Devlin v Surfers Paradise Investments Pty Ltd
[1997] QCA 102
•2/05/1997
| IN THE COURT OF APPEAL | [1997] QCA 102 |
| SUPREME COURT OF QUEENSLAND |
Appeal No. 7399 of 1996
Brisbane
[Surfers Paradise Investments P/L v. Devlin & Anor.]
BETWEEN:
SURFERS PARADISE INVESTMENTS PTY. LTD.
(A.C.N. 058 247 064)
(Second Defendant) Appellant
AND:
IAN BARRY DEVLIN
(Plaintiff) First Respondent
AND:
EILAZAK PTY. LTD. (A.C.N. 066 647 863)
(First Defendant) Second Respondent Fitzgerald P.
McPherson J.A.Williams J.
Judgment delivered 2 May 1997
Separate reasons for judgment of each member of the Court; McPherson J.A. and Williams J. concurring as to the orders made.
| (1) | SET ASIDE SO MUCH OF THE JUDGMENT AND DECLARATION AS IS CONTAINED IN PARAGRAPHS 1, 2, 3 AND 4 OF THE JUDGMENT GIVEN ON 21 AUGUST 1996. | |||||
| (2) | IN LIEU THEREOF, ORDER THAT IT BE DETERMINED WHETHER: | |||||
| ||||||
| THE ISSUE AND ALLOTMENT TO THE SECOND DEFENDANT OF 5000 SHARES IN THE CAPITAL OF THE FIRST DEFENDANT IS INVALID OR OUGHT TO BE SET ASIDE. | ||||||
| (3) | ALTERNATIVELY, IF THE ISSUE AND ALLOTMENT BE NOT INVALID: | |||||
| ||||||
| (4) | ORDER THAT THE PLAINTIFF AND JANICE MARIE DEVLIN BE DISCHARGED FROM EACH OF THE UNDERTAKINGS IDENTIFIED AS A “FURTHER UNDERTAKING” GIVEN BY THEM AND RECITED IN THE JUDGMENT; AND THAT THE SECOND DEFENDANT BE DISCHARGED FROM THE UNDERTAKING ALSO IDENTIFIED AS “FURTHER UNDERTAKING” GIVEN BY IT AND RECITED IN THE JUDGMENT. | |||||
| (5) | ORDER THAT THE ACTION BE REMITTED FOR FURTHER DIRECTIONS, IF ANY, AND FOR HEARING AND DETERMINATION IN THE TRIAL DIVISION. | |||||
| (6) | ORDER THAT PARTIES BE AT LIBERTY TO APPLY TO THE SUPREME COURT OR A JUDGE OF THE COURT FOR THE PURPOSES OF THESE ORDERS. | |||||
| (7) | COSTS OF APPEAL AND THE COSTS AWARDED IN THE PROCEEDINGS BELOW TO BE COSTS IN THE CAUSE. |
CATCHWORDS: CIVIL - MORTGAGE OVER SHARES - REDEMPTION - Clogs on the equity of
redemption.
| Counsel: | Mr D. Jackson Q.C., with him Mr D. Campbell, for the appellant Mr R. Chesterman Q.C., with him Mr A. Heyworth-Smith for the respondents |
| Solicitors: | D’Arcys for the appellant C.A. Sciacca & Associates for the respondents |
| Hearing Date: | 9 April 1997 |
| IN THE COURT OF APPEAL |
SUPREME COURT OF QUEENSLAND
Appeal No. 7399 of 1996
Brisbane
| Before | Fitzgerald P. McPherson J.A. Williams J. |
[Surfers Paradise Investments P/L v. Devlin & anor.]
BETWEEN:
SURFERS PARADISE INVESTMENTS PTY LTD
ACN 058 247 064
(Second Defendant) Appellant
AND:
IAN BARRY DEVLIN
(Plaintiff) First Respondent
AND:
EILAZAK PTY LTD
ACN 066 647 863
(First Defendant) Second Respondent
REASONS FOR JUDGMENT - FITZGERALD P.
Judgment delivered 2 May 1997
This is an appeal from orders made in the Trial Division on a motion for judgment on 21 August 1996.
It is desirable to state at the outset that a number of the lawyers who represented the parties on this
appeal were not previously involved in the proceeding. Neither the procedure, the evidence, the
findings nor the orders are satisfactory, and the respondent conceded that at least one conclusion of the Trial Division Judge could not be supported and that some variation of his Honour’s orders is needed.
Further, those orders made do not finally dispose of the action, which is one of a number of
proceedings between these and other parties relating to disputes over comparatively small amounts
which have been made the subject of complex litigation. Indeed, the action cannot be finally disposed
of on the present motion for judgment.
The judgment of McPherson J.A., which summarises a number of the matters raised in the action,
explains why it is inappropriate to determine at this stage whether resolutions purportedly passed on
behalf of the shareholders and by purported directors of Eilazak Pty Ltd on 21 March 1996, or either
of those resolutions, was valid. While the determination of those issues might facilitate the resolution of
at least some of the material disputes in the action, this Court could not determine such issues unless it
made findings of fact and considered arguments which were not advanced below. Further, this Court
is not fully seized of the matter, and cannot be sure that there is no other potentially relevant evidence
available or what ramifications the determination of those issues in isolation from the remainder of the
action could have upon the parties’ overall respective rights and obligations.
However, McPherson J.A. has held that, on giving an appropriate undertaking, the respondent Devlin
is entitled to redeem the single share in Eilazak Pty Ltd which was the subject of the security which he
gave in favour of the appellant Surfers Paradise Investments Pty Ltd “freed from the incubus of the
5,000 shares allotted to” Surfers Paradise Investments. Accordingly, his Honour proposes certain
orders and declarations which are expressed to some extent in the alternative. Further, in part at least,
I think, because of his view with respect to Devlin’s entitlement to redeem his share, his Honour
considers that the costs of the appeal and of the proceeding below should be costs in the cause.
In my opinion, just as the Court should not decide on the validity of the resolutions and for much the
same reasons, it should not decide any other issue at this time in the confused circumstances presented.
Devlin’s entitlement to redeem the single share in Eilazak which was the subject of the security to
Surfers Paradise Investments was either not the subject of dispute or peripheral to the main dispute.
I consider that the preferable course is for the action to proceed to trial on all issues. Further, since it
is the procedure adopted by the first respondent which has caused the costs of both the proceedings
below and of the appeal in this Court to be wasted, he should pay the costs thrown away.
I would therefore allow the appeal with costs to be taxed, and set aside the orders made below with
an order that the first respondent pay the appellant’s taxed costs of and incidental to the motion for
judgment.
IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND
Appeal No. 7399 of 1996
Brisbane
| Before | Fitzgerald P. McPherson J.A. Williams J. |
[Surfers Paradise Investments P/L v. Devlin & Anor.]
BETWEEN:
SURFERS PARADISE INVESTMENTS PTY. LTD.
(A.C.N. 058 247 064)
(Second Defendant) Appellant
AND:
IAN BARRY DEVLIN
(Plaintiff) First Respondent
AND:
EILAZAK PTY. LTD. (A.C.N. 066 647 863)
(First Defendant) Second Respondent
REASONS FOR JUDGMENT - McPHERSON J.A.
Judgment delivered 2 May 1997
This is an appeal against a judgment for redemption given in action no. 5758 of 1996 instituted
by Ian Barry Devlin, who is the mortgagor and the first respondent to the appeal, against the appellant
Surfers Paradise Investments Pty. Ltd. (“SPI”), which is the mortgagee. Before the matters giving rise
to this litigation, Devlin was a director of and the holder of one of two issued shares in Eilazak Pty. Ltd., to which I will refer as “the Company”. At that time, the only other director and shareholder was a Ms.
K.J. Ludlow.
In early 1996 the Company was engaged in carrying out a land development project for which
it needed further funds. Devlin approached a Mr Hayes of SPI, which agreed to lend him a sum of
$20,000 in return for security over his share in the Company. A deed dated 7 February 1996 was
prepared and executed by which SPI lent him that sum for a period of 60 days from 8 February 1996
with interest at the rate of 11½% p.a., and, as security for repayment of the loan, took a charge over
Devlin’s share in the Company. Clause 5 of the deed was as follows:
“5. Devlin does hereby appoint S.P.I. his lawful attorney to exercise all or any voting rights to the share and S.P.I. shall be entitled to attend any meeting of Eilazak and vote on any resolution put to such meeting as though it were the registered holder of the share. This power of attorney is given by way of security and shall remain irrevocable for so long as the loan amount or any part thereof shall remain outstanding (the term of the loan).”
There was provision in cl.6 to the effect that during the term of the loan, Devlin should not resign as a
director of the Company; or vote in favour of any resolution by which the existing shareholding of the
company should be altered; or vote in favour of a resolution altering the constitution of the board of
directors. Clause 7 required Devlin to give notice to SPI of any meeting of directors or shareholders
of SPI.
Devlin initially defaulted in repaying the loan and interest, which, however, have since been paid
out in full. His name has throughout remained on the register of shareholders, and he has always had
possession of the share certificate relating to his share in the Company . On 6 March 1996 Ms. Ludlow
gave written notice resigning from the office of director as from 5 March 1996. On 12 March 1996
Devlin, acting under art.61(1) of the Company’s articles of association, appointed his wife Mrs J.M. Devlin to fill the casual vacancy on the board of directors. At the time or shortly afterwards, the validity
of this appointment was, it is said, acknowledged by SPI or its solicitor on its behalf.
The loan with interest having been repaid on 16 July 1996, it is at first sight difficult to see why
it should have been necessary to proceed with the redemption action. The explanation lies in the fact
that during the time when Devlin’s share was subject to the charge, SPI did three things. For the
purpose of this appeal, it is accepted that SPI acquired from Ms. Ludlow her share in the Company.
Then, relying on Ms. Ludlow’s share and the power of attorney in cl.5 of the security from Devlin, SPI
on 21 March 1996 removed, or purported to remove, Mr & Mrs Devlin from office as directors of the
Company, and in their place appointed Mr Hayes and Mr Richardson, who is his solicitor. As
directors, on 9 April 1996 they then issued and allotted to SPI a further 5000 shares of $1.00 each in
the Company. Devlin’s single share in the Company which, before the security was given was one of
only two issued shares in the Company, is therefore held by him freed from the charge he gave on 8
February 1996 but is now only one of 5002 issued shares in the Company. On the assumption that that
share issue is valid, Devlin is plainly now very much a minority shareholder in the Company. If that state
of affairs continues, it is not unreasonable to suppose that his vote will not count for much in the affairs
of the Company; and, if it were to declare a dividend or to be wound up, he will receive only a 1/5002
share of what is distributed.
This to my mind demonstrates the utility of the redemption proceedings by Devlin. SPI still
holds the 5000 shares issued to it through its having exercised the power of attorney given by the deed
of charge over Devlin’s share. In a passage from a judgment of Lord Langdale in Moore v. Painter
(1842) 6 Jur. 903, 904, which was cited with approval by both Starke J. and Dixon J. in Southwell
v. Roberts (1940) 63 C.L.R. 581, 586, 591, his Lordship said:
“There is nothing more necessary for this court to do than take care that a mortgagee in possession shall so deal with the mortgaged property as to be able to restore it to the mortgagor in the same nature as he received it.”
The particular question before the High Court in Southwell v. Roberts was whether, on the taking of
accounts in redemption proceedings, the mortgagee was entitled to be credited with amounts expended
on making permanent improvements to the mortgaged property while the mortgagee was in possession.
Although the improvements were of considerable value, Nicholas C.J. in Eq. at first instance in the
Supreme Court of New South Wales directed that, on the taking of accounts between mortgagee and
mortgagor, the mortgagor was not to be charged with the amounts expended on those improvements.
His Honour held that in making them the mortgagee had transgressed the rule that “a mortgagee may
not clog the equity of redemption”: see Roberts v. Southwell (1940) 57 W.N. (N.S.W.) 33, at 35.
The rule is relevant to the present case. SPI has not offered or undertaken to transfer or
surrender the 5000 shares acquired by it in the character of chargee, or to submit to their being
cancelled by reduction of the share capital of the Company. How much, if anything, it paid for those
shares is something the record does not disclose. If it did not pay anything, it is difficult to see how it
can resist immediate redemption of the shares. If it paid for them, it may be entitled to retain those
shares until the sum expended on the shares is repaid to it. Whether it is so entitled depends on
whether, stating it in a general way, it was necessary for 5,000 or any number of shares in the Company
to be issued in favour of SPI in order to protect its security over Devlin’s share.
As to that, the submission on appeal was that it was necessary to issue further shares because
at the time it was done the Company was either insolvent or short of funds urgently required to complete
the purchase of land forming part of the development project in which it was engaged. This is disputed
by Devlin. But if, for the present, SPI’s contention to that effect is accepted, it may be that its claim to be paid something as a condition of surrendering the 5000 shares is founded on an act of salvage of the
mortgaged property rather than on any improvement to it. I doubt if it makes any difference which of
these alternatives it was, because, according to McTiernan J. in Southwell v. Roberts (1940) 63
C.L.R. 581, 600, “the dominant consideration is what is just and equitable between mortgagor and
mortgagee”. What is clear, however, is that subject to the resolution of that question, SPI is not entitled
to insist on maintaining on the share mortgaged by Devlin a clog in the form of the 5000 shares which
it acquired in its character of mortgagee only for the purpose of protecting its security.
The usual method of determining such a question in redemption proceedings is to direct the
taking of accounts between mortgagee and mortgagor to ascertain what sum, if any, was expended by
the mortgagee, and ought to be allowed to it against the mortgagor in those accounts, as expenditure
properly incurred in and about the mortgaged property. No such direction or inquiry was sought from
or made by the Chamber Judge in the proceedings below. I suspect that that was because, by then,
counsel had identified another matter which was said to be decisive in favour of Devlin. It was that the
removal of Mr and Mrs Devlin as directors of the Company and the consequential share issue was an
excessive or improper exercise of SPI’s power as mortgagee. Counsel for SPI, on the other hand,
submitted that, as to that question, there was an issue which ought to be tried rather than disposed of
summarily in Chambers.
On this point the learned judge accepted the submission of counsel for Devlin in preference to
those on behalf of the defendants SPI and the Company. He made declarations that the removal of
the Devlins from office and their replacement as directors by Hayes and Richardson were invalid, and
he also declared the issue and allotment of the 5000 shares to SPI to be invalid. The operative part of
the judgment was preceded by the recital of a series of undertakings from the plaintiff and Mrs Devlin, one of which was that they would use their best endeavours to cause the Company to repay the
consideration, if any, paid to it by SPI for the allotment of those shares.
On appeal, it was submitted for SPI that the judge ought not to have given judgment summarily
when there was a triable issue about the validity of the Devlins’ removal and the subsequent share issue.
The response was that Devlin had not been applying for summary judgment but moving for judgment
under O.19, r.4 in an action which was being tried on affidavit : see Suntown Pty. Ltd. v. Proud
[1979] Qd.R. 336. That may be so; but it was not the way in which the application was presented by
the plaintiff to the Chamber Judge; and, in any event, it appears to be the case that, on the question in
issue, there were and are matters of fact which called for more thorough investigation and fuller
consideration than they received at the hearing.
On appeal, a further possible basis of invalidity of the share issue and directors’ removal was
identified. It is that Devlin was not given notice of the general meeting of the company at which he and
his wife were removed, or of the meeting of directors at which it was resolved to issue and allot the
5000 shares to SPI. The point has a potential to prove fatal to the validity of the disputed share issue.
It appears to turn on whether a mortgagor or chargor of shares continues, during the subsistence of the
mortgage or charge, to be entitled to receive notice of general meeting. The decision in Musselwhite
v. C.H. Musselwhite & Son Ltd. [1962] Ch. 961 may be thought to suggest that notice ought to have
been given to Devlin and that, without it, the steps taken on 21 March 1996 to replace him and Mrs
Devlin as directors and on 9 April 1996 to issue and allot the 5000 shares to SPI were invalid. It was
suggested that if, in any event, SPI was independently entitled to the share acquired from Ms. Ludlow,
the share allotment might be valid to the extent of half the number of the disputed shares; but I cannot see how that result could be reached. On any view of it, the 5000 shares were either validly issued and
allotted or they were not. There was never any issue or allotment of 2500 shares to anyone.
It was submitted that it was not open to a party seeking redemption to raise questions about the
validity of the security he wishes to redeem or, at any rate, that he is not entitled to raise such questions
in redemption proceedings. But there is ample authority for that course. See National Bank of
Australasia v. United Hand-in-Hand & Band of Hope Company (1879) 4 App.Cas. 391, 400-401,
which is a decision of the Privy Council affirming a judgment of the Full Court of Victoria reported at
(1877) 3 V.L.R.(E) 61, 67, where, in proceedings to set aside a security, Stawell C.J. said that plaintiffs
who “failed to establish one case, may, if they have pleaded and proved another, have any relief to
which they are entitled if it is comprised specifically or generally within the prayer of the bill”. It was a
decision given even before the adoption of the Judicature Act in Victoria. A later and perhaps even
clearer instance, in which an application to set aside a mortgage was combined with an alternative
application to redeem it, is Hunt v. Worsfold [1896] 2 Ch. 225, 228, where North J. said of the
plaintiff in that case that:
“As he is entitled without any leave to ask for a declaration that the mortgage deed is invalid, I think he is equally to ask in the other alternative for possession of the land upon payment of what may be found due on the mortgage”
So in this case, it would be open to Devlin to challenge the validity of the share issue; and, in the
alternative, to ask for an account to be taken, with or without an inquiry, of what, if anything, may be
due to SPI arising out of the share issue. The practice of permitting such claims in the alternative is
authenticated by the decisions mentioned, and there is no compelling reason why the court should insist
on two separate proceedings when one will do.
It is, however, not fairly open to Devlin to rely for the first time on this appeal on what may be
called the notice point as affecting the validity of the share issue. Mr Chesterman Q.C. for the
respondent nevertheless sought to retain the declarations of invalidity with respect to the removal of Mr
& Mrs Devlin, the appointment of Messrs. Hayes and Richardson, and the share issue, on the basis
accepted by the primary judge, which was that SPI had exercised its power as mortgagee improperly.
I do not consider that, having regard to the way in which the matter was conducted at first instance, it
would be right to dispose of the appeal on that ground. SPI may possibly be able to justify the share
issue as an act of improvement or salvage if the matter is more thoroughly investigated. Furthermore,
the nature of the account that is needed if the invalidity point fails was to some extent misapprehended
at the hearing below, and a proper account-taking is required if SPI is entitled to payment as a condition
of its surrendering the disputed shares.
Having formed the view that the share issue amounts to a clog on the equity of redemption, I
consider that Devlin is entitled to redeem upon his undertaking to pay the amount, if any, found to be
due to SPI. Such an undertaking ought to be pleaded or given expressly: Adams v. Bank of New
South Wales [1984] 1 N.S.W.L.R. 385, 296; and cf. Tannock v. North Queensland Securities Ltd.
[1932] St.R.Qd. 285. The joint undertaking recited in the judgment as given by Mr and Mrs Devlin
is not expressed in the form required for the purpose of a redemption proceeding. On giving it in the
appropriate form, Devlin’s right to redeem cannot be doubted. He has already paid out the principal
of the loan and interest, and it is SPI that now claims to retain the benefit of something which, unless its
claim to be paid more on account of the share issue is made good, remains a constraint on the exercise
of the rights he had as the holder of half of the issued share capital in the Company before he charged
his share to SPI.
It is nevertheless desirable that the parties be given the opportunity of fully litigating the question
whether SPI had and properly or validly exercised a power as chargee of Devlin’s share in the
Company to remove him and his wife as directors and to make the disputed share issue and allotment.
I would therefore:
| (1) | Set aside so much of the judgment and declaration as is contained in paragraphs 1, 2, 3 and 4 | |
| of the judgment given on 21 August 1996. | ||
| (2) | In lieu thereof, order that it be determined whether: | |
|
or
(b) by reason of excess of power or the improper exercise of power or otherwise -
the issue and allotment to the second defendant of 5000 shares in the capital of the first
defendant is invalid or ought to be set aside.
| (3) | Alternatively, if the issue and allotment be not invalid: | |
|
the account in paragraph 3(b), the plaintiff be entitled to redeem 5000 shares in the
capital of the first defendant purporting to have been issued and allotted to the second
defendant on or about 9 April, 1996;
(b) order that an account be taken between the plaintiff and the second defendant of the
amount, if any, due by the plaintiff to the second defendant under a mortgage or charge
given by deed dated 7 February 1996 over the plaintiff’s share in the capital of the first
defendant;
(c) order that such further inquiries be taken and declarations, judgments and orders be made
or given as may be appropriate.
| (4) | Order that the plaintiff and Janice Marie Devlin be discharged from each of the undertakings |
| identified as a “further undertaking” given by them and recited in the judgment; and that the | |
| second defendant be discharged from the undertaking also identified as “further undertaking” | |
| given by it and recited in the judgment. | |
| (5) | Order that the action be remitted for further directions, if any, and for hearing and determination |
| in the Trial Division. | |
| (6) | Order that parties be at liberty to apply to the Supreme Court or a Judge of the Court for the |
| purposes of these orders. | |
| Logically, the validity or invalidity of the share issue is the first matter to be resolved; but, |
whether or not that course is adopted, the respondent plaintiff has shown that he has a right, subject to
giving the undertaking, to redeem his share in the capital of the Company freed from the incubus of the
5000 shares allotted to the second defendant. I would accordingly order that the costs of appeal and
the costs awarded in the proceedings below should be costs in the cause.
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