FEDERAL COURT OF AUSTRALIA

Hanna v Australian Securities and Investments Commission (No 2) [2011] FCA 1491

THE COURT ORDERS THAT:

1.    The application be dismissed.

2.    Unless submissions to the contrary are received within 14 days, the plaintiff is to pay the costs of the interveners to be taxed if not agreed.

3.    If submissions on costs are filed by the plaintiff, the interveners have a further 14 days to reply.

4.    Any issue of costs will be determined on the papers.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION

1    The plaintiff (Mr Hanna) seeks reinstatement of two deregistered companies, Strongwall International Limited (ACN 086 506 176) (Strongwall) and Remex Australia Pty Ltd (ACN 054 675 491) (Remex). Remex holds 81% of the shares in Strongwall. He also seeks validation of an agreement of 15 June 2011 between Remex and Viva Natural Stone Pty Ltd (Viva) for the transfer of 51 of the 81% of the shares in Strongwall (the Shehade agreement).

2    Much of the relevant factual material was set out in Sebastian v Strongwall International Limited (Deregistered) [2011] FCA 1045; WAD 246 of 2011 (Strongwall No 1) and Hanna v Australian Securities and Investments Commission [2011] FCA 1077 (Hanna No 1). The facts are not fully repeated in these reasons.

RELEVANT STATUTORY PROVISIONS

3    By s 601AH(2) of the Corporations Act 2001 (Cth) (CA) the Court may make an order that the Australian Securities and Investments Commission (ASIC) reinstate the registration of a company if an application is made by a person aggrieved by the deregistration or by a former liquidator of the company. The Court must be satisfied that it is ‘just’ that the company’s registration be reinstated before doing so. By s 601AH(3), if the Court makes such an order, it may validate anything done between the deregistration of the company and its reinstatement together with other orders which it considers appropriate.

BACKGROUND

4    Strongwall was deregistered on 25 July 2010 for failure to pay outstanding annual company return fees of $2335. Remex was deregistered on 10 July 2011 for failure to pay outstanding annual company review fees of $767. Remex is the corporate trustee of the Ribbon Discretionary Trust which is ‘Mr Hanna’s family trust’. There is no dispute that Mr Hanna is relevantly ‘a person aggrieved’ by the deregistration of the two companies. As such, there can be no real debate that he has standing to bring the application having on a prima facie basis at least, a ‘genuine grievance that the dissolution had affected [his] interest’ (Australian Competition & Consumer Commission v Australian Securities & Investments Commission (2000) 174 ALR 688 (at [24]) and Brereton v Australian Securities and Investments Commission [2007] FCA 651 (at [2])).

5    Both Mr Hanna and the interveners (the Sebastian parties), (the applicants in WAD 246 of 2011 (the Sebastian proceedings)), have sought orders for the reinstatement of Strongwall. The Sebastian parties, who originally sought reinstatement in the Sebastian proceedings, however, now oppose such orders or, alternatively, support them only on the basis that orders also may be made for the winding up of Strongwall and the appointment of a provisional liquidator. Mr Hanna is opposed to the appointment of a liquidator or a provisional liquidator.

6    ASIC, for its part, does not oppose reinstatement of both Strongwall and Remex if various conditions set out in its letter of 9 September 2011 are satisfied. Those conditions are standard in form with the exception that on the Sebastian parties’ originating process in the Sebastian proceedings, ASIC had previously indicated that it would not oppose the reinstatement of the company on the same conditions but also on the condition that the company was wound up and a liquidator or provisional liquidator was appointed. ASIC has now indicated, however, that the issue of having each company wound up and a liquidator appointed:

is a matter for the parties (based on their submissions to the Court as to the solvency of the company) and not ASIC. ASIC will reinstate (if [ordered] to do) the company in accordance with what the Court orders or directs in this matter.

7    The parties have argued the debate by reference to reinstatment of Strongwall. Without reinstatment of Strongwall, reinstatement of Remex is of no value.

MR HANNA’S ARGUMENTS IN SUPPORT OF THE joint REINSTATEMENT

8    Mr Hanna argues that the deregistration of the companies is an obstacle to giving effect to the agreement discussed in Sebastian No 1 and Hanna No 1 for the transfer of 51 of the 81% shareholding in Strongwall by Remex to Viva, a company represented by Mr Shehade (the Shehade agreement). The deregistration of the companies is also an obstacle to Mr Hanna recovering unpaid wages and superannuation which amount to substantial sums, as there has been no capacity for the payment of those sums for several years. Mr Hanna argues it would be unjust for him to have ‘devoted the last eight years of his life as the director of [Strongwall] and to be unable to recover unpaid wages and superannuation’. Further, the receipt of unpaid wages and superannuation would give rise to the payment of tax in favour of public policy consideration. Mr Hanna also argues that it would be unjust for his wife and family to have lost the family home to a mortgagee sale in the circumstances of impecuniosity surrounding the company’s affairs, and now also to be deprived of the opportunity to recover unpaid wages and superannuation because of the deregistration of the companies. While these considerations are relevant and certainly establish an argument that Mr Hanna is an aggrieved person, there is much more to consider.

9    Mr Hanna argues that all of the ASIC policy requirements for reinstatement of Strongwall are satisfied because at the time of its deregistration it was carrying on business, was not in liquidation and is now or will be solvent as a result of financial backing available to it from Viva under the Shehade agreement. Mr Hanna points to the fact that he is prepared to act as a director and secretary for Strongwall if it is reinstated and that further directors are available and willing to be appointed to it. In particular, he stresses that the deregistration was simply due to non-payment of annual review fees. There are no outstanding penalties due under any penalty notices and no legal costs ordered by the Court to be paid to ASIC. There have also been no members’ resolutions to wind it up.

10    In Hanna No 1 (at [6] and [10]) I referred to prospective litigation in Singapore. The main thrust behind Mr Hanna’s argument that there will be funding for Strongwall turns on the financial support of others. Until Strongwall is reinstated there can be no steps taken in Singapore to enforce compliance with the license agreement (as discussed in Strongwall No 1 and Hanna No 1) which will, if successful, enable Strongwall to recover approximately $575,000 due under the Singapore licence agreement.

11    Mr Hanna argues that there may also be a further action available against another entity in Australia for breach of confidentiality and/or breach of intellectual property rights in respect of which there might be a much higher damage award.

12    With deregistration of the companies, no effect can be given to the Shehade agreement.

13    Mr Hanna suggests that there is a reasonable basis to believe that it is actually associates of the Sebastian parties who are involved in procuring the breach of the Singapore licence agreement to the detriment of Mr Hanna. Those Sebastian parties at the same time are preventing the reinstatement of the company by which Mr Hanna as a director might be able to enforce compliance with the Singapore licence agreement for the benefit of Strongwall. As against this, if the basis for belief that the associates of the Sebastian parties are involved in the breach of the Singapore licence agreement is true, opposition by the Sebastian parties to the reinstatement would not be in the best interests of Strongwall but, rather, in the interests only of the Sebastian parties. It is argued that the opposition to the reinstatement is motivated by a desire to prevent Strongwall from taking action in Singapore because the Sebastian parties have an interest in Buildgreen (Asia) Pte Ltd (Buildgreen) as discussed in Strongwall No 1 and Hanna No 1.

14    Mr Hanna also argues that any delays in the reinstatement and performance of the Shehade agreement will cause further financial hardship to him. He is living on a pension pending the reinstatement of Strongwall and is deprived of the opportunity to obtain moneys owed to him by Strongwall.

15    In the meantime, it is clear, Mr Hanna says (and it does not appear to be the subject of debate), that Mr Shehade is unable to take steps to raise funds to meet Strongwall’s debt and move forward with the commercialisation of the Strongwall construction system unless the reinstatement is ordered.

16    Mr Hanna argues that Strongwall’s patents need to be protected and fees paid to maintain the patents but there will be no incentive to maintain the patents if Strongwall is not reinstated. Mr Hanna relies upon the undertaking that he has filed not to dispose of Remex’s remaining 30% shareholding in Strongwall pending the outcome of the Sebastian proceedings which provides, he says, the Sebastian parties with security in the event that they succeed in those proceedings. The Sebastian proceedings, however, are not likely to be concluded for a substantial period of time and, Mr Hanna says, face considerable difficulties, not least of which are the proposed strike out applications and the question of delay in pursuing the Sebastian proceedings to which I referred in Strongwall No 1 (see [73]-[82]). Mr Hanna argues, accordingly, that the ownership of the patents is no longer an issue as Mr Hanna has undertaken to sign any documents necessary to ensure that upon the reinstatement of Strongwall, the ownership of the Strongwall patents and any intellectual property associated with the Strongwall System (as defined in Strongwall No 1) is legally and beneficially assigned to Strongwall.

17    Although Mr Hanna has argued for validation of the Shehade agreement, it was accepted by counsel for Mr Hanna that if that relief was not granted, it would make little difference because those controlling Remex could simply ratify or validate the Shehade agreement on Remex’s re-registration. (The parties did not suggest that the considerations relevant to re-registration of Remex differed from those relating to Strongwall.)

18    As to the question of appointment of a liquidator, as sought by the Sebastian parties, Mr Hanna argues that no appointment of a provisional liquidator or the winding up of Strongwall should occur as there has been no resolution by the members for it to be wound up, the appointment of a liquidator would involve considerable expense, once a liquidator is appointed it would be difficult to have that liquidator removed, no creditors have taken any action to wind up Strongwall and Mr Hanna is a significant unsecured creditor of Strongwall and opposes the appointment of a liquidator.

19    At least in relation to the expense aspect, I enquired of senior counsel for the Sebastian parties in the course of argument as to whether his clients would provide an assurance to meet the reasonable fees of a liquidator, if a liquidator were appointed on the reinstatement of the company. Subsequent submissions received make it clear that the Sebastian parties are not prepared to give such an assurance. Mr Hanna has made no offer in relation to fees.

CONSIDERATION

Principles

20    Relevant considerations going to reinstatement include (see for example, Australian Competition & Consumer Commission v Australian Securities & Investments Commission (2000) 174 ALR 688 (at [27]-[28])) the circumstances in which the company came to be deregistered, whether good use would be made of the order if granted, whether any person is likely to be prejudiced by the reinstatement and the public interest. (See also the Australian Securities and Investments Commission Regulatory Guide 83 in which ASIC states that while a court has a wide discretion when determining whether it would be ‘just’ that the registration of a company be reinstated, some considerations are the solvency of the company and whether the directors have a ‘track record’ of management of failed companies (RG 83.29)). As the Regulatory Guide for ASIC emphasises, a company cannot be reinstated for a specific purpose. If reinstated, it exists for all purposes (RG 83.34).

21    In Deputy Commissioner of Taxation v Australian Securities and Investments Commission [2010] FCA 1411, Jagot J summarised authorities (at [25]-[26]) in the following terms:

25    In Australian Competition and Consumer Commission v Australian Securities and Investments Commission (2000) 174 ALR 688; [2000] NSWSC 316 at [27] Austin J said:

The wording of the section is very broad, and the cases confirm that it gives the Court a wide discretion. The Court takes into account the circumstances in which the company came to be dissolved; whether, if the order were made, good use could be made of it; and whether any person is likely to be prejudiced by the reinstatement: Re Kilkenny Engineering Pty Ltd (in liq) (1976) 1 ACLR 285; Drysdale v ASC (1992) 10 ACLC 1427; Re Steelmaster Pty Ltd (in liq) (1992) 6 ACSR 494.

26    In Blazai at [25]-[26] Tamberlin AJ referred to other decisions identifying relevant considerations to the question whether reinstatement was just as follows:

[25]    The expression "satisfied that it is just that the company's registration be reinstated" confers wide discretion on the court. In Promnitz v Australian Securities and Investments Commission [2004] FCA 22; (2004) 22 ACLC 108, Goldberg J at [20] stated:

The requirement that the Court be satisfied that it is just that the company's registration be reinstated is not constrained by any particular criterion. However, the cases make it clear that there are a number of matters which ought to be taken into account, namely the circumstances in which the company came to be deregistered, the future activities of the company if an order be made and also whether any particular person is likely to be prejudiced by the reinstatement.

[26]    In Callagher v Australian Securities and Investments Commission (2007) 239 ALR 749, Lander J at [55] stated:

ACMF came to be deregistered because of the default of its direction in failing to pay an ASIC fee. It has by its director undertaken to remedy that default. ASIC does not object to the reinstatement of the registration of ACMF. ASIC's attitude should be taken into account. It should be clearly understood that a company which has been deregistered for failing to comply with its statutory obligations could not be expected to be reregistered as of right. More is required. The court must be satisfied that it would be just to order the reinstatement of the registration. The words of the section give the court a very wide discretion. In exercising that discretion, which must remain unfettered, the court will ordinarily have regard to the circumstances in which the company's registration lapsed; the party seeking the order; the reasons for seeking the order; the utility of making any order; the prejudice which any party including the company which is sought to be the subject of the order for reinstatement of the registration might suffer; and any other circumstances which would bear upon the making of an order which in all the circumstances would be just ... In making the order it must also be steadily borne in mind that the company's registration is not to be reinstated for a particular purpose but the company's registration will be reinstated for all purposes ...

Application of the principles

22    I am not persuaded that Strongwall was solvent at the time of its deregistration. Its inability to meet a modest fee due to be paid to the regulator and the financial records, such as they are, do not support an impression of solvency. In Mr Hanna’s affidavit sworn 26 August 2011 in the Sebastian proceedings, the financial statements of Strongwall for the year ended 30 June 2010 appear to show operating losses of exceeding $768,000, which was a substantial increase from the previous year. Retained losses increased from $2,794,985 the previous year to $3,563,717. The assets disclosed in that financial year under the heading ‘Other’ was $127. The current liabilities were in excess of $1.57 million. Precisely what these liabilities are is not clear. There is no disclosure as to what the current liabilities of $1,383,662 or non-current financial liabilities of $1,120,123 comprise. Whether or not those figures include Strongwall’s indebtedness to Mr Lim of SGD829,215.68 and SGD39,203.13 is unclear. It may well be that these figures include Mr Hanna’s claim against Strongwall for accumulated salary.

23    The evidence available as to the oral agreement between Mr Hanna and Mr Shehade for the sale of shares is so lacking (the Shehade agreement) in precision when set against the background of complaints against Mr Hanna, including the unchallenged failure to transfer to Strongwall the key asset, namely, the patents, that there can be no basis at this stage for confidence that the effect of the oral agreement would cure the deep financial difficulties that Strongwall has experienced. In those circumstances, there can be little basis for confidence that creditors of Strongwall would be satisfied. This would include the apparently unchallenged liability in respect of Mr Lim’s advances to Strongwall.

24    Much turns on Mr Hanna’s case on the support to be given by Viva and/or Mr Shehade to recoup moneys due from Singapore so as to pay the debts owed to Mr Lim. There is no evidence that Mr Shehade would provide any specific or sufficient working capital to Strongwall upon reinstatement. There are no figures as to the funding which would be made available nor undertakings or assurances proffered which would ensure that, on reinstatement, Strongwall could be in a solvent position. A rare exception to the situation in which reinstatement of an insolvent company would be made would be to enable a claim to be pursued with an insurer. This has now been recognised in statute but absent that particular circumstance, the reinstatement of a company, the viability of which would depend wholly on an imprecise oral agreement, would be an unusual exercise of the discretionary power to reinstate.

25    I accept the argument advanced by the Sebastian parties that the proposed Singaporean litigation cannot be viewed, with any confidence, as being the magic panacea to Strongwall’s problems. It is speculative and uncertain in its nature and the evidence in relation to it is so vague as to be unpersuasive at this stage. One can see, for example, that the license agreement relates to a license owned by Strongwall International (Singapore) Pte Ltd rather than by Strongwall. While Strongwall no doubt holds shares in that company, little is known about the attitude of the directors of the Singaporean company, let alone its capacity to pursue the litigation described. Insofar as the patents are concerned, they are presently owned by Mr Hanna as he has not transferred them. Perhaps they are beneficially owned by Strongwall as Mr Hanna now contends but, in any event, they are not owned by the Singaporean company.

26    Insofar as the weighing up Mr Hanna’s personal financial prospects having regard to the justice of the situation, it is quite unclear, whether Mr Hanna would be paid wages which are said to be due to him but also whether he would be paid anything at all for the transfer of the shares.

CONCLUSION

27    The only basis upon which I would reinstate Strongwall would be with Strongwall being wound up and a liquidator appointed so that the patents could be sold, if possible, to enable creditors, including Mr Hanna, to be paid something and to enable a return to shareholders after any recognition of obligation to creditors. In those circumstances, if Viva or other interests or supporters of Mr Shehade wish to purchase the patents, they could do so. I have endeavoured to press the parties into a commercial settlement of this matter (including by compelling mediation) but, at least at this stage, it seems unlikely to occur.

28    The position of Remex is the same as Strongwall. If Strongwall is not reinstated, there is no demonstrated purpose in Remex being reinstated. The application will be dismissed.

29    I will receive submissions from Mr Hanna within 14 days if he wishes to contend that there is some good reason that costs should not follow the event. Absent submissions, costs will follow the event. The following orders are made:

1.    The application be dismissed.

2.    Unless submissions to the contrary are received within 14 days, the plaintiff is to pay the costs of the interveners to be taxed if not agreed.

3.    If submissions on costs are filed by the plaintiff, the interveners have a further 14 days to reply.

4.    Any issue of costs will be determined on the papers.

Associate:

Dated:    21 December 2011