21st Century Sign Company Pty Ltd, Re [1992] QSC 381 [1994] 1 Qd R 93; (1992-93) 9 ACSR 77

,. c c ATTACHMENT C. 2 IN THE SUPREME COURT OF QUEENSLAND APN No. 727 of 1992 Brisbane Before The Hon. Mr. Justice Ryan [Re: The 21st Century Sign Company Pty. Ltd.]] IN THE MATTER of the Corporations Law - and - IN THE MATTER of THE 21ST CENTURY SIGN COMPANY PTY. LTD. (ACT: 053 182 559) REASONS FOR JUDGMENT- RYAN J. Judgment delivered on 20/10/1992 C Counsel: Mr. K.B. Varley for Applicant c Solicitors: Mr. M. Martin for Respondent McCrea Jones T/A for Carter Green, Solicitors for Applicant Baker Johnson & Partners, Respondent Solicitors for Hearing Dates: 1 and 2 October 1992 -- 1 of 10 -- c c c c IN THE SUPREME COURT OF QUEENSLAND APN No. 727 of 1992 IN THE MATTER of the Corporations Law - and - IN THE MATTER of THE 21ST CENTURY SIGN COMPANY PTY. LTD. (ACT: 053 182 559) REASONS FOR JUDGMENT - RYAN J. Delivered the Twentieth day of October, 1992. Application has been made by James Arthur Daemar for the following orders: 1. A declaration that no step has been taken by the applicant in respect of a certain charge granted by 21st Century Sign Company Pty. Ltd. on 10 December 1991 to the applicant to enforce the said charge. 2. Further or alternatively, that pursuant to s. 267 of the Corporations Law, the applicant be given leave to enforce the said charge created in his favour by the company. 3. Further or alternatively, that pursuant to s. 1322 of the Corporations Law, the time limited to bring an application fbr leave pursuant to s. 267 of the Corporations Law be extended so as to allow the hearing of an application pursuant to s. 267 of the Corporations Law for leave to enforce the said charge and the granting of such leave. Leave was sought during the hearing to add to the application a paragraph 3A, in the form that alternatively, pursuant to s. 1322(4)(a) of the Corporations Law, the failure of the applicant to first seek leave prior to attempting to ! .I -- 2 of 10 -- 2 enforce a certain charge has not had the effect of avoiding the charge, or for validation of the charge. I grant that leave. Mr. Daemar has deposed that he is the company secretary of the company, 21st Century Sign Company Pty. Ltd., which was incorporated on 30 July 1991. On 14 August 1991, the company purchased a sign manufacturing business and related plant, machinery, stock and work in progress for $208,000 from a Mr. Barnes and Barnes Rental Pty. Ltd. The company paid $48,000 in cash in partial satisfaction of the purchase price and allotted 160 1 000 shares to Barnes Rental Pty. Ltd. in lieu of the balance of the purchase price. On 13 November 1991, Mr. Daemar sold items to the company for $31 1 000. The company has not paid any of the purchase price for the i terns. The equipment had been assigned to him by Mr. Barnes in lieu of a debt due and owing by Mr. Barnes to him. On or about 15 August 1991, Mr. Clark a director of the company 1 loaned to the company $18,000 and thereafter made further advances. In lieu of enforcing the debts due to himself and Mr. Clark, they took security from the company in respect of (J 0 () them on 10 December 1991 by way of a deed of charge granted by () the company in their favour. On 12 December 1991 there was lodged with the Australian Securities Commission provisional registration thereof obtained pursuant to s. 265 of the Corporations Law. The registration was provisional on the basis that stamp duty had not yet been paid in respect of the deed of charge. It was stamped on 7 January 1992. Mr. Daemar alleges that as at 10 December 1991 and immediately thereafter 1 the company was solvent. On 21 April -- 3 of 10 -- 3 1992, as anticipated sales by the company had not eventuated, he issued a letter of demand to the company on behalf of the chargee. By this, demand is made for the payment in full in the sum of $52,000 payable immediately. He states that the company was unable to meet the demand, and on 28 April he and Mr. Clark gave notice to the company that the deed of charge had crystallised and that all the assets the subject of the charge henceforth vested in the chargee. On 28 April 1992, he C' instructed a Mr. Cole to take possession of the assets the subject of the charge and to hold them in trust merely as a c c c formalisation process. The letter dated 28 April 1992, addressed to the Directors, 21st Century Signs Pty. Ltd., and signed by Mr. Daemar and Mr. Clark, is in these terms: "By reason of Clauses 1 . 1 , 5 .. 2, 7. 1 and 7. 1 ( n) , ( o) and (r) the said Deed of Charge has crystallised and all the assets of the company vest in the chargee effective immediately. Pursuant to Clause 9.1 the chargee is now mortgagee in possession and, pursuant to clause 8.1 shall appoint Steven Cole to act as its agent with the title of receiver to formalise transfer. In any event pursuant collateral to a bill chargee." to Clause 27.1 the deed is of sale in favour of the On 29 April, a meeting of the directors of the company was held, at which it was resolved inter alia that the notice of the crystallisation of the charge was acknowledged and that the directors comply therewith, and that the company cease to employ personnel and cease trade effective from 7 May 1992, if anticipated sales did not eventuate. On 7 May 1992, he and Mr. Clark sold sufficient of the assets the subject of the charge to -- 4 of 10 -- ---~-- ~~ 4 realise a sufficient value to cover the debt owed. They sold the assets to The Partners Corporation Pty. Ltd. On the same day, a meeting of the directors of the company resolved that it be wound up pursuant to s. 497 of the Corporations Law. On 13 May 1992, Mr. Daemar was instrumental in the formation and incorporation of a new company called 21st Century Signs Pty. Ltd. Its initial directors were Mr. Daemar and Mr. Clark. This company, by an agreement dated 13 May 1992 acquired the equipment and stock from The Partners Corporation Pty. Ltd. for 50,000 $1 0 shares in the capital of Century. On 2 September 1992, a meeting was held of creditors of The 21st Century Sign Company Pty. Ltd., at which it was resolved 0 that the company be wound up, and that Mr. Ivor Worrell be appointed liquidator of the company. Section 267(1) of the Corporations Law provides: "Where: (a) a company creates a charge on property of the company O in favour of a person who is a relevant person in relation to the charge; and (b) within six months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under () subsection ( 3 ) , given leave for the charge to be enforced; the charge, and any powers purported to·be conferred by an instrument creating or evidencing the charge, are, and shall be deemed always to have been void." Mr. Daemar is a relevant person in relation to the charge as he was at the time when the charge was created, an officer of the company. It was submitted for the liquidator of the company that he had purported to take a step in the enforcement of the charge within six months after its creation on 10 December 1991, -- 5 of 10 -- 5 by making the demand on 27 April 1992 and by the letter of 28 April 1992. It was said that, in terms of s. 267 ( 2) of the Corporations Law, he had taken a step in the enforcement of the charge by entering into possession or assuming control of property of the company for the purposes of enforcing a charge created by the company. The deed of charge provides in cl. 7 that the moneys secured shall at the option of the chargee immediately become payable and c= the security shall at the option of the chargee become enforceable if the chargor fails to make payment when due of any part of the moneys thereby secured. Clause 8 authorises the chargee at any time after the security becomes enforceable to appoint in writing any person to be a receiver of the charged property, with power inter alia to take possession of, collect and get in the whole or any part of the charged property. Clause 9.1 provides that notwithstanding a receiver may or may not have C been appointed, the chargee may at any time after the moneys secured shall have become payable and have not been paid in full and without giving any notice, exercise all or any of the powers, c authorities and discretions conferred on a receiver. I consider that the effect of the letter was that the chargee entered into possession ·or assumed control of the property of the company for the purpose of enforcing a charge created by the company, and consequently took a step within six months after the creation of the charge in the enforcement of the charge. The Court had not given leave for the charge to be enforced. Accordingly the charge is void and is deemed always to have been void. -- 6 of 10 -- 6 The question then arises whether the charge can be validated. I can see nothing in s. 267 of the Corporations Law which would authorise the Court to give retrospective leave. If there is any power to validate, it must be found in s. 1322 ( 4) (a). This authorises the Court to make an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Law or in relation to a corporation is not invalid by reason of any contravention of a provision of this Law or a provision of the constitution of a corporation. By s. 1322(6), the Court is not to make an order under this section unless it is satisfied: (i) that the act, matter or thing, or the proceeding, referred to in paragraph 4 (a) is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is in the public interest that the order be made. (J () It must also be satisfied that no substantial injustice has Q been or is likely to be caused to any person. I was referred to several cases in which the power of the Court to make a validating order was considered. In Harman v. Energy Research Group Australia Ltd. (1985) 9 ACLR 897, at p. 901 Brinsden J. stated that s. 539(4) of the Companies Code, which is in the same terms as s. 1322(4) of the Corporations Law, was "a remedial provision intended to permit to be made perfect what is imperfect in respect of some failure -- 7 of 10 -- 7 to comply with the provisions of the Code or the articles of the company. It is not intended to breathe into life something which is a nullity by reason of another provision of the statute". He thought that the word "invalid" covered only what was irregular or voidable, but not what was a nullity. In Sydney Aussie Rules Social Club Ltd. v. Superintendent of Licences ( 1989) 7 ACLR 991 Young J. had to consider an application for validating orders under s. 539 of the Companies C Code. He described some of the matters for which orders were sought as irregularities, but others as having the result that c, there was a completely invalid meeting or election. He expressed disagreement with the statement by Brinsden J. to which I have referred, and stated his view as being that there is power in s. 539 to validate something which otherwise would be completely and utterly void. The scope of s. 539 was considered again by Hodgson J. in c/ Abalcheck Pty. Ltd. v. Pullen (1990) 8 ACLC 1078 at p. 1085. In remarks which were clearly obiter, he said: c~ "I do not have to decide the question whether an order can be made under s. 539 which has the effect of validating something which the Code otherwise makes void. I am inclined to think that there is no absolute principle which prevents such an order being made, and that it is necessary in each case to look at the particular provision of the Code and the particular provisions of s. 539 in order to see if it can be applied. In general terms also I am inclined to the view that s. 539 ( 4) should not be construednarrowly and that the avoidance of the charge under s. 205A can be regarded as occurring by reason of a failure to comply with a provision of the Code within the meaning of s. 539 ( 4 )(a), namely that provisionwhich, in substance though not in strict form, requires that before enforcing a charge to which s. 205A applies, the leave of the court must be obtained." -- 8 of 10 -- --------~~--~--("-.- 8 The order which is sought is a declaration that the taking of a step in the enforcement of the charge without the Court having given leave for the charge to be enforced is not invalid by reason of a contravention of or failure to comply with a provision of the Code. I am precluded from making such an order by s. 1322(6){a) unless I am satisfied that the taking of that step is essentially of a procedural nature. I consider that a step taken in enforcement of a person's substantive rights under a charge is a step essentially of a procedural nature. It is however necessary to have regard to the legislative scheme expressed in s. 267 in order to determine whether that section has the effect that the taking of a step to enforce a charge without first obtaining the leave of a Court is not properly describable as being essentially of a procedural nature, or whether that legislative scheme excludes the operation of s. 1322(4). Section 267( 3) enables the Court on application by a chargee to give leave for the charge to be enforced if it is satisfied, before the chargee purports to take a step in the enforcement of the charge, of two matters, namely that immediately after the creation of the charge, the company that created the charge was solvent, and that in all the circumstances of the case it is just and equitable for the Court to do so. The object of this provision seems to be to ensure that the Court will examine the circumstances in which a charge is created in favour of a relevant person in order to ensure that other creditors of the company are not prejudiced thereby. In my opinion, it would be inconsistent with that provision to give an operation to s. 1322 0 0 0 0 -- 9 of 10 -- c c c c 9 which would have the effect that an order could be made validating the taking of a step to enforce a charge without the leave of the Court having first been obtained, and without any requirement that the Court be satisfied as to the matters in s. 267(3). Under s. 1322(6), the matters as to which the Court must be satisfied as preconditions to making an order under s. 1322(4) are quite different from those ins. 267(3). I am unable to conclude that the taking of a step in the enforcement of a charge without leave of the Court which can only be given if the Court is satisfied of certain matters, is an act essentially of a procedural nature. I dismiss the application, and order the applicant to pay the respondent's costs including any reserved costs to be taxed. -- 10 of 10 --