Carina Holdings Pty Ltd v Horizon Star Pty Ltd

[2005] HCATrans 15

[2005] HCATrans 015

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P29 of 2003

B e t w e e n -

CARINA HOLDINGS PTY LTD

Applicant

and

HORIZON STAR PTY LTD

Respondent

Application for special leave to appeal

GLEESON CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 4 FEBRUARY 2005, AT 2.24 PM

Copyright in the High Court of Australia

MR K.G. ROBSON:  If it please your Honours, I appear for the applicant.  (instructed by Talbot & Olivier)

MR A.P. HERSHOWITZ:   If it please your Honours, I appear for the respondent.  (instructed by Paiker & Overmeire)

GLEESON CJ:   Yes, Mr Robson.

MR ROBSON:   If it please the Court.  We invite the Court to state what we say is a simple rule that makes eminent common sense, a simple commonsense rule that is also well accepted in commerce and therefore attractive to this Court.  A director has the power to act in an emergency or necessity or when there is an imminent threat to the survival of the company or its assets without being so authorised by the board.  This rule is, we say, well accepted in the United States.  There is no really persuasive authority either way in England but at least in this Full Court, the Full Court of this State, apparently this law does not appeal.  We say that the advances are indisputably owing to the applicant in this case.  That makes it a rather attractive case for a further reason, namely that it is an unusual section 459G case.  The specific advances are specifically admitted in the deed but the Master found that there is no dispute as to the debt and further, the Full Court accepted that position.

HAYNE J:   Can I just understand some aspects of the facts.  It appears from the application for leave, particularly page 35, that the amount of the disputed debt has been paid into court.  Is that right?

MR ROBSON:   Yes.

HAYNE J:   Is there any other creditor who has indicated interest in the proceedings or is this simply a dispute between companies related in the fashion that the facts reveal?

MR ROBSON:   It is the latter.

HAYNE J:   Why should this Court get into the question of what is the power of a director in a company where it is said that there is deadlock in the context of a contention that there should be a winding up in insolvency of a company which has paid into court the amount of the disputed debt and where there is no other creditor who has put its head over the parapet? 

MR ROBSON:   I imagine what will happen is if this application fails that next week, as early as possible, the respondent will apply for the sum of money to be paid out of court.  Then we will be faced with pursuing a company in liquidation, no doubt.  There is a further alternative that I can put fairly for the respondent, that is that ‑ ‑ ‑

GLEESON CJ:   Could you just elaborate on that.

MR ROBSON:   The company has no assets apart from the money which is paid into court and that sum of approximately $146,000 is claimed by the applicant and behind it, a person known as Jan Franke who is the director, what we describe as the innocent director.  The Full Court decided that this company, the applicant, is, in effect, a sole purpose vehicle, a vehicle to fund a business that the persons associated with the applicant were interested in investing in.  The Full Court found, by implication really, in just a throwaway line that in fact there was no point to continuing the life of the vehicle, and I think that is what your Honour is getting at in another way, but that is not ‑ ‑ ‑

HAYNE J:   And, therefore, if it is plain that this company is to be wound up on the just and equitable ground, why should we consider whether it should be wound up in insolvency?  At the end of the day there has to be some decent commercial reason why this litigation should be permitted to continue and continue all the way to the High Court.

MR ROBSON:   There is a solid commercial reason and that is that companies of this nature, quasi partnerships with only two directors, are extremely abundant, if that is the correct phrase, in this nation.  Perhaps this is the centre of the universe so far as $2 companies are concerned.  It is of the widest possible application – I appreciate you have heard that all this morning but, in our respectful submission, of all the other cases, it is true in this case.  The fact that this action, a derivative action under Part 2F.1A or a winding up on the just and equitable ground, is available does not deprive the director of her right and duty to perform her obligations and functions and nor does it prevent the company as a company from commencing an action in its own behalf simply because the other directors are in a position to withhold authorisation.  That is West View Hills v Lizau at 624, the decision of the Court of Appeals of New York as referred to in the book.

The other reason is more of a commonsense or commercial position and that is that we say obviously a director in this situation should not be compelled to file an application for leave under section 236, which is part of Part 2F.1A, nor should a winding up on the just and equitable ground be preferred.  The law frowns on unnecessary expense and delay and discourages pointless litigation when there is a simple alternative provided by the law itself. 

HAYNE J:   I thought that was the point I was trying to make, Mr Robson.

MR ROBSON:   I appreciate that there are two ways of looking at it and your Honour has one of them.  I have the other one, which is that if it is the law that a director in this situation can sign the demand, then is that not a far better alternative to putting a company to a liquidator whether by a winding up on the just and equitable ground or whether through a derivative action under Part 2F.1A.  East has been looked at again and again in the United States and, as I say, in West View Hills v Lizau alone it is considered to be stated law that these alternatives are no reason to preclude this rule from arising and, we say, being accepted in this country as well.

HAYNE J:   But in truth it is a rule which would deny the existence of deadlock.  The law about deadlocked companies is very elaborated.  It would be an unusual thing to graft onto that body of law some precept, apparently that in emergency or in some cases, although there is a deadlock, one can act without the other.  That in essence is what you would ask us to do, is it not?

MR ROBSON:   We are saying it was tried and tested once again in the Court of Appeals of New York and the minority, the dissentients in that case, focus on that very issue and said that this is wrong to state a rule in these circumstances.  The only other cases the dissentients pointed out where the rule was applied, the rule we propose, is where there is a deadlock.  In fact, your Honour has hit upon the point but not quite correctly, with respect.  When there is a deadlock that is the prime reason, even on the dissentients’ view in the Court of Appeals of New York, that the rule should be stated.  In a deadlock that is the most obvious case.  What was at issue in West View Hills v Lizau and has, however, been taken to be the law since is that now you can go further even when there is not a deadlock and you can go and state this rule.

GLEESON CJ:   Where did the Full Court deal with this point?

MR ROBSON:   The Full Court did not deal with the point.  They, in our respectful submission, grasped entirely the wrong theory.  The Full Court dealt with it as if it was a case of ostensible authority.  The case was never about ostensible authority, it is a case of implied authority.  The Full Court referred to Northside and Smith v Henniken-Major, and applied a theory that is only applicable in the case of an innocent third party who deals with a company, entirely inappropriate.  The question is one of implied authority.

GLEESON CJ:   Was this point argued before the Full Court?

MR ROBSON:   It was argued in the sense of authority.  The American authorities were not put to the Full Court.  There were no Australian authorities in this argument that could have been referred to the Full Court.  I appreciate that may be a reason for frowning upon the application.  However, one must bear in mind, with respect, that the problem is just that.  There really is no authority to state what should be a commonsense commercial rule.  And can I say that it would strike a man or woman of commerce right between the eyes with a thunderbolt to find that this rule is not really the law in this country.

GLEESON CJ:   Was it said to be the rule before the Full Court?

MR ROBSON:   It was said to be the rule but without reference to West View Hills v Lizau or the Judge Kaplan cases, management and technologies and so on.

GLEESON CJ:   Where do we find the submission that was made to the Full Court?

MR ROBSON:   It is not in the application book, I am sorry, your Honour.  They are only in the written submissions.

GLEESON CJ:   I see.  Do you have a copy of them there?

MR ROBSON:   I do, yes.

GLEESON CJ:   Just read out to us what the submission was in the written submissions.

MR ROBSON:   May I be excused from the Bar Table to collect ‑ ‑ ‑

GLEESON CJ:   By all means.

MR ROBSON:  

16.      Horizon puts it too highly in asserting that a board meeting was required to authorise the issue of the demand.  Rather, it need only be shown that the demand was signed by an authorised person, which is only a question of fact . . . 

17.      A director is clearly an authorised person –

and then we refer to Form 509H in the Corporations Regulations which are repeated in the application book today –

18.      The Affidavit accompanying the demand asserts that Franke, a director of Carina, was authorised to swear it . . . 

19.      When a demand is signed by someone with prima facie authority, such as a director, then the signature carries with it an assertion of agency.  It is unnecessary to have explicit evidence of authority in that case.  See DFC of T v Players International . . . 

20.      Horizon puts the question of authority in issue in one sense, but not in a valid sense.  Franke had authority to sign the demand but Reimers had no authority to prevent it being signed.

And that is the point that we emphasise today.  It is turning the law upside down, with respect –

Arguing that he did is a complete subversion of several clear sections of the Corporations Act, the common law, the equitable duties to prevent a conflict of interest from arising.

21.      Horizon’s complaint may be that it disputes the retainer held by Carina’s solicitors . . . If so, Horizon should have challenged the retainer on motion, as that is not a proper defence . . . 

24.      It is incorrect to assume that a board resolution is required to issue a demand, which is merely an act of debt collecting.

25.      Debt collecting might only become a board issue for major customers; debt that is causing cash flow problems to the extent of creating insolvency; or debt that arises from litigation (as it is a contingent liability). 

And then there are other submissions that refer to the need to have a meeting to resolve, and whether in fact a meeting is required when there is a situation such as this, just two persons who are at loggerheads or, as Justice Hayne puts it, in deadlock. 

The Master treated it, if I can put it this way, as a red herring.  He did not use that phrase, but that is the way he seemed to have treated it, and just dealt with it very shortly at the end of the judgment, his reasons for decision.  The Full Court upheld the submission in approximately four paragraphs.  That is against us to some extent, but the very problem is that this rule has to be now stated by the High Court because, unfortunately, it just has not been brought to the attention of the Full Court before.  It has not been held by the Full Court.

GLEESON CJ:   I agree that it has not been brought to the attention of the Full Court, having regard to what you read out to us from the written submissions.

MR ROBSON:   But here the case was dealt with by the Full Court, as I say, on the basis of ostensible authority, being a subspecies of apparent authority, we say.  This is ‑ ‑ ‑

GLEESON CJ:   It seems to have been argued and treated by the Full Court as a question of fact.

MR ROBSON:   Yes, it was treated as a question of fact in the sense that there was no resolution of the board.  We say that the Full Court proceeded on entirely the wrong theory and should have applied the correct theory of implied authority.  Smith was referred to by Justice McKechnie.  That is a case that possibly has even less relevance than Northside.  That concerned the second attempt of the English Parliament to put into effect a directive of the European community, what is their section 35A, and also their section 322A, rules which again deal with third parties being able to deal with a company without looking into the internal management and a rule which deals with a transaction to which the parties include a director of the company, and then the board of directors in connection with a transaction exceed any limitation on their powers.  They are company law cases but they are quite removed from the real issue here, we submit. 

Furthermore, it is of interest to note that in Smith itself, Lord Justice Robert Walker would have accepted the applicant’s argument if those facts had been before that court.  The other justices disagreed, but only because they differed as to the proper interpretation of in effect the ostensible authority rule.  That case concerned a director who on his case – this is Smith - made an honest mistake as to the correct interpretation or construction of the articles. 

That is not the situation here.  Here, we have the cleanest possible view of a factual outline.  We have it being abundantly clear, we say, that the director Mr Reimers, who controlled the debtor, should never have contemplated taking the action adverse to the company at several stages.  He could never have contemplated vetoing the resolution to sue the debtor.  He should never have contemplated filing an application to set aside the statutory demand.  Here, there is a delinquent director, we say, on the correct construction of the facts, who is refusing to abide by his duties as stated in the Corporations Act. 

That brings me to a further point, your Honours.  The Full Court dealt with the case on the basis that Northside and Smith v Henniken-Major could answer the question.  That is not correct.  The question of authority is a factual matter partly, but also is a question of what the Corporations Act provides, and as I read - and I will not repeat it - the Corporations Act provides how a demand may be signed, both by way of statute and by the

Regulations, and furthermore, reform.  All of those requirements were satisfied in this case. 

Your Honours, the other three grounds really are not of themselves of merit, in our submission, but they should be argued should this application be given special leave.  We say it is quite clear that 467A does not allow a defect in an affidavit to be corrected, and your Honour Justice Hayne so found in the trial judgment in David Grant, and that has been followed all the way through.

The other point I have already covered really, and that is a question of retainer.  The correct argument made by the respondent here was a question of retainer, nothing to do with the question of authority.  If it please the Court.

GLEESON CJ:   Thank you.  We do not need to hear you, Mr Hershowitz. 

The Court is of the view that having regard to the particular facts and circumstances of the case and the manner in which the case was conducted in the Full Court and dealt with by the Full Court, the decision of that court does not raise an issue suitable to a grant of special leave to appeal to this Court.  The application is dismissed with costs. 

MR ROBSON:   Your Honour, could I be heard on the question of costs? 

GLEESON CJ:   Yes. 

MR ROBSON:   Firstly, if there needs to be an order in favour of the respondent, it is agreed between the parties that the order should be against Jan Franke, because the company itself, it is agreed, should not pay the costs. 

GLEESON CJ:   Hang on, you say that is agreed between the parties, but Jan Franke is not one of the parties. 

MR ROBSON:   That is correct. 

GLEESON CJ:   Has Jan Franke an opportunity to be heard on this matter, before we make an order against her? 

MR ROBSON:   My instructor represents her as well. 

GLEESON CJ:   Well, so you say, but is there an appearance for her? 

MR ROBSON:    No, there is not. 

GLEESON CJ:   If people are in agreement about this, then they can just go away and do it, but it is no light thing for us to be making orders against third parties. 

MR ROBSON:    I appreciate that, your Honour, but I am bound to mention that.  There is an anterior point, which I would briefly like to make, if I may.  We say, and it is set out in the application book, that there should be no order for costs.  As your Honour Justice Hayne observed, the money is sitting in an account in the Supreme Court, abiding the outcome of this application.  We say for all the reasons expressed in the application book, really, this is a case of a delinquent director.  There should be no order, in effect, in his favour.  There will be further proceedings, no doubt, but at the end of the day we say it will be clear that either the Supreme Court should make an order as to the costs as a whole, or this should not be a question that needs to trouble this Court in any event, for the reasons we set out in the factual basis. 

GLEESON CJ:   Thank you. 

The application is dismissed with costs.  If the parties have some private agreement between themselves about the matter of costs, they can give effect to their agreement in due course. 

We will adjourn for a short time to reconstitute. 

AT 2.45 PM THE MATTER WAS CONCLUDED