Lightburn Pty Ltd v Kama Power Products Pty Ltd

LIGHTBURN PTY LTD v KAMA POWER PRODUCTS PTY LTD
[2003] SASC 43
Civil

BESANKO J: This is an oral application by the director of a company for the approval of the Court pursuant to s 471A of the Corporations Act 2001 (“the Act”) for the exercise of a power by the director to cause the company to appeal from an order winding up the company. The order was made on 20 December 2002.
Before turning to the merits of the application, it is necessary to set out a summary of the relevant facts.
The Facts
Lightburn Pty Ltd (“Lightburn”) claims to be a creditor of Kama Power Products Pty Ltd (“the company”). It served a statutory demand on the company seeking payment of the sum said to be owing to it ie., $60,235.36. The statutory demand was served under the power contained in s 459E of the Act. The company did not pay the alleged debt or any part of it. It issued an application to set aside the statutory demand pursuant to s 459G of the Act (Action Number 1189 of 2002). The company was required by s 459G(3)(b) to serve the application and accompanying affidavit within 21 days. Unfortunately, due to an error by the company in the specification of the address of the creditor, the application and accompanying affidavit were not served until a day or two after the 21 day period had expired. The time limit prescribed by s 459G is a strict one and cannot be extended by the Court (David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265). The Master who heard the company’s application under s 459G delivered no reasons for his decision to dismiss the company’s application, but it seems clear from the transcript (in particular the passages showing the Master’s exchanges with Mr Tudor) that he did so on this ground. In any event, there is no appeal from the order dismissing the company’s application to set aside the statutory demand.
On 17 September 2002, Lightburn Pty Ltd applied to wind up the company (s 459P) relying on the presumption of insolvency raised as a result of the company’s failure to comply with the statutory demand (ss 459Q and 459C) (Action Number 1316 of 2002). Section 459C(3) of the Act provides:
“A presumption for which this section provides operates except insofar as the contrary is proved for the purposes of the application.”
Both the company’s application to set aside the statutory demand and Lightburn’s application to wind up the company came before a Master of this Court on 22 October 2002. Mr Lucian Tudor, a director of the company purported to appear for the company, although no leave had been obtained under Rule 36.11 of the Supreme Court Rules 1987 for the company to act in person and to appear by Mr Tudor. Lightburn’s application to wind up the company was adjourned to 6 November 2002. The company’s application to set aside the statutory demand was also adjourned to that date, and an order was made as to the filing of affidavits by the parties.
Both applications came before a Master on 6 November 2002. The Master adjourned both matters for mention only to 21 November 2002 in order to “enable Mr Tudor and his company to seek legal advice in relation to their position in respect of both actions”.
The Master also noted the following:
“It is clear that Mr Tudor representing the company does not fully comprehend the various matters involved in this application or in Action Number 1316/02, in which an application is made to wind up Kama Power Products Pty Ltd.”
That observation by the Master is, in my opinion, fully justified having regard to the documents to that date filed by Mr Tudor on behalf of the company. It should also be noted that Mr Tudor had put before the Court evidence that he was suffering from a medical condition involving major depression and anxiety.
Both applications again came before a Master on 21 November 2002. A solicitor appeared on behalf of the company at that hearing. A supporting creditor, Pacific Access Pty Ltd, appeared at the hearing. Pacific Access Pty Ltd claims that the company is indebted to it in the sum of $53,560.00. As I understand it, Mr Tudor disputes this debt and asserts that the debt (or at least part of it) is a debt of Lightburn and not the company.
Lightburn’s application to wind up the company was adjourned for argument to 5 December 2002. The company’s application to set aside the statutory demand was also adjourned for argument to 5 December 2002, and in addition, further orders were made concerning the filing and serving of affidavits.
On 5 December 2002 a solicitor appeared on behalf of the company when both applications were called on for argument. The solicitor applied for an adjournment. She informed the Court that Mr Tudor had “quite severe psychiatric disorders”, and that although he was present that morning, he was not competent to give her instructions. The Master adjourned both applications to 18 December 2002. A record of the hearing indicates that he did so because he had been advised by the company’s solicitor that due to the medical condition of the director of the company instructing her, she had been unable to obtain instructions in the immediate past. He adjourned the matter to enable the solicitor to obtain further medical advice as to the director’s ability and competency to give her instructions.
Lightburn’s application to wind up the company and the company’s application to set aside the statutory demand came on before the Master on 18 December 2002. The same solicitor who had appeared on 5 December 2002 again appeared on behalf of the company. The applications were adjourned to 20 December 2002. The reason for that adjournment is unclear and there is no transcript of the hearings on 18 December 2002 or 20 December 2002 respectively.
On 20 December 2002, Mr Tudor appeared on behalf of the company. The Master made an order in Action Number 1316 for the winding up of the company and an order appointing Mr Hall as the liquidator. He made an order in Action Number 1189 of 2002 that the action be dismissed. The Master did not deliver reasons for making these orders.
On 24 December 2002, Mr Tudor, purportedly on behalf of the company, lodged a notice of appeal to the Full Court of this Court against the winding up order. On the same day, he purported to issue an application on behalf of the company seeking a stay of execution of the order for winding up pending the appeal.
On 20 January 2003, Mr Tudor issued an application under Rule 36.11 of the Supreme Court Rules 1987 for leave to be granted to the company to act in person, and to be represented by Mr Tudor.
On 24 January 2003, the plaintiff issued a notice for specific directions seeking an order that the notice of appeal be dismissed as incompetent under Rule 95.08.
On 4 February 2003, Mr Tudor purported to issue an application under Rule 36.11 (I think on his own behalf) for leave to be granted to Lightburn to act in person, and to be represented by Mr Tudor. He was effectively seeking an order that he appear on behalf of Lightburn and that the authority of the solicitors and counsel presently appearing for Lightburn be brought to an end. That application was issued the day before the date I had fixed for hearing of various earlier applications. As far as I can see it was the first time the point had been raised at least on a formal basis. It is most unlikely it could be determined on a summary basis. It seemed to me that whether or not it was a device or ploy, as was suggested by counsel for Lightburn, it should not affect the hearing and determination of the earlier applications.
I make the following observations at the outset. First, it was put to the Master by the solicitor for the company that Mr Tudor suffers from a mental condition. This is confirmed in the affidavit material put forward by Mr Tudor and was alluded to in the course of submissions before me. It is not a matter which Mr Tudor disputes. The exact nature and severity of the condition is unclear. Secondly, Mr Tudor has filed a number of affidavits which are very difficult to understand. It is clear that he is in dispute with certain members of Lightburn Pty Ltd, and that he has issued a number of actions in various courts in this State. The complaints which he makes in the affidavits filed in the two actions are widespread, diffuse and difficult to understand. Thirdly, Mr Tudor (and therefore the company) put forward no evidence before the Master who made the winding up order that would go any way towards rebutting the presumption that the company was insolvent raised by the company’s failure to comply with the statutory demand. This is an important consideration when I come to consider the question of whether leave should be granted under s 471A of the Corporations Act 2001.
The Applications Before the Court on 5 February 2003
Counsel for Lightburn submitted that the appeal was incompetent, and that even though it was an appeal to the Full Court I had jurisdiction to dismiss it. Rule 95.08 of the Supreme Court Rules 1987 provides:
“95.08 (1)A respondent may make an application at any time to the Full Court or a Judge for an order dismissing an appeal as incompetent.
(2)Upon the hearing of the application, the burden of establishing the competency of the appeal is on the appellant.”
Counsel for Lightburn submitted that the appeal was incompetent because Mr Tudor had no power to cause the company to institute an appeal. He referred to s 471A(1) of the Act:
“(1)   While a company is being wound up in insolvency or by the Court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company except:
(a)    as a liquidator appointed for the purposes of the winding up;
or
(b)    as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made; or
(c)    with the liquidator’s written approval; or
(d)    with the approval of the Court.”
This submission prompted an oral application by Mr Tudor for the approval of the Court under s 471A(1)(d).
If leave is not granted, then I think it is appropriate to dismiss the appeal as incompetent. If the appeal is dismissed as incompetent, the question of a stay does not arise. In addition, the application under Rule 36.11 does not arise if the appeal is dismissed as incompetent.
There is one other point I should mention before turning to consider whether approval under s 471A should be granted. Even if I was otherwise minded to grant approval, I would want to be satisfied that Mr Tudor has the power to cause the company to appeal. This point was not raised by Lightburn, but I note from an exhibit to an affidavit filed on behalf of Lightburn Pty Ltd on 16 October 2002 (Action Number 1189 of 2002) that there are two directors of the company. I would need to be satisfied that Mr Tudor has the power as an officer of the company to institute the appeal on behalf of the company, either because of a provision in the Articles of Association of the company or by reason of a resolution of the board of directors of the company.
Not surprisingly in view of his lack of legal training, Mr Tudor did not argue that he did not need leave to cause the company to appeal because the directors retained a residual power at common law to cause the company to institute an appeal. Before the introduction of s 471A of the Act, there was such a residual power at common law which was first recognised, it is said, in Re Diamond Fuel Company (1879) 13 Ch D 400. The rationale for such an exception to the general rule that the powers of the directors are suspended on the making of a winding up order was that otherwise the directors would be precluded from challenging the very order that led to the suspension of their powers. In practice, absent such an exception, a company would rarely appeal against the making of a winding up order because the one person who might cause the company to appeal (ie., the liquidator) owed his very position to the existence of the order. The ability of the Court to give its approval under s 471A means that there is no longer this rationale for the exception. More importantly perhaps is the fact that the section appears quite clear in its terms, “a person cannot perform or exercise … a function or power as an officer of the company”. The conclusion that there is no longer a residual power at common law in directors to institute an appeal on behalf of a company against a winding up order has been adopted in a number of cases (Rock Bottom Fashion Market Pty Ltd v H R and C E Griffiths Pty Ltd [2000] 2 Qd R 573; Walker v Midlink Nominees Pty Ltd (2000) 22 WAR 318; Brolrik Pty Ltd v Sambah Holdings Pty Ltd & Ors (2001) 40 ACSR 361; Lane Cove Council v Geebung Polo Club Pty Ltd (Green as Liq) & Ors (No 2) (2002) 41 ACSR 15). There is some authority to the contrary (see, for example, Object Design Inc v Object Design Australia Pty Ltd (1997) 78 FCR 60). In my respectful opinion, the words of s 471A(1) are such that there is no room for a residual power at common law in directors to institute an appeal on behalf of a company against a winding up order.
The notice of appeal was lodged on 24 December 2002. It seems to me that I can give the approval nunc pro tunc under s 471A(1)(d). In this regard I propose to follow the approach of Barrett J in Brolrik Pty Ltd v Sambah Holdings Pty Ltd & Ors and hold that an appeal instituted without approval is in a state of suspended validity which will come to an end if leave is not obtained within an unspecified time. At the same time, I think that if an application for approval is made and is refused, it is open to the Court to act under powers contained in the Rules of Court to dismiss the application as incompetent.
There is no indication in s 471A of the Act of the matters which are relevant to the Court’s consideration of whether or not to grant leave. There has been some discussion of the relevant matters in the authorities. In Rodgers v C J S Panels Pty Ltd; Australian Associated Motor Insurers Ltd v Caprice Body Works Pty Ltd (2001) VSC 470 Warren J said at para [16]:
“The question does arise as to whether the Court should grant leave nunc pro tunc in any event. Before doing so in my view it would be necessary for the Court to be satisfied that there was a purpose in granting such leave and in so determining that matter, the Court would need to be satisfied as to the solvency of the subject company.”
I agree with the first part of her Honour’s proposition. The Court would never grant leave if it was clear that there was no purpose in doing so. With respect, I do not necessarily agree with the second part of her Honour’s proposition. It seems to me to be putting too high an onus on an applicant for approval under s 471A(1)(d), and to involve the determination of the very issue which, in many cases, will be the central issue on appeal. In making these observations, I have in mind the ability of the Court to impose conditions on the grant of an approval which would prevent the diminution of the company’s assets by reason of an unsuccessful appeal (Lane Cove Council v Geebung Polo Club Pty Ltd per Barrett J at paras [10] – [14]).
I raised with Mr Tudor whether he had the funds to pay the costs of an appeal and if he could secure the payment of such funds. He assured me that he had the necessary funds. If the protection of the company’s assets had been the decisive consideration, I would have called the matter back on and given Mr Tudor the opportunity to establish that he could put in place the necessary arrangements.
However, to my mind in the particular circumstances of this case it is not the decisive consideration. I would accept that if arrangements are put in place to ensure the company’s assets are not at risk unless and until the winding up order is set aside, it is not necessary for the applicant to establish the solvency of the company in order to obtain approval under s 471A(1)(d). It may be that it is not necessary for the applicant to establish even a prima facie case that the company is solvent providing the necessary arrangements are put in place. However, the Court must be satisfied that there is some reason to grant leave. If it is clear that there is no purpose in granting leave because any appeal is doomed to fail, then leave should be refused. Clearly, creditors and shareholders of a company need to know where they stand and there is a public interest in the final determination of applications for the winding up of companies.
In my opinion, the appeal lodged by Mr Tudor on behalf of the company is bound to fail. The affidavit material put forward by Mr Tudor is so confusing that it is not clear whether there is any assertion that the company was not accorded procedural fairness. In any event, it seems to me that there is no basis for such an assertion. The company was given what I consider to be ample opportunity to obtain legal advice.
As to the merits, no material was put forward to establish the solvency of the company or to rebut the statutory presumption of insolvency and I think that on the material put before the Master an order winding up the company was inevitable.
It must be emphasised this is not a case where the company produced evidence to prove that it was solvent even acknowledging the debt the subject of the statutory demand, or where it sought leave under s 459S to rely on a ground for disputing the debt which is material to proving the company is solvent (Master Paving Pty Ltd v Heading Contractors Pty Ltd (1997) 193 LSJS 1). The failure to produce any clear evidence of the company’s financial position means that even if an application for leave under s 459S had been made, it would have been refused on the basis that the Court could not be satisfied that the ground the company wished to raise was material to proving that the company was solvent.
To my mind, the failure to put any clear or intelligible evidence before the Master of the company’s financial position means that any appeal against his decision must inevitably fail.
Conclusions
I would refuse approval under s 471A(1)(d) of the Act for Mr Tudor to perform or exercise a function or power to cause the company to appeal. It follows that the appeal is incompetent and I dismiss it under Rule 95.08.
I will hear the parties as to what other orders are appropriate in light of these conclusions.

[2003] SASC 43

19 February 2003