Intagro v ANZ Banking Group - [2004] NSWSC 618

Reported Decision:
50 ACSR 224
(2004) 22 ACLC 1065

Supreme Court

CITATION: Intagro v ANZ Banking Group [2004] NSWSC 618

HEARING DATE(S): 9 July 2004

JUDGMENT DATE:
29 July 2004

JUDGMENT OF: McDougall J at 1

DECISION: See paras [86] and [87] of judgment

CATCHWORDS: PRACTICE AND PROCEDURE - where leave to amend cross-claim sought - where amendment to cross-claim seeks to join cross-defendants - whether amendment raises claim that is obviously futile - whether amendment raises claim that is premature - whether amendment should not be permitted on discretionary grounds - where risk of relitigation - CORPORATIONS LAW - construction of s 197(1) Corporations Act 2001 (Cth) - whether majority view in Hanel v O'Neill (2003) 48 ACSR 378 plainly wrong - s 233 Corporations Law - statutory interpretation - whether legislature intended s197(1) to re-enact in substance, and with same effect, s 233(2) of Law - whether legislature intended s 197(1) to replace s 233(2) with provision of opposite effect - whether legislative intention that s 197(1) achieve some other purpose - meaning of "entitled" in s 197(1), (2) of Act.

LEGISLATION CITED: Corporations Act 2001 (Cth)
Corporations Law

CASES CITED: Hanel & Anor v O'Neill (2003) 48 ACSR 378
Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485
Little v Registrar of the High Court of Australia (1991) 29 FCR 544
Sterling Engineering Co Ltd v Patchett [1955] AC 534
Hill v Hasler [1921] 3 KB 643
Burswood Management Limited v Attorney-General (Cth) (1990) 23 FCR 144
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
The State of Queensland v J L Holdings Pty Limited (1997) 189 CLR 146
The Commonwealth of Australia v Verwayen (1990) 170 CLR 394
Horton v Jones (No 2) (1939) 39 SR (NSW) 305
Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360
Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438
Forster v Jododex Australia Pty Limited (1972) 127 CLR 421
Ainsworth v Criminal Justice Commission (1992) 175 CLR 564

PARTIES :
Intagro Projects Pty Ltd (Plaintiff/Cross-Defendant)
Australia and New Zealand Banking Group Limited (Defendant/Cross Claimant)

FILE NUMBER(S): SC 50165/03

COUNSEL: D J Hammerschlag SC/LV Gyles (Plaintiff/Cross-Defendant)
S D Rares SC/P J Dowdy (Defendant/Cross-Claimant)

SOLICITORS: Holding Redlich (Plaintiff/Cross-Defendant)
Minter Ellison (Defendant/Cross-Claimant)

INTAGRO PROJECTS PTY LTD v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED

50165/03

INDEX – JUDGMENT 29 JULY 2004

Paragraph

Introduction 1

The nature of the proceedings 4

The proposed amendment to the cross-claim 7

Section 197 and its predecessor 8

The fundamental issue 10

The decision in Hanel 13

Analysis of the decision in Hanel 24

Other views on the construction of s 197 51

The preferred construction of s 197(1) 57

Is the majority view in Hanel plainly wrong? 61

The test to be applied to a proposed amendment 64

Prematurity 66

Discretionary considerations 76

The proposed further amendment 82

Conclusion and orders 86

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

29 July 2004

AND NEW ZEALAND BANKING GROUP LIMITED

JUDGMENT

HIS HONOUR

Introduction

1 The defendant and cross-claimant (“the Bank”) seeks leave to amend its cross-claim. The principal ground of opposition to the application is that the amendment is obviously futile. If that question is resolved in favour of the Bank then, it is said, leave to amend should not be granted because the amendment is premature, and on discretionary grounds.

2 The amendment would invoke the operation of s 197 of the Corporations Act 2001 (Cth) (“the Act”). The Bank submits that:

(1) The construction of s 197 that it must establish if its cross-claim is to have any prospect of success is supported by the reasoning of the “majority” (see para [13] below for an explanation of the use of that word) of the Full Court of the Supreme Court of South Australia in Hanel & Anor v O’Neill (2003) 48 ACSR 378; and

Hanel,

Australian Securities Commission v Marlborough Gold Mines Limited

3 The effect of the amendment, if leave to amend were granted, would be to add two individuals, Mr and Mrs Robinson, as cross-defendants (Intagro is already a cross-defendant). Intagro’s solicitors have also received instructions to act for Mr and Mrs Robinson. It may be accepted that the submissions put for Intagro adequately reflect the position of Mr and Mrs Robinson.

The nature of the proceedings

4 On 10 August 2001 and 17 January 2003, Intagro entered into two guarantees whereby it agreed, among other things, to guarantee the performance by a company known as TJF/EBC Pty Ltd (“TJF”) of its obligations to the Bank. The Bank says that it is owed in excess of $37 million by TJF and that Intagro is liable for this amount pursuant to the guarantees. The Bank by its cross-claim seeks to recover that amount from Intagro.

5 The Bank says that Intagro entered into the guarantees in its capacity as trustee of certain trusts. Intagro denies this. Indeed, the relief that it claims by its summons includes the following:

“12. A declaration that the First Guarantee (as defined in paragraph 23 of the Plaintiff’s Contentions) was entered into by the Plaintiff in its own capacity and not in its capacity as trustee of any trust.

…

15. A declaration that the Second Guarantee (as defined in paragraph 24 of the Plaintiff’s Contentions) was entered into by the Plaintiff in its own capacity and not in its capacity as trustee of any trust.”

6 Further, in its statement of contentions, Intagro says, as to the capacity in which it gave the guarantees:

The capacity in which the Guarantees were entered into by the Plaintiff

44. In the event that the Court finds the First and Second Guarantees binding as against the Plaintiff (which is denied), then the Plaintiff says, and it is the fact, that the Plaintiff did not enter into the Guarantee as a trustee of a trust, and in the premises:

(a) Part 11 of the First and/or Second Guarantees do not apply to the Plaintiff and;

(b) in satisfying any liabilities that the Plaintiff has to the Defendant pursuant to the First and/or Second Guarantees (and the Defendant denies there are any), the Defendant has no recourse to assets that are held by the Plaintiff on trust for other entities.”

The proposed amendment to the cross-claim

7 As I have indicated, the Bank by its cross-claim as presently drafted seeks recovery from Intagro of principal, interest and other monies, in excess of $37 million, pursuant to the guarantees. It wishes to assert that Mr and Mrs Robinson are personally liable to discharge Intagro’s alleged liability for the following reasons:

“

Personal liability of the second and third cross defendants

13. At all material times, the first cross defendant was acting, or purporting to act, as trustee when it incurred liability for the Debt.

14. At all material times, the second and third cross defendants were directors of the first cross-defendant when it incurred liability for the Debt and remain so.

15. The first cross defendant has not, cannot and will not discharge its liability for the Debt in full nor is it entitled to be indemnified against the liability for the Debt out of the trust assets.

16. The second and third cross defendants are liable to discharge the first cross defendant’s liability for the Debt under section 197 of the Act.”

Section 197 and its predecessor

8 Section 197 of the Act provides, relevantly:

197

Directors liable for debts and other obligations incurred by corporation as trustee

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

…“

9 The immediate statutory predecessor of s 197 was s 233 of the Corporations Law. Section 233 provided, relevantly:

“233 Liability of directors for debts etc. incurred by body corporate acting as trustee

(1) Where:

(a) a relevant body corporate while acting or purporting to act in the capacity of trustee of a trust, incurs a liability:

(i) in the case of a company - - whether within or outside Australia; or

(iii) otherwise - - within this jurisdiction; and

(b) the relevant body corporate is for any reason not entitled to be fully indemnified out of the assets of the trust in respect of the liability; and

(c) the relevant body corporate has not discharged, and is unable to discharge, the liability or a part of the liability;

the relevant body corporate and the persons who were directors of the relevant body corporate when the liability was incurred and were not innocent directors in relation to the incurring of the liability are jointly and severally liable to discharge the liability or the undischarged part of the liability, as the case may be.

(b) the assets of the trust are insufficient to indemnify the trustee in respect of the liability concerned;

be taken not to be entitled to be fully indemnified out of the assets of the trust in respect of a liability.”

The fundamental issue

10 The fundamental question is whether the legislature simply intended to re-enact, in “simple” language, s 233; or whether it intended to make a substantial change.

11 It is clear, from s 233(2), that s 233(1) would not impose liability “merely because … the trust has no assets” or because “the assets of the trust are insufficient to indemnify the trustee in respect of the liability concerned”.

12 Section 197(1) includes, immediately following paragraph (b), the sentence: “This is so even if the trust does not have enough assets to indemnify the trustee.” I will refer to that for convenience as “the ambiguous sentence”. The question really comes down to whether the legislature intended, by the ambiguous sentence:

(1) To re-enact in substance, and with the same effect, s 233(2); or

(2) To replace s 233(2) with a provision of the opposite effect; or

The decision in Hanel

13 Hanel was an appeal from the decision of a magistrate, who had granted summary judgment in favour of the respondent (to the appeal) against the appellant. The decision of the Full Court was that the appeal should be allowed and that the matter should be remitted for trial. Mullighan and Gray JJ did not think that the magistrate had erred in her construction or application of s 197(1) of the Act. However, they concluded, she had erred in failing to consider the question of mitigation of loss. I will for convenience, although at the cost of accuracy, refer to Mullighan and Gray JJ as “the majority”.

14 Debelle J, on the other hand, considered that the magistrate had erred in her construction and application of s 197(1). He did not consider the question of mitigation of loss.

15 It follows, I think, that the views expressed by the majority on the construction and application of s 197(1) are obiter dicta. It follows equally that the view of Debelle J was the reason for his Honour deciding the case as he did; but that his Honour’s view did not command the support of the other members of the court. However, I do not regard those considerations as sufficient to displace my obligation to follow the majority view, as to the proper construction of s 197(1), unless convinced that it is plainly wrong.

16 Mullighan J dealt with the s 197 point briefly at 381 [11]-[14]. He said:

“[11] In my view, whether Daroko [the trustee] was entitled to be indemnified out of the assets of Daroko Unit Trust is not merely a matter of law to be determined from the trust deed. It is a matter of mixed law and fact. Certainly, cl 21 provides a legal basis for the indemnity. However, the undisputed facts establish that, at the relevant times, there were no such assets in the Daroko Unit Trust due to the conduct of the appellant. He had caused all of the assets to be paid to Forcett [the trustee of another trust associated with the appellant]. It was the unilateral act of the appellant which resulted in the Daroko Unit Trust being without the funds to discharge the liability to the respondent. It would be a strange result if s 197(1)(b) was to be interpreted so that a director could escape personal liability by reason of that provision merely by ensuring that a provision, such as cl 21, was contained in the trust deed and could thereby operate as a shield against personal liability, even though the director causes the trust to be without funds to avoid paying the debt.

Australian Corporation Law

[13] I accept the argument of Mr Cudmore [counsel for the respondent], that if there are no assets comprising the trust fund, there is no entitlement to be indemnified.

[14] This is the approach taken by the learned magistrate and, in my view, she was correct. She was correct in her conclusion that the appellant was liable for [sic] the respondent for the losses caused by [sic] Daroko.”

17 Gray J considered the matter at 390 [63]-392 [74]. After dealing with the statutory antecedents of s 197, his Honour noted at 391[68] that it was “accepted that the word “This” immediately following s 197(1)(b) was a reference to the liability of the director, the subject of s 197(1).”

18 At 391 [69], his Honour noted that the liability of the director was individual and joint with the corporate trustee. He then said:

“The section provides that the director’s liability arises when subs (1)(a) and (b) are satisfied “even if the trust does not have enough assets to indemnify the trustee”.”

19 At 391 [70], his Honour dealt with the submission that s 197(1) re-enacted s 233 in different words: something said to have been confirmed by the absence of any reference to s 197 in the Explanatory Memorandum. His Honour said:

“ … This submission should be rejected. No explanation was offered as to why the legislature would completely redraw the subsection if all that was intended was to repeat earlier works [sic] that had a settled meaning. The fact that a new subsection was introduced replacing the old subsection in its entirety suggests that a legislative change was intended. This submission would also leave the words [the ambiguous sentence] as insignificant, superfluous and with no work to do. … “

20 At 392, his Honour said (omitting citations):

[71]

[72]

[73]

[74]

21 The core of the reasoning of Debelle J on the construction of s 197 is found at 384 [37]-385 [39]:

[37]

[38]

[39]

22 The conclusion of Debelle J’s reasoning was expressed thus at 386 [40]:

“It will be seen, therefore, that s 197(1) has the same meaning and effect of [sic] s 233 (1) and (2). In other words, s 233 has been re-enacted, albeit in different and obscure terms. If parliament intended that s 197 should alter the operation of s 233, it would have been easily done in clear and unambiguous terms.”

23 His Honour thereafter referred to the wording of s 233. He noted at 386 [42] that the repeal and re-enactment, particularly in different words, was indicative of an intention that s 197 should have a different operation to s 233. However, his Honour said, “it cannot be assumed that the parliament necessarily intended to alter the law. The fact that s 197(1) is expressed in terms which are different from s 233 does not require the conclusion that parliament intended to alter the law. The real question is what the words in s 197(1) mean and, on examination, it is apparent that they substantially re-enact s 233.”

Analysis of the decision in Hanel

24 The approach of the majority has a number of difficulties. First, it imputes to Parliament the intention to effect, without warning, a substantial change to a legislative provision that, in one form or another, had been in force since 1985. Second, it imputes to Parliament the intention to do so as part of “a plain English rewrite … of the relevant areas of the Corporations Law” which was intended to “make the law more user friendly and reduce compliance costs for corporations and market participants”: Explanatory Memorandum to the Corporate Law Economic Reform Programme Bill 1998, paragraph 2.12. Third, although the substantial changes to the law that were to be effected through the enactment of the Corporate Law Economic Reform Programme Bill were discussed at length in the Explanatory Memorandum, there was no reference to the intention to effect a significant change to the former s 233. Indeed, in paragraph 1.3 of the memorandum (which dealt with “Directors’ Duties and Corporate Governance” and referred to the statutory business judgment rule and the statutory derivative action available to shareholders), the statement was made that “[i]t is not intended to impose a new form of liability on directors.” One would have thought that if, in a related context, it were intended to impose a new form of liability on directors, this might have been flagged.

25 Thus, the change – if that is what was effected – was unheralded and, perhaps, unintentional. It was, apparently, effected through the process of “plain English” rewriting rather than as part of the significant (and recognised) changes that were proposed.

26 It is necessary to consider what might be the policy underlying s 197 and its antecedents. The policy must have been directed at the problems created when a trustee traded without a right of indemnity or in circumstances (for example, trading outside the terms of the trust instrument) where it lost, or was disentitled to the benefit of, its right of indemnity. The general principles relating to insolvent trading may be difficult to apply to the trading activities of a trust. Section 197 and its predecessors were, I think, intended to cut through those difficulties and to focus on the real problem. As a matter of policy, up until and including the enactment of the Corporate Law Economic Reform Project Act, 1998 the legislature chose to focus on the legal problem (trading without a right of indemnity) rather than the practical problem (trading where the value of the right of indemnity may be insufficient). It may be accepted that a policy focussing on the legal right rather than its practical value could be seen by some to be too narrowly focussed; but, ordinarily, one would expect a significant change in policy to be clearly announced and clearly expressed.

27 The majority approach could lead to extraordinary consequences. The key to liability under s 197 is that a person is a director of a corporation when it incurs a liability while acting, or purporting to act, as a trustee. If, at some later time, the corporation has not discharged and cannot discharge that liability or part of it, and is not entitled to be fully indemnified against the liability out of trust assets (either as a matter of law or because the trust assets are insufficient), the person is jointly and severally liable with, among others, the corporation. But the entitlement in law to indemnity may have existed at the time the liability was incurred, and there may then have been more than sufficient trust funds to enable the liability to be met. If the director resigned at that or a later point of time, and the situation thereafter changed – either as to the entitlement in law to be indemnified or as to the sufficiency of the trust fund to meet the liability – the (former) director would, nonetheless, be liable. One can understand the policy reasons that could be thought to justify making a director liable when a trustee company incurs debts without a right of indemnity or without an indemnity of sufficient value. It is very difficult to understand the reasons for making that director liable when he or she acted properly at the time the liability was incurred (because the right to indemnity existed and was sufficient in value) and when he or she had no responsibility for the subsequent events that rendered the trustee incapable of meeting the liability. The majority approach does not address this problem.

28 It could be said that the problem that I have just identified was intended to be answered by s 197(2). There are, I think, two points to be made about this response. The first is that it is less than satisfactory to leave an innocent director (as the example postulates) to the vagaries of a legislative exculpation of uncertain extent. The second is that if, as Mullighan J reasoned and as Gray J in his alternative approach also reasoned, the word “entitled” in sub s (1) encompasses not just the legal right but also its practical value, then it should have the same meaning in sub s (2). It would follow that the innocent director would not be exculpated under sub s (2) unless the other director or directors (on the assumption that all directors are to be regarded as having been trustees) were not only liable to indemnify the innocent director but also practically capable of doing so in full. An inquiry into the statutory exculpation would involve, of necessity, an examination of the financial position of the “indemnifying” directors. They would have it in their power, through a divestiture of assets, to deny the benefit of sub s (2) to the innocent director.

29 Further, the majority approach is, with respect, difficult to follow as a matter of language. It requires the ambiguous sentence, which in terms is part of the sub section imposing liability, to be read not just, as its language would suggest, as relating to, or qualifying in some way, the liability that is imposed (as, clearly, the following sentence does) but as imposing what is in substance a separate head of liability. That is an unusual approach to drafting, even in a “plain English rewrite” of a hitherto well understood, and in my view readily comprehensible, provision.

30 It must, however, be recognised that any attempt to construe s 197(1) by reference to grammatical and syntactical considerations runs straightway into the problem that its grammar is poor (“has not, and cannot, discharge”; the need for, and lack of, a past participle seem to have escaped notice) and its syntax is confused. Any attempt to make sense of the section involves the taking of some liberty with its drafting.

31 Central to the reasoning of Mullighan J is the proposition that the question of entitlement to be indemnified is a matter of mixed law and fact.

32 Inherent in his Honour’s approach is that the verb “entitle” connotes not just the giving of a legal right or claim, or the grounds for a legal right or claim, but the quantification or value of that legal right or claim. This is, with respect, at odds both with the relevant English meaning of the word “entitle” and with its application in other areas of legal discourse. The Macquarie Dictionary and Oxford English Dictionary alike indicate that, as I have said, the relevant meaning of the verb “entitle” is to give a legal right or a claim to a legal right or a ground for a claim to a legal right; to give a rightful claim. Decided cases – admittedly in divergent areas of the law – indicate a similar connotation.

33 The dictionary meaning of the word, namely “to give a rightful claim to anything” was endorsed, in the context of the phrase “entitled … to practise in Federal Courts”, by the Full Court of the Federal Court in Little v Registrar of the High Court of Australia (1991) 29 FCR 544, 552.

34 In Sterling Engineering Co Ltd v Patchett [1955] AC 534, the question, in the context of the Patents Act 1949 as it then stood, was whether as between an employer and an employee one was “entitled”, to the exclusion of the other, to the benefit of an invention made by the employee. Viscount Simonds (with whom Lord Porter, Lord Tucker and Lord Somervell of Harrow agreed) said at 545 that “[t]he word “entitled” refers to legal right.” Lord Reid, who agreed that the appeal should be allowed, said at 545 that what was required to be determined “is the legal right of the parties”. At 547, his Lordship said that “before the respondent can invoke [the] sub section he must point to something which would prevent the court from being satisfied that the legal right to the benefit of the inventions … belongs to the appellants.”

35 In Hill v Hasler [1921] 3 KB 643, the question arose, in the context of landlord and tenant legislation, whether a landlord was “entitled to gain possession”. Lord Sterndale MR, with whom Atkin LJ agreed (although his Lordship gave short separate reasons), said at 652 that the words in question “mean having a legal right to possession”, so that they were satisfied when a valid notice to quit expired and it was not necessary, for them to be engaged, that there be a court order for possession. Atkin LJ at 654-655 said that the words must be understood in what his Lordship called “their plain and obvious sense” as meaning a legal right to obtain possession of the premises.

36 It is necessary, of course, to bear in mind that the requirement is to construe the language employed by the legislature, and not the language employed by the legislature in other contexts; and that it is not always appropriate to take the meaning given to a particular word in one statutory context and apply it in another: see for example Burswood Management Limited v Attorney-General (Cth) (1990) 23 FCR 144. However, when a word has a well understood meaning (particularly in legal discourse), the construction of an enactment in which it is used should start with a presumption in favour of that meaning.

37 It does not appear that Mullighan J was influenced, in the meaning that he attributed to the word “entitled”, by the ambiguous sentence. That is to say, it does not appear that his Honour took the ambiguous sentence into account as in some way dictating the meaning of the word “entitled”. If that be correct, his Honour’s reasoning leaves the ambiguous sentence with no work to do. It may be that, from time to time, Parliament enacts otiose sentences. From time to time it may be impossible to escape the conclusion that Parliament has done so: but this conclusion, I think, is not one lightly to be reached: see Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, 381-382 (McHugh, Gummow, Kirby and Hayne JJ).

38 Consideration of the former s 233, on one view, could support the approach of Mullighan J. If the question of entitlement to be fully indemnified were a question of legal entitlement, or right, then sub s (2) would have been otiose. In other words, s 233 could be taken as involving some legislative recognition that, without sub s (2), the issues raised by s 233(1)(b) involve consideration not merely of the legal rights of the trustee (including under the trust deed, if any, and under the general law) but the ability of the trust estate to meet the full extent of the trustee’s claim for indemnity. Debelle J dealt with sub s (2) by saying that it meant that “where the company is entitled to be indemnified out of trust assets, the director will not be liable merely because the assets of the trust are insufficient to indemnify the corporation for the relevant liability”: 385-386 [40]. However, if I may say so with respect, his Honour’s paraphrase of sub s (2) departs substantially from its wording, which says nothing in terms about the liability (or otherwise) of the director; but (as a matter of language) appears to limit the circumstances in which the trustee may be taken not to be entitled to be fully indemnified out of the assets of the trust.

39 In contrast to Mullighan J, Gray J focussed closely on the wording of s 197(1), comparing (and contrasting) it with the wording of the former s 233.

40 As I have noted, his Honour said at 391 [70], of the submission that s 197(1) re-enacted s 233 in different words, that it would leave the ambiguous sentence “as insignificant, superfluous and with no work to do”. However, with respect, I do not think that his Honour was correct in this. On the argument for the appellant, the ambiguous sentence was necessary to ensure that s 197(1) re-enacted, in different words, s 233. That is because s 233 contained, in sub s (2), the assertion in substance that insufficiency of trust funds did not of itself mean that there was no entitlement to indemnity. It could be argued with some force that if s 233 had been enacted without the equivalent of its sub s (2) then – particularly, but not necessarily, if what I have said in para [38] above is correct – the change was not only deliberate but also significant, and marked a reversal of the previous legislative intention.

41 If the ambiguous sentence were intended to restate the effect of the former s 233(2), then it would have work to do; whether it did that work, and whether it achieved that intention, would then depend upon the construction that could properly be given to it. But to say that it has no work to do if the section as a whole is to be given the narrower rather than the wider meaning is, I think, to overlook its significance as a replacement (or potential replacement) for the former sub s (2).

42 At 392 [72], Gray J said that the word “This” that is the subject of the ambiguous sentence, refers back to the director’s liability for which sub s (1) provides. As a matter of syntax, I think, with respect, that that is correct. (Whether it is appropriate to give primacy to grammatical and syntactical considerations in seeking to construe this poorly drafted provision is a matter that I have touched upon in para [30] above.) His Honour said, with respect correctly, that when the requirements of both paragraphs (a) and (b), of sub s (1) are met, “the liability cannot be avoided”. His Honour then pointed out that the absence of sufficient assets in the underlying trust would not avoid or negate the liability. Again, with respect, that is correct. However, I think, it does not address the real question: which is not whether the ambiguous sentence avoids or negates the liability of the director but whether (as the majority concluded) it enhances it.

43 At 392 [73], Gray J considered what he called “[a]n alternative approach”. That alternative approach read the word “entitled” as comprehending not only the legal right, but also the ability in fact for that right to be fully satisfied. His Honour relied upon the ambiguous sentence as supporting this conclusion. But it seems to me, with respect, that this approach to the construction of the ambiguous sentence is directly in conflict with his Honour’s proposition in the preceding paragraph (which, as I have already noted, reflects what his Honour had earlier said at 391 [68]), that the word “This” in the ambiguous sentence refers back to the director’s liability that the sub section establishes. It is only if the ambiguous sentence can be read as, in some way, qualifying paragraph (b), that it could have the effect that his Honour ascribes to it in para [73].

44 Further, his Honour’s alternative approach suffers (as, I think, does the approach of Mullighan J) from the difficulty that I have identified in para [28] above. That is, on the assumption that the word “entitled” should have the same meaning in sub s (2) as in sub s (1) of s 197, it makes the availability of the statutory exculpation for which sub s (2) provides dependent on an analysis not just of the legal position of the other directors (considered as if all were trustees) but of their financial position. In other words, in a hypothetical context, it requires an assessment of the ability of those other directors to satisfy any obligation imposed by law that they may have had (were all directors trustees) to indemnify the innocent director.

45 The majority views were clearly influenced by the consideration that a narrow reading of s 197 (ie, a reading that construed it as in substance re-enacting the former section 233) would enable a person to escape liability by carrying on a business through a corporate trustee, ensuring that the trustee had a full legal right to indemnity in the trust deed, and ensuring that there were insufficient assets in the trust fund to meet any claim pursuant to that indemnity. See Mullighan J at 381 [11] and Gray J at 392 [74]. The force of that policy consideration may be acknowledged. However, their Honours do not appear to have considered the possible consequence of their approach that is outlined in para [27] above. Nor do their Honours appear to have considered that another consequence of their approach might be to impose on directors of trustee companies a liability as great as, and to an extent coextensive with, that imposed on directors generally under s 588G, but without the defences relevant to the latter section provided by s 588H.

46 Intagro submitted that the reasoning of Debelle J was so persuasive that, in substance, I should accept it not only as correct but also as demonstrating that the reasoning of the majority was plainly wrong. But I think, with respect, that there are problems in the reasoning of Debelle J also. There is also the difficulty that his Honour’s reasons did not find favour with the majority.

47 Debelle J pointed out at 385 [38] that the ambiguous sentence would be otiose on a literal reading of s 197(1), because the director is either liable (the requirements of paras (a) and (b) having been satisfied) or is not. That assumes that the word “entitlement” is given its ordinary English meaning. Thus, it may be seen that his Honour’s analysis begs the question, which is really whether the ambiguous sentence was intended to expand the ordinary English meaning of the word “entitled”. Further, his Honour’s view was based on the consideration that, as a matter of syntax, the word “This” should be read as referring to all that precedes it. I am doubtful that a strict grammatical approach is the best way to seek to construe a provision that seems to eschew common notions of grammatical and syntactical propriety.

48 More fundamentally, however, in seeking to give meaning to the ambiguous sentence, Debelle J in effect rewrote the sub section in a significant way. That is because, as he said at 385 [39], it should be taken to apply “to those instances where a director of a corporation acting as trustee will not be liable for the debts of the corporation because the corporation is entitled to be fully indemnified out of the assets of the trust.”

49 The difficulty with his Honour’s construction is that it involves rewriting the ambiguous sentence so that in substance it relates not to what precedes it, but to the opposite. His Honour’s reading is, in effect, that if a director is not liable under what precedes it because of the existence of the legal right to full indemnity, he or she remains not liable even though the right to indemnity is wholly or in part insufficient.

50 His Honour’s approach gives work to the ambiguous sentence, and (I think) effect to the legislative intention; but it does represent a significant rewriting of the words of the statute. But although I find his Honour’s expression difficult, I think (if I have understood his reasons correctly) that the underlying approach is that which, as I indicate in paras [57] to [60] below, I prefer.

Other views on the construction of s 197

51 In Ford, Austin and Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 11th ed, 2003), there appears at 887-888 [20.170] the passage cited by Gray J in Hanel at 391 [67] n 4. In substance, the authors propound two constructions:

(1) The word “This” in the ambiguous sentence might refer to the proposition that the director is liable in the stated circumstances: as the authors say “[a] statement of the obvious point that the director’s liability is not diminished by the trust’s lack of sufficient assets to indemnify the corporation”.

52 The first suggested construction, the authors say, involves accepting that Parliament enacted a point so obvious that the ambiguous sentence should be regarded as superfluous. The alternative construction is somewhat difficult to understand. It is clear that the authors thought that the alternative construction would render s 197(1) consistent with the former s 233. However, the reference to the condition being “satisfied”, suggests the contrary. Paragraph (b) is one of two conditions that, if existing, operate to impose personal liability in the circumstances under consideration. To talk of it being “satisfied” is, in my understanding, to indicate that the condition has been met: ie, that the trustee is not entitled to be fully indemnified. If the ambiguous sentence were intended to refer to that sentence, then I think, contrary to the position stated, it would mean that the ambiguous sentence did have the effect of deeming paragraph (b) to be satisfied (in the sense that I understand that word) where the legal right to indemnity existed but the assets were insufficient to discharge it in full. That reading is consistent with the construction given by the majority in Hanel, and involves acceptance of the proposition that, intentionally or not, the legislature made a fundamental change to the pre-existing law.

53 Austin J, speaking extracurially, has dealt briefly with the decision in Hanel: see his Honour’s “Libby Slater Lecture” given to the Superannuation Lawyers’ Association of Australia in February 2004 (internet version available at His Honour (at p 6 of the internet version) pointed out the ambiguity of the word “This” in the ambiguous sentence and referred to the decision in Hanel. He then said:

“With respect, the majority view seems out of accord with the legislative history and is not fully in harmony with the statutory language. The ambiguous sentence seems to be supplementary rather than an independent ground to liability. But Debelle J’s reading also seems out of accord with the statutory language. I suggest that the ambiguous sentence should be taken to mean that the director’s liability (if it exists because the right to indemnity has been destroyed) is not diminished by reference to the fact that the trust has insufficient assets to indemnify the trustee. On its proper construction, s 197 should not be taken to render the director liable when the right of indemnity remains in place but there are insufficient assets to meet the indemnity.”

54 As will be seen from what I have said, I respectfully agree with his Honour’s criticisms of the reasoning in Hanel.

55 Austin J has propounded one alternative view as to the construction to be given to the ambiguous sentence. There is, I think, at least one other view. It is not far removed in principle from what Austin J said.

56 As s 197(1) stands, it does not appear to qualify the liability of a director by reference to questions of causation. It may be, however, that the legislature was seeking to close off an argument that the liability of a director under the section should be limited to the extent of the trust assets that would have been available but for the satisfaction of the condition in para (b). See Ford, Austin and Ramsay, Ford’s Principles of Corporation Law (LexisNexis, looseleaf) at [20.170]. On this construction, the ambiguous sentence would be directed at a situation where a corporate trustee could not satisfy a liability out of its own assets, and could not have recourse to trust assets because it had no entitlement to be fully indemnified. Where the trust assets were insufficient to meet the liability, it could be argued that the creditors’ real loss was not the full amount of the debt, but the extent to which, because it was denied access to the trust assets, it could not recover. The difficulty with this construction is that it seems to involve the legislature taking steps to meet an argument that, on the unqualified words of the section, would not appear to be available.

The preferred construction of s 197(1)

57 If I were considering the construction of s 197(1) without the instruction of the majority decision in Hanel, I would conclude that it effected no change to the pre-existing law. I would conclude that sub s (1) should be construed as if the word “only” were inserted after the word “liability” where it appears for the second time, so that the introductory words read:

only

…

58 That is consistent with the “plain English” style of drafting whereby conditions that are indicated, through the use of the conjunction “and”, to be cumulative, are taken to express between them all (and only) the conditions to be satisfied. That is to say, I think that reading in the word “only” in the manner that I have indicated does no violence to the statutory scheme, and (perhaps at the expense of superfluity) makes it plain.

59 If it be correct to read the introductory words of the sub section in this way then, I think, it is correct to construe the pronoun “This” to refer (as syntactically it should) to the subject of that which precedes it: namely, the liability that is created in the circumstances that have been described.

60 On that construction, the ambiguous sentence fulfils the function that was fulfilled, in respect of the same subject matter, by sub s (2) of s 233 of the antecedent legislation. It does not render the ambiguous sentence superfluous (or, alternatively, renders it no more superfluous than was s 233(2)). It means that the legislature did not, as a possibly unintended (and certainly unheralded) by-product of devotion to “plain English” drafting, wreak a fundamental change in this aspect of the law.

Is the majority view in Hanel plainly wrong?

61 It will be seen from what I have said that I have difficulty in accepting the reasoning of the majority in Hanel. But, equally, I have difficulty in accepting the reasoning of Debelle J, at least as his Honour has phrased it.

62 If I were able to conclude that there was an obvious construction (other than that favoured by the majority) of the ambiguous sentence that gave it meaning and purpose, and did not do undue violence to the language of the sub section as a whole, then I might be tempted to the conclusion that the majority view was “plainly wrong”. However, in circumstances where any attempt to extract meaning from the provision must grapple with its tortuous language and defective grammar and syntax, and where the alternative that I would prefer did not commend itself to the majority (and did not find plain expression in the dissenting reasoning, on this point, of Debelle J), I am not sure that I can do so.

63 It must follow, consistent with what was said in Marlborough Gold Mines on this point, that I should follow the majority view in Hanel, notwithstanding the reservations that I hold.

The test to be applied to a proposed amendment

64 The authorities are clear. Except in extreme circumstances, and putting aside (for the moment) questions of prejudice, a party is entitled to litigate an issue which is fairly arguable: The State of Queensland v J L Holdings Pty Limited (1997) 189 CLR 146, 154 (Dawson, Gaudron and McHugh JJ). In The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, Dawson J at 456 said that “an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial.” In Horton v Jones (No 2) (1939) 39 SR (NSW) 305, Jordan CJ said at 310 that, again leaving aside questions of prejudice, an amendment should be allowed “[u]nless [it] is so obviously futile that it would be struck out if it appeared in an original pleading …”.

65 If the majority view in Hanel is correct, then the claim against Mr and Mrs Robinson based on s 197(1) is clearly, putting it at its lowest, fairly arguable. I do not think that the reservations that I have about the majority’s reasoning are such as to enable the claim against Mr and Mrs Robinson to be described as “so obviously futile that it will be struck out if it appeared in an original pleading”, or “futile because it is obviously bad in law”.

Prematurity

66 Intagro submits that the claim is premature because s 197(1), even if enlivened, does not create liability ab initio. It submits that liability under the section arises only when all its requirements are satisfied. I am not sure that the submission characterises adequately the liability for which s 197(1) provides. It speaks in the present tense: a director “is liable” if the conditions in paragraphs (a) and (b) are met. The director “is liable both individually and jointly with the corporation”; and the corporation, on any view, is liable ab initio.

67 But I do not think that it is necessary finally to decide this point. The relief that the Bank seeks against Mr and Mrs Robinson includes:

Corporations Act 2001 (Cth)

68 I do not think that this is entirely hypothetical. For the Bank to succeed, it would need to show, among other things:

(1) The existence and enforceability in law of the guarantees given by Intagro.

(2) The existence and recoverability in law of a debt to which those guarantees attach.

69 Those are all matters that will be litigated in the proceedings. They will be decided in the judgment that is given (assuming, for the present, that no order is made under Pt 31 r 2). Those matters alone will not establish the liability of Mr and Mrs Robinson. The Bank will also need to show that Intagro has not discharged and cannot discharge the debt. They too are matters that are capable of proof in the proceedings. The first is hardly likely to be a matter in dispute. The second will involve (on the Bank’s case) an analysis of the financial position of Intagro and of the relevant trusts.

70 The Bank will need to show also that Intagro is not entitled to be fully indemnified against any liability that it has to the Bank out of trust assets. The terms of the trust deeds will indicate one source of entitlement to indemnity (in the sense of legal right). The general law would indicate another: Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360. The summary of contentions in the summons suggests that it is at least likely that factual matters relating to disentitlement (ie, matters that would disentitle Intagro to the benefit of any indemnity that it may have either expressly or under the general law) will be litigated. Further, if on its proper construction s 197(1)(b) is satisfied if either legal or factual unavailability of full indemnity exists, the latter will be, for the reasons given in the preceding paragraph, something that is likely to be demonstrated in the proceedings.

71 Of all the issues to which I have referred in the Bank’s favour, there is little left, of its cause of action based on s 197(1), that could be described as hypothetical. To be sure, Intagro might decide to seek other sources of funding to enable it to discharge any liability that it owes to the Bank; but that is encompassed by the form of the declaration.

72 In Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438, 448, Lord Dunedin summarised the conditions for the grant of a declaration of right as follows:

“The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, someone presently existing who has a true interest to oppose the declaration sought.”

73 His Lordship’s words were cited with approval by Gibbs J in Forster v Jododex Australia Pty Limited (1972) 127 CLR 421, 438. His Honour, having quoted what Lord Dunedin said, said:

“Beyond that, however, little guidance can be given.”

74 His Honour’s statement of principle was expressly approved by Stephen J at 448 and Mason J at 450 (McTiernan J concurred in the reasons of Mason J).

75 In Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, Mason CJ, Dawson, Toohey and Gaudron JJ at 581-582 stated the relevant principles in terms that in substance accepted the formulation of Gibbs J in Forster and of Lord Dunedin in Russian Commercial and Industrial Bank. Their Honours held that the appellant had a sufficient interest in obtaining a declaration that, in reporting adversely to the appellants, the respondent had failed to observe the requirements of procedural fairness. That, their Honours said, involved “no mere hypothetical question” although the respondent did not have power to implement its recommendations and persons about whom adverse recommendations were made could challenge them before a Parliamentary Commission.

Discretionary considerations

76 Intagro submitted, in written submissions, that the amendments should not be permitted on discretionary grounds. In substance, it relied upon the proposition that Mr and Mrs Robinson would become involved as parties in “a complex and lengthy factual and legal dispute as between the Bank and Intagro”. It submitted that if any of the issues referred to in para [68] above were decided adversely to the Bank, the claim against Mr and Mrs Robinson would fail.

77 It is, undoubtedly, a matter of concern that Mr and Mrs Robinson will be put to the expense of defending the cross-claim. The Bank submitted that Mr Robinson would be a significant witness, so that (in substance) no particular hardship would be caused, in circumstances where it was likely that he and Mrs Robinson would have common representation if they were joined as cross-defendants.

78 I think that the Bank’s submission misses the point. A perusal of the pleadings indicates that Mr Robinson will be a vital witness for Intagro. It may well be the case – and Intagro did not really question this – that he will be the principal witness of fact for Intagro. But there is a substantial distinction between being a witness – even a major one – and being a party. There may be a cost to Mr Robinson, in terms of time and otherwise, of participating in the preparation of Intagro’s case and giving evidence. But those costs are wholly different, and separate, to the costs that he would incur if forced to defend himself.

79 Nonetheless, the very circumstances to which Intagro point seem to me to indicate that a proper exercise of the discretion requires leave to amend to be given. It would be unthinkable if the issues to which I have referred were litigated as between Intagro and the Bank and if (assuming that the Bank succeeded) Mr and Mrs Robinson were free to litigate them again because they were not bound by the previous findings. It may very well be the case that, retrospectively, their joinder will be shown to have been futile. But, if that happens, they will be entitled to their costs. They will have been out of pocket until they are recouped, and may even be out of pocket when they have obtained quantification and payment of their costs. But that does not seem to me to be, of itself, a sufficient reason for keeping them out of the proceedings, and risking relitigation of the fundamental issues to which I have referred.

80 Further, at least at present, it appears that Intagro and Mr and Mrs Robinson will be commonly represented. Thus, although I accept that there will be a cost to Mr and Mrs Robinson in becoming involved as cross-defendants, I do not think that the cost will be as substantial as if they were hitherto unconnected with the proceedings and, therefore, forced to have separate representation. It was not submitted that there was any likelihood of conflict that could terminate the proposed common representation; nor is the prospect of any such conflict immediately apparent.

81 Further, it may well prove to be the case, once the issues have been defined and the evidence has been amassed, that mechanisms can be found for limiting the involvement of Mr and Mrs Robinson in the hearing. For example, if they are prepared to leave the litigation of the fundamental issues to which I have referred to Intagro, it would not be necessary for them to maintain continuous separate representation.

The proposed further amendment

82 Apparently as a result of matters discussed in the course of the hearing, the Bank propounded a further draft of the amended cross-claim. It sought, in effect, that the further draft should be substituted for the draft that was attached to, and the subject of, its notice of motion.

83 The substance of the proposed further amendments was to allege that, in certain ways, Intagro may have acted in breach of trust, so that it would not be entitled to be fully indemnified out of trust assets.

84 Intagro (and, presumably, Mr and Mrs Robinson) did not “consent to the new amendment, nor to the current application being reopened or further argued”. They said that the notice of motion should be dealt with “as presently framed” so that if the Bank did not wish to proceed on the notice of motion as presently framed, it should be dismissed; otherwise, it should be decided. Other objections were taken.

85 In view of the conclusion to which I have come, I do not propose to decide, in the absence of full argument, whether or not the Bank should be permitted further to amend its cross-claim in terms of the further draft. If the parties cannot agree on that matter then it will have to be raised, argued and decided in the ordinary way.

Conclusion and orders

86 In my judgment, the Bank should have leave to amend its cross-claim as sought. As I hope I have made clear, that leave is limited to the amendment propounded by the draft amended cross-claim annexed to the notice of motion and does not extend to the further draft of the amended cross-claim that I have just mentioned. I therefore make the following orders:

(1) Make order 1 as sought by the defendant/cross-claimant in its notice of motion filed 22 April 2004.

87 I will hear the parties on costs.

******

Last Modified: 08/03/2004

CITATION:	Intagro v ANZ Banking Group [2004] NSWSC 618
HEARING DATE(S):	9 July 2004
JUDGMENT DATE:	29 July 2004
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [86] and [87] of judgment
CATCHWORDS:	PRACTICE AND PROCEDURE - where leave to amend cross-claim sought - where amendment to cross-claim seeks to join cross-defendants - whether amendment raises claim that is obviously futile - whether amendment raises claim that is premature - whether amendment should not be permitted on discretionary grounds - where risk of relitigation - CORPORATIONS LAW - construction of s 197(1) Corporations Act 2001 (Cth) - whether majority view in Hanel v O'Neill (2003) 48 ACSR 378 plainly wrong - s 233 Corporations Law - statutory interpretation - whether legislature intended s197(1) to re-enact in substance, and with same effect, s 233(2) of Law - whether legislature intended s 197(1) to replace s 233(2) with provision of opposite effect - whether legislative intention that s 197(1) achieve some other purpose - meaning of "entitled" in s 197(1), (2) of Act.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Corporations Law
CASES CITED:	Hanel & Anor v O'Neill (2003) 48 ACSR 378 Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 Little v Registrar of the High Court of Australia (1991) 29 FCR 544 Sterling Engineering Co Ltd v Patchett [1955] AC 534 Hill v Hasler [1921] 3 KB 643 Burswood Management Limited v Attorney-General (Cth) (1990) 23 FCR 144 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 The State of Queensland v J L Holdings Pty Limited (1997) 189 CLR 146 The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Horton v Jones (No 2) (1939) 39 SR (NSW) 305 Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360 Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438 Forster v Jododex Australia Pty Limited (1972) 127 CLR 421 Ainsworth v Criminal Justice Commission (1992) 175 CLR 564
PARTIES :	Intagro Projects Pty Ltd (Plaintiff/Cross-Defendant) Australia and New Zealand Banking Group Limited (Defendant/Cross Claimant)
FILE NUMBER(S):	SC 50165/03
COUNSEL:	D J Hammerschlag SC/LV Gyles (Plaintiff/Cross-Defendant) S D Rares SC/P J Dowdy (Defendant/Cross-Claimant)
SOLICITORS:	Holding Redlich (Plaintiff/Cross-Defendant) Minter Ellison (Defendant/Cross-Claimant)

Introduction	1
The nature of the proceedings	4
The proposed amendment to the cross-claim	7
Section 197 and its predecessor	8
The fundamental issue	10
The decision in Hanel	13
Analysis of the decision in Hanel	24
Other views on the construction of s 197	51
The preferred construction of s 197(1)	57
Is the majority view in Hanel plainly wrong?	61
The test to be applied to a proposed amendment	64
Prematurity	66
Discretionary considerations	76
The proposed further amendment	82
Conclusion and orders	86