Court orders restoration of struck-off company to allow pending litigation, subject to paying creditor costs.

[*147] 1980 Nov.10

(PIKIS, P.D.C. & MICHAELIDES,D.J.)

IN THE DISTRICT COURT OF FAMAGUSTA SITTING

AT LARNACA

In the matter of the companies Law, Cap. 113

and

In the matter of WAIKIWI SHIPPING COMPANY LIMITED,

Petitioners,

and

Thomas Barlow & Sons Natal Limited,

Respondents,

(Companies Petition No.3/80).

Company - Striking off the register

- Restoration - Discretion of the Court - “Carrying on business or in operation” - Meaning - Litigation for any purpose incidental to the business of a company - Qualifies as an act of “carrying on business” - Right of creditor to be heard in the restoration proceedings - Restoration ordered subject to petitioner paying creditor’s costs - Section 327(6) of the Companies Law, Cap. 113.

M. Montanios, for the Petitioners.

K. Chrysostomides, for Thomas Barlow & Sons.

Natal Ltd., Creditors.

JUDGMENT

The judgment of the Court was delivered by:-

PIKIS, P.D.C.: Waikiwi Shipping Co. Ltd. was [*148] incorporated on 24th January 1972 and its existence recorded in the Cyprus register of Companies. Mr. Takis Christodoulides, the Registrar of Companies, in evidence before us referred to the objects of its company and its activities as they emerge from information appearing in the register of the Company. It was a shipping company who apparently traded through the use, hire or other disposition of a vessel they owned, namely “Waikiwi Pioneer”. Little is known about the activities of the company since, judging from the register, except that in 1972 the ship was mortgaged as security for substantial loans made to the company. No further information about the existence of the company was revealed to the Registrar after 1972 and, so far as the Registrar is concerned, the company went to sleep after 1972. He tried to awaken them in 1977, warning them that the company would be struck off the register unless they complied with their statutory obligations to file annual returns, a warning to which there was no response. Finally the company was struck off the register, primarily for failure to file annual returns, by notice published in the official gazette on 26th October 1979 (notification No. 1562). The Registrar acted pursuant to the powers vested in him under the provisions of s.327(5) of the Companies Law, Cap. 113. The petitioners are not the only shipping company that was struck off the register for failure to file annual returns but one of many. In the words of the Registrar, “shipping companies are regular defaulters” and go down on that score by the hundreds every year.

By their present petition the company prays for the restoration of the company on the register by virtue of the [*149] provisions of s. 327(6), Cap. 113. The restoration is sought to enable the company to pursue litigation with the creditors before the South Africa Court of Appeal. The history of Court proceedings between Thomas Barlow & Sons Natal Limited, of South Africa (hereafter referred to as creditors) and the petitioners may briefly be summarized as follows: The creditors sued the petitioners for services rendered, viz. for repairs done to their vessel. The petitioners raised a counterclaim for damages for negligence, alleging they suffered loss resulting from the negligent repair of their vessel amounting to the equivalent of C£28,194. The trial Court found for the creditors and dismissed the counterclaim. Judgment, it seems, was given for the creditors for the equivalent of C£10,655 with costs, which remained unsatisfied. The petitioners took an appeal against the aforementioned judgment and the appeal is listed for hearing on 14th November 1980. It appears to be certain that unless the name of the petitioning company is restored on the register of Cyprus companies they will be unable to prosecute the appeal inasmuch as the appeal will lapse in view of the disappearance of the appellants.

The petitioners raised objection to the way the creditors entitled their opposition and raised certain question as to their right to be heard in the present proceedings. None of the two points was pressed before us, wisely so, for we are of the view that the creditors have a right to be heard in proceedings of this nature. Mr. Chrysostomides referred us to a number of authorities [*150] establishing that right. A series of provisions of the Companies Law, itself, Cap. 113, safeguards the interests of the petitioners over a wide range of the company’s activities, with a corresponding right, it appears, to be heard in any matter that is likely to affect their interests. (See, inter alia, sections 213, 243 and 276, Cap.113 : and Buckley on the Companies Act, 13th edition, p. 701 .) We shall not dwell further on the subject for we are clearly of the view that a creditor has a locus standi in proceedings of this nature, for the restoration of a company under s. 327(6), more so as in this case in circumstances where an order for restoration is likely to have direct repercussions on his relationship with the company. Hence we shall proceed to examine the substance of the dispute of the parties.

The factual background to this application is set out in affidavits filed in support of the petition and opposition respectively as well as the evidence of the Registrar of Companies earlier referred to. The facts as they emerge from the material before us so far as material to the determination of the issue in hand may be stated as follows:

The petitioners showed gross disregard to the discharge of their statutory obligations to file annual returns designed to give essential information about certain aspects of the company, such as the structure of its capital, its debts as well as information about its shareholders and officers of the company. In a supplementary affidavit the allegation is made that notices sent, by the Registrar to [*151] the petitioners warning them about the future fate of the company went unnoticed and that they learned for the first time that the company had in fact been struck off when proceedings were taken by the creditors in South Africa to dismiss their appeal on the ground that the petitioners ceased to exist. The non receipt of these notices is attributed to the occupation of Famagusta by the Turkish army, whereat the registered offices of the company were situate in combination with existing arrangements for the forwarding of the correspondence of the company to its officers. Notwithstanding the tragic events of 1 974 and their devasting effects it was nonetheless the duty of the petitioners to keep open avenues of communication with the Registrar of Companies. The creditors appear to dispute the correctness of the aforementioned allegations without, however, disclosing material that rules out the version of the petitioners on the matter.

On the material available before us we cannot rule out the case for the petitioners on the subject. In the meantime the annual returns had been prepared and in fact they have been handed over to the Registrar who will, if we order the restoration of the company, restore its name on the register.

The creditors invited the Court to hold that the company ceased operations a long time ago and submitted that the pursuit of litigation on behalf of assignees cannot be regarded either as a business activity or as evidence of the company being in operation. It is common ground that the pursuit of litigation in South Africa for [*152] the benefit of cessionaries is the only activity of the company and the only reason for wishing to keep it in being. The creditors contend that with the aforesaid factual background in mind it cannot be found that the company, is carrying on business or that it is in operation. Moreover they submitted that it would be unjust in the circumstances to restore the company on the register as this course will land the creditors, in the event, of the counterclaim being dismissed on appeal, with a still larger bill of costs, with no prospect of recovering either the judgment debt or the costs as the petitioners are insolvent,

Mr. Chrysostomides referred the Court to the decision in Re Lindsay Bowman

Ltd/(1969)1 W.L.R. 1443 (also cited in 1969, 3 All E.R. 601) where Megarry J., as he then was, discusses the interpretation of

comparable provisions to those of s. 327(6) to be found in the English statute. The object of restoration, it is explained, is to put back the company on the register for all purposes and not partially. Therefore the conditions that a Court of Law may attach upon restoration should not be self defeating, that is they should not directly or indirectly defeat legislative intent; because they should not directly or indirectly defeat legislative intent in this area designed to bring about retrospective resurrection. For this reason the learned Judge in the above case declined to insert what is known as a “Rugby Auto Electric” (unreported) clause, a course that would give a contributory right he would not enjoy if the company was deemed after restoration to have been in existence all along. [*153] Mr. Chrysostomides also referred us to the analysis made of the principles governing restoration in Halsbury’s Laws of England, 3rd edition, volume 6, at paragraphs 1590 and 1591. Mr. Montanios, in his

address, laid stress on the principle emerging from a consideration of In Re Outlay Assurance Society (1887) 34 Ch.D. 479 and

submitted that the pursuit of a law suit by a defunct company is evidence of a company carrying on business. The case cannot be regarded as absolutely supporting the proposition formulated by counsel although it indicates the wide discretion vested in the Court to order the restoration of a company in appropriate circumstances. In the above case Court proceedings were but an aspect of the process of voluntary liquidation and not, as in the present case, the sole activity of the company. Mr. Montanios argued that refusal to restore the company to the register would lead to the collapse of appeal proceedings and that would, in his submission, be unjust. A company, he argued, should, like a person with a physical existence be credited with a desire to honour his obligations to its assignees.

Section 327(6), Cap. 113 confers discretion on the Court to restore a company to life before the effluxion of twenty years from the day it was struck off provided one or both of the following conditions are satisfied: (a) If the company was carrying on business or was in operation at the time when it was struck off and (b) when it is considered otherwise just to restore the company independently of its activities at the time of its removal from the register. [*154] Company Carrying on Business or in Operation - S.327(6), Cap. 113.

We reflected on the concept of a company carrying on business or in operation, as appearing in the context of s. 327(6), mainly in order to ascertain whether the pursuit of litigation simpliciter constitutes a business activity for the purposes of the law. We must confess that our first reaction was that a company can be said to be carrying on business only if it is engaged in the transaction of its ordinary business, be it at a low level. However such approach runs counter to weighty pronouncements on the subject that cannot be disregarded. Our research revealed

to us a recent decision Re Sarflax Limited (1969) 1 All E.R. 529 where very instructive observations were made with regard to

the concept of “carrying on business”. In that case Oliver J. adverted to the notion of “carrying on business” as encountered in the context of s. 332(1 ) of the English Companies Act of 1948, a provision dealing with a company carrying on business with intent to defraud its creditors. It would seem to us that the observations there made are of equal relevance for the interpretation of s. 327(6), Cap. 113. The learned Judge he3d that the expression “carrying on business” is not synonymous with actively trading and decided that the collection and distribution of assets with a view to lequidation are activities that constitute “carrying on business’’. The Judge was reinforced in his decision by a similar interpretation accorded to “carrying on business” in interpreting s.14(1) of the Bankruptcy Act 1914. ( See Theophile v. Solicitor – [*155] General (1950) 1 All E.R. 405 and Re Bird (1962) 2 All E.R. 406.) The above cases support the proposition that a bankrupt carries on business until he has performed all the obligations that the fact of trade imposes on him. A study of the above referred to cases establishes that litigation carried on for any purpose incidental to the business of a company or with a view to winding up its affairs qualifies as an act of carrying on business. So if at the time when a company was struck off it was engaged in such litigation the Court may legitimately infer that it was carrying on business. There is no reason in principle why one should distinguish between litigation for the recovery of a debt with a view to distribution among creditors or litigation for the recovery of a claim assigned to a third party. In both cases the litigation is undertaken for purposes incidental to the business of the company and it would matter not whether the ultimate beneficiaries are to be its creditors or assignees.

An aspect of the case that has perplexed us, to a degree, is the meaning that should be attributed to the alternative test of carrying on business, that is to the expression “or in operation”. We incline to the view, unaided by authority, that ”operation” in this context connotes a passive as opposed to a more active existence occurring when a company carries on business. For example, a company may be in operation by retaining its staff without doing any business in anticipation of future business. We need not canvass the question further for, in the light of [*156] what has been said earlier, we have reached the conclusion that the petitioners were carrying on business at the time they were struck off the register of Cyprus Companies. Therefore we should examine whether we should, in the exercise of our discretion, restore the company to the register.

We have examined the case before us with extreme care, not least because it is the first case of its kind that comes before us. And we must express our gratitude to both Mr. Chrysostomides and Mr. Montanios for their able addresses and the assistance they have given us in resolving the matter in issue.

Even if a company is not carrying on business or in operation the Court may order its restoration if of the opinion that so to do is otherwise just. This alternative prerequisite to registration “otherwise just” is inexorably interwoven with the ultimate exercise of the Court’s discretion whether to order restoration. We have sifted the evidence before us as well as we could. We are not neutral to the frustration experienced by the creditors in having to carry on with litigation with the petitioners, an insolvent company without any certain prospect that if successful on appeal they will be recompensed for the cost and expense incurred. The creditors fear that they may, in the end, find themselves stranded with a yet larger unsatisfied bill of costs and that, no doubt, is not a pleasing prospect. On the other hand it is injudicious to speculate on the outcome of the appeal under any circumstances more so when the issue is not fairly defined before our Court. It [*157] is fair to say that if the petitioners are successful on appeal a judgment in their favour will more than set off the claim of the creditors for judgment and costs. The right of appeal, wherever acknowledged, is a fundamental .step in the process of definition of litigants rights. Therefore to refuse the petition would be tantamount to discontinuance of the appeal proceedings. And that appears to us to be unjust. The implications of the insolvency of the petitioners and its repercussions on the claim of the creditors may be referred to a competent South African Courts who may conceivably order security for costs. That again is a matter entirely for the South Africa Courts. As a matter of general proposition it would be correct to say that a Court of Law would be very slow to refuse restoration of a company if such refusal would entail the frustration of pending Court proceedings.

Having examined every aspect of the case we are of the view that we should order restoration of the company on the register subject to the petitioners paying the creditors’ costs in the proceedings before us. We are well aware that it is impermissible to impose a penalty as a condition precedent to restoration but an appropriate order as to costs is not a penalty. (Re Moses and Cohen Ltd. (1957) 3 All E.R. 232.) Need arose for an application to restore because of the default of the petitioners and such costs would have been avoided had the petitioners discharged their statutory duties. The creditors had every right to voice their views on the matter and should be awarded their costs. One may draw a useful analogy with the restoration [*158] of law suits earlier dismissed because of failure on the part of plaintiff to comply with procedural steps. It is the practice of the Court to order the applicant/plaintiff to pay the costs of the defendant on the ground that such costs are the direct result of the original default of plaintiff. The same line of thinking applies here. Therefore the petitioners are adjudged to pay the creditors costs as a condition precedent to restoration. Inasmuch as a bill of costs has not been filed an undertaking by counsel for the petitioners to meet such costs will suffice.

L. Montanios (for the petitioners): I give a personal undertaking that the costs of the creditors will be paid.

Order for the restoration of the company on the register.