several persons were the holders of the parcel of shares concerned. But there is no way of knowing how many "Ors" there were or, indeed, that there were any identifiable holders other than A W Henderson. The only safe course is, I think, to recognise that A W Henderson was entered as a holder in 1916.
20 Item H ("E Apps Smith"), taken at face value, indicates that a person who became a member 140 years ago is today a member. Principles discussed by Dixon J in Axon v Axon (1937) 59 CLR 395 at 404-5 amply justify the inference that E Apps Smith is no longer living. Item F, taken at face value, indicates that a person who became a member 94 years ago is today a member. Bearing in mind that the disability of infancy subsisted in 1909 until age 21, the virtually irresistible likelihood is that the "Thos Fenwick" registered in 1909 was born before 1889. He, by reference to the same principles, should be presumed to be now dead.
21 In summary, therefore, the register contains the names of two persons (Mr Lunn and Belmont Colliery Proprietary Limited) clearly now in existence, three persons (Bullard, Lloyd and Threlkeld) acknowledged upon the face of the register to have died, two persons (Apps Smith and Fenwick) who, for reasons stated, should be presumed to be dead and one person (Henderson) who, if he became a shareholder at age 21, must be either more than 108 years old or dead.
Thus, with the benefit of Barrett J's analysis, it appears that, according to the register, the current state of the shareholding is:
(1) William Herbert Lunn, in respect of 100 shares;
(2) Belmont Colliery Proprietary Limited, in respect of 1625 shares;
(3) "Est Wm Bullard", in respect of 25 shares;
(4) "A W Henderson & Ors", in respect of 100 shares;
(5) "Est G A Lloyd", in respect of 50 shares;
(6) "Thos Fenwick", in respect of 25 shares;
(7) "Est L E Threlkeld", in respect of 100 shares; and
(8) "E Apps Smith", in respect of 50 shares.
As to (1), no difficulty arises.
As to (2), although the conclusions reached in Savage v Lunn impugn the title of Belmont to the whole of its shareholding in the Company, the order for rectification was made in respect of only the 100 shares which had been held by James Lunn - which were the only shares in suit. Belmont remained - and remains - the registered holder of the remaining 1625 of the 1725 shares that were ostensibly transferred to it in 1938. However, Belmont was deregistered as a result of strike-off action by ASIC, on 14 October 2007. Prior to deregistration, its director was Leslie Herbert Savage, and its shareholders were Leslie Herbert Savage and Jocelyn Jean Savage. Upon deregistration, its property (other than trust property) vested in ASIC pursuant to (CTH) Corporations Act 2001, s 601AD(2), and is to be dealt with by ASIC pursuant to s 601AE(2). Accordingly, prima facie, its 1625 shares are now vested in ASIC. These are the shares identified in italics in question 2.
Moreover, conformably with the findings in Savage v Lunn, Belmont's ostensible shareholding of 1625 is, to say the least, dubious, and it is likely that those truly entitled to those shares are the successors of the shareholders from whom Mr Blackwood purportedly acquired his shareholding (later ostensibly transferred to Belmont) in 1916. These persons are amongst those identified in bold in question 2.
As to (3) through (8), for the reasons explained by Barrett J, these shareholdings are all likely to be vested in deceased estates. They too are amongst those identified in bold in question 2.
Thus the total issued share capital appears to be 2075 shares, of which Mr Lunn holds just under 5%. At least at first sight, a proposal to pay the whole of the surplus to Mr Lunn, who is entitled to less than 5% of the shareholding, seems extraordinary. But this approach has been proposed by the liquidator on the basis that various provisions of the Incorporation Act and the Deed of Settlement permit the company (and thus the liquidator) to disregard all interests other than those of Mr Lunn.
Dealing first with the 1625 shares of which Belmont is the registered holder, the liquidator submits that:
(1) pursuant to clause 5 of the Incorporation Act, the liquidator is not bound by any trust arising pursuant to section 601AE of the Corporations Act 2001 in regard to the shares ostensibly held by Belmont;
(2) pursuant to clause 5 of the Incorporation Act, the liquidator is not bound by any trust arising by reason that shares ostensibly held by Belmont were held on trust for other persons; and
(3) by reason of clause 18 of the Deed of Settlement, Belmont could not hold the shares ostensibly held by it.
Section 5 of the Incorporation Act relevantly provides as follows:
5. Trusts or equitable interests affecting shares. The corporation shall not be bound in any manner by any trusts or equitable interests or demands affecting any shares of the capital standing in the name of any person as the ostensible proprietor thereof or be required to take any notice of such trusts or equitable interests or demands but the receipt of the person in whose name the shares shall stand in the books of the corporation shall notwithstanding such trusts or equitable interests or demands and notice thereof to the said corporation be a good and valid and conclusive discharge to the corporation for or in respect of any dividend or other money payable by the said corporation in respect of such shares ... Provided always that nothing therein contained shall be deemed or taken to interfere with or abridge the right and power of a Court of Equity to restrain the payment of any such dividend or other money payable thereafter by the corporation in respect of any such shares ... or to direct the payment of such dividends or other money by the corporation ... to such other person as such Court may think fit.
Prima facie this provision protects the Company (and thus the liquidator) against notice of equitable interests in respect of shares. Essentially, it provides that the discharge of the registered holder shall be a good and sufficient discharge. (Applied to the Belmont shares, that would mean that the liquidator could pay Belmont's ostensible entitlement to it and receive a good discharge, without being affected by notice that Belmont held its shareholding on trust for someone else). It does not preclude equitable interests arising, and the proviso plainly admits that such interests may be recognised and enforced by a court of equity.
The interest of Belmont is not an equitable interest: it appears as the registered holder on the face of the register, although pursuant to s 601AD(2) its interest (unless held on trust) is now vested in ASIC. Even if the liquidator would not be bound by any trust upon which Belmont may have held its shares, that does not mean that he can disregard the registered shareholding of Belmont, which is now vested in ASIC. Least of all does it mean that Belmont's interest is somehow extinguished or forfeited so as to enlarge Mr Lunn's interest.
Clause 18 of the Deed of Settlement provides for the transferability and assignability of the shares by the proprietor, but includes the following proviso:
PROVIDED that no Body Corporate shall hold any shares in the said Capital
Notwithstanding that provision, on the face of the register a body corporate, Belmont, is registered as holder of 1625 shares. It does not follow from clause 18 that those shares can be treated as somehow extinguished or non-existent, in a way that enlarges Mr Lunn's interest. If Belmont had been otherwise regularly registered, and given the contractual nature of the Deed of Settlement, the possibilities would include that the contractual prohibition had been waived.
As to the other registered shareholders, the liquidator submits that their rights, or those of their successors, have ceased pursuant to clause 15 of the Deed of Settlement, which relevantly provides as follows:
15. As to shares of female proprietors when marrying and of deceased lunatic and insolvent or bankrupt proprietors. THE husband of any female proprietor or the executor or administrator of any deceased proprietor or the Committee of any Lunatic Proprietor may on notice in writing to the head office of the Company for the time being and production of satisfactory evidence of title either elect to become a proprietor in respect of the shares to which he shall be entitled in either of those capacities or procure any other person to become a proprietor in respect of such shares ... PROVIDED always that no person shall be entitled to receive any dividends or other profits which shall be declared on the shares of such female deceased Lunatic Insolvent or Bankrupt proprietor after his or her marriage death commission of Lunacy Insolvency of Bankruptcy until some person shall have become a proprietor in respect of such shares and the person who shall ultimately become a proprietor in respect of such shares shall be entitled to such last mentioned dividends and profits and the full right and interest of and in such shares AND PROVIDED FURTHER that if no person shall become a proprietor in respect of such shares within the period of two years from the date of such marriage death or Commission of Lunacy respectively then the rights herein reserved to such husband executor administrator or committee respectively shall cease and determine and it shall be lawful for the Board of Directors to sell the said shares by public auction and to retain the proceeds together with the interest and dividends which shall have accrued previously to such sale until the person legally entitle thereto shall establish his claim to the satisfaction of the Board of Directors and such person shall not be entitled to claim Interest on the amount retained ...
Clause 15 does not have the effect that the interest of a deceased shareholder is extinguished. This is apparent from the power given to sell such shares, coupled with an obligation to retain the proceeds "until the person legally entitled shall establish his claim". All that ceases after two years are "the rights herein reserved to such ... executor", which is a reference to the right given by the first part of the clause to "elect to become a proprietor in respect of the shares to which he shall be entitled in either of those capacities or procure any other person to become a proprietor in respect of such shares". Clause 15 does not mean that the shareholdings of a deceased shareholder are extinguished or forfeited in a way that enlarges the remaining shareholdings.
Accordingly, there is no apparent basis for concluding that Mr Lunn's holding of less than 5% of the share capital entitles him to receive a distribution of 100% of the surplus.
A fundamental function of a liquidator, having got in the assets, is to establish who is entitled to them - whether creditors or contributories. It is for this reason that, at least where there is likely to be a surplus, a liquidator is required to settle a list of contributories - and has power, in the course of doing so, to adjust the rights of the contributories (including now, explicitly, to rectify the register) [Companies Code, s 378, s 386(2), s 389; (NSW) Supreme Court Rules 1970, Pt 80 r 32 ("the Companies Rules"); cf Corporations Act, s 478]. Thus the liquidator ought to inquire into and ascertain who is entitled to the surplus. Although (in an affidavit sworn on 24 July 2012 in support of an application for remuneration) the liquidator says that "despite ongoing efforts" he has not been able to locate the true owners of any shares in the Company, that is so "because none of the descendants of the original shareholders have at any stage properly taken steps to transfer the shares ...". The liquidator says in his affidavit that since his appointment no person other than Mr Lunn has contacted him asserting ownership of any shares, or asserting any rights attaching to shares, in the company. However, there is no evidence of what if any inquiries and investigations the liquidator has undertaken to ascertain who may be the persons presently entitled. The evidence reveals no attempt by the liquidator to identify by search and inquiry who might be entitled to the shares, other than those of which Mr Lunn is the registered holder.. This is so not only in respect of the deceased estates; there is no evidence of any inquiry in relation to who is truly entitled to the shares held in the name of Belmont. While it seems to me that the decision of the Court of Appeal in Savage v Lunn would probably be sufficient basis for the liquidator to determine that neither Belmont (and thus ASIC) nor Mr Blackwood were entitled to be registered, ASIC and the Savages should be afforded an opportunity to be heard, as should any successor of Mr Blackwood. Ultimately, proper inquiry by the liquidator may not locate any person entitled in respect of one or more of the former shareholders, in which case it may be that their entitlement to any surplus is to be dealt with as unclaimed moneys, although I have not given close consideration to this.
In any event, an application for directions is not the appropriate vehicle for obtaining approval to distribute surplus. The power to distribute surplus is a power of the Court which is delegated to a liquidator, but which can be exercised by the liquidator only with the special leave of the Court [Companies Code, s 389(1)(c), (2); Companies Rules, r 46; cf Corporations Act, s 488(1)(c), (2); (NSW) Supreme Court (Corporations) Rules 1999, r 7.10]. The regulations and rules make provision in respect of applications for special leave to distribute surplus [(NSW) Companies (New South Wales) Regulations ("the Companies Regulations"), regs 183, 184; cf (Cth) Corporations Regulations 2001, reg 5.6.71; Corporations Rules, r 7.9]. On such an application, the liquidator is expected to prove that there is a surplus, and show who is entitled to the surplus, and that proper steps have been taken to ensure that those who might have a claim on it have been notified [In the matter of John L Norris Holdings Pty Limited (in liq) [2013] NSWSC 2005, [3]].
Finalisation of the liquidation
The liquidator seeks the direction of the Court as to the following questions:
1. Is the liquidator entitled to be excused from preparing final accounts?
2. Is the liquidator entitled to destroy the books of the Company provided he publishes a notice announcing same in a newspaper published in Sydney three weeks prior to the proposed date of destruction?
3. Is the liquidator entitled to be released pursuant to section 381 of the Companies (New South Wales) Code?
In addition, the relief claimed in the interlocutory process includes an order pursuant to Companies Code, s 381, that the liquidator be released; and an order that the company be dissolved.
Release. Companies Code, s 381, provides that when the liquidator has realized all the property of the company (or so much as can be realised without needlessly protracting the winding up) and has distributed a final dividend to creditors and adjusted the rights of the contributories among themselves and made a final return (if any) to them, he may apply for an order that he be released and that the company be dissolved. Section 382 makes further provision in connection with orders for release and dissolution. The rules make provision as to what evidence a liquidator must adduce on an application to be released [Companies Rules, Pt 80 r 35; cf Corporations Rules, r 7.5]. A liquidator is required to prove, strictly, compliance with all the prerequisites to a release [see, for example, Re Autistic Therapy Society of Qld Ltd (in liq) (1981) 5 ACLR 658; (1981) CLC 40-735; Re Budget Floor Coverings Pty Ltd (in liq) (1982) 6 ACLR 657; 1 ACLC 312]. Again, an application for directions is an inappropriate vehicle to obtain a release. In any event, the requisite notices have not been given (particularly bearing in mind that notice should be given to ASIC and the Savages), nor has the liquidator adjusted the rights of the contributories and made a final return to them.
Dissolution. The liquidator seeks an order that the Company be dissolved - although in his 24 July 2012 affidavit [par 18(p)], he suggested that a private Act of Parliament would be required for that purpose. Any application for an order of dissolution should be considered in conjunction with an application for a release under s 381: see s 381(d). Accordingly, it is not appropriate to address this question now. However, although I was at first concerned whether the Court would be able to make an order for dissolution of a company that was incorporated by specific act of Parliament, the reasoning of Barrett J in Cardiff Coal Company (No 3) as to the ongoing application of Companies Code Part XII in respect of the Company would apparently carry with it the ongoing application of s 381 and s 382, and thus authorise an order of dissolution in conjunction with a release. In National Australia Bank Ltd v Australian Securities Commission (1991) 5 ACSR 453, McLelland J (as he then was) held that reinstatement of the registration of a company that had been deregistered and dissolved under the Companies (Victoria) Code in 1990 was a "matter arising, directly or indirectly, out of" a matter "arising before" 1 January 1991. See also City West Water Ltd v Mr D Investments Pty Ltd (2002) 43 ACSR 622 (Mahony SM). In my view, as the winding-up application was, as held by Barrett J, a matter arising before 1 January 1991, it follows that an application under Companies Code, ss 381 and 382, for dissolution of the company consequent upon that winding up is a "matter arising, directly or indirectly, out of" a matter "arising before" 1 January 1991.
Final reports. Companies Code, s 422, requires the liquidator to lodge half-yearly accounts with the Corporate Affairs Commission. The liquidator's affidavit of 20 August 2014 suggests that there is no longer in existence any body performing the relevant functions of the Corporate Affairs Commission; however, an affidavit sworn by Mr Hewitt on 9 September 2003 deposes to a conversation with an officer of the Office of Trading which confirmed that it maintained a register for all bodies corporate in New South Wales, called the Miscellaneous Bodies Corporate Register, and that the liquidators returns should be lodged with that office. In those circumstances, I am unpersuaded that there is no relevant successor of the Corporate Affairs Commission.
The purpose of requiring accounts to be filed is to ensure that the liquidator is subject to scrutiny. Companies Rules, r 35(2), requires that in conjunction with an application for an order of release, the liquidator file a summary of receipts and payments in the winding up and a statement showing the position of the company at the date of filing the summons. If the liquidator desires a release, final accounts will be essential for that purpose. No basis for excusing the liquidator from preparing final accounts is apparent. If it be established that there is indeed no other relevant body with which they can be filed, they should in any event be filed with the Court.
Destruction of books. Companies Code, s 425(2) provides that the liquidator shall retain the books of the company and of the liquidator that are relevant to affairs of the company for a period of 5 years from the date of dissolution of the company and may at the expiration of that period destroy them. Section 425(3) provides that the books may be destroyed within the 5 year period, in the case of a winding up by the Court, in accordance with the directions of the Court given pursuant to an application of which not less than 14 days' notice has been given to the Commission.
Any application for permission to destroy the books inside the 5-year period should be addressed in conjunction with the application for dissolution. If it is established that there is some good reason why the 5-year period should be abridged, and notice is given to NSW Fair Trading - or if it is established that NSW Fair Trading no longer performs those functions - then it may well be that an order can be made.
Conclusion
My conclusions may be summarised as follows:
Section 5 of the Incorporation Act does not have the effect that the shares of which Belmont is the registered holder are somehow extinguished or forfeited so as to enlarge Mr Lunn's interest. Nor does clause 18 of the Deed of Settlement have the effect that those shares can be treated as somehow extinguished, in a way that enlarges Mr Lunn's interest. Nor does clause 15 of the Deed of Settlement mean that all rights in respect of the holding of a deceased shareholder cease. There is no basis for concluding that Mr Lunn's holding of less than 5% of the share capital entitles him to receive a distribution of 100% of the surplus. In any event, an application for directions is not the appropriate vehicle for obtaining approval to distribute surplus.
A fundamental function of a liquidator is to establish who is entitled to the surplus, and for that purpose to settle a list of contributories and adjust rights between them. The evidence reveals no attempt by the liquidator to identify by search and inquiry who might be entitled to the shares, other than those of which Mr Lunn is the registered holder. To the extent that persons entitled cannot be identified or found, it may be that their entitlements fall to be dealt with as unclaimed moneys.
An application for directions is an inappropriate vehicle to obtain a release. In any event, requisite notice has not been given, nor has the liquidator adjusted the rights of the contributories and made a final return to them.
Any application for an order of dissolution should be considered in conjunction with an application for a release under s 381. However, the reasoning in Cardiff Coal Company (No 3) would support the ongoing availability of ss 381 and 382, and thus authorise an order of dissolution in conjunction with a release.
No basis for excusing the liquidator from preparing final accounts is apparent. Even if - which is not established - there is no other body to receive them, they should be filed with the Court. Any application for permission to destroy the books inside the 5-year period should be addressed in conjunction with the application for dissolution. If some good reason why the 5-year period should be abridged is established, then upon appropriate notice to NSW Fair Trading (or if there is no body in existence to perform the relevant functions of the Corporate Affairs Commission), then it may well be that an order can be made.
I will publish these reasons, give formal advice to the effect that the liquidator would not be justified in treating Mr Lunn as the sole shareholder, and adjourn the balance of the summons to a date to be fixed to enable the liquidator to consider these reasons and determine how he wishes to proceed. I am conscious that a relatively small amount remains available, and that further investigation may deplete it still further, but it is plain that Mr Lunn is not entitled to more than his proportionate share of the surplus.
The Court orders that:
(1) The liquidator would not be justified in determining that William Lunn is the only shareholder of the Cardiff Coal Company retaining all or any rights attaching to all or any shares he holds in the Cardiff Coal Company.
(2) The liquidator would not be justified in determining that the liquidator should pay all remaining funds less the costs of this application to William Lunn as the sole remaining shareholder in the Cardiff Coal Company.
(3) The summons otherwise be adjourned to a date to be fixed.
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Decision last updated: 12 November 2014
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