Final Bell hasn’t tolled for deregistered companies – Bell Group companies brought back to life to litigate another day

This weeks’ TGIF considers the case of The Bell Group Limited v Australian Securities and Investments Commission [2018] FCA 884, in which the Court ordered that 16 companies - which had been deregistered for some 25 years - be reinstated.

Background of the case

The case falls within the long history of the liquidation of the Bell Group of companies (Bell Group), which collapsed in 1991. Since the 2013 settlement of actions against certain creditor banks (the Bell Proceedings), there is some $1.7 billion available for distribution amongst the Bell Group’s creditors and shareholders. Other proceedings are currently on foot to determine how and to whom those funds will be allocated.

Between 1992 and 1994 a number of companies in the Bell Group (the Deregistered Companies) were deregistered by ASIC because they were not in operation. At the time of deregistration, the Deregistered Companies were the debtors to, creditors of, and shareholders of, a number of other Bell Group companies. It is now likely that most of the Deregistered Companies will receive a distribution from the Bell Proceedings if they are reinstated.

Since the time of deregistration, the non-trust property of the Deregistered Companies vested in ASIC. This property included:

• debts owed to the Deregistered Companies from the Bell Proceedings. This meant that ASIC could possibly obtain $40 million from the liquidation of the Bell Group if it proved for the debts. ASIC indicated that it did not intend to lodge a proof of debt, but the Court noted that it was not bound by that statement; and
• shares held by some of the Deregistered Companies in other Bell Group companies. This meant that those other Bell Group companies cannot join the Bell tax group (Bell Tax Group), because they are not considered to be wholly-owned subsidiaries of the head company.

Why were the Plaintiffs trying to reinstate the Deregistered Companies?

The Plaintiffs in this case were other companies within the Bell Group, all of which are in liquidation (the Plaintiff Companies), and Mr Woodings, the liquidator of most of the Plaintiff Companies (the Liquidator) (together, the Plaintiffs). The Plaintiff Companies were either shareholders of the Deregistered Companies prior to their dissolution, or were companies in which the Deregistered Companies held shares.

The Plaintiffs sought orders that:

• the Deregistered Companies be reinstated under s 601AH(2) of the Corporations Act (Act);
• the Deregistered Companies then be wound up by the Court pursuant to s 461(k) of the Act; and
• under s 601AH(3)(d) of the Act, from the time of deregistration, the shares held by certain Deregistered Companies be taken to have always been beneficially held by those companies (and not by ASIC) (the Ancillary Order).

There were two main motives for these orders:

• after reinstatement, the Deregistered Companies are likely to receive a distribution from the Bell Proceedings funds. This will mean if they are reinstated and wound up, they will have money to pay to a number of the Plaintiff Companies as shareholders. The total amount that the Plaintiff Companies stand to gain if this occurs is between $19.56 million and $51.74 million; and
• if the Court makes the Ancillary Order regarding the shares held by the Deregistered Companies in other Bell Group companies, then those other Bell Group companies would be able to join the Bell Tax Group. This would mean that their $740 million tax loss could offset the significant tax liability of the rest of the group, resulting in a lower amount of tax payable by the group.

The Commissioner of Taxation (Commissioner) joined the proceedings to argue that the reinstatement and Ancillary Order should not be made. ASIC joined the proceedings and generally opposed the orders, but did not make submissions.

Orders for Reinstatement

There were only two questions the Court had to consider regarding reinstatement:

1. were the Plaintiffs ‘persons aggrieved’ by the deregistration of the Deregistered Companies; and
2. was it ‘just’ to reinstate the Deregistered Companies?

Were the Plaintiffs ‘persons aggrieved’?

The Plaintiff Companies contended that they were persons aggrieved because:

• they were deprived of the distributions they could otherwise receive as shareholders of the Deregistered Companies;
• they had a legitimate interest in removing the uncertainty that ASIC might itself decide to prove for the $40 million debts owed to the Deregistered Companies from the Bell Proceedings; and
• as deregistration meant that certain Bell Group companies were not eligible to join the Bell Tax Group, the Plaintiff Companies consequently lost the chance of a tax benefit in future income years.

The Court held that the Plaintiffs were persons aggrieved, and agreed with all of the Plaintiff’s contentions.

The Court highlighted that an interest in reinstatement as a shareholder only was not sufficient to be a ‘person aggrieved’ in the relevant sense. It was necessary to also show, as the Plaintiffs did in this case, that there was a prospect of a distribution in the winding up of the Deregistered Companies. However, that prospect does not have to be a certainty based on precise financial evidence, and there may be a number of barriers in place before the distribution can be obtained.

Was it ‘just’ to reinstate the companies?

The Court was of the view that it was just to reinstate the companies because:

• the Deregistered Companies had been administratively deregistered by ASIC, rather than having been wound up;
• it was proposed that the Deregistered Companies would immediately be put into liquidation on reinstatement, so that there was no prospect of the company trading whilst insolvent;
• the delay in reinstating the Deregistered Companies since the funds from the Bell Proceedings had become available in 2013 was reasonable, given the other steps that were being taken in the Bell liquidations; and
• there was no prejudice to the Commissioner in reinstatement, because it is well known that deregistration of a company by ASIC is not necessarily permanent. The Commissioner was therefore not entitled to expect that a deregistered company will not be reinstated when it comes to levying income tax.

The Court noted that the result may have been different if the orders that the Plaintiffs sought attempted to affect the Plaintiff Companies’ tax liabilities in the past, which have already been assessed by the Commissioner.

The Court consequently held that the Deregistered Companies should be reinstated and wound up immediately, and that the Liquidator be appointed the liquidator of the Deregistered Companies.

The Ancillary Order

The Plaintiffs sought the Ancillary Order under s 601AH(3)(d) of the Act to enable them to obtain a tax benefit in future years, by setting off losses of other Bell Group companies. The Commissioner contended that the Court did not have power to make the Ancillary Order.

The scope of the Court’s powers under s 601AH(3)(d) of Act

Section 601AH(3)(d) of the Act empowers to the Court to ‘make any other order it considers appropriate’ on the reinstatement of a company.

The Court made the following comments about the nature and scope of the power:

• The power in s 601A(3)(d) ‘is cast in very broad terms.’
• The power extends to making any necessary orders to put the company in a position as if the dissolution of the company had never occurred, subject to the interests of affected third parties.
• However, the power was broader than this, and was not confined to removing anomalies or impediments caused by the reinstatement of the company.
• The power extended to giving a deregistered company back what they might have lost due to deregistration, including even the waiver of limitation periods to enable a reinstated company to commence proceedings.
• The only real restraint on the power is that a Court could not make an order denying the retrospective effect of reinstatement that s 601AH(5) otherwise outlines.

The Court held that based on the above construction of the power, the Ancillary Order was within power.

Was it ‘just’ to make the Ancillary Order?

The Court held that it was just to make the Ancillary Orders because the Plaintiff’s objectives were lawful and reasonable, and the making of the Ancillary Order was more consistent with the primary statutory objective of putting the Deregistered Companies in the position they would otherwise have been in than not making them.

The Court noted that nothing in the reasons actually addressed whether the Plaintiffs and other Bell Group companies could in fact form part of the Bell Tax Group. All the Ancillary Order would do would enable the Plaintiffs to contend for that consequence elsewhere.

Comments

• The Court showed a considerable level of deference to the views of the Liquidator and his estimates of how funds would flow through the different companies. The Court did not require precise financial information as to the likely flow of funds, particularly considering that no one actually contradicted the Liquidator’s predictions.
• The case confirms that the scope of the power in s 601AH(2) and 601AH(3)(d) is extremely broad. Companies can be reinstated after decades, and any consequential orders on doing so are only confined by having to be retrospective in nature. However, the case also highlights that whilst the scope of the power is broad, the Court will be careful to exercise that jurisdiction in a way which does justice between the parties.

In the context of the Bell Litigation, it is clear that the long saga of the liquidation of the Bell Group is far from over. It will be interesting to see whether these now reinstated companies will participate in any of the other litigation on foot, and how the possible loss in tax revenue from the reinstatement will affect the Commonwealth’s involvement in those other proceedings.