Crawford v Demertjis & Ruhs Pty Ltd

By summons filed on 18 September 2023, the plaintiff, Michael Crawford, seeks to appeal against the judgment entered against him by Brender LCM in the Local Court (the Court below) on 22 August 2023 in favour of Demertjis & Ruhs Pty Ltd (the lessor). The judgment sum of $62,962.61 comprised a principal amount of $57,238 of which $57,040 was outstanding rent and $198 was the cost of rectifying damage to premises. The balance comprised pre-judgment interest and fees.

Although Mr Crawford did not accept that leave was required, he sought and was granted leave to amend the summons to add an application for leave to appeal. The amended summons was filed, in accordance with my direction, on 1 February 2024.

The relevant background facts are as follows. The lessor is the proprietor of commercial premises in Ingleburn, New South Wales (the premises). On 2 February 2010, the lessor granted a lease of the premises to Industrial Equipment Sales Pty Ltd (the lessee) for a term of three years commencing on 1 March 2010 and ending on 28 February 2013 (the lease). There was an issue in the Court below about the description of the lessee which was not pressed in this Court.

The rent clause in the lease provided as follows:

The lease provided, in the Holding Over clause, that unless a party gave written notice of termination of the lease, it would continue as a periodic lease from month to month at the same rent or at a rent agreed by the parties (the holding over provision).

The parties to the lease were the lessor, the lessee and Mr Crawford, who was referred to as a guarantor.

Clause 30 of the lease, which set out the circumstances in which the lease could be terminated, relevantly provided as follows:

Clause 30b conferred a right on the lessor to re-enter the premises and take possession or continue the lease as a weekly tenancy if the lessee failed to pay rent for more than 14 days, seriously breached the lease or in the event of the bankruptcy or insolvency of the lessee or Mr Crawford.

Clause 34, headed “Interpretation”, at sub-clause j, provided that headings in bold in the lease had been inserted to assist the parties but “do not form a legal part of the lease.”

Clause 35 provided for the guarantor’s (Mr Crawford’s) liability as follows:

On 11 July 2010 the lessee was deregistered. Accordingly, by operation of s 601AD(1) of the Corporations Act 2001 (Cth), it ceased to exist and, by operation of s 601AD(2), its property was vested in the Australian Securities and Investments Commission (ASIC). Neither the lessee nor Mr Crawford notified the lessor of the deregistration. Rent under the lease continued to be paid until 15 June 2018. On 16 December 2020, the lessor issued a notice to vacate. The lessor regained possession of the premises on 15 January 2022 at which time the rental arrears amounted to $57,040.

The lessor commenced proceedings in the Local Court for recovery of the outstanding rent and the sum of $198 to rectify damage to the premises (the outstanding sum). There was no issue as to the quantum.

In its amended statement of claim filed on 24 November 2022, the lessor sued Mr Crawford for the outstanding sum pursuant to cl 35 of the lease. In the alternative, it sought damages for alleged misleading and deceptive conduct (that Mr Crawford had not informed the lessor of the deregistration of the lessee). The alternative claim does not need to be addressed as it was rejected by the Court below and there is no notice of contention.

Mr Crawford relevantly defended the claim by alleging, first, that the lease had been terminated on the lessee’s deregistration on 11 July 2010 and that no further rent was payable; and, second, that his liability as a guarantor was secondary and, accordingly, did not arise since the lessee could not be liable for any amount under the lease after 11 July 2010 because it had ceased to exist. He also argued that, as a matter of construction, his liability was limited to monies “payable by [the lessee]”, of which there were none following the lessee’s deregistration.

The Court below held that:

The grounds of appeal set out in Mr Crawford’s summons are as follows:

Mr Crawford has invoked this Court’s jurisdiction under s 39 of the Local Court Act 2007 (NSW) which entitles a person who is dissatisfied with a judgment of the Local Court to appeal as of right to this Court “but only on a question of law”. He has not sought leave pursuant to s 40 of the Local Court Act to appeal on “a ground that involves a question of mixed fact and law”.

I consider that leave is required as the questions raised by the grounds are not questions of law alone, as required by s 39 of the Local Court Act. The relevant test was authoritatively stated by Gibbs CJ in Williams v The Queen (1986) 161 CLR 278 at 287; [1986] HCA 88:

In R v PL [2009] NSWCCA 256; (2009) 199 A Crim R 199, the Court considered the distinction between a ground that involves a mixed question of fact and law and a ground that involves a question of law alone.

In R v PL, the second appeal ground was:

This ground was held to involve a mixed question of fact and law. Spigelman CJ (McClellan CJ at CL and R A Hulme J agreeing) said at [26]:

The third appeal ground was:

This ground was held to involve a question of law alone. Spigelman CJ said at [27]:

Grounds 1, 2 and 3 in Mr Crawford’s summons do not involve a question of law alone since none can be decided without reference to the facts and circumstances of the present case. The grounds raise mixed questions of law and fact within the meaning of s 40 of the Local Court Act.

Accordingly, leave to appeal is required. Leave ought be granted only where the matter involves an issue of principle, a question of general public importance or a reasonably clear (and not merely arguable) injustice. The quantum of the appeal is a relevant consideration in the grant of leave. The error must be more than merely arguable: Be Financial Pty Ltd as trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 at [32], [33] and [35] (Basten JA). These principles are of particular significance where there is a separate leave application.

In the present case, the parties have prepared the matter as if there was no requirement for leave. The hearing of the appeal was listed with an estimate of half a day which was sufficient for the leave application and the appeal to be heard. I am persuaded that the rights of a party in the lessor’s position and the obligations of a party in Mr Crawford’s position in circumstances where the lessee has been deregistered, raise an issue of principle and that leave ought be granted. Although the matter in issue is small in the context of this Court’s jurisdiction, the jurisdiction of the Local Court is limited to $100,000 (s 29(1)(a) of the Local Court Act) and the sum in issue is well over half that amount.

Section 601AD of the Corporations Act relevantly provided:

Section 601AH relevantly provided:

The first ground raises the question whether the holding over clause was effective to create a periodic tenancy in circumstances where the lessee was deregistered during the fixed term of the lease.

Mr Crawford accepted that, on the lessee’s deregistration, there were some aspects of the lease which subsisted (such as the leasehold interest, which vested in ASIC). However, he submitted that the lease, as a contract, depended on “the existence of the tenant” and that, therefore, when the tenant ceased to exist, the lease must necessarily have come to an end. He submitted that deregistration caused the “legal structure” of the lease to be “ripped apart” and “destroyed” with the consequence that “the bundle of rights” which constituted the lease “came to an end”.

Although Mr Crawford accepted that the lease did not contain an express provision that deregistration of the lessee would terminate the lease, he submitted that this consequence must flow from the effect of s 601AD(1) of the Corporations Act. This was the sole juridical basis identified by Mr Crawford to support the proposition that deregistration of a lessee automatically terminated a lease to which it was a party.

Mr Crawford contended that any other interpretation would render the lease unworkable since, for example, there would be no entity capable of serving a notice or on which a notice (such as a notice of termination) could be served and no entity which would be capable of occupying the premises (since the lessee, by reason of s 601AD(1) no longer existed, and it was the only entity which had a right to exclusive possession under the lease).

Mr Crawford submitted, further, that because the lease was terminated on 11 July 2010, it was no longer in existence at the end of its term and that, accordingly, the holding over provision had no effect. Thus, he contended that no liability for rent could accrue after deregistration (on 11 July 2010) or, in the alternative, at the expiry of the fixed term of the lease on 28 February 2013. Mr Crawford also put an alternative argument as to why he was not liable, which is the subject of grounds 2 and 3 and will be addressed below.

Leases are not only proprietary interests but they are also contracts: see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 33-34 (Mason J); [1985] HCA 14. Thus, the grant of the lease by the lessor to the lessee created a proprietary interest which was governed, as a matter of contract, by the terms of the lease. As referred to above, Mr Crawford accepted that the lease did not expressly provide for automatic termination upon the deregistration of the lessee.

In GIO General Ltd (Agent for NSW Workcover Scheme) v Sabko Pty Ltd (2007) 70 NSWLR 743; [2007] NSWSC 251 (Sabko), the plaintiff (the insurer) sought an order for reinstatement of the defendant (the insured company) pursuant to s 601AH of the Corporations Act and an order that the company be wound up. In order to establish that it had standing to bring the application for winding up, the insurer needed to show that it was a creditor of the insured company: ss 459P(1)(b) and 462(2)(b) of the Corporations Act. The insurer and the insured company entered into a contract of insurance for the period of one year from 8 April 2005 to 8 April 2006 in the form required by the Workers Compensation Regulation 2003 (NSW). The contract included a term which provided for automatic renewal of the insurance unless the insured company gave notice that renewal was not required or the insurer gave notice of refusal to renew.

The insurer contended that the term had the effect that, despite the deregistration of the insured company, the insurance policy was automatically renewed for a further year at a premium which fell due on 31 July 2006. It submitted that when the insured company was reinstated, the premium became due and that, thus, the insurer was a creditor of the insured company. Austin J accepted this submission and said, of present relevance:

I consider that, just as the policy in Sabko was held to have been automatically renewed by the effluxion of time (no notice in accordance with the policy having been given to prevent this consequence), the lease in the present case continued and became a monthly tenancy since no notice of termination was given as required by the holding over provision and no act effecting termination occurred. Although the lessee could have neither given nor received a notice of termination, the continuation of the lease and its transformation into a periodic tenancy was the consequence of the operation of the terms of the contract (being the lease) which was entered into before it was deregistered. The continued operation of the lease did not depend on there being a lessee in existence to take or remain in possession of the premises. Indeed, the obligations under the lease would have arisen even if an existent tenant had decided not to go into possession of the premises until a period after the commencement of the lease or at all, or had vacated the premises after a period prior to the termination of the lease.

For these reasons, I consider that the Court below was correct to find that the lease did not come to an end upon deregistration. As the lease was extant at the time of the expiring of its term, the holding over provision came into effect and the lease continued as a monthly tenancy. Accordingly, ground 1 has not been made out.

In support of ground 2, Mr Crawford submitted, in the alternative to his argument in support of ground 1, that, even if the lease continued after the lessee’s deregistration, the lessee was not capable of accruing liabilities after it ceased to exist and accordingly, that no liabilities accrued under the lease for which Mr Crawford could be liable. He further submitted that, as the lessee’s liability to pay rent was extinguished upon its deregistration, no liability to pay rent could accrue to anyone in the period of the lessee’s deregistration because the lessee was the sole lessee.

The parties referred me to decisions (referred to below) in which it was held that claims cannot be made by or against a company while it is deregistered. The parties also indicated that they had been unable to locate an authority which addressed the effect of deregistration of one only of two parties who are jointly and severally liable in respect of the same obligation to a third party. I propose to consider the authorities on which the parties relied and identify the applicable principles, with a view to ascertaining the effect of the principles in the present case.

Mr Crawford relied on Re Austral Family Homes Pty Ltd (in liq) (1992) 28 NSWLR 247 (Re Austral), in which a liquidator sought an order under ss 381 and 382 of the Companies (New South Wales) Code (the Code), which preceded the Corporations Act, that the company be dissolved and that the liquidator be released. Section 381 of the Code provided that when a liquidator had realised all of a company’s property (or all that could be practically realised) and distributed a final dividend and adjusted the rights of contributories, the liquidator may apply to the court for an order that the liquidator be released or for an order that the liquidator be released and that the company be dissolved. Section 458(1) of the Code provided that such a dissolution could be declared void on subsequent application to the Court.

McLelland J dismissed the application. In addressing the consequences of dissolution, his Honour said at 249:

Re Austral concerned an application for dissolution by the Court, which could only be undone by a further application under s 458(1), whereas deregistration occurred in the present case because the lessee failed to furnish returns to ASIC. Re Austral and some of the cases referred to in the passage extracted above have been cited with approval in cases concerning the Corporations Act (including Gallagher Bassett Services NSW Pty Ltd v Murdock (2013) 86 NSWLR 13; [2013] NSWCA 386 at [13] (Barrett JA, Gleeson and Leeming JJA agreeing)).

The word “extinguishes” in the passage extracted above needs to be understood in the present context to at least anticipate and accommodate the possibility of reinstatement, which could be granted on the application of a person aggrieved by the deregistration if the Court is satisfied that it is “just” to do so: s 601AH(2)(b) of the Corporations Act. Having regard to s 601AH(5) (which provides that a company reinstated is taken to have continued in existence as if it had not been deregistered), it cannot be said that claims against the company are extinguished for all time (as the word “extinguishes” implies). It is, however, uncontroversial that they are unenforceable against the deregistered company unless and until it is reinstated.

The effect of the availability of reinstatement was addressed in Sweeney & Vandelaur Pty Ltd v BNY Australia Ltd (1993) 11 ACSR 356 (Sweeney) at 359-360 where Cole J said at 360:

Sweeney was applied in Re Morton; Ex parte Mitchell Products Pty Ltd [1996] FCA 828; (1996) 21 ACSR 497 at 514-515, resulting in actions which deregistered companies had purported to bring being struck out. It was also applied in Partners v Sampson [2002] NSWSC 383 (which concerned the Corporations Act) where the purpose of the application for reinstatement (which was granted) was to enable the applicant to wind up the company. The reinstatement was held to be “just” because it was necessary as the company could not be wound up while it remained deregistered: Partners v Sampson at [14].

In Re Silverline Technologies Pty Ltd (In Liq) [2005] NSWSC 620; (2005) 192 FLR 261 (Silverline), the liquidator of an Australian company sought directions concerning a charge granted by that company to a New Zealand company which had been deregistered. The liquidator relied on Re Austral in support of the submission that, as the debts owed to the New Zealand company were “extinguished”, the Australian register should record in the entry describing the charge in favour of the New Zealand company the following additional words:

In Silverline, Barrett J considered the NZ legislation, which contained equivalent provisions to s 601AD and s 601AH of the Corporations Act. His Honour considered that, as it could not be concluded that the NZ company’s chose in action against the Australian company had been extinguished (its chose in action having been vested in the NZ equivalent of ASIC and there being a possibility that the NZ company would be reinstated), the words ought not be added to the Australian register. However, his Honour permitted the liquidator to conclude the winding up irrespective of the debt secured by the charge as the liquidator had been diligent in investigating whether a claim would be made in respect of the debt.

I consider that Barrett J’s analysis in Silverline correctly identifies the difficulty with describing debts owed to or by a deregistered company as having been “extinguished”, in circumstances where the debt has not been discharged and there is a possibility that the company may be reinstated. The fact that a debt is not presently enforceable against a company does not make it an “extinguished” debt. As long as a deregistered company remains deregistered, a pre-existing debt cannot be enforced against it and it cannot accrue further debts during the period of deregistration. However, it does not follow that other parties to the relevant contract are not liable for those debts.

The premise of ground 2 is that the Court below found that the lessee continued to accrue liabilities for rent and outgoings following its deregistration. I do not consider that the Court below made such a finding. What the Court below found was that:

I am not persuaded that either of these findings was in error. The Court below did not make the alleged error of attributing liabilities for rent and other payments to the lessee following its deregistration. The findings of the Court below were based on the construction of cl 35 as an indemnity, rather than as a guarantee (which is the subject of ground 3, addressed below). Ground 2 has not been made out.

The reasons of the Court below for construing cl 35 as an indemnity are as follows:

Mr Crawford submitted, in this Court and the Court below, that, even if the lease continued after the deregistration of the lessee, cl 35 did not create an indemnity. He submitted that the words “the payment of the rent and all other monies payable by the [lessee]” (emphasis added) in cl 35 indicated that Mr Crawford’s liability was only ever secondary as he would only ever be liable for amounts for which the lessee was primarily liable. Mr Crawford contended that as, post-deregistration, the lessee could not accrue any liability under the lease, there were no “monies payable by the [lessee]” which fell within the scope of Mr Crawford’s liability to the lessor under cl 35. On this basis, Mr Crawford contended that he could not be liable under cl 35.

It was argued on behalf of the lessor that the words “payable by the Tenant” in cl 35 were “descriptive” and “adjectival” and, in effect, included monies which the lease contemplated would be paid by the lessee. The lessor submitted that the words ought not be construed as if they read, “for which the lessee is also presently liable” since this would be an unwarranted gloss on the wording of cl 35. The lessor submitted that the evident commercial purpose of cl 35 was to make Mr Crawford personally and primarily liable for all of the amounts which the lease provided would be payable by the lessee and that this purpose would be defeated if cl 35 were construed such that the lessee’s non-existence (as a consequence of deregistration) prevented a debt which would otherwise have accrued against the lessee also accruing against Mr Crawford.

In order to address these submissions, it is necessary to construe the lease as a whole to determine whether the intention of the parties, objectively ascertained, was that Mr Crawford would be liable for rent and other payments for which the lease provided that the lessee would be liable, even if the lessee never became liable for those amounts. As part of this analysis, it is useful to address whether cl 35 ought be construed as an indemnity (and thereby imposing primary liability on Mr Crawford as well as the lessee) or a guarantee (and thereby imposing secondary liability on Mr Crawford).

In Canty v PaperlinX Australia Pty Ltd [2014] NSWCA 309, Gleeson JA (Barrett and Emmett JJA agreeing) at [37]-[49] explained the distinction between a guarantee and an indemnity and applied the relevant principles to the agreement in that case. His Honour said:

His Honour continued:

When construing the lease as a commercial contract, it is important to consider the language used, the surrounding circumstances and the commercial purpose or objects to be secured by the agreement: Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 at [35] (French CJ, Crennan and Kiefel JJ).

For the reasons given in Canty, the description of Mr Crawford as a “guarantor” is not determinative, since the characterisation of an obligation as either a guarantee or an indemnity is a question of substance and not form. This approach is fortified by cl 34j of the lease (set out above) which provides that headings do not form a “legal part of the lease”. I consider that the words in cl 35 are apt to create an indemnity since they expressly make Mr Crawford jointly and severally liable with the lessee to the lessor. These words only have meaning if the liability of Mr Crawford is, but for the lessee’s deregistration, the same as the liability of the lessee and thus is a strong, and in my view determinative, indicator that the parties’ intention was to create an indemnity. The consequence is that Mr Crawford’s liability is a primary liability for the “rent and other monies” under the lease.

This conclusion also affects the interpretation of “payable by the lessee”. If these words are given the meaning for which Mr Crawford contended (that is, “for which the lessee is liable”), the commercial purpose of cl 35 would be subverted in that any inability on the part of the lessor to recover against the lessee would also prevent recovery against Mr Crawford. I consider that these words ought be construed as referring to payments, including rent, which the lease contemplated would be paid by the lessee, whether or not the lessee actually ever accrued liability for those amounts. This reading is supported by the balance of cl 35 which renders Mr Crawford jointly and severally liable “for the due performance and observance of all the terms and conditions on the part of the Tenant contained or implied.”

In substance, cl 35 makes Mr Crawford liable for all the obligations which the lease contemplated would be performed by the lessee. For these reasons, ground 3 has not been made out.

I note for completeness that the lessor submitted that the consequence of acceptance of Mr Crawford’s arguments would be that a party in its position would need to apply for reinstatement of the lessee pursuant to s 601AD of the Corporations Act for the sole purpose of enforcing a debt against a third party. The lessor submitted that this would be an expensive, arid and fraught exercise, particularly in circumstances where it could be assumed that the lessee was insolvent. The lessor referred to In the matter of BMT & Associates Pty Ltd [2014] NSWSC 1082 (BMT) in which Black J said, at [24]-[27], that, in circumstances where the deregistered company was plainly insolvent, the Court would only order its reinstatement if a liquidator could be appointed prior to the making of a reinstatement order. No such order was made in BMT as the applicant did not have the consent of a liquidator to the appointment. The lessor submitted that it would be unjust if it were required to arrange and potentially pay for the liquidation of an insolvent company for the sole purpose of pursuing its rights against a (potentially) solvent indemnifier.

I have not found it necessary to address these matters since I am satisfied, as a matter of construction of the lease, that it is not necessary for the lessor to obtain an order for reinstatement of the lessee as a condition precedent to the enforcement of its rights against Mr Crawford.

The parties agreed that, subject to an exception which does not apply, there is no reason to depart from the general rule that costs follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1. Accordingly, the plaintiff ought pay the defendant’s costs of the proceedings.

For the reasons given above, I make the following orders: