TGIF 24 July 2020 – Deprived so revived: Owners Corp successfully reinstates developer to pursue alleged defect claims

This week’s TGIF considers a decision of the NSW Supreme Court which led to a company, wound up and deregistered after completion of a development, being reinstated to face claims by the Owners Corporation over alleged defects. 

Key takeaways

• The Court’s discretion to reinstate a company will be enlivened if a party is able to demonstrate it is aggrieved by the deregistration and that reinstatement would be just.
  
  
• The expression ‘aggrieved’ should not be construed narrowly and will include a creditor precluded from bringing a claim against the company by reason of the de-registration.
  
  
• If the deregistered company has been through a winding up, the aggrieved creditor bears the risk of funding a liquidator to conduct investigations and identify assets by which to satisfy their claim. 

What happened? 

On 18 February 2016, following completion of a residential and commercial apartment complex, the former owner of the development site (BSPL) was placed into voluntary liquidation by its sole shareholder and subsequently deregistered. 

Shortly thereafter, defects in the development emerged and the Owners Corporation commenced proceedings against certain sub-contractors for, amongst other things, breaches of various statutory warranties and the builder who had agreed with BSPL to accept liability for, and manage the rectification of, future defects.  

Notwithstanding this agreement, the builder (whose sole director had been BSPL’s sole director) denied any responsibility for the defects and asserted the party responsible was BSPL (which could not be sued unless reinstated). As a consequence, the Owners Corporation filed an application to have BSPL reinstated so that it could be made a defendant to the defect proceedings. The application was opposed by the former director of BSPL principally because the reinstatement would be futile given the company had limited assets at the time of winding up.

However, the Owners Corporation contended that the evidence suggested the director of BSPL had undertaken a strategy to deprive the company of assets available to satisfy an order for compensation in respect of defects and then initiated a wind up of the company when it was subject to statutory warranty obligations. Moreover, it was alleged that there was reason to believe that, if the company were reinstated, a liquidator would be entitled to investigate certain transactions which may ultimately produce assets which a judgment in the defect proceedings could be enforced against. 

The test for reinstatement

Section 601AH(2) of the Corporations Act 2001 (Cth) provides that a Court may make an order that ASIC reinstate a company on application by a ‘person aggrieved’ and if the Court is satisfied it is ‘just’. 

Was the Owners Corporation a ‘person aggrieved’?

The Owners Corporation argued it was a creditor of BSPL by virtue of its claim for breach of statutory warranties and thus, by reason of being precluded from bringing that claim, it was a ‘person aggrieved’ by the deregistration. It submitted that it had been deprived of the exercise of a legal right of ‘potential’ value and this was sufficient, given the low threshold required, so as to ground an order for reinstatement. 

This was rejected by the former director who contended that the Owners Corporation had not lost the ability, nor been deprived of any legal rights, to bring its claim for breach of statutory warranties and, indeed, had already done so against the other sub-contractors. Further, it was emphasised there was no right of any value that had been lost given BSPL had no substantial assets at the date of its winding-up from which any successful claim in the defect proceedings could be paid out. 

Notwithstanding this, the Court disagreed noting that the fact the Owners Corporation was able to bring its claim against other sub-contractors was neither to the point nor a basis to reject the reinstatement application. Accepting, therefore, that the Owners Corporation was a ‘person aggrieved’, his Honour turned to consider whether it would be ‘just’ to order reinstatement. 

‘Just’ to reinstate?

Considerations relevant to whether reinstatement is ‘just’ include the circumstances in which the company was de-registered, the purpose of reinstatement and the public interest generally. Where reinstatement is sought for the purpose of pursuing litigation, only an arguable case needs to be demonstrated. 

In addition, where reinstatement would lead to a newly-appointed liquidator investigating certain transactions, the mere possibility of recovery will be sufficient. 

The Owners Corporation submitted that there were aspects of BSPL’s corporate rearrangement, undertaken shortly before the deregistration, that a liquidator would have cause to examine with a view to recovering monies to allow any judgment to be enforced. This included the transfer of apartments within the development to a related entity for, apparently, nil consideration and the circumstances of a loan account connected to the sale proceeds of properties within the development. 

Whilst conceding the matter was finely balanced, the Court concluded that it would be ‘just’, in all the circumstances, for BSPL be reinstated.  The prejudice identified by the former director of being potentially subject to an examination by the liquidator was not deemed sufficient to tend against the exercise of the discretion, particularly in circumstances where the director himself was already a defendant to the defect proceedings. 

Comment   

This case is a useful reminder to practitioners of the ability to resurrect a company, particularly in circumstances where contingent claims crystallise at a much later date. As noted by the Court in this decision, where the purpose of reinstatement is litigation, all that must be demonstrated is an arguable cause of action. 

However, it is important to keep in mind that where a company is reinstated, and that company was in liquidation prior to being deregistered, the ‘person aggrieved’ will ordinarily be required to fund the liquidator to pursue any potential recoveries.