Cranes 'R' US Pty Ltd v Busselton Mini Crane Hire Pty Ltd
[2012] WADC 24
•17 FEBRUARY 2012
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: CRANES 'R' US PTY LTD -v- BUSSELTON MINI CRANE HIRE PTY LTD [2012] WADC 24
CORAM: SWEENEY DCJ
HEARD: 1 JUNE 2011
DELIVERED : 17 FEBRUARY 2012
FILE NO/S: APP 6 of 2010
BETWEEN: CRANES 'R' US PTY LTD
Appellant
AND
BUSSELTON MINI CRANE HIRE PTY LTD
Respondent
ON APPEAL FROM:
Jurisdiction : MAGISTRATES COURT OF WESTERN AUSTRALIA
Coram :MAGISTRATE EDWARDS
Citation :BU 531 of 2009
Catchwords:
Corporations - Ability of a director to retain solicitor without authority of board of directors - Ability of a director to institute proceedings on behalf of company without authority of board of directors - No valid retainer - Unauthorised proceedings - Proceedings struck out - Costs order against solicitor
Legislation:
Nil
Result:
Appeal allowed
Representation:
Counsel:
Appellant: Mr A P Hershowitz
Respondent: Mr D F Beere
Solicitors:
Appellant: Michael J Joubert
Respondent: Mossensons
Case(s) referred to in judgment(s):
ACN 076 676 438 Pty Ltd (in liq) v A-Comms Teledata Pty Ltd [2000] WASC 214
Adams v Brinklow (Unreported, WASC, Library No 5883)
Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673
Atwood v Chichester (1878) 3 QBD 722
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279
Carr v Finance Corp of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246
Daimler Company Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 AC 307
Deputy Commissioner of Taxation (Vic) v Players Entertainment Network Pty Ltd (1988) 6 ACLC 902
Hall v Nominal Defendant (1966) 117 CLR 423
Harry S Bagg's Liquidation Warehouse Pty Ltd v Whittaker (1982) 44 NSWLR 421
Henderson v Henderson (1843) 3 Hare 115; (1843) 67 ER
Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2002] WASC 23
Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94
Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156
In Re Duomatic Ltd [1969] 2 Ch 365
In Re Express Engineering Works Ltd [1920] 1 Ch 466
John Morley Building Co v Barras [1891] 2 Ch 386
John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113
Marshall v The Town Planning Appeal Tribunal of Western Australia [2006] WASCA 146
Massey v Wales; Massey v Cooney (2003) 21 ACLC 1978
Montevento Holdings Pty Ltd v Scaffidi Holdings Pty Ltd [2010] WASC 132
Northside Developments Pty Ltd v Registrar General (1990) 170 CLR 146
Palmer v Prince [1980] WAR 61
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Racovalis v Rescom Mortgages Pty Ltd [2010] VSCA 55
Richmond v Branson & Son [1914] 1 Ch 968
Royal British Bank v Turquand (1856) 6 El & Bl 327; (1856) 119 ER 886
SWEENEY DCJ:
Introduction
The key issue involved in this appeal is whether proceedings in the Magistrates Court lodged on behalf of the claimant, the respondent to this appeal, have been properly instituted, or whether they have been commenced without the authority of the company and are a nullity.
On 23 December 2009 the claimant company lodged a general procedure claim in the Magistrates Court claiming an amount of $32,259.32 against the defendant (the appellant) 'by way of crane hire, labour, wages and insurance refund' together with interest and costs. The defendant having failed to lodge a response or statement of defence, the claimant entered default judgment and judgment was given on 2 February 2010. The claimant then began to take steps to enforce the judgment, and a property seizure notice issued.
As it happens, the defendant had attempted to lodge some form of defence to the claim. Mr Nicola Demarte, a director of the defendant, had instructed an employee to deal with the matter, but she did so incompetently. I will explain that in a little more detail below.
By application dated 18 February 2010 the defendant applied to set aside the judgment. The matter was heard on 17 March 2010 before Magistrate Edwards. The defendant argued that the claimed debt was not owed, having been forgiven in various negotiations by which Mr Paul Perrott, a director of the claimant, and his wife Sharon had sold their 25% beneficial interest in the defendant to Demarte's wife Robyn, the sole shareholder in the defendant. The argument was that, in arriving at the price for the Perrotts' interest in the defendant, the debt had been taken into account.
That argument was unsuccessful. Her Honour found that the materials before the court did not disclose an arguable defence to the claim and so, on 14 April 2010, her Honour dismissed the application to set aside default judgment.
The very next day a notice of discontinuance of claim was filed by Demarte, who is not only a director of the defendant, but is the other director of the claimant, purporting on behalf of the claimant to discontinue the whole of the judgment and the costs of the claim. It was an audacious, and obviously improper, move on the part of Demarte.
That step prompted an application of the part of the claimant seeking an order for removal of the notice of discontinuance from the court file, together with an injunction restraining Demarte from filing any such further notices purportedly on behalf of the claimant.
In response to that application, on 25 May 2010 the defendant filed an application seeking orders that the name of the claimant company be struck from the proceedings, that the default judgment be set aside, that the property seizure notice earlier issued be cancelled and that the claimant's solicitor, Mr Beere, pay the costs of the proceedings to date.
Both applications were heard before her Honour on 1 September 2010. The argument on behalf of the defendant was that the claimant's solicitor was not properly retained by the claimant company, its director, Perrott, not being authorised by the company to instruct Mr Beere to institute legal proceedings on its behalf.
Judgment was delivered on 3 November 2010. Her Honour granted the claimant's application and ordered that the notice of discontinuance filed by Demarte, purporting to act on behalf of the claimant, be removed from the court file. Her Honour found, no doubt correctly, that in purporting to discontinue the proceedings, Demarte was attempting to deprive the claimant company of a sum awarded in its favour in circumstances in which he had a clear conflict of interest, and hence the filing of the notice was a breach of his obligations as a director of the claimant company. No complaint is made about her Honour's ruling in that regard.
Her Honour then dismissed the defendant's application. Briefly stated, her Honour's reasons were that, the defendant having failed to raise, in the first application to set aside default judgment, any challenge to Perrott's authority to instruct a lawyer to commence legal proceedings on behalf of the claimant company, the defendant was now estopped from raising it in the second such application. Her Honour also found that, while the issue of authority or lack thereof to commence legal proceedings did amount to an arguable defence, it was not in the interests of justice to set aside the default judgment. Against that decision the defendant now appeals.
There are five grounds of appeal. Ground 1 complains that her Honour erred in law in finding an issue estoppel arose preventing the defendant from raising the issue of whether or not proceedings were instituted without due authority of the claimant.
The second ground complains that her Honour erred in law in finding that the second application to set aside the default judgment amounted to an abuse of process, when the second application sought different orders to the first, when the evidence strongly suggested the proceedings had been instituted without authority, and when her Honour concluded the issue did give rise to an arguable defence.
The third ground complains that her Honour erred in law and fact in failing to make a positive finding that the proceedings had been instituted without the authority of the claimant, when the essential facts concerning that issue were not in dispute.
The fourth ground complains that her Honour confined herself to the application to set aside default judgment and did not consider the other orders sought including an order that the claimant's name be struck from the proceedings on the basis that they had been commenced without its authority.
The fifth ground complains that her Honour ought to have granted an extension of time to the defendant within which to bring a second application to set aside the default judgment.
Counsel for the defendant before me appeared to adopt a less ambitious stance, his submissions pressing the point that there is an arguable defence on the basis that the proceedings have been commenced without authority. Grounds 3 and 4 were certainly not abandoned before me, however, and represent the defendant's position before her Honour. I have addressed myself to the grounds of appeal and not just to the submissions.
It is common ground that, to succeed, the defendant must show error on the part of the learned magistrate. A decision to set aside, or refuse to set aside, a default judgment being a discretionary one, it is not enough for me to decide that I would have exercised the court's discretion differently from her Honour and reached a different decision. However:
If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so: House v R (1936) 55 CLR 400 per Dixon, Evatt and McTiernan JJ at 505.
Somewhat reluctantly, I uphold the appeal on the basis that the proceedings were instituted without the authority of the claimant, with the result that the entire proceedings are a nullity and the defendant should not be estopped from raising that issue and it follows that the default judgment should be set aside. I say 'reluctantly' because it appears to me that her Honour's earlier decision of 14 April 2010, to the effect that the defendant has no defence on the merits to the claim for the debt, is entirely correct. Indeed, that decision was not the subject of an appeal. And my decision puts the claimant in the invidious position that it currently has no‑one who can instruct a solicitor on its behalf.
Nevertheless, I consider the authorities compel me to this decision. And the claimant is in this position because it entered into contractual arrangements whereby the defendant became its debtor when both directors of the claimant had a material interest in the defendant, Demarte as a director and Perrott as a beneficial shareholder. It was that commercial approach and the ultimate falling out between the two directors which has caused this result.
This decision does not leave the claimant without remedy. The corporations law provides solutions for situations where the directors are at loggerheads, including the appointment of a liquidator who can then act on behalf of the company.
The relationship between the parties and the broad history of the dispute
There are multiple affidavits before the court, sworn by Demarte and Perrott and filed during the two applications. Unfortunately both Demarte and Perrott do not always appear to preserve the distinction between themselves in their personal capacities and the corporate entities and consequently the affidavits are not as clear as I would like in some areas.
For 15 or more years Demarte has been involved in the crane hire business in Bunbury and Busselton in a company called Halifax Crane Hire Pty Ltd.
On 15 May 2002 he also registered the defendant company, Cranes R Us (WA) Pty Ltd, with four issued shares all beneficially owned by his wife Robyn Demarte. He and his wife are the directors of the company. The defendant purchased four cranes to operate.
On 25 May 2003 the claimant company, Busselton Mini Crane Hire Pty Ltd, was registered as a proprietary company. Demarte had previously used that same business name in conjunction with another family member, but nothing turns upon that. The two directors are Demarte and Perrott, with Demarte as secretary. The company has two issued shares, Demarte holding one and Perrott and his wife Sharon jointly holding the other.
In his affidavit of 18 February 2010 Demarte explained that the reason behind the registration of the claimant was that he identified a niche market for a 7 tonne crane truck and purchased one from the Eastern States 'for the Bunbury depot'. He says that Perrott purchased a half share in the crane truck for about $53,000. Perrott says the sum was higher, but nothing turns upon that. It is not entirely clear from the affidavits but it appears that the crane might have been purchased by Demarte and Perrott in their personal capacities.
Demarte deposes that 'the defendant dry hired the crane from Paul Perrott and me at 40% of its monthly turnover and we shared the 40% turnover equally between us. At that time Paul was still employed at Metroof'.
Demarte deposed:
Paul asked me to assist him with a company structure as he did not have the funds to start his own. On 23/5/2003 the business Busselton Mini Crane Hire Pty Ltd was registered with me as a director and secretary and with Paul as a director and each of us had one share each. I agreed to let Paul use this company as he wanted to leave his job and become a subcontractor to the defendant.
Paul utilised the entity Busselton Mini Crane Hire Pty Ltd and subcontracted the crane to the defendant. Paul used Busselton Mini Crane Hire Pty Ltd to invoice the defendant every month.
The business arrangement between Paul and I was that Paul purchased a 25% share in the defendant which along with Halifax held most of the crane business in Busselton. Paul paid $150,000 for a 25% share in the defendant.
In practice the business arrangement between Paul and I was that Paul subcontracted to the defendant using the crane in mainly the Busselton and surrounding areas and operated as Busselton Mini Crane Hire Pty Ltd.
As a contractor, Paul received 40% of the total crane hire of the crane per month and in addition he was paid $1,200 per month for doing welding work on behalf of the defendant and this was a flat rate that was paid to him irrespective of whether he did any welding or not. Paul utilised the welding equipment of the defendant including its consumables such as welding rods and gases. He also used the defendant's depot or yard in Busselton.
This arrangement remained in place for about five years. At about this time Paul purchased my half share in the crane. (emphasis added)
Although the affidavit is unclear, what Demarte appears to be saying is that, even prior to the incorporation of the claimant company, the defendant hired the crane from Demarte and Perrott personally and paid 40% of the crane's monthly turnover to them which they shared equally but, either following the incorporation of the claimant, or following Perrott purchasing Demarte's share in the crane, Perrott hired the crane to the defendant and then the defendant in turn used him as a subcontractor to operate the crane. By way of payment he received 40% of the crane's monthly turnover, which he did not then share with Demarte, together with $1,200 per month and, some years into that arrangement, Perrott bought Demarte out of the crane so that he was now its sole owner. According to Demarte, part of the arrangement included the claimant being able to utilise both equipment and premises belonging to the defendant.
Perrott has a different take on the above arrangements. He casts a slightly different light on the incorporation of the claimant, although there is not much difference between the two respective versions. In his affidavit of 12 March 2010 he deposes:
When I left my employment with Metroof for the purposes of operating the crane owned jointly by the Defendant and myself it was my intention to utilise the cranes services in working for the Defendant through a separate company structure to obtain the advantages of limited liability protection and I raised this issue with Demarte. He agreed to me incorporating a company for that purpose and naming that company Busselton Mini Crane Hire Pty Ltd even though he had previously used that name as a business name. He also understood that I would acquire Demarte's remaining half share in the crane so that I would own it outright and I did by paying to Demarte's half of the original purchase price. Once the Claimant company structure was established it was agreed that I would make it available to the Claimant which would contract it out to the Defendant exclusively in servicing the Defendant's clients.
That appears to imply it was Perrott personally who owned the crane, although later in the same affidavit he deposes 'the Claimant did not own any plant and equipment apart from the crane'. Perhaps in the end nothing turns on who owned the crane. Neither deponent says just when the crane was purchased outright by Perrott. On some basis the claimant hired the crane to the defendant. Perrott’s version is not inconsistent with Demarte retaining a financial interest in that crane for a period of some years after the incorporation of the claimant, perhaps until Perrott or the claimant was able to fund the purchase of Demarte's interest.
Perrott also states:
In reality the entire issued capital should have been owned by my family trust and I am not sure why that was not done but in fact one share was owned by Demarte and one share was owned by me. Both of us were appointed as Directors.
It is not entirely clear to me why, on Mr Perrott's version of the facts, Mr Demarte was a director at all, or why he felt the need to ask Mr Demarte for agreement to his incorporating a company at all.
Perrott deposes that the arrangement was that 'The rate charged by the Defendant to the Defendant's clients would be shared as between the Defendant and the Claimant' and 'Generally the amount concerned was calculated by Demarte in respect to each job' with the defendant then taking 60% and the claimant taking 40%. The defendant would meet all the fuel costs for the crane and the claimant would meet all other operating costs. The claimant would also charge the defendant $1,200 per week for Perrott's services as the crane operator. The claimant would invoice the defendant for the crane hire and Perrott's services as the crane operator. It is not clear whether Perrott regarded himself as an employee of the claimant being paid a salary by it for operating the crane, or a subcontractor to it.
Perrott also deposes:
… At no stage did Demarte receive any financial benefit from being a shareholder in the Claimant and effectively he had no involvement in the day to day administration of that company which simply involved the keeping of the appropriate records in relation to the crane hire and my work operating the crane and rendering invoices to the Defendant.
He states that, once the claimant's operating costs for the crane were met, the income received was paid to him in his capacity as trustee for the Perrott Family Trust. It seems clear enough that what Perrott is asserting is that the claimant company was his own private family company set up as a vehicle for his family trust.
Except that it was not. There were two directors and not one. There were three shareholders and, according to the ASIC extracts, not one of them held their shares to the benefit of a trust. And income earned by the claimant must have been paid to the claimant, whatever Perrot then did with it. And this assertion rather overlooks the fact that on Perrott's version of events, Demarte provided the initial figure upon which the claimant's invoices were based, given that they represented a percentage of what the defendant charged its clients and provided the client base for every job through the defendant. It also overlooks the fact that Demarte was for some period of that arrangement a joint owner of the crane itself (whether the other owner was Perrott or the claimant).
There is no evidence before me as to whether the directors of the claimant or its shareholders ever held meetings. There is no evidence as to who did the books for the company.
The claim in this case arises from certain unpaid invoices for hire of the crane and Perrott's services as the crane operator. Not much turns upon whether those services were for operating the crane, as Perrott deposes, or doing welding, as Demarte claims, because each agree the sum to be paid was $1,200 per week irrespective of whether or not precise work was done. Perrott deposes that all previous invoices had been paid by the defendant. There is no evidence that the claimant had ever instituted proceedings against anyone before, and, given that it had only ever serviced the defendant's clients and invoiced the defendant for that, which had paid all previous invoices, the clear implication is that it has not.
The unpaid invoices are annexed as exhibits to Perrott's affidavit of 13 March 2010 and are dated 30 November 2007, 27 February 2008, 27 October 2008 and 19 December 2008. A claim is also made for a 'WFI Insurance refund' of $1,106. Subsequently two part payments had been made towards two of the invoices by way of two payments of $5,280, reducing the total owing to the $32,259.32 claimed.
Why the defendant has no substantive defence to the debt
There was no appeal from the original decision refusing to set aside the default judgment. To some extent then the defendant's purported defence is academic, but I consider it briefly here because the lack of a substantive defence to the debt claimed might be seen (and was seen) as a compelling reason to dismiss a further application to set aside the default judgment.
Demarte's original affidavit in support of his first application to set aside default judgment attempted to advance a basis for saying the debt is not owed at all. He swore in that affidavit of 18 February 2010 that, following Perrott purchasing his interest in the crane, the next development was that Mr and Mrs Perrott asked Demarte to purchase their 25% share in the defendant company. It is apparent from both the ASIC company documents and the eventual sale agreement that this was a beneficial interest in the defendant, held legally by Mrs Demarte on trust for the Perrotts. Mr Demarte deposed:
For the next few months there were extensive discussions and negotiations concerning the sale of Paul's share in the defendant and Paul was represented by a solicitor, Mr Peter May who drew up a sale agreement. The price negotiated was the sum of $227,000 and was a complete settlement of the financial relations between Paul and the defendant.
That share sale agreement dated 9 March 2009 is before the court annexed to an affidavit of Perrott dated 12 March 2010. The preamble records that Perrott and his wife own one fully paid share in the defendant but that the share has been held by Mrs Demarte upon trust for Mr and Mrs Perrott and that Mrs Perrott in her personal capacity has agreed to purchase the share and also a sea container upon certain terms and conditions. The agreed purchase price was $227,000 to be paid by an immediate payment of $150,000 and then three subsequent payments of $20,000 and a final payment of $17,000.
In argument before her Honour on 18 March 2010 Mr Joubert, counsel for the defendant, sought to draw from Demarte's claim that 'the price negotiated … was a complete settlement of the financial relations between Paul and the defendant' a defence that, in negotiating the price for the sale of Mr and Mrs Perrott's beneficial interest in the defendant company, any debts then owing by the defendant company to the claimant company were taken into account and forgiven, so that the value of the share took into account the non‑payment of, or writing off of, those debts.
That was a very long bow to draw from that single sentence in the affidavit. The assertion was very much denied by Perrott who deposed in his affidavit of 12 March 2010 that the share sale agreement did not include any settlement in relation to the amount due and owing from the defendant to the claimant.
An application to set aside default judgment is not an appropriate vehicle for this court to decide between competing assertions of fact between the parties. But leaving aside issues of credibility, and turning simply to the contents of the share sale agreement itself, there is no mention whatsoever in the agreement (or the attached declaration to that agreement which I have not yet mentioned) of any debts of the defendant being taken into consideration in fixing the share price, or having been forgiven.
And the claimant argued that even if, which was denied, any such arrangement was made between Mr and Mrs Perrott and Mrs Demarte, no such arrangement could possibly be binding upon the claimant company, it not being a party to the share sale agreement. That argument must surely be correct. The doctrine of privity of contract provides that only parties to a contract gain rights or are subject to liabilities under that contract. There are numerous exceptions to the general rule, but no argument has been advanced to suggest this case falls within an exception and, even if it did, there is no promise contained within the contract to the benefit of the defendant that its debts to the claimant would be forgiven. And there is no promise made by the claimant, nor any apparent consideration for any such promise.
Mr Demarte cannot have it both ways. In defending the claim for the debt, he seems to be arguing that Perrott had power to announce that debts duly owing to the claimant would be forgiven in consideration of his personally receiving a particular purchase price for his equitable interest in a share of another company, yet he challenges Perrott's authority to institute proceedings on behalf of the claimant. Either the corporate veil means something, or it does not. Both he and Perrott chose to run their businesses by means of incorporated bodies, thereby gaining the advantage of limited liability. The disadvantage is that the company becomes a legal entity in its own right, distinct from its directors and distinct from its shareholders, and its existence cannot be disregarded at will.
Over and above the submission, largely from the bar table, that the debt was forgiven, there was no assertion on the part of Demarte that the debt claimed by the claimant company was not duly owing to it.
The claim that the debt was forgiven is also inconsistent with the defendant's incompetent attempt to file a notice of defence in this matter. Sandy Joy Atherton was employed by Demarte when he received the general procedure claim in this matter. He asked her to file a notice of intention to defend and so (she deposes in her affidavit of 18 February 2010) she went to the Bunbury Court registry and explained that the defendant wished to defend the action and to also file a counterclaim. Following discussions with the registrar and having prepared and filed a document, Ms Atherton understood that she had achieved both of those aims.
In fact all she succeeded in filing was a general procedure claim form, commencing an entirely new action on behalf of the defendant against the claimant. That is case number 15/2010. The description of claim reads:
Cranes 'R' Us are seeking all associated costs, court charges and interest for $32,259.32 for debt payment for monies absorbed through Busselton Mini Crane Hire Pty Ltd. This payment has not been paid. As well a request is sort [sic] for wages to Mr Nick Demarte which far exceeds the claimed debt.
As Mr Paul Perrot is the Secretary/Director of Busselton Mini Crane Hire Pty Ltd he has no right to issue a summons without my authority as Chief Executive Officer and Company Owner.
It is because of the filing of this document that the claimant has never sought to argue that the defendant's failure to lodge a defence is unexplained. It is clear enough that Ms Atherton's actions did represent an incompetent attempt to defend the action and also mount a claim of some sort on behalf of the defendant.
Several points emerge from the fairly garbled description of claim, however. The first point is that the defendant is seeking the precise sum that the claimant sought in its action. That coincidence between the figures of itself suggests that it is not a genuine claim. It is also impossible to determine what 'debt payment for monies absorbed through Busselton Mini Crane Hire Pty Ltd' is supposed to mean.
The second point which emerges is that Mr Demarte is claiming for wages to himself which he says far exceed the claimed debt. No particulars are given of the basis upon which he says he is to be paid wages, but it would appear to be a claim for wages for working in some capacity for the claimant. Perrott deposes that Demarte never received any financial benefit from being a director of the claimant. A director has no general right to remuneration unless there is some contractual basis for wages.
Bearing in mind that this claim was supposed to be the defence to the debt claimed against the defendant, these are very different grounds for disputing the debt to those raised before her Honour in the first application. Indeed they appear not to dispute the debt, but rather to set up a vague unsubstantiated counterclaim or set‑off. There is no evidence before the court to substantiate these claims.
Finally, and this is of interest to the issue estoppel argument, Perrott is described as the 'Secretary/Director' of the claimant and Demarte as 'Chief Executive Officer and Company Owner'. Perrott is a director of the claimant, but not its secretary. Demarte is its secretary. Demarte was described in the corporate documents as a mere director. There is no material before me which suggests that Demarte was a chief executive officer of that company. In the context of a company with two shareholders and two directors, the expression 'company owner' is meaningless.
Inaccurate and confused though the wording is, Demarte appears by this new action to have challenged the authority of Perrott to commence legal proceedings in the name of the claimant company. This point was not taken by his counsel at the first application to set aside the default judgment, however, even though it was clearly in Demarte's contemplation.
The only other argument made in support of some defence to the debt owing arises out of a 'declaration' described as forming part of the share sale agreement, by which Mr and Mrs Perrott undertook that the business known as Nato Crane Hire (presumably their new business) would not be contracting to certain specified builders, provided that the share sale agreement was complied with. The background to that, Demarte says, is that, prior to the share sale agreement being signed, he became concerned that Perrott was planning to go into business in competition with him. Consequently he asked Mr and Mrs Perrott for the declaration and also asked Perrott to stop using the defendant's yard in Busselton.
Mr Demarte deposes that, immediately after the first payment of $150,000 due under the share sale agreement, the defendant's long term clientele in Busselton then started utilising the services of Nato Crane Hire. Demarte also complains that Nato Crane Hire took about 75% of the defendant's business from it and it was that business which had been intended to fund the balance of the payments owing under the share sale agreement. He asserts that Perrott deliberately misled him about his intentions and, consequently, Demarte made no further payments to Mr and Mrs Perrott. The payments were of course due from Mrs Demarte under the share sale agreement, Demarte not actually being a party to the agreement. Mr Demarte expressed a desire to 'counterclaim for breach of contract and damages' and asked in his affidavit for this matter to be stayed pending resolution of the action he filed in case number 15/2010. That claim however, which I have quoted in full above, is not related to the share sale agreement at all.
Not surprisingly, Perrott has a different take on that situation and, in his affidavit of 12 March 2010, quite denies that Nato Crane Hire started immediately contracting to the defendant's clientele. Perrott says it was contracting to Halifax, Demarte's other business, until May 2009 by which time Mrs Demarte had defaulted in making further payments due under the share sale agreement.
But on any version, none of this can constitute a defence to the debt said to be owing from the defendant to the claimant the subject of the invoices which are before the court. On Demarte's version at its highest, Mrs Demarte has a claim against the Perrotts for misrepresentation and/or breach of contract arising out of the share sale agreement and declaration. The Perrotts may also have a claim against Mrs Demarte. But there is no nexus between that issue and the debt the subject of this claim.
My decision is therefore made on the basis that there is indeed no basis to doubt that the debt is duly owing to the claimant.
Issue or 'Anschun' estoppel
Her Honour approached the defendant's application by considering the second order sought, namely an order setting aside default judgment, and acknowledged that judgment entered in default does not constitute a final judgment (Racovalis v Rescom Mortgages Pty Ltd [2010] VSCA 55 cited in Civil Procedure in Western Australia at [13.10.1]. Her Honour also acknowledged that a second application to set aside a default judgment can be made, although it would fail if the issues of substance had been determined in the first application: Carr v Finance Corp of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246, 248. Her Honour also pointed out that the first application to set aside the judgment was not dismissed on a technicality, but rather on the basis that the defendant had no defence on the merits.
Her Honour also referred to the decision of Master Seaman in Adams v Brinklow (Unreported, WASC, 1985, Library No 5883) in which a second application to set aside default judgment succeeded on the basis of further evidence put before the court notwithstanding that the evidence was available to the defendant at the time of the first application.
Because her Honour turned immediately to consider the second order sought by the defendant, in other words the application to set aside the default judgment, the question of some form of estoppel raised its head. Her Honour appeared to consider the defendant's application as really being no more than a second attempt to set aside default judgment.
In fact, it was a different beast. The defendant's application was a challenge to the validity of the proceedings themselves. The first order sought was that the claimant's name be struck out from the proceedings, another way of asking the court to dismiss the proceedings as a nullity. If the defendant were successful in that application, certain consequential orders would naturally follow – the first being that the default judgment must be set aside and the second, that any execution proceedings which had issued be likewise set aside, or 'cancelled' as is provided for by s 103 Civil Judgments Enforcement Act2004. Finally a costs order was sought, not against the claimant, but against its solicitor, a costs order against the claimant itself being inconsistent with striking its name from the proceedings.
Of course, the fact of the entry of default judgment stood in the way of the application, but the second application being in reality an application to have the proceedings dismissed as a nullity, this was a new type of application altogether. As a corollary to that application, the defendant was really alleging an irregularity in the default judgment of a fundamental kind. In the combination of those circumstances, the defendant ought not to have been estopped from challenging the validity of the proceedings in any event. If the proceedings were commenced without the authority of the claimant, they should not be allowed to stand and it follows that, if default judgment was entered in proceedings which were in themselves a nullity, then that default judgment was irregularly entered. Not every irregularity, however insignificant, will cause a default judgment to be set aside (see ACN 076 676 438 Pty Ltd (in liq) & Anor v A-Comms Teledata Pty Ltd & Anor [2000] WASC 214 [17] ‑ [18] (Parker J) and the authorities he cites therein) but such an irregularity, if established, should not be overlooked.
But in case I am wrong in that approach of viewing the defendant's second application as being a different type of application altogether, I turn now to consider her Honour's reasoning which led to the conclusion that the defendant was estopped from raising the issue of authority on its second application to set aside default judgment.
Her Honour found that the question of Perrott's authority to commence proceedings and instruct solicitors on behalf of the claimant was a matter which, with due diligence, might have been raised by the defendant in its first application to set aside default judgment. That must be so, particularly given that Ms Atherton and, by implication, Demarte did raise it in the general procedure claim form filed in an attempt to file a notice of defence.
Her Honour then referred to the cases of Henderson v Henderson (1843) 3 Hare 115 (67 ER, 319) and Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, before concluding that the question of Perrott's authority to institute proceedings on behalf of the claimant was a defence relevant to the subject matter of the claim and that it was 'unreasonable not to plead the defence and therefore enable it to be considered on the first application to set aside judgment'. Of course the 'defence', if indeed it is strictly a defence, could not be 'pleaded' at all in an application to set aside judgment in default of a defence, but her Honour meant it was unreasonable not to raise it in Demarte's affidavit in support, or in submissions by counsel at that first hearing.
Consequently her Honour found that the failure of the defendant to raise the challenge to Perrott's authority to give instructions to institute proceedings on behalf of the claimant gave 'rise to an issue estoppel'. It is apparent from her Honour's reasons that she was referring to an Anschun estoppel.
Her Honour then considered whether, notwithstanding that estoppel, the justice of the case demanded that the default judgment be set aside. In that regard, her Honour found that the failure to raise the issue in the first application was unexplained and also criticised the delay in raising the matter following judgment, the issue not being raised in these proceedings until some two months later.
Her Honour then averted to the well-known principle (citing Palmer v Prince [1980] WAR 61) that the court should be wary of reaching a view about the merits of a defence based only upon affidavit evidence, untested by cross‑examination. Her Honour expressly declined to reach a finding on the issue of whether or not Perrott had the requisite authority to instruct solicitors on behalf of the claimant.
Finally, her Honour was persuaded that it was not in the interests of justice to set aside the default judgment, there being no defence on the merits because, even if the court were to set aside the judgment, leaving the parties to litigate the issue of authority at trial and, even if, ultimately, the claimant failed in that argument and the claim was dismissed on that basis, the matter could be remedied, her Honour reasoned, by the claimant simply holding a meeting of the board of directors, at which Demarte would be disqualified from voting, due to an obvious conflict of interest. Perrott being the only other director, a resolution would carry that the company institute a fresh set of proceedings against the defendant. In those circumstances her Honour was persuaded that it was a pointless exercise to set aside the default judgment.
The doctrine of res judicata, issue estoppel and 'Anshun estoppel' were neatly summed up by McLure JA in Marshall v The Town Planning Appeal Tribunal of Western Australia [2006] WASCA 146 as follows [15] ‑ [17]:
The doctrine of res judicata provides that where an action has been brought and final judgment on the merits has been entered in that action, no other proceedings may be maintained on the same cause of action. To determine what is res judicata, only the record may be examined. Only the parties to the action and their privies are bound.
The doctrine of issue estoppel applies where there is a final judicial determination directly involving an issue of fact or law that disposes once and for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion: Blair v Curran (1939) 62 CLR 464 at 531 ‑ 532 per Dixon J.
Anshun estoppel applies to matters which were not raised in prior proceedings but which could and should have been raised: Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. The estoppel will apply where the matter relied on in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it in the first action. The principle is based on the policy that parties to litigation should bring forward their whole case and not seek to re-open issues in subsequent litigation, not only to avoid the possibility of inconsistent decisions but also to make efficient use of court resources and judicial time (see Halsburys Laws of Australia Vol 12 at [160] ‑ [165]).
Entry of judgment in default is an interlocutory order which does not finally dispose of the rights of the parties. That is not to say that it is not binding upon the parties, but rather that the court has jurisdiction to hear further from the parties in that same action and is not prevented from doing so by the doctrine of res judicata. Consequently, an order dismissing an application to set aside a default judgment is not a bar to a second application of the same character: Atwood v Chichester (1878) 3 QBD 722 approved in Hall v Nominal Defendant (1966) 117 CLR 423, 440 (Taylor J); Carr v Finance Corporation of Australia Ltd (No 1).
And issue estoppel cannot apply here, because the issue of whether or not these proceedings were commenced with the authority of the claimant was not raised and adjudicated upon in the first application and nor was it necessarily decided by the first application.
As to Anschun estoppel, it is immediately apparent that there is no second action here. The defendant is not seeking to re‑open an issue in subsequent litigation. This is still the same litigation. There is no risk of inconsistent judgments between earlier and subsequent litigation.
I can find nothing in the judgments in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 which support the proposition that a party cannot, in a second attempt to set aside a default judgment, raise issues which he could have raised, but neglected to raise, in his first attempt. In the majority judgment, Gibbs CJ, Mason and Aickin JJ, having discussed the development of the principle expressed in Henderson v Henderson summed up the principle thus [602]:
In this situation we would prefer to say that there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff's claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding. In this respect, we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings … (emphasis added)
And later [603]:
The likelihood that the omission to plead a defence will contribute to the existence of conflicting judgments is obviously an important factor to be taken into account in deciding whether the omission to plead can found an estoppel against the assertion of the same matter as a foundation for a cause of action in a second proceeding.
I do not consider that Anschun estoppel was aimed at such an application. I respectfully disagree with her Honour's conclusion that the failure to raise the issue of Perrott's authority to issue proceedings on behalf of the claimant in the first application 'gives rise to issue estoppel'. A defendant making a second application to set aside default judgment would be hard pressed to get a hearing if Anschun estoppel stood in his way.
Nevertheless, the court has an inherent power to guard against an abuse of its processes. The factors to be considered in deciding whether a second application to set aside default judgment amounts to an abuse of process were summarised by the court in Racovalis & Ors v Rescom Mortgages Pty Ltd & Ors [30]:
Considerations relevant to whether a second application to set aside a default judgment is an abuse of process will vary from case to case. They will usually include the effect on a party who, having been successful in opposing an application, is faced with a second application; the effect of any delay in making a second application; whether there was an explanation for the new material not being provided to the Court on the earlier application; the nature of that material; and whether a fair trial can be held. The evils of permitting a second application include the risk of conflicting decisions; the unnecessary vexing of respondents; judge shopping; the diminution of certainty in the conduct by litigants of their affairs; and adverse consequences to the administration of justice.
If all the defendant were doing was trying to persuade a different judicial officer that the argument it raised the first time, based upon the same evidence, should succeed on a second application, the application would be doomed.
But here the defendant raises an entirely new issue. There can be no question of judge shopping and, the first application not raising the issue of authority to sue at all, there can be no inconsistency in the judgments. The explanation for not raising the issue on the first application was a bit thin: Demarte deposed in his affidavit of 22 June 2010 that
This issue of authority was not raised earlier because at the time of making the affidavit in support of the application to set aside the judgment obtained by default, I was under severe time constraints and in the rush to prepare the affidavit I did not have time to raise the issue of authority.
At that time Demarte was represented by a lawyer, the relevant facts relating to the issue of authority to commence proceedings must have been known to Demarte, and he could have addressed the issue in an affidavit.
To put that into context, however, the first application was filed on 18 February 2010, together with the two supporting affidavits. Demarte had been greeted by the Bunbury bailiff, armed with a seizure notice, two days earlier (Demarte's affidavit of 18 February 2010, par 8). He and his lawyer moved swiftly to file the application, seeking to demonstrate an arguable defence. It is clear enough that the seizure notice prompted a sense of urgency, which may well explain why the issue of authority, which Demarte had raised via Ms Atherton's attempt to file some sort of defence, was overlooked. The first application was dismissed on 14 April 2010 and Demarte's lawyer raised the issue of authority to sue in correspondence to Perrott's lawyer dated 22 April 2010, after Demarte's bold attempt to simply discontinue the proceedings on the claimant's behalf.
A month later, on 25 May 2010, and after the claimant had filed its application to have the purported notice of discontinuance rejected, the defendant's second application was filed.
The delay in raising the issue was not, in those circumstances, inordinate, nor completely unexplained. It occurred after the claimant had issued execution proceedings, but then Demarte was not aware that default judgment had been entered against the defendant until after the seizure notice had issued and so could not have acted in time to prevent that step having been taken.
Although I have disagreed with her Honour that Anschun estoppel applied here, it is readily apparent that her Honour did not consider the principle in Henderson v Henderson to be necessarily fatal to the defendant's second application to set aside the default judgment, if 'the justice of the case in any event demand(ed) that the second application be granted'. That seems to be benign view to take of Anschun estoppel. I do not understand the effect of the authorities to be that, once the court has found that it was unreasonable for a party not to plead a defence in an earlier action so that the matter could be dealt with in the one proceedings, other factors such as the merits of the new defence should be weighed in the balance.
Be that as it may, her Honour's approach means that the finding that there was an estoppel was not the error which was fatal to the defendant's position.
Her Honour did not reach any finding on the question of whether the proceedings had been commenced without authority of the claimant, except to find that the matter raised an arguable defence. That conclusion, which I will consider shortly, was not fatal to the defendant's position.
What was fatal to the defendant's position in the end, because it very much influenced her Honour's view on where the interests of justice lay, was her Honour's further conclusion that, even if the proceedings were not duly authorised and the claimant eventually lost at trial on that basis, the matter could be easily cured by Perrott calling a meeting of the board of the claimant, passing a resolution to institute proceedings and then commencing new (and duly authorised) proceedings. I will consider that proposition after first considering the issue of Perrott's authority to instruct a solicitor on behalf of the claimant and whether or not a finding ought to have been made about that issue by her Honour.
Were the proceedings authorised by the claimant company?
It was common ground in this matter that there had been no meeting of the board of the claimant and no resolution of the company to institute legal proceedings against the defendant. Demarte deposed in his affidavit of 20 May 2010:
The board of (the claimant) has never resolved to confer authority on individual directors to commence proceedings on behalf of the company.
Prior to the commencement of these proceedings no board meeting was held by the directors of (the claimant) to resolve to commence these proceedings or to confer on Mr Perrott authority to commence these proceedings on behalf of (the claimant).
Following the commencement of these proceedings, no board meeting was held by the directors of (the claimant) to resolve to ratify these proceedings or to confer on Mr Perrott authority to continue these proceedings on behalf of (the claimant).
I have never been advised of any board meetings of the board of (the claimant) that I have not attended.
Neither Mr Perrott nor anyone acting on his behalf has sought to consult me at any stage about (the claimant's involvement in these proceedings.
Perrott asserts in his affidavit of 12 March 2010: 'I did not need his authority to issue these proceedings being a Director of the Claimant'.
The business of any company is to be managed by or under the direction of the directors: s 198A Corporations Act2001. It is the board of directors who are the proper persons to authorise the institution of proceedings in the name of a company: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 142 (Slesser LJ), citing John Morley Building Co v Barras [1891] 2 Ch 386, 391 (Stirling J).
In the case of Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94, the key issue concerned whether a statutory notice of demand, signed by a single director of the plaintiff company, a Mrs Franke, was duly issued on behalf of the company. The material facts are set out in the first instance judgment: Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2002] WASC 23.
In essence, Mr Reimers was the sole director of Horizon Star Pty Ltd, which ran a business called West Coast Heavy Haulage. Reimers was friendly with a Mr Atkins, who told him he was a bankrupt with nothing to do and was bored and needed to start making a living. Atkins told Reimers that he had access to some $300,000 cash and was interested in buying a haulage business. Reimers and Atkins explored the idea of purchasing a business and negotiations were entered into, but the deals did not proceed. In mid‑October 2000, Atkins suggested to Reimers that he would 'tip' $200,000 into Horizon Star in return for a 50% shareholding in Horizon Star. Because Atkins was dealing in cash (presumably to side step the limitations of bankruptcy) the cash could only be 'drip fed' to purchase an interest in Horizon Star.
Reimers arranged for a new company, Carina, to be incorporated in August 2000 as the vehicle for the proposed purchase of the 50% interest in Horizon. It was a $2 company. Atkins of course could not be a director, given his bankruptcy. Instead, Reimers and Franke, Atkins' de facto wife, were made directors and shareholders, each owning one share. Atkins provided a management team of two of his people to work at Horizon Star.
To cut a long story short, for various reasons including a bereavement and illness, Reimers was out of action for some months. Horizon Star fell into debt to Carina. When he returned to work in January 2001, Reimers found that Atkins had arranged for a locksmith to change the locks. Mrs Franke signed a statutory notice of demand on behalf of Carina addressed to Horizon Star demanding payment of the debt. No meeting of the board of directors of Carina had been held authorising the issue of the statutory demand.
The debt itself had been acknowledged in a certain deed of transfer of shares. At first instance, the master held there was no genuine dispute about the debt, which finding was confirmed on appeal.
The salient point of relevance to this case concerned the master's finding as follows [26]:
I fail [sic] to consider a submission of the plaintiff which logically should have been considered earlier, namely, that Mrs Franke, one of the two directors of Carina, had no authority from Carina to instruct a solicitor, Mr Kevin Staffa, to issue the statutory demand on behalf of Carina against Horizon. Mr Reimers says he is the other director of Carina (they, incidentally, each own one share) and that no meeting of the board of directors of Carina was held to authorise the issue of the statutory demand. It is true that no meeting of the board of Carina was held to authorise the issue of the statutory demand. But I consider that there is no merit in the argument that the demand is thereby invalid. Mr Reimers is the only director of Horizon which is said to owe Carina $145,700, a debt admitted by Carina in a deed. If a directors' meeting of Carina was held to consider ways of collecting the debt, Mr Reimers would have a clear conflict of interest and would have to withdraw from the meeting. He cannot use his position as a director of Carina to cause advantage to another entity such as Horizon or to cause detriment to Carina: see s 182(1) of the Corporations Law. To do so is a criminal offence: see s 184(2) of the Law. I consider there is no invalidity in the demand issued.
The master's approach was very similar to her Honour's approach in this case.
On appeal, McKechnie J referred to the affidavit of Franke, in which she deposed that she was authorised to make an affidavit on behalf of Carina, and treated her statements of authority as being prima facie evidence of the facts, citing Deputy Commissioner of Taxation (Vic) v Players Entertainment Network Pty Ltd (1988) 6 ACLC 902. His Honour continued at [19] ‑ [20]:
However, the prima facie evidence of authority was displaced by the finding of the Master that no meeting was held to authorise Mrs Franke to issue the demand …
Mrs Franke had no ostensible authority to act on behalf of Carina Holdings. Her only function was to participate in proceedings of the Board: Northside Developments Pty Ltd v Registrar General (1989 ‑ 90) 170 CLR 146 per Dawson J at 205; Smith v Henniken‑Major & Co (a firm) (2002) 3 WLR 1848. The Master may be right in his surmises as to what might have occurred if a meeting had taken place. However, the fact remains that no meeting was held and in consequence no authority was given to Mrs Franke to issue the notice of statutory demand.
The notice of demand was therefore a nullity.
Wheeler and Murray JJ were in agreement with McKechnie J on this point. Murray J added that the statutory demand ought to have been set aside as a nullity because the document was not, as required by the Corporations Act 2001, signed by Franke 'on behalf of the creditor' because 'there had been no board meeting and, as a director of the respondent, she was not otherwise authorised to exercise the respondent's powers: s 198A(2) and s 198D', a reference to sections of the Corporations Act 2001.
The decision establishes two points of relevance to this case: firstly, that a resolution of the board is required and cannot be dispensed with on the pragmatic basis that a board meeting, had it only been held, could only have gone in one direction and, secondly, the fact that a defendant may have no defence on the merits does not override the need for proceedings to be duly commenced.
As best as I can understand the claimant's submission about this decision, it is that it can be distinguished on the basis that Franke had no ostensible authority to act on behalf of the company and her only authority was to participate in meetings of the board, whereas Perrott conducts all the day‑to‑day runnings of the claimant. McKechnie J also noted, however, that Carina did not trade and was merely a vehicle through which to advance money to Horizon Star. In those circumstances, Franke was as involved in the runnings of Carina as any other director.
The recent decision of EM Heenan J in Montevento Holdings Pty Ltd v Scaffidi Holdings Pty Ltd [2010] WASC 132 certainly cannot be distinguished on such a basis. It involved a director who clearly did have hands‑on involvement in the company.
Mr Guiseppe Scaffidi was one of two directors of Scaffidi Holdings Pty Ltd. The case involved a long‑running dispute between various members of the Scaffidi family over the administration of a family trust. Certain applications had been made on behalf of both Scaffidi Holdings and Mr Giuseppe Scaffidi. The same law firm purported to act for both. In response, one of the other parties involved sought an interlocutory injunction to restrain those solicitors from acting for Scaffidi Holdings on the basis that there was no valid retainer from the company to the solicitors.
The evidence demonstrated that no properly convened meeting had ever been held by the directors of Scaffidi Holdings to consider a resolution to instruct the solicitors or to pursue its various applications. Therefore, it was argued, the solicitors could not act for the company. The evidence also disclosed that the applications made on behalf of Scaffidi Holdings had never been raised or discussed with the other director, Mr Eugenio Scaffidi. His Honour commented at [6] ‑ [7]:
The evidence also discloses that Mr Giuseppe Scaffidi has been accustomed, for quite some time, to act in an executive fashion on behalf of that company, without any special formalities, saying that it has been the habit of the company for its business to be conducted that way.
By this present application, the propriety of such an approach is called into question.
After remarking at [9] that 'it is equally apparent that, because of the animosity between them, there has been an inability for agreement to be reached upon any major matter of control or for the determination of the affairs of the company', his Honour found [10] ‑ [11]:
There is nothing in the evidence to indicate that there ever was a managing director of the company or that any particular director had special powers, including executive powers. Similarly, there is nothing in the evidence to indicate that by resolution of the board of directors or by any provision of the articles, that any delegated authority was conferred on a particular director to act either generally or specially for the company in relation to any matters.
Therefore, Mr Giuseppe Scaffidi's actions in giving instructions and acting for the company as of recent times has been an attempt to exercise authority on behalf of the company which he considers he is entitled to exercise or which he has attempted to exercise in the absence of challenge but neither of those factors renders it legitimate or competent.
His Honour read from Ford's Principles of Corporations Law (13th ed) par 13‑080:
In any company, whether public or proprietary, with several directors, a director acting individually has no usual authority to bind a company … In such a company a director's normal power is to bind the company only by joining with other directors in a collective resolution of the board of directors. If a director is to have power, as a single director, to bind the company, he or she must either have that power as an agent, delegated by the appropriate organ, or – sometimes, in a family company – have predominant power under the company's constitution as a governing director. An individual director may be expressly authorised by the company to carry out formal functions for the company, such as executing a document on behalf of the company, but whether the transaction underlying it binds the company depends on whether it was authorised by some person or persons with sufficient authority.
Finally, his Honour concluded that [14]:
There is nothing in the evidence to indicate that Mr Giuseppe Scaffidi was possessed of any such special or general authority and indeed the evidence is directly to the contrary. I am therefore satisfied that he does not have the authority to give instructions to commence, defend or pursue legal proceedings by the company and that his attempts to do so are incompetent.
Further, his Honour concluded [18]:
For the reasons which I have given, I am satisfied that these proceedings or this application in the name of Scaffidi Holdings Pty Ltd, should never have been brought because there was no‑one able to give valid instructions on behalf of the company.
Those two authorities make it clear that the mere fact that Perrott is a director of the claimant company, even one accustomed to acting as though he is solely in charge, does not empower him to institute legal proceedings on behalf of the complainant. In the absence of some express or implied authority, a valid decision to institute proceedings on behalf of the company can only be made by the directors in a meeting, or by a resolution without a meeting, in which the number of directors required by the company's constitution or the Corporations Act2001 have joined.
His counsel argues that Perrott's power to institute proceedings on behalf of the claimant derives from a delegation of that power by the directors. Section 198D Corporations Act2001 enables the directors of a company to delegate any of their powers to a single director, who must exercise his powers in accordance with any directions of the directors and whose exercise of those delegated powers is as effective as if the directors had exercised it.
Any resolutions of the company, whether made at a directors' meeting or without such a meeting, must be recorded within the company's minutes within one month of the resolution: s 251A. Failure to do so constitutes an offence against the Corporations Act2001. The minutes must be signed by the chair of that meeting, or the next meeting or, if there was no meeting, by a director. Again, failure to do so constitutes an offence. A minute that records a resolution of the company is prima facie evidence of that resolution: s 251A(6).
It is not suggested to this court that there ever was a meeting at which the directors of the claimant delegated either all of their powers, or the single power of instituting proceedings, to a single director, Perrott. It is not suggested that there ever was such a resolution. It is not suggested that there is in existence any such minute. The absence of such a minute, it is argued, is only an evidentiary matter. So much I can accept, but it is not suggested that there was such a resolution.
The delegation, it is argued, is to be inferred from the fact that Perrott asserts that he was exclusively managing the claimant from its inception and such an assertion has not been contradicted by Demarte, and that Perrott's exclusive management of the claimant itself constitutes the delegation by the directors to one director of all of their powers, including the power to institute proceedings. Counsel relies particularly on the passages from Demarte's affidavit of 18 February 2010 (quoted more fully above) referring to the claimant:
I agreed to let Paul use this company as he wanted to leave his job and become a sub‑contractor to the defendant.
Paul utilised the entity Busselton Mini Crane Hire Pty Ltd and subcontracted the crane to the defendant. Paul used Busselton Mini Crane Hire Pty Ltd to invoice the defendant every month.
… In practice the business arrangement between Paul and I was that Paul subcontracted to the defendant using the crane in mainly the Busselton and surrounding areas and operated as Busselton Mini Crane Hire Pty Ltd.
… This arrangement remained in place for about five years.
In argument before me, counsel informed me there was 'ample' authority for the proposition that no resolution is required for there to be a delegation of powers to one director of a company. However, in none of his submissions filed before this court or the Magistrates Court is that proposition supported by anything other than the submission that Demarte has not contradicted the assertion by Perrott that he was 'in charge of the claimant'. Counsel argued that the passages quoted above amount to an acceptance by Demarte that Perrott was in charge of the claimant. The ample authority referred to appears to be a reference to those cases which deal with the 'indoor management rule', which I will come to.
Demarte clearly does not accept that Perrott was in charge of the claimant company to the exclusion of Demarte's own role as director and secretary of the company. While Perrott deposes, and it is not denied, that he was the crane operator and he sent out the invoices, the claimant contracted exclusively to the defendant, working exclusively for the defendant's client base, storing the crane at the Busselton yard (which was either the yard of the defendant or Halifax Crane Hire Pty Ltd), and each invoice Perrott sent to the defendant was based upon the figure the defendant charged its own clients, that figure calculated by Demarte for each job. Just as the defendant company incurred a liability to the claimant every time it engaged it to provide the crane and crane operator, it also provided business to the claimant company. Demarte also deposes in his affidavit of 22 June 2010 that he and Perrott owned the crane in equal shares, which obviously only relates to the period prior to Perrott buying him out of the crane, but does indicate that for that period at least Demarte had a very active stake in the claimant. Demarte also deposes that he paid for advertising for the claimant.
All of the above functions performed by Demarte as director of the defendant were equally to the benefit of the claimant company. Perrott's assertion in his affidavit of 4 May 2010 that 'on Demarte's own admission, even though he remained a Director and Secretary of the Claimant company he had no involvement in the operation of the company at all' rather overlooks the fact that the day‑to‑day operations of the defendant were to the benefit of the claimant and Demarte had practical involvement in the generation of business for the claimant, the contracts it entered into and the income it generated. His functions as director of the defendant were consistent with and complimentary to his functions as director of the claimant.
In any event, the mere lack of challenge to Perrott generally carrying out the day‑to‑day business of the company does not of itself vest in him the power to institute proceedings on behalf of the claimant without the authority of the board: Montevento Holdings Pty Ltd v Scaffidi Holdings Pty Ltd [2010] WASC 132.
Professor Ford's Ford's Principles of Corporations Law (13th ed) states at par 13‑120:
If a person presumes to act as an agent for an individual without a grant of authority, that individual, on hearing of the 'agent's' presumption, may be prepared to ratify the unauthorised act and become a party to the transaction. That may happen because it is to his or her advantage to accept some benefit from the transaction entered into by the 'agent'. If similar transactions follow and it is seen that the principal has reached the stage of usually ratifying various transactions entered into by the agent, there may be scope for an inference that the principal is content for the agent to enter transactions of the same type on behalf of the principal. In other words, there is an implied actual authority by acquiescence.
Companies are more prone than individuals to get into the situation where there is an implied grant of actual authority by acquiescence. This can happen where a board of directors is not vigilant and leaves an opportunity for an individual, such as a major shareholder or a dominating personality, to do business on behalf of the company without having been appointed an agent.
Before it can be found that a board of directors had conferred an implied actual authority there would have to be not only the acquiescence of the individual board members but evidence of communication by words or conduct of their respective consents to one another and to the agent: Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.
There is no material before the court suggesting that Perrott has ever purported to institute legal proceedings in the name of the claimant before, with the acquiescence of Demarte. It is clear from the affidavits that the claimant has exclusively contracted to the defendant, and that the defendant has previously met its liabilities to the claimant. There is no asserted precedent for Perrott having acted in this fashion before, with the agreement of the company. And it can hardly be suggested that Demarte, as fellow director, has acquiesced in the institution of these proceedings on behalf of the claimant. His first incompetent attempt to defend the matter via Ms Atherton's actions expressly challenged the power of Perrott to institute these proceedings.
Counsel argued that Perrott 'was doing the invoices. It just follows logically that, if you're doing the invoices and you're not paid, then he has the authority to instigate the legal proceedings'.
I do not find that last argument persuasive. An office girl can issue invoices. The power to commit a company to legal proceedings is a weighty matter exposing the company to considerable risk of fruitless expense. It does not arise as a matter of inference from the issuing of an invoice.
There having been no resolution of the company (with or without a meeting) in which the board authorised Perrott to retain a solicitor to institute these proceedings, he lacked actual express authority to do so and there is no material tending to show that he had implied authority to do so.
There are numerous authorities in which a company has been bound by the actions of one director, notwithstanding that the director did not in fact have the authority of the company to so act. These various cases deal with the common law 'indoor management rule', otherwise known as the rule in Turquand's case: Royal British Bank v Turquand (1856) 6 El & Bl 327; (1856) 119 ER 886. Again borrowing from Professor Ford's Ford's Principles of Corporations Law (13th ed) at par 13‑150:
When the board of directors of a company wants to give actual authority to an agent there are procedural conditions to be fulfilled ...
Can a third party outsider be expected to prove that all these and any other conditions were fulfilled? Under a common law applicable to companies a third party is allowed to assume that all necessary steps internal to the company have been taken. The rule of law allowing the assumption is called the rule of indoor management because it covers all those matters inside the management of the company which are not public.
The learned authors considered whether the rule is a creature of the law of estoppel, or an example of the general evidentiary presumption of regularity, or a special rule of company law, or a product of the 'closed door' rationale (existing to protect outsiders because outsiders lack access to the company's internal records), settling on the last. Whatever the precise basis of the rule, it is apparent it is for the benefit and protection of third parties dealing with the company. It is not to enable the company to breach its own internal management rules.
The rule has now been substantially captured in s 128 and s 129 Corporations Act 2001. Section 128 provides that a person is entitled to make the assumptions in s 129 (which in very broad terms are that all necessary steps internal to the company have been taken) and that 'the company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect'.
Without going through examples of the various authorities where the rule has been applied, it is used to hold a company to contractual liabilities incurred by a person purporting to be its authorised agent. Although the 'agent' in fact lacked authority to so commit the company, the company is estopped or prevented from denying liability.
There are exceptions where the rule has been held not to apply, where the third party had either actual knowledge that there was an irregularity (see Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156), or was put on his enquiry and failed to make due enquiries: see, for example, Northside Developments Pty Ltd v Registrar General (1990) 170 CLR 146, where it was held that a lender which took a mortgage over the assets of the defendant company to secure a loan to another company (both companies having a director in common) was put on its enquiry, given that the defendant company appeared to be entering into a transaction which was both to its detriment and apparently unrelated to the purposes of its business.
It was suggested in argument that these cases support the proposition that Demarte, not being a genuine outsider third party, but a director of the claimant, is estopped or prevented from asserting that there was an irregularity in the commencement of these proceedings by the claimant.
Of course, Demarte is not asserting the irregularity as a director of the claimant. Demarte is not a party to these proceedings. It is the defendant which asserts the irregularity. It does so through one of its directors, Demarte.
The argument misapplies the indoor management rule. The rule serves to prevent a company seeking to avoid contractual liability from asserting that its purported agent in fact lacked authority to bind the company. Yet again borrowing from Professor Ford's Ford's Principles of Corporations Law (13th ed) at par 13‑250:
The rule is for the protection of persons who wish to uphold a transaction with a company and cannot know the company's internal workings: Morris v Kanssen [1946] AC 459 at 474 ‑ 5. The company cannot rely on the rule for its benefit.
In Hughes v NM Superannuation Board Pty Ltd (1993) 29 NSWLR 653 the chairman of the company, without authority to do so, purported to notify a trustee of a superannuation fund that the company was terminating the fund. The company was not allowed to say that the trustee could have assumed under the rule that the chairman had authority.
The indoor management rule has no application to this case. It does not prevent a third party, here the defendant, from asserting that the claimant company has not authorised the proceedings or the retainer of a solicitor. It matters not that Demarte is fully aware that the company's internal management rules were not complied with, being a director of the company, because he is not seeking to rely upon an assumption that they were complied with.
Some reliance was placed upon the decision of Buckley J in In Re Duomatic Ltd [1969] 2 Ch 365. Focusing on the aspect of that case which might assist the claimant, the shares issued in Duomatic Ltd consisted of ordinary shares held by the directors and non‑voting shares held by others. The articles of the company required that the remuneration of directors should be determined from time to time by the company in general meeting. The directors drew remuneration from time to time as agreed between them, but no formal resolution was ever passed authorising that remuneration. When the company went into voluntary liquidation, the liquidator sought repayment of certain remuneration to the directors.
The case stands for the principle, correctly recorded in the headnote:
That where it could be shown that all the shareholders with the right to attend and vote at a general meeting had assented to some matter which a general meeting of the company could carry into effect, the assent was as binding as a resolution in general meeting.
As a majority of the ordinary shareholders with a right to vote had assented to the remuneration, the payments of remuneration were not disturbed.
The real point of the case insofar as the claimant is concerned is that, while certain formalities required by the company's articles had not been complied with, in that the issue of remuneration to the directors had not been put to the shareholders in general meeting, the remuneration had been agreed upon by the ordinary shareholders of the company who were entitled to vote, who also happened to be the directors of the company, and so the court regarded their assent as being as binding as if the matter had been put to the ordinary shareholders in general meeting.
Similar reasoning appears in the decision of the Court of Appeal in InRe Express Engineering Works Ltd [1920] 1 Ch 466. In that case five people had purchased certain debentures for £7,000. They formed a private company in which they were the sole shareholders and sold their debentures to the company for £15,000. The contract for the sale and the issue of the debentures was carried out at a meeting at which all five were present and at which they appointed themselves directors of the company. Subsequently the seal of the company was affixed to the debentures. The articles of the company provided that no director could vote in respect of any contract in which he had an interest. Upon the winding up of the company a year later the liquidator claimed a declaration that the issue of the debentures in the company were invalid and should be set aside. There was no suggestion of any intention on the part of the directors to defraud subsequent shareholders or creditors.
The court found that the company was bound by the unanimous agreement of its members, the issue of the debentures being a matter intra vires the company. Although the meeting at which the issue was approved was called a directors' meeting, all of the shareholders in the company were present and they might just as easily have called it a general meeting and duly authorised the issue of the debentures. Accordingly, the court held that the issue of the debentures was not invalid. Warrington LJ stated (at470):
It happened that these five directors were the only shareholders of the company, and it is admitted that the five, acting together as shareholders, could have issued these debentures. As directors they could not but as shareholders acting together they could have made the agreement in question. It was competent to them to waive all formalities as regards notice of meetings, etc, and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in question. Inasmuch as they could not in one capacity effectually do what was required but could do it in another, it is to be assumed that as businessmen they would act in the capacity in which they had the power to act. In my judgment they must be held to have acted as shareholders and not as directors, and the transaction must be treated as good as if every formality had been carried out.
The claimant relies upon these cases and others (for example Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd & Ors [1992] 2 VR 279) which adopt the same reasoning, in support of the proposition that it was not necessary for the claimant to ever hold a meeting of the directors to delegate the power to Perrott to institute legal proceedings on behalf of the claimant.
That may well be so, but it begs the question. There is no material before this court to suggest that the directors of the claimant, being Perrott and Demarte, or a majority of the shareholders in the company (Demarte holding one share and Perrot and his wife holding the other) ever did agree to delegate to Perrott the authority to institute legal proceedings on behalf of the company.
Taken at its highest, there is material before the court that Demarte, by either agreement or acquiescence, agreed that Perrott should exercise the day‑to‑day functions of the company, such as driving the crane and sending out the invoices. That does not amount to a delegated authority to commence legal proceedings on behalf of the company without Demarte's assent.
Were it the case that Perrott did constitute a majority of the board and were it the case that Perrott could, single‑handedly, pass a resolution authorising himself to institute proceedings, that would be another matter but, as will appear in the reasoning immediately below, I do not accept that proposition. Consequently, I do not consider that the so‑called 'Duomatic principle' is of assistance to the claimant.
Cannot the claimant company simply hold a board meeting now and authorise the commencement of proceedings against the defendant?
It was critical to her Honour's reasoning, and critical to the claimant's submissions before me, that there is nothing to stop Perrott from calling a meeting of the directors of the claimant, at which Demarte will be disqualified from voting, to authorise proceedings being instituted against the defendant and that, the outcome of such a meeting being inevitable, the default judgment should not be set aside. It is, at first blush, an attractive argument but, on closer examination, is unfortunately flawed.
It is flawed for two reasons: the first being that it is contrary to the authority of Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94 and the second being that the provisions of the Corporations Act2001 do not allow the matter to be so easily resolved in any event.
Her Honour distinguished Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94 on the following basis:
(McKechnie J) further said that to surmise what might have occurred if a meeting had taken place was not the issue. The difference in the present case is that if a meeting did take place there would have been only one possible outcome. That is, Mr Demarte would have had to disqualify himself and Mr Perrott would have been left to make the decision, as he in fact did. The result would and could have been no different. It is not a question of surmising what may have been.
With respect to her Honour, McKechnie J was not simply advising against speculation, and indeed accepted that the learned master was probably correct in his surmises, but rather said it was not to the point, because no board meeting had been held. In that case, Carina had only two directors and, had Reimers sought to vote against the issuing of the statutory demand to Horizon Star, of which he was also a director, he would have been acting in conflict of interest. The situation therefore was no different to the case before me. The outcome of a board meeting in that case was no less predictable than in this case. Horizon Star Pty Ltd v Carina Holdings Pty Ltd [2003] WASCA 94 cannot be distinguished on that basis.
Turning next to the provisions of the Corporations Act2001, a company's internal management is governed by the replaceable rules contained within the Corporations Act2001, or its constitution or both: s 134. The 'replaceable' rules are so described because they can be displaced or modified by a company's constitution. It is common ground that the claimant has no constitution, so it is bound by the replaceable rules.
A director of a public company who has a material personal interest in a matter that is being considered at a directors' meeting must not be present while the matter is being considered at any meeting and cannot vote on the matter: s 195(1). That does not apply, however, in the case of a non‑public proprietary company. In the case of a private proprietary company, such as the claimant, providing the director has disclosed the nature and extent of his interest and its relation to the affairs of the company at a meeting of the directors, then the director may vote in the matter: s 194. Demarte's interest in the matter has been disclosed. He is entitled to vote.
He is also obliged to exercise his powers as a director and discharge his duties in good faith in the best interests of the corporation (s 181) and must not improperly use his position to gain an advantage for himself or for someone else, or to cause a detriment to the corporation (s 182). Breach of those obligations exposes him to civil penalty.
But neither obligation deprives him of his right to vote, given that his conflict of interest is well and truly disclosed. This is not a spurious technicality, because it impacts on the number of votes need to pass a resolution.
One director can call a meeting (s 248C) but the quorum for a directors' meeting is two directors and the quorum must be present at all times during the meeting: s 248F.
If Demarte simply fails to attend the meeting, it fails for lack of a quorum. If he does attend, a resolution can only be passed by a majority of the votes cast by directors entitled to vote on the resolution: s 248G. Demarte is entitled to vote and so Perrott alone does not constitute a majority of those entitled to vote. Nor can Perrott avail himself of s 248A, which enables the directors to pass a resolution without a formal meeting if all the directors entitled to vote sign a document agreeing to the resolution, because Demarte is entitled to vote and presumably will not sign such a document. Perrott cannot even solve the problem by going to the shareholders in general meeting, even if the shareholders have the power to pass such a resolution, which may be doubtful: see Massey & Anor v Wales & Ors; Massey & Anor v Cooney & Anor (2003) 21 ACLC 1978. Demarte holds one share and the Perrotts between them only hold one share.
Her Honour's ultimate decision rested upon the proposition that, were Perrott to hold a company meeting of the claimants' directors, he could simply pass a resolution to institute fresh proceedings against the defendant. Her Honour regarded that outcome as inevitable. To the contrary, however, the only way such a resolution can be passed is with the concurrence of Demarte. Although that is not a specific ground of appeal, it is an error which influenced the entire judgment.
Ought her Honour to have made a finding that the proceedings were instituted without the authority of the claimant?
Her Honour was wary of reaching a view about the merits of the argument that Perrott lacked authority to instruct solicitors on behalf of the claimant, because the evidence before the court was contained only in affidavits and was untested by cross‑examination. That approach is supported by authority. Where that evidence is uncontroversial as to the determinative facts, however, the court should make a finding, rather than allow the matter to proceed to trial on that issue.
In John Shaw & Sons (Salford) Ltd v Shaw the issue of the authority of certain directors of the company to institute proceedings was, on the invitation of both sides, considered at trial and the trial judge made a finding in favour of the plaintiff company that its proceedings had been duly authorised. Although the appeal was successful on the substantive merits of the action, the Court of Appeal was divided on the question of whether or not the proceedings were authorised but, relevant to this case, the question of the appropriate way to challenge authority to commence proceedings and the appropriate remedies was discussed.
The plaintiff's counsel had argued that, even if the court was satisfied that the proceedings had not been duly commenced, the court had no power to strike out the action because the defendants had failed to raise the issue by motion and could not then raise it as a defence at trial. An obvious hurdle to that argument was the fact that both parties had, at trial, consented to the trial judge considering the issue. Counsel relied upon the case Richmond v Branson & Son [1914] 1 Ch 968, 974 (Warrington J), in which his Honour doubted whether the issue could be raised at trial and commented:
The business of this Court could not be carried on if one were not entitled to assume the authority of the solicitor unless and until that authority has been disputed and shown not to exist in the proper form of proceeding, namely, a substantive application on the part of the parties concerned to stay the proceedings on the ground of want of authority.
Slesser LJ, however, considered that Richmond v Branson was a case in which the court declined to go into matters of evidence as to whether or not proceedings were authorised except upon a substantive motion. His Lordship continued (145):
But the rights of the Court in its inherent jurisdiction to stay actions which would be an abuse of its process if they are not properly upon the record, either because the plaintiff was not existent at the time of the issue of the writ or because they are satisfied on the facts that he had not authorised the proceedings, has so far been undoubted, and this, altogether apart from the desire of either party, if the facts are before the Court. Where the Court may properly come to the conclusion on sufficient or admitted evidence that there is no action properly before it, it may well think it right to act in accordance with that inherent jurisdiction, to refuse to proceed, and the difference which has been sought to be found between the case where no retainer could be given at all, and the case where what is still in dispute is whether in fact there was or was not authority to give one is not a difference in principle, but a difference of expediency, depending upon whether a Court is or is not so informed of the facts that it does or does not think it right to come to a conclusion on the matter as a question of law.
In the present case, as I have said, the facts which have been found by the learned judge are before the Court; they show, to my mind, a complete absence of authority of the company to sue in this action. In other words, I have come to the conclusion that the company is not before the Court at all, and that, therefore, for this reason, the appeal succeeds and the action must be struck out; but as there is no‑one who is before the Court who can be made liable for costs, the appellants if they desire costs must pursue such other remedies in other proceedings on this head as they may think advisable.
Roche LJ also considered the issue (147):
I agree with both the Lords Justices as to the result of the decided cases and particularly of the Daimler case [1916] 2 AC 307 and of the Russian Commercial Bank case [1923] 2 KB 630; [1925] AC 112. The principles to be derived from them are that such an objection to a right to sue as is here taken should be taken not at the trial by an interlocutory motion or summons; that if such procedure is not adopted the court need not, and ordinarily should not, entertain such an objection at the trial as if it were a defence. If it were otherwise, then for reasons pointed out by Warrington J in Richmond v Branson [1914] 1 Ch 968, the position of the court would be nigh intolerable. Nevertheless, as appears from the decision in the Daimler case, if want of capacity or authority to sue plainly appears at any stage the Court may then strike out the action.
It was argued for the respondents that the application of the latter principle was limited to objections based upon want of capacity to sue and did not extend to objections based upon want of authority to sue. I see no reason for such limitation of the powers of the Court, and in my opinion the argument is not well‑founded. When it clearly appears that there is want of authority to sue, e.g. if an admission in that sense were made in the course of the hearing, the same result in my opinion ought to follow and the action in question ought to be struck out.
In the present case, there having been no resolution of the company (with or without a meeting) in which the board authorised Perrott to retain a solicitor to institute these proceedings, and there being no express delegation of that power to him and no material tending to establish any implied delegated power to institute proceedings on behalf of the claimant, he lacked authority to do so. The company has not concurred in his institution of the proceedings. His assertion, taken at its highest, that he exclusively manages the company still does not give him the authority to institute proceedings on its behalf.
It may well have the effect of estopping the claimant from asserting that any contract Perrott has entered into on behalf of the company is unauthorised, but it does not give him authority to institute proceedings on behalf of the company without a formal or informal resolution of the directors.
If my understanding of the law is correct, then the application of that law to these facts makes the case a clear one and the matter ought to be decided at this stage of the proceedings. Although there are facts in dispute between the parties, the salient facts on the issue of authority are not in dispute and the facts upon which Perrott bases his authority, taken at their highest, do not tend to establish that authority. I find the defendant has established that Perrott did not have authority to instruct a solicitor to commence proceedings on behalf of the claimant.
The proceedings were not authorised by the claimant and the court ought to have so found. Ground 3, complaining of the lack of such a finding, is made out.
If the proceedings were instituted without authority, they are a nullity. The claimant is not before the court. And the appropriate remedy is for the action to be struck out and default judgment and execution proceedings be set aside.
Had her Honour not proceeded on the basis that an issue estoppel arose, and had her Honour made a finding to the effect that the proceedings were commenced without authority, and had her Honour not been swayed by the argument that the issue could be easily cured by a meeting of the claimant company to pass a resolution authorising proceedings, her Honour would have considered the other orders sought by the defendant, specifically the order seeking that the proceedings be struck out. Ground 4, complaining that her Honour failed to consider granting any of the other orders sought by the defendant, is made out.
Earlier I discussed the factors that ought to be considered by the court in entertaining a second application to set aside default judgment. As I said earlier, it is my view that this was really an application of a different kind, being a challenge to the validity of the proceedings itself but, to the extent that it necessarily did involve a second application to set aside the default judgment, the fact that there was not a particularly satisfactory reason for failing to raise the issue of authority until the second application and the fact that the second application was not filed until five or six weeks after the dismissal of the first application were not faults of such weight that this court should allow proceedings which are a nullity to stand and an irregular judgment, irregular because the proceedings are a nullity, to likewise stand. Ground 1, which complains that her Honour ought not to have found that issue estoppel applied and ground 2, which complains that her Honour ought not to have found that the second application was an abuse of process (a reference, I assume, to her Honour's finding that an issue estoppel arose) are made out.
Ground 5 complains that her Honour ought to have granted an extension of time to the defendant within which to bring its second application. An application to set aside default judgment must, pursuant to the Magistrates Court (Civil Proceedings) Rules 2005, be made within 21 days. Her Honour made no reference in her judgment to any need for an extension of time to be granted, nor did she specifically refuse to grant an extension. But as an extension of time would appear to be necessary, it follows from the rest of my reasons that it should be granted to extend time to 25 May 2010, the date on which the defendant filed its second application.
In its application before the Magistrates Court, the defendant sought an order that the claimant's name be struck from the proceedings. That curious order appears to have been inspired by a quick reading of the headnote to the report of the decision of Powell J of the New South Wales Supreme Court in Harry S Bagg's Liquidation Warehouse Pty Ltd & Ors v Whittaker & Ors (1982) 44 NSWLR 421, which reads:
Where a solicitor is found not to have been validly retained by a company which is one of a number of plaintiffs, the appropriate order is that the name of the company be struck out and the solicitor pay as much of the defendant's costs of the proceedings up to the making of the order as are attributable to the company being made a party. (emphasis added)
The judgment itself reveals that his Honour ruled that where the solicitor had been validly retained by some and not other plaintiffs, the names of those plaintiff companies which had not authorised proceedings should be struck out, leaving the proceedings on foot in the names of the other plaintiffs, but where no plaintiff had duly authorised the commencement of the proceedings:
The appropriate course to adopt would seem to be to either stay the proceedings – which seems once to have been the practice (Reynolds v Howell (1873) 8 QB 398 – or to dismiss the proceedings – which seems to be the more modern practice (Newbiggen-by-the Sea Gas Co v Armstrong (1879) 13 Ch D 310; Nurse v Durnford (1897) 12 Ch D 764; Daimler Co Ltd v Continental Tyre and Rubber Co) – in each case all prior orders being discharged and the solicitor being order to pay the costs of both the application and the proceedings. In the present case I think it proper to adopt what seems to be the more modern practice.
The reference for the Daimler Co Ltd v Continental Tyre & Rubber Co case, omitted in the passage above but mentioned in the list of authorities, is [1916] 2 AC 307.
The claimant's submission was that the proceedings could never be struck out in the absence of an application on the part of the defendant for summary judgment, however the authorities support the remedy sought by the defendant as the order which should follow when the court has found that there is no valid retainer.
I have considered whether the proceedings ought to be stayed, instead of being struck out. After all, the defendant does not appear to have an actual defence and it may be competent, for example, for a court‑appointed provisional liquidator to retrospectively ratify the institution of the proceedings: Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673.
In the end, following the authority of John Shaw & Sons (Salford) Ltd v Shaw and the passages quoted from it above and Harry S Bagg's Liquidation Warehouse Pty Ltd & Ors v Whittaker & Ors, I consider that the appropriate course is to strike out the proceedings. When the court has found that the claimant is not before the court, not having consented to proceedings in its name, then they are a nullity and should not merely be stayed.
Notwithstanding the comments of Slesser LJ in John Shaw & Sons (Salford) Pty Ltd v Shaw quoted above as to the question of costs, I have decided that it should follow that the solicitor should pay the defendant's costs, without the need for proceedings to be commenced against him, which will only incur further expenses to both parties.
Finally, as I mentioned at the start, the claimant is not without remedy and may choose to avail itself of the options within the Corporations Act 2001 to institute authorised proceedings. As I read the authorities, neither the doctrine of res judicata, nor issue estoppel, would prevent if from so doing. The earliest of the unpaid invoices dating to late November 2007, the claimant is still well within time.
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