In Thorne Developments Pty Ltd v Laird [2022] QSC 085 heard in the Queensland Supreme Court, the plaintiff sought an order to validate, amongst other things, an agreement with the defendants for the sale of shares made during a period in which the company was deregistered. Despite the defendants’ efforts to avoid the sale and related loan, the Court validated the acts done during the deregistration period, giving the sale legal effect.
Deregistration and reinstatement
Thorne Developments Pty Ltd (‘Thorne Developments’) was deregistered on 4 December 2011. The deregistration came about administratively, and not because of insolvency or any identified misconduct. On application, ASIC reinstated the plaintiff company just under two years later on 4 September 2013.
When a company is deregistered, it ceases to exist as a legal entity. If a company is reinstated, under s 601AH(5) of the Corporations Act 2001 (Cth)(‘the Act’), the company is taken to have continued in existence as if it had not been deregistered.
At the time of its deregistration on 4 December 2011, the plaintiff was the owner of two shares in a company called Transparent Enterprises Pty Ltd (‘TEPL’). On 28 February 2012, the plaintiff, and the defendants, Mr Graham Laird, Rick Williamson Investments Pty Ltd (‘RWI’) and Mr Richard Williamson, executed a document entitled “Share Sale Agreement” (‘SSA’) to sell those shares. The same day, the plaintiff, Mr Laird and RWI executed a Loan Agreement (‘LA’) under which Mr Laird and RWI borrowed $1,476,775 from the plaintiff for the balance of the purchase price for the shares.
None of the parties were aware that ASIC had deregistered the plaintiff. Instead, they proceeded on the assumption that the plaintiff was registered and that Mr Thorne, as the sole director of the plaintiff, was entitled to execute and effect the SSA and LA.
Orders sought by the plaintiff
A court may validate anything done during the period between deregistration and reinstatement of a company’s registration under s 601AH(3)(c) of the Act. The plaintiff sought validation orders from the Supreme Court concerning the SSA and the LA. The primary purpose of the orders sought was to restore the parties to the position that would have prevailed had the plaintiff not been deregistered.
The defendants’ grounds for opposing validation of the share and loan agreement
The defendants argued that the making of validating orders would cause them unfair prejudice and would be unjust on a number of grounds.
1 – The attitude of the defendants no longer wishing to be bound
The defendants opposed the validation of the SSA and LA because they did not wish to be bound by the agreements. However, it was unclear on the evidence how their change in attitude would mean that they would suffer unfair prejudice or that it would be unjust to order validation. The defendants voluntarily entered into agreements and took steps to carry their terms into effect , including changing the TEPL register and lodging relevant forms with ASIC. Justice Bradley was not persuaded to allow the defendants to avoid their contractual obligations on the basis that they had a change of mind.
2 – The purchase price of the shares
The defendants also argued that the valuation of the shares was now known to be inaccuratebased on an expert report which identified a decline in the value of the TEPL shares as at 30 June 2018. While the report provided some explanation for the defendants’ change of heart, it did not render it unfair or unjust to make validating orders. Further, as to whether the valuation was inaccurate, the only evidence of the value of the shares as at February 2012 was the amount that the defendants were prepared to pay, and the plaintiff was prepared to accept, for the transfer of the TEPL shares. Justice Bradley did not allow the defendants to exploit the benefit of hindsight to invalidate a venture which was not as successful as anticipated.
3 – The passing of time
The defendants also relied on the significant time that had passed since the parties entered into the agreements. Justice Bradley held that this circumstance was unfortunate, but would not, of itself, cause unfair prejudice to the defendants or make the grant of relief unjust.
4 – Whether the plaintiff held the TEPL shares as trust property
Finally, the defendants claimed that the plaintiff entered into the SSA and LA in its capacity as the trustee of the Thorne Family Trust No. 3 (‘Trust’) and that, accordingly, the shares in TEPL were trust property. The defendants’ contended that by the time the plaintiff was reinstated, the shares had vested in the new trustees, and did not revest in the plaintiff as trust property.
Justice Bradley held that the capacity in which the plaintiff held the shares was not essential to its claim for relief under s 601AH(3)(c) or (d) of the Act, but nonetheless the defendants’ allegation was simply wrong. On the balance of the evidence, the shares were not trust property; there had been no declaration of trust in respect of the TEPL shares; and the TEPL register of members showed an asterisk next to the shares which designated that the shares were held non-beneficially. Justice Bradley observed that, in the past decade, the defendants had never acted to correct the records of TEPL to record Ms Thorne (the current trustee of the Trust) as the legal owner of the shares, nor had they accounted to her (or to the persons they submit are the true beneficial owners of the shares) for the dividends paid to them.
Conclusion
Justice Bradley concluded that the defendants signed both the SSA and LA voluntarily, acting in their own interests, and with access to professional accounting and legal advisers. They obtained the immediate benefit they sought from the SSA as if it were a legally binding agreement. Therefore, Justice Bradley granted the order to validate the SSA and LA as acts done during the deregistration period, and gave them legal effect, consistent with the position which would have prevailed has the plaintiff not been deregistered.
~ with Philippa Thorne, Graduate at Law
