DFC of T v ACTION WORKWEAR PTY LTD (DEREGISTERED)

Judges:
Mahony SMa

Court:
Supreme Court (Vic)

Judgment date: 21 June 1996

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KJ Mahony (Senior Master)

Winding up a deregistered company

In this proceeding a Deputy Commissioner of Taxation seeks an order that a deregistered company be wound up in insolvency. Section 574(1)(b) of the Corporations Law preserves the power of the court to wind up such a company.

Since the amendments of 1993 which first provided for winding up in insolvency (Part 5.4), there has been a distinction between such a winding up which, while ordered by the court, is not a winding up ``by the Court'' and a winding up ``on other grounds'' which is a winding up ``by the Court'' (Part 5.4A). See, also, Part 5.4B which concerns ``Winding up in insolvency or by the Court''. A question which would arise from this distinction is whether s 574(1)(b) extends to a winding up in insolvency.

That is not a question which requires answer in this proceeding because, at least partly in deference to the practice of the court in such cases not to make a winding up order without also ordering the reinstatement of the company's registration (see
Re Williams United Mines Pty Ltd (1992) 10 ACLC 1,526; (1992) 8 ACSR 627), the applicant procured an amendment of the notice of motion to include a claim for the reinstatement of the company's registration. No special circumstances having been urged to justify a departure from the practice, if for some reason it were inappropriate to order the reinstatement of the company's registration, I would also decline to make a winding up order.

Irrespective of the practice and of the provisions of s 574(1)(b), it would be difficult to order the winding up in insolvency which is sought in this proceeding because the company was already deregistered before the step was taken upon which the application is founded. That step was service of a statutory demand at the former registered office of the company. Since the company did not exist, it is not surprising that the demand was not complied with.

In these circumstances, the applicant also seeks reinstatement of the company's registration so as to take advantage of the retrospective effect of such a reinstatement which is provided for by s 574(4):

``On the lodging of an office copy of an order under subsection (3)...''

that is the subsection which confers on the court the power to order reinstatement of registration-

``... the company shall be deemed to have continued inexistence as if its registration had not been cancelled.''

The applicant seeks reinstatement of the company's registration so as to extract from the statutory fiction of the company's continuing existence the further fictions that it was duly served with the demand and failed to comply with it and that thereby the statutory presumption of insolvency (s 459C(2)(a)) arose

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and continued until this proceeding was commenced.

There is no opposition to the winding up application but the former directors and shareholders of the company obtained leave - under Rule 3.17 of Chapter V of the Rules of this Court - to be heard in the proceeding without becoming parties, because of prejudice they claimed they would suffer in the event that the registration of the company were reinstated at this time.

Reinstatement application and third parties

The effect on third parties which the retrospectivity attending the reinstatement of a deregistered company may have is a matter to which attention may have to be given because s 574(5) provides that in an order for reinstatement the court-

``... may... give such directions and make such provisions... as seem just for placing the company and all persons in the same position, so far as possible, as if the company's registration had not been cancelled.''

(my emphasis).

Under the comparable English legislation - s 574 may be traced from s 7 of The Companies Act 1880 - this power has been used: see, for example,
In re Donald Kenyon Pty Ltd [1956] 1 WLR 1397, in which an order was made that the limitation period did not run for the period of the company's dissolution in respect of debts outstanding and not statute-barred at the date of its dissolution.

It may also be necessary to hear persons who would be so adversely affected by the retrospective effect of the reinstatement of the company's registration that the prejudice they would suffer might constitute reason for dismissing the application: see, for example,
Re Dormo Constructions Pty Ltd & the Companies Act (1979) ACLC ¶40-548, where Needham, J of the Supreme Court of New South Wales adjourned the hearing of a reinstatement application to enable notice of it to be given to three ``subcontractors'' who had sued one of the applicants (a former director of the company) because the company was deregistered when they did their work. His Honour felt that it may not be ``just'' to order the reinstatement (see s 574(3)) if that would be to destroy the actions against the applicant.

Needham, J had expressed a similar view in
Re Great Eastern Cleaning Services Pty Ltd and the Companies Act (1978) ACLC ¶40-455; (1978) 2 NSWLR 278; 3 ACLR 794. This case is to be contrasted with
Re Portrafram Ltd [1986] Butterworths Company Law Cases (BCLC) 533, a decision of Harman, J (of the English Chancery Division). Needham, J acceded to an application that the Commissioner of Taxation be added as a respondent to a reinstatement application so that he could resist an application the success of which would deprive him of a personal claim against the applicant for unremitted tax instalment deductions. Harman, J held that such a person could not be added as a party. Those cases turned on construction of relevant Rules of Court; and, since it is plainly necessary in an appropriate case that the situation of persons other than the company be considered (see
Re Pollnow (1994) 12 ACLC 88, at p 95;
Re Porter and Another (1994) 15 ACSR 424, at p 427), it is a source of some satisfaction that Rule 3.17 provides a convenient and inexpensive means of achieving that end, without the need for joinder of parties.

The company, its directors and the Deputy Commissioner of Taxation

To appreciate the situation of the former directors and shareholders of the company, John Francis Edwards and Helen Mamie Adams Edwards, one needs to refer to some of the history of the company until it was deregistered and to some events which occurred subsequently.

Action Workwear Pty Ltd was incorporated in Victoria on 20 September 1989. At material times its directors and shareholders were Mr and Mrs Edwards (to whom I shall refer collectively as ``the directors''). The company acted as the trustee of a unit trust. From 1 July 1993 to 30 March 1995, it made group tax instalment deductions but failed to remit them to the Deputy Commissioner. By the end of that period it owed $81,257.00 in that behalf, although the sums deducted for March 1995 would not have been payable until 7 April 1995.

During the same period it was also failing to lodge annual returns so that the Australian Securities Commission (``the Commission'') surmised that it was defunct. Prior to August 1994 it received from the Commission notice under s 572(1) but in that month it received a further notice that deregistration action had ceased due to the request of a creditor on 5

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August 1994. On 19 August 1994 an application for the winding up of the company was filed and that proceeding was discontinued or ``withdrawn'' on 24 November 1994.

The Commission deregistered the company on 30 March 1995. The directors did not become aware of this until about July 1995. In the meantime, on 10 June 1995, a demand addressed to the company in respect of the unremitted group tax was made by the applicant. (This was not the statutory demand which led to this proceeding.)

The deregistration does not appear to have concerned the unitholders of the trust of which the company had been trustee. The unitholders' reaction to the deregistration was simple; they appointed a new trustee. The evidence is silent as to the connection between the unitholders and the directors; but it is a reasonable inference that the unitholders did not know of the deregistration when the directors did not.

The next development was one of great significance to the directors' current situation. On 9 October 1995 the applicant served on each of the directors a notice under s 222AOE of the Income Tax Assessment Act 1936 (``the ITAA'').

The relevant tax legislation

Section 222AOE is contained in Division 9 of Part 6 of the ITAA. Division 9 is entitled, ``Penalties for directors of non-remitting companies''; and its purpose is spelt out in s 222ANA, namely, ``to ensure that a company either meets its obligations [inter alia to remit group tax] or goes promptly into voluntary administration under Part 5.3A of the Corporations Law or into liquidation'' (subs (1)). In this behalf a duty, enforced by penalties, is imposed on the directors of the company to cause it to take one of those courses (subs (2)). In further summary of the effect of subsequent provisions, s 222ANA(2) states that a penalty is recoverable ``only if the Commissioner gives written notice to the persons concerned'' but is ``automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given''.

I shall not set forth the terms or effect of all the following sections (in Subdivision B) which provide in detail as to these matters. They are set forth and considered in depth in the judgment of Cooper, J of the Federal Court in
Re Scobie & Anor; ex parte DFC of T 95 ATC 4525, at pp 4526, 4527-4530.

The situation on the date of deregistration

By 30 March 1995 - the date on which the company was deregistered - the directors had been failing to comply with s 222AOB of the ITAA for more than 18 months. This was because they had not caused the company to remit the outstanding group tax or make an agreement with the Commissioner of Taxation concerning it, and because, this being so, an administrator of the company had not been appointed, and neither they nor anyone else had caused it to begin to be wound up.

In consequence, since August 1993, s 222AOC of the ITAA had been operating each month to impose on each director a liability to pay to the Commissioner a penalty in a sum equal to the total sum then owing by the company (that is, the progressively increasing unremitted group tax sum, together with additional tax and penalties).

This liability of the directors was immediate in the sense that at any given time it was capable of being discharged by payment. (Section 222AOI provides that a person who pays an amount under s 222AOC has the same rights against the company ``or anyone else'' as if the payment had been made under a guarantee.) By s 222AOE, however, the penalty the subject of the liability was not recoverable by the Commissioner because the Commissioner had not served the written notice required by that section.

Had the notice been served and more than 14 days passed while the failure to comply with s 222AOB continued, the penalty then would have become recoverable. By s 222AOG, remission of the penalty could be achieved only by compliance with s 222AOB before or within 14 days after service of such a notice.

Events after service of the notice

As I have mentioned, the applicant duly served the directors with the notices provided for by s 222AOE on 9 october 1995. The directors responded by a letter dated 18 October 1995 from their accountant, Mr Stephen W Wharton, of Wharton Partners Pty Ltd. The letter was as follows:

``We refer to your correspondence dated 9th October, 1995 and the Section 222 AOE Notice to the... former Directors of Action Workwear Pty Ltd (ACN 007 306 774) (`the

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Company') notifying them that they are liable to pay a penalty equal to the liability of the Company arising under Section 221F of the Income Tax Assessment Act (`the Act').

We advise that we act for Mr & Mrs Edwards in this matter.

We are advised that the Company was deregistered on the 30th March, 1995. By reason of the deregistration of the Company it has ceased to exist and the former Directors are no longer Directors of the Company. In the circumstances the former Directors are not in a position to cause the Company to take any of the courses of action prescribed under the Act.''

I interpolate that ``the courses of action'' referred to were, I presume, those any one of which would constitute compliance with s 222AOB. The letter went on:

``Mr & Mrs Edwards are not able to make an application to the Supreme Court for the reinstatement of registration of the Company, however we are advised that they would not object to the Deputy Commissioner of Taxation making an application to the Supreme Court for the re- instatement of the Company.

Upon re-instatement of the registration of the Company and upon service of requisite notices, Mr & Mrs Edwards will undertake, as Directors and shareholders of the Company, to either:-

• a) Have the Company discharge the liability or enter into an agreement to pay the liability dependant (sic) upon its capacity to do so, OR
• b) Appoint an Administrator or apply for the Winding up of the Company.

Either way the Directors will discharge their liability arising under the Section AOE Notice in accordance with the available options and procedures under the Act as soon as they are able to do so.

We await your further response in this matter.''

The applicant replied by letter dated 20 October 1995 to Wharton Partners Pty Ltd:

``We acknowledge receipt of your facsimile dated 18th October 1995 and the following comments are made.

You are advised that the notices sent to [the directors] are solely the 14 days (sic) notification as required under section 222AOE in order for the Commissioner to initiate recovery proceedings. The directors had become liable under section 222AOC to pay the amounts outstanding when the company concerned failed to make remittances as required under section 221F(5).

You are also advised that as this office has not received payment for the amount outstanding, it is our intention to initiate recovery proceedings immediately after the 14 day period has expired.''

The County Court proceeding

In accordance with the intention expressed in the last paragraph of the applicant's letter, a proceeding was subsequently commenced in the County Court seeking judgment against each of the directors for the sum of the penalty.

Subsequently the applicant entered a default judgment against the directors in that proceeding. This, in turn, prevented the directors from putting before me their objections to the reinstatement of the registration of the company because they were based on the prejudice which they would suffer in defending the County Court proceeding. Accordingly, one of the adjournments ordered in this proceeding was to enable the directors to apply for an order setting aside the judgment. The judgment was not said to be irregular but it was set aside. This enabled the directors to pursue their objections to the reinstatement application.

In the letter from their accountant the directors had been referred to as not objecting to the reinstatement if sought by the applicant. It was the commencement of the recovery proceeding in the County Court which changed that. In that proceeding the directors' defence would be (I was informed by their counsel, Mr Searle) that, by reason of the deregistration of the company, the directors were relieved of the penalty; or that, if they continued to be liable to the penalty, there were no reasonable steps they could have taken to ensure compliance with s 222AOB(l). Their concern about reinstatement was directed to its retrospective effect. That effect would be such, it was said, that they would be deprived of these defences.

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It was put that it was not for me to determine whether the defences were good, merely that they were arguable.

The setting aside of the default judgment appears to confirm that the County Court judge or master who made the order considered that the directors had an arguable defence to the applicant's claim. I was not provided, however, with any statement of the reasons given for the order or copies of any of the affidavits filed in support of the application for it. Analysis of the directors' defences, as they were put to me by Mr Searle, is therefore required, particularly as to whether they are viable, and, if only one is viable, which one; and, as to each viable defence, whether it is such that reinstatement of the company's registration would prejudice it.

The discretion

Whether an order for the reinstatement of the registration of a company should be made is a matter of general discretion:
Re Immunosearch Pty Ltd (1990) 8 ACLC 1,031, at pp 1034-5; (1990) 2 ACSR 455, at p 459;
Pecta Pty Ltd v Australian Securities Commission (1993) 11 ACLC 382; (1993) 10 ACSR 188; Re Pollnow (supra) (1994) 12 ACLC, at p 95; and, since the applicant would suffer prejudice if the reinstatement application fails, by being unable to proceed with the winding up application, if there is any defence of the directors in the County Court proceeding which would be prejudiced by the success of the reinstatement application, in exercising the discretion it would be necessary to weigh the competing elements of prejudice.

Effect of deregistration on directors' liability

The first defence would be that, by reason of the deregistration, the directors are relieved of the liability.

(a) The legislation

It must be observed at the outset that this would be an unexpected consequence because s 574(1)(a) of the Corporations Law provides that though a company is dissolved by cancellation of its registration-

``the liability (if any) of every officer and members of the company continues and may be enforced as if the company had not been dissolved....''

Of course, the liability of the directors to the applicant when the company was dissolved on 30 March 1995 was not then ``enforceable'', for the penalty was not then ``recoverable'': supra; but that fact would have no impact on the provision that the liability ``continues'' (unless there were some particular provision to the contrary).

If there were some particular provision reversing the effect of s 574(1)(a) in such a case as this, one would expect to find it in the relevant Division of the ITAA. It is not there. Liability to the penalty, once incurred, is remitted only on compliance with s 222AOB: s 222AOG. The deregistration of the company does not constitute compliance with s 222AOB: see s 222AOB(2).

Further, s 222AOB(3) provides that the obligation imposed on the directors of the company to cause compliance with s 222AOB(1) continues until the section is complied with. The degree of difficulty attending performance of the obligation may be said to be significantly increased if the company goes out of existence, but the imposition of such a continuing obligation is clearly complementary to s 574(1)(a) of the Corporations Law and not inconsistent with it.

Even if (contrary to a conclusion which I express subsequently) the true position is that deregistration of the company prevents compliance with s 222AOB, of the alternative consequences that the directors are thereby prevented (until reinstatement) from obtaining remission of the penalty and that the directors are thereby relieved from liability for the penalty, only the former finds support in the legislation.

(b) The common law

If the defence were a good one, it would also be surprising, having regard to the apparent position at common law of guarantors of the liabilities of a deregistered company. It will be recalled that s 222AOI of the ITAA provides that a person who pays an amount under s 222AOC, that is, an amount in or towards discharge of a penalty, has the same rights against the company ``or anyone else'' as if the payment had been made under a guarantee. In
The Union Bank of Australia Ltd v Puddy [1949] VLR 242, at pp 247-248, Fullagar, J held that deregistration of a principal debtor company does not extinguish the liability of its guarantor.

The defence would have it that while, if one of the directors had paid the penalty, by force of

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the ITAA he or she would thereby have acquired a right of indemnity against the company and to contribution from the other, as if paying under a guarantee given by the directors, deregistration of the company would cancel their liability, contrary to the position which would obtain if they had given a guarantee.

(c) Deregistration contrasted with methods of compliance with s 222AOB

Analysis of the position which obtains when a company's registration is cancelled demonstrates why that event has not been specified as a means of compliance with s 222AOB. In that behalf I set out the following passage from very helpful written submissions provided by Ms Horovitz of Counsel for the applicant:

``The assets of a company that is deregistered vest with the Commission. There is no person to protect the rights and interests of the creditors, to realise the assets of the company, to investigate the affairs of the company, or to make any payments to creditors on behalf of the company. The company has not discharged its liabilities in any manner or form whatsoever. Furthermore, on the application of... an aggrieved person, the registration of the company may be reinstated placing the company in the position as if it had never been deregistered.''

Of course, it is otherwise when a company is under the external administration of an administrator or a liquidator. That, presumably, is why the legislature, in attempting to improve the collection of outstanding tax (or limit the extent of indebtedness in that behalf) in effect provided that, if there was not payment or agreement to pay, one of those forms of external administration would be required for there to be compliance with s 222AOB.

(d) Deregistration and compliance with s 222AOB

It was put that there is a lacuna in the legislation in that it cannot operate as apparently intended once the company is deregistered. If the company is deregistered, Mr Searle contended (echoing the opinion of the directors' accountant), there cannot be compliance with s 222AOB. The company cannot pay or make an agreement because it does not exist. There cannot be an administrator appointed or a winding up commenced because it does not exist. The directors can do nothing because they are no longer directors. All of these will change, it was said, if the company's registration is reinstated; but, unless and until it is, that is the position. The impossibility of the position of the former directors of such a company is further illustrated, Mr Searle submitted, by the 14 day period given to comply with s 222AOB after a notice under s 222AOE is served.

This approach overlooks the significance of the existence of the directors' liability before the company was deregistered. It is important to bear in mind the distinction between the accrual of the liability and the accrual of a cause of action to recover the penalty the subject of the liability. The latter is dependent on the service of a notice and the expiration of 14 days after service without compliance with s 222AOB; the former is not. It arises as soon as there is non- compliance with 222AOB(l): s 222AOC. In this behalf, see Re Scobie (supra) 95 ATC 4525, at p 4531.

The 14 days after service of the s 222AOE notice constitute the concluding period in which a penalty to which directors have become liable is not recoverable: s 222AOE; and in which remission of the penalty may be achieved by compliance with s 222AOB: s 222AOG. By making the penalty irrecoverable unless a notice is served, the ITAA provides directors with more than a notional opportunity to achieve remission of the penalty, affording them for the purpose of complying with s 222AOB all the time before any such notice is served together with 14 days after service.

In this case, that time ran from 8 August 1993 until 23 October 1995, and for more than 19 months of that period the registration of the company remained extant. The directors failed to comply with s 222AOB for all that time. The temptation not to take the penalty seriously while it is not recoverable may be real; but it is unrealistic to focus only on the 14 days after a s 222AOE notice is served as if the notice were the source of the liability.

The deregistration of the company may have impeded the directors' capacity to achieve compliance with s 222AOB; but since their liability arose before the deregistration, the true significance of any such impediment must be that it was self-inflicted. Certainly, it has no impact on the liability which preceded, and

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survived, the deregistration. It matters not that, with the deregistration, they ceased to be directors. The liability attaches to a person while a director but, once attached, continues to adhere to the person until remitted and whether the person remains a director or not: see s 222AOC;
Fitzgerald v DFC of T 95 ATC 4587; (1995) 13 ACLC 1,547; Re Scobie (supra) 95 ATC, at p 4529.

Reinstatement and compliance with s 222AOB

In this case, for whatever reason, the directors (according to their accountant) were ``not able to make an application to the Supreme Court for the reinstatement of registration of the Company''. Their inability may have been due to the company's insolvency. If it was insolvent immediately before deregistration, the directors as shareholders would have lacked standing to obtain a reinstatement order: see
In re Lindsay Bowman Ltd [1969] 1 WLR 1443; Re Immunosearch Pty Ltd (supra). On the other hand, it may have been because of personal financial difficulties. To obtain such an order the directors would have been obliged to incur legal costs and accountancy fees (for the preparation of outstanding annual reports) and lodging fees. The directors' difficulties in this case, however, were necessarily irrelevant to the general proposition that Mr Searle put, which was, as I have mentioned, that deregistration negatives the chance to comply with s 222AOB; and, therefore, he did not dwell on those difficulties.

Mr Searle submitted that the scheme of the legislation is that not only should there be at any given time a company with directors but that each of the four methods of compliance with s 222AOB should be available. I do not think the latter is so any more than the former. An administrator may not be appointed to a company which is clearly solvent. Such an appointment may only be made if the directors resolve that, in their opinion, the company is, or is likely to become, insolvent: see s 436A(1)(a) of the Corporations Law. On the other hand, an insolvent company could not pay the sum outstanding (without creating a preference).

In any event, the proposition that once the company is deregistered compliance with s 222AOB is not possible, does not resist scrutiny.

Even if, as in this case, a notice under s 222AOE is served after the company has been deregistered, the retrospective effect of a reinstatement of its registration may be utilised to achieve compliance with s 222AOB within the 14 days after service requisite for remission of the penalty. Reinstatement will ``validate'' an agreement or an appointment of an administrator made within 14 days after service of the notice, even if the reinstatement is pursuant to an order made after that period has expired.

A deregistered company may be wound up: supra. Mr Searle submitted that it would not be possible to achieve commencement of winding up wholly within the 14 day period. A similar submission was put to Cooper, J in Re Scobie (supra). He calculated that, ``in the Federal Court at least'', a winding up order could be obtained 11 days after commencement of the proceeding: see 95 ATC 4525, at p 4532. The winding up which he was contemplating was a winding up on the application of the company itself. During argument, I misled myself somewhat by overlooking the repeal of s 465 of the Corporations Law in 1993. Even though now a winding up not preceded by any other form of external administration commences on the date of the winding up order (see s 513A of the Corporations Law), it may be that, in this Court at least, by the winding up application being made ``a special application'' (see Rule 8.15 of Chapter V of the Rules) and accompanied by a reinstatement application, appropriate dispensations and abridgements of time could achieve orders on both applications on the same day that the proceeding is commenced, and certainly within 14 days of the commencement of the proceeding.
Re Sparad Ltd (1993) 12 ACSR 12 and
Scott v Janniki Pty Ltd (1994) 12 ACLC 813; (1994) 14 ACSR 334 are cases in which deregistered companies were reinstated and wound up with dispensation from advertising.

Thus, while my basic conclusion is that a penalty is not remitted by deregistration of the company (supra), I would also reach a conclusion adverse to Mr Searle's submission that compliance with s 222AOB is not possible after a company has been deregistered. It is possible even within the 14 days after service of a notice under s 222AOE.

A second defence

The directors' second defence to the County Court claim of the applicant would be that there were no reasonable steps which they could have

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taken to ensure that they complied with s 222AOB(1): see s 222AOJ(3).

It would seem that this defence must fail for, contrary to what the directors maintained by the letter of their accountant and again before me, it was not impossible for there to be compliance with s 222AOB in the 14 days after service of the notice under s 222AOE (supra). The position in respect of the periods prior to service and prior to deregistration is a fortiori. Further, they seem to be periods which this defence conveniently ignores, perhaps because of an assumption that there is no liability until a notice under s 222AOE is served.

There was no evidence at all to show that there were no steps that the directors could have taken to ensure that they complied with s 222AOB in 1993 or 1994 or in 1995 before their (unexplained) incapacity to apply for reinstatement alleged in their accountant's letter.

A tentative view

Thus one reaches the tentative view that the suggested defences to the County Court proceeding are not viable and, for that reason, could not be prejudiced by the reinstatement of the registration of the company. The view is necessarily tentative because that proceeding is not before me and because the conclusions which I reach are for the purposes of this proceeding only. It is to be borne in mind that the default judgment was set aside and it may be that the question of the directors' defence has not been fully answered.

At this stage, however, the apparent weakness of the suggested defences is sufficient to indicate that, if it becomes a matter of balancing prejudice (supra), the applicant's would substantially exceed the directors'.

Reinstatement with a special order for the directors

An alternative submission put by Mr Searle was that, if on balance I considered that reinstatement of the company's registration should be ordered, I should also order that the reinstatement would not prejudice the directors' defences to the County Court proceeding. The submission presupposes that the defences would be viable but for the reinstatement of the company and, for present purposes, I am content to assume that to be so.

I have already mentioned
Re Donald Kenyon Ltd [1956] 1 WLR 1397, a case in which an order was made under the English equivalent of s 574(5), that is, to place persons ``in the same position, so far as possible, as if the company's registration had not been cancelled'': see, also, In re Lindsay Bowman Ltd (supra) [1969] 1 WLR, at p 1446.

The special order sought by Mr Searle, however, would be designed to place the directors in the same position as if the company's registration had not been reinstated. This is not provided for in s 574, but there is (or, strictly, was) some authority to support the proposition that such an order may nevertheless be made.

Re Donald Kenyon Ltd was a decision of Roxburgh, J; and, subsequently, in In re Rugby Auto Electric Services Ltd (unreported, referred to by Buckley, J in
In re Huntington Poultry Ltd [1969] 1 WLR 204, at pp 206-207), Roxburgh, J ordered that the reinstatement of a company was ``without prejudice to any remedy which any creditor who became such after the date of dissolution might otherwise have against any person prior to the date of this order taking effect''. Buckley, J observed that the effect of that order was ``to preserve the liability of those persons who acted as directors'' ([1969] 1 WLR, at p 206), that is, after and despite the reinstatement. Here, perhaps not without some irony, it is the directors who are seeking to preserve the deregistration position.

Buckley, J did not have to consider the case further, because the factual situation with which he was dealing was distinguishable.

This was not the lot of Megarry, J in In re Lindsay Bowman Ltd (supra). In that case a creditor appeared to support a contributory's application for a reinstatement order on condition that what the judge called ``the Rugby Auto Electric clause'' ([1969] 1 WLR, at p 1444) was included in the order, but opposed the reinstatement if the clause were not to be inserted. Megarry, J said (at pp 1446-1447):

``What is sought is a provision that will preserve to the creditor the rights that he acquired while the company was defunct. The statutory fiction that results from an order under the subsection is that the company continued in existence throughout; and this, with all that flows from it, is the necessary consequence of the order. One of the consequences is that any liabilities properly incurred by a director in the name of the company would be liabilities of the

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company and not of the director. What the concluding limb of the subsection empowers me to do is to give directions or make provisions for placing the company and others in the same position as nearly as may be as if the name of the company had not been struck off. What Mr Hamilton seeks is a direction or provision putting him in the same position as if the company had been struck off, as in fact it was. In other words, he seeks a direction or provision which will negative the statutory fiction, whereas all that the subsection empowers me to do is to give a direction or make a provision which supports or carries out the statutory fiction as nearly as may be. I do not see what power I have to include such a direction or provision in the order.

In saying this, I am conscious of differing from a judge of great experience. Unfortunately, In re Rugby Auto Electric Services Ltd (No 00973 of 1959) was not reported, and there is nothing in the file of that case which has suggested to me the reasoning which Roxburgh J may have had in mind when inserting the clause. In those circumstances all that I can do is to apply the language of the statute to the best of my ability. I cannot see any escape from the conclusion that the power of the court is limited to giving directions and making provisions for the sole purpose of effectuating the statutory fiction, namely, that the name of the company has not been struck off. Such a power cannot, in my judgment, be used for the purpose of negativing the statutory fiction... I must take the subsection as I find it, and not as it might have been; and in my judgment it does not authorise the insertion of the Rugby Auto Electric clause in the order.''

The reasoning of Megarry, J is, with respect, cogent and compelling. The court does not have jurisdiction to make such a special order to protect the directors' defences in the County Court proceeding as Mr Searle sought.

An alternative, Mr Searle submitted, would be to order that the reinstatement did not put the directors back into office: cf Re Pollnow (1994) 12 ACLC 88, at p 94. The position there being considered by Burchett, J, however, was one in which a director's term of office would have expired during the period of deregistration. In this case, there was no evidence before me on that subject. Further, what Mr Searle would hope to achieve by such an order would be achieved by the appointment of a liquidator upon the making of a winding up order. In any event, since liability to the penalty is not remitted upon a person ceasing to be a director (supra), the order would not achieve for the directors the benefit which Mr Searle's submission suggested.

The retrospective effect of reinstatement

In order further to ascertain the possible effect which reinstatement of the company's registration may have on the directors in their conduct of their defence to the County Court proceeding, and, also, the significance to be attributed to the applicant's ``service'' of the statutory demand, it is desirable that some focus be placed on the scope of the retrospectivity which attends reinstatement of registration. (In this, some care is required to distinguish cases which concern the (non-retrospective) effect of orders declaring void the dissolution of a company after winding up, that is, orders under s 571(1) of the Corporations Law or its equivalent in other jurisdictions or times: see, for example,
Morris v Harris [1927] AC 252;
Re Kenneth Wright Distributors Pty Ltd (in liquidation); W J Vine Pty Ltd v Hall [1973] VR 161; and
Solla v Scott & Ors (1983) 1 ACLC 613; [1982] 2 NSWLR 832; 7 ACLR 323.)

(a) Tymans Ltd v Craven

The question was considered by the English Court of Appeal in
Tymans Ltd v Craven [1952] 2 QB 100. At that time the English equivalent of s 574 was s 353 of the Companies Act 1948. In contrasting the operation of the section with s 352 (the equivalent of s 571), Evershed, MR said (at p 112):

``But as I have already stated, the subsection is in terms 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 section 352, and such as make it at least reasonable and sensible to expect that the

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reanimation of the company should be retroactive in its effect.''

His Lordship explained (at p 111) the power of the court under s 353 to ``give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off'' (cf s 574(5)), as follows:

``... (D)uring the period of the company's suspended animation, the company, as well as third parties, might well have abstained from taking those steps - a step in an action, or the exercise of some contractual right - for which the proper time might have in the meantime expired. In my judgment, the final words of the subsection can properly and usefully be regarded as intended to give to the court, where justice requires and the general words''

-

as to the retrospective effect of reinstatement-

``would or might not themselves suffice, the power to put both company and third parties in the same position as they would have occupied in such cases if the dissolution of the company had not intervened. More generally the final words of the subsection seem to me designed, not by way of exposition, to qualify the generality of that which precedes them, but rather as a complement to the general words so as to enable the court (consistently with justice) to achieve to the fullest extent the `as-you-were position,' which, according to the ordinary sense of those general words, is prima facie their consequence.''

The other member of the majority in Tymans Ltd v Craven, Hodson, LJ, said (at p 126):

``For my part, I think that the words of section 353(6) are clearly designed to produce an `as you were' position, and think that the latter part of the subsection is complementary and is intended to provide for cases where provision is necessary in order to clarify an obscure position or give back to the company an opportunity which it might otherwise have lost. An example of this would be a case where a company had lost an opportunity of obtaining a concession or renewing a lease during the interval between its dissolution and an order under the subsection. A provision in the order could deal with such a case... The directions and provisions to be made by the order would naturally be supposed to make good what had previously been stated, namely, that the company should be deemed to have continued in existence as if the name had not been struck off.''

(b) Distinction between s 574(4) and s 574(5)

Thus, one may conclude that the direct effect of s 574(4) is to validate ``acts... done and... engagements entered into by individuals purporting to act as directors or officers of the company and in its name'' during the period of dissolution; and that the power of the court conferred by s 574(5) expressly to ``give... directions and make... provisions'' is exerciseable with respect to matters affecting or intended to affect the company but not involving acts done and engagements entered into in its name by persons purporting to act on its behalf.

These matters may concern the company in respect of omissions by such persons to purport to act for it (for example, the ``lost opportunities'' referred to by Hodson, LJ); or they may concern third parties in respect of their relationship or attempted dealings with the company.

As to the latter, the example has already been given of
In re Donald Kenyon Pty Ltd [1956] 1 WLR 1397. That was the case in which an order was made that the limitation period did not run for the period of the company's dissolution in respect of debts outstanding and not statute- barred at the date of its dissolution. Notwithstanding that in
Solla v Scott & Ors (1983) 1 ACLC 613; [1982] 2 NSWLR 832; 7 ACLR 323, McLelland, J expressed obiter ``some doubt'' about the capacity of the section to support an order of that type (see, also,
Harule Pty Ltd; ex parte Olita Readymixed Concrete Pty Ltd (in liq) (1994) 13 ACSR 500), it does exemplify the concern for the situation of third parties which may be felt upon the making of a reinstatement order.

(c) Consequences with respect to a statutory demand ``served'' on a deregistered company

In my view, and this results from something of a refinement of my attitude to s 574 as a result of preparing these reasons, another instance would be the making of an order that a statutory demand be taken to have been duly served on the company on a date in the period of its dissolution. Such an order would be

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appropriate where the former directors and officers of the company continued to act in its name as they would if it were still registered, and they and the creditor giving the statutory demand were unaware of the company's dissolution. In such circumstances, the ``company's'' initial response or lack of any response to the statutory demand would be unaffected by the dissolution.

In the past, I have been prepared to assume that the general retrospective effect attending reinstatement sufficed (as I have expressed it (supra)) ``to extract from the statutory fiction of the company's continuing existence the further fictions that it was duly served with [a statutory] demand and failed to comply with it and that thereby the statutory presumption of insolvency (s 459C(2)(a)) arose and continued until [the winding up] proceeding was commenced''. I have changed my mind about this. Because the situation being considered is one involving the acts of a third party and omissions to act by those who might purport to act in the name of the company, it is one in which the court must consider whether it would be appropriate to give a special direction or to make a special provision. That course would be appropriate in a case such as that to which I referred in the preceding paragraph, but not where, as in this case, the creditor knew before purporting to serve the statutory demand that the company had been dissolved. (That much was conceded by Ms Horovitz during argument; and I note that Mr Searle did not contend that either the application for winding up or the application for reinstatement was other than bona fide.)

(d) Joro Pty Ltd v State Bank of New South Wales Limited

This approach seems to me to derive support from an unreported decision, made in circumstances not permitting time for further consideration, of Young, J of the Supreme Court of New South Wales:
Joro Pty Ltd v State Bank of New South Wales Limited (8 December 1992, unreported). (A copy of the judgment was provided by Mr Jackson, the solicitor for the Australian Securities Commission, when this proceeding first came before me.) A company which had given a mortgage to the bank was deregistered and an order for the reinstatement of its registration was subsequently made and that was done. In the meantime, that is, while it was dissolved, the bank had purported to serve ``a notice precedent to exercising a power of sale''. The company applied for an injunction to restrain the bank from exercising that power. Young, J was of the view that Tymans Ltd v Craven (supra) was not relevant to the particular question before him, which was whether the company could be said to have ``failed'' to comply with the notice. Young, J concluded that there was no failure to remedy the defaults identified in the notice ``because the customer did not exist and had no duty to do anything because it did not exist''. Accordingly, an injunction was granted.

The judgment does not specify whether the bank gave the notice in the belief that the company remained extant or whether directors and other officers of the company were purporting to carry on business in its name at the time that the notice was ``served''. As I have indicated, I would consider those questions relevant to whether some special direction or provision should be made to validate the ``service'' of a notice on a deregistered company. That question, however, only arises when reinstatement is ordered. In the case before Young, J, reinstatement had already occurred, and it is clear by the failure to refer to what would have been a key argument of the bank - which relied simply on the general retrospectivity attaching to reinstatement - that no such direction or provision had been obtained.

Protection of the directors' position

Assuming that the directors have an arguable defence to the applicant's claim in the County Court proceeding - as I am prepared to do only because they were able to have the judgment against them set aside - but, being unable to identify that defence, and, for the reasons I have given, not being able or prepared to make any of the orders which, by Mr Searle, the directors sought, I shall simply refrain from giving any direction or making any provision concerning the notice under s 222AOE or concerning any of their direct dealings with the applicant. (This involves no difficulty since I would be loath to consider that the jurisdiction under s 574(5) has such an extent.) If there is some advantage to the directors from my silence, so be it.

If, on the other hand, there were some disadvantage, it is to [be] recalled that they brought their current position on themselves by failing to perform their duty as directors and

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ensure the continued existence of the company; and failing to perform their consequential duty to remedy the situation when, through their breach of the first and fundamental duty, the company was deregistered. The delay and inaction of persons in their position is a relevant factor: see
Re Kenneth Wright Distributors Pty Ltd (in liquidation); W J Vine Pty Ltd v Hall [1973] VR 161, at p 171.

As I have already indicated, the prejudice which the applicant would suffer if he lost the opportunity of obtaining a winding up order because I refused to order the reinstatement of the company would significantly outweigh that of the directors if I were to make that order. This is so, simply because the applicant is a creditor of the company with the requisite standing to obtain the reinstatement order, and a need to obtain that order, while the directors cannot point to any prejudice which they will suffer in consequence of the order.

Basis for winding up order

In these circumstances, the only reason one would refuse the reinstatement order would be that a winding up order would not be made. It would be manifestly inappropriate to return a company to the register whose former directors had failed to comply with their statutory obligations, especially if it appeared that the company would be insolvent, unless an appropriate form of external administration were in place. I have mentioned, however, the conclusion I have reached that the basis on which the applicant sought to obtain a winding up order will not be open, because I shall not in this case order that the statutory demand be taken to have been served on the company.

It would appear, however, that the applicant need not rely on failure to comply with a statutory demand to obtain an order that the company be wound up in insolvency. In Re Sparad Ltd (supra), McLelland, CJ in Eq held that the evidence before the court in that case was sufficient to enable an inference of insolvency: see 12 ACSR, at p 14. In this case, the evidence is that the company failed to comply with its statutory duty to remit group tax deductions for more than 18 months, that it was then allowed to be deregistered, and, having been deregistered, that it was left in that state when the question of the vacancy in the office of trustee of the unit trust was addressed. There is no evidence of what assets (if any) vested in the Australian Securities Commission upon its deregistration but, in the absence of some cogent evidence to the contrary, the conclusion appears compelling that the company, if reinstated, would be insolvent.

If that were not so, an alternative would be to permit the applicant to amend the notice of motion to seek winding up on the just and equitable ground. As to this, McLelland CJ in Eq said of the facts in Re Sparad (at pp 13-14):

``It seems to me that the fact that the registration was cancelled and has remained cancelled since 24 June 1993 and, as I would infer, no action has been taken by anyone associated with the company to remedy that situation, is clear evidence that the company is without effective control. In particular its affairs, if a dissolved company can be said to have affairs, are not under effective control and it is unlikely that there would be any person who would be concerned to revive the company at this stage. It also provides sufficient evidence to justify a winding up order on the just and equitable ground, quite apart from any question of insolvency.''

In this case, one knows much more about the company and its directors. It is certain that they have taken no action to restore the company's registration and, indeed, that, for their own purposes, they have sought to oppose its reinstatement. They have done nothing about the outstanding annual accounts or indicated any interest in the company's having a future - unless thereby they were to obtain remission of the penalty. If this company's registration is reinstated, no reliance could be placed on the directors for its management in the future.

Having regard to the inference I am prepared to draw concerning the insolvency of the company (supra), however, it is not necessary in this case for the applicant to seek to amend the notice of motion to add a claim for winding up ``by the Court'' on the just and equitable ground.

Conclusion

For these reasons, I shall order that the registration of the company be reinstated and, upon the applicant's undertaking as soon as practicable to obtain authentication of that order and to lodge with the Commission the office

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copy of it necessary to effect the reinstatement, I shall also order that the company be wound up in insolvency and appoint the nominated liquidator.