National Mutual Holdings Pty Ltd v The Sentry Corporation

[1989] FCA 479

Re: NATIONAL MUTUAL HOLDINGS PTY LTD AND ORS
And: THE SENTRY CORPORATION AND ANOR
No. VG173 of 1987
FED No. 479
Federal Court

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop J.(1)

CATCHWORDS

Federal Court - Practice and procedure - order dismissing cross-claim - cross-respondents not otherwise parties - cross-claim based on duty of directors to state source of information and disclaim belief in truth of information.

Fair Trading Act 1985 (Vic.)

Trade Practices Act 1974

Federal Court Rules O.20 r.2

Yorke v. Lucas (1985) 158 CLR 661 at 666

The Saints Gallery Pty. Ltd. v. Plummer (1988) 80 ALR 525

Cf. Co-Ownership Land Development Pty. Ltd. v. Queensland Estates Pty. Ltd. (1973) ALJR 519 at 521

Tesco Supermarkets Ltd. v. Nattrass (1972) AC 153 at 170

General Steel Industries Inc. v. Commissioner for Railways (N.S.W.) (1964) 112 CLR 125

HEARING

MELBOURNE

#DATE 17:8:1989

Counsel for Applicants : Mr Hayes, Q.C., Mr Charles, Q.C. and

Mr Scerri

Solicitors for Applicants : Mallesons Stephen Jaques

Counsel for Respondents : Mr Horton, Mr Ryan and Mr Karkar Solicitors for Respondents : Messrs Phillips Fox

JUDGE1

Pursuant to notice dated 27 June 1989, National Mutual Life Association of Australasia Ltd. ("N.M.L.A."), National Mutual Corporation Pty. Ltd. ("N.M.C."), Gilbert Michael Hoskins ("Hoskins") and John Kent ("Kent"), hereinafter collectively referred to as the cross-respondents, moved the Court for a number of orders including orders that the cross-claim of the respondent the Sentry Corporation ("Sentry") filed on 9 June 1989 be dismissed in whole as against Hoskins, Kent and N.M.C. and, as against N.M.L.A., paragraphs 10 to 14 be dismissed. After hearing submissions on 28 July 1989, the Court announced that the motion be granted insofar as those orders were concerned and that the reasons for so doing would be published later. Those reasons are now published.

1. In the proceeding, the six applicants are seeking relief against Sentry and its auditors, the respondent Peat Marwick Mitchell & Co. The claims arise from the sale of 9,000,000 shares beneficially owned by Sentry being all the issued shares in the company then known as Sentry Holdings Ltd. ("Sentry Holdings"). Negotiations for the sale of the shares occurred between individuals acting on behalf of what can be described as the Sentry group of companies as vendor and individuals acting on behalf of what can be described as the National Mutual group of companies as purchaser. The claims by the applicants are alleged to arise from representations made by the individuals acting on behalf of the Sentry group of companies to the individuals acting on behalf of the National Mutual group of companies. By their amended statement of claim the applicants alleged that during the period April 1986 to June 1986, the early negotiations were conducted by named individuals on behalf of Sentry Assurance International Ltd. ("S.A.I.L.") which then owned the shares and Messrs Mayer, Hoskins, Kent and Strong on behalf of N.M.C.; that in June 1986 Sentry acquired the shares from S.A.I.L. and replaced S.A.I.L. in the negotiations with N.M.C. thereby adopting the representations made in the early negotiations; that during the period June 1986 to July 1986, the intermediate negotiations were conducted on behalf of Sentry by the same individuals who had previously negotiated on behalf of S.A.I.L and the same individuals on behalf of N.M.C.; that in July 1986 National Mutual Holdings Pty. Ltd. ("National Mutual"), and being the first applicant, replaced N.M.C. in the negotiations with Sentry; and that during July 1986, the final negotiations were conducted by the same individuals on behalf of Sentry and on behalf of National Mutual by the same individuals who had previously negotiated on behalf of N.M.C.. The shares were sold pursuant to an agreement dated 22 July 1986 and made between National Mutual and Sentry. The representations relied upon by the applicants to support their claims are alleged to have been made during the periods of these negotiations.

2. Pursuant to leave granted on 7 June 1989 by the Federal Court constituted by Gummow J., Sentry, on 9 June 1989, filed and served its cross-claim against the cross-respondents. Reference to the reasons of Gummow J. will be made later in these reasons. At present it is sufficient to note that not one of the cross-respondents, apart from this cross-claim, is a party to the main proceeding. By its cross-claim, Sentry is claiming contribution or indemnity and consequential orders against each of the cross-respondents. By its cross-claim Sentry alleges that at all material times after about 10 July 1986, Hoskins and Kent were directors and officers of National Mutual. Although it is not pleaded, counsel for Sentry asserted from the bar table that prior to 10 July 1986, National Mutual was a shelf company not under the control of the National Mutual group of companies but was brought into that group as part of the new structure and as part of the arrangements made by the National Mutual group pursuant to its negotiations and the consumation of the proposed purchase of the shares. Sentry relies upon a number of claims against the cross-respondents but they all depend, for present purposes, upon a series of allegations that in their capacity as directors and officers of National Mutual, at all material times after 10 July 1986, Hoskins and Kent owed to National Mutual a duty to exercise a reasonable degree of care and diligence in the exercise of their powers and the discharge of their duties as directors and officers; that in the course of the negotiations Hoskins and Kent made or communicated the representations that had been made to them by the negotiators on behalf of the Sentry group of companies to National Mutual and allowed the same to remain unaltered up to the making of the sale agreement; that they did not make it apparent to National Mutual that they were not the source of the information contained in the representations nor did they expressly or impliedly disclaim any belief in the truth or falsity of the representations. Similar allegations are made with respect to N.M.C. and N.M.L.A.. The claims challenged are based upon those allegations and are based upon the Fair Trading Act 1985 (Vic.), the Trade Practices Act 1974 and negligence respectively.

3. On 21 April 1989, Sentry had filed a cross-claim seeking indemnity or contribution against the cross-respondents. The cross-respondents had moved the Court for orders that the cross-claim be dismissed. On 6 June 1989, the Court, constituted by Gummow J. found that Sentry could not make the cross-claim without leave of the Court. The cross-claimants submitted that leave should not be granted. They relied upon a number of grounds including the grounds that insofar as paragraphs 1 to 14 thereof were directed to them, the cross-claim disclosed no reasonable cause of action, had a tendency to cause prejudice, embarrassment or delay, or was frivolous and vexatious, see O.20 r.2 of the Federal Court Rules. In the result, the Court gave leave to Sentry to file and serve a cross-claim against the cross-claimants "in the form of the pleading(s) subject to amendment of the cross-claim(s) against (the cross respondents) to give effect to the Reasons for Judgment" delivered on 6 June 1989.

4. On 9 June Sentry filed and delivered the cross-claim the subject of the motion of 27 June 1989. The pleading now challenged is in the same form as the pleading before Gummow J. with the addition of paragraphs 3A, 6A and 10A. Paragraphs 15 onwards relate to other claims and are not the subject of the motion before the Court.

5. In his reasons for Judgment, Gummow J, in considering the pleading before him, said:-
   

"In this portion of the cross-claim, it is alleged that if, contrary to its defence, Sentry is liable to National Mutual in damages in respect of the representations alleged against it, whether by reasons of s.52 of the TP Act, negligence or otherwise, NMC and NMLA and Messrs. Hoskins and Kent (directors of National Mutual) are each obliged to indemnify Sentry, or to contribute to the carriage of its loss. This is said to be because the cross-respondents (i) also made the representations in question, (ii) contravened s.52 of the TP Act,

(iii) acted negligently in breach of their duties of care to National Mutual, and, because the loss and damage claimed by National Mutual against Sentry will have arisen by reasons of these alleged delinquencies of the cross-respondents. There are allegations that the cross-respondents "made and communicated" to National Mutual the alleged representations and allowed them to remain unaltered up to the making of the Sale Agreement (paras. 3, 6, 7, 10, 11). No indication is given as to how the representations were made or communicated.

As I understand the submissions for Sentry, it accepts that it is not misleading conduct, nor in the present context, negligence, for a recipient of information merely to pass it on without knowledge of its truth and without accepting responsibility for it: Yorke v Lucas (1985) 158 CLR 661 at 666; The Saints Gallery Pty. Ltd. v. Plummer (1988) 80 ALR 525. The pleader intended the allegations as to the making and communication of the representations to be understood in a sense which complied with these criteria for liability. It is appropriate to have regard to the manner in which by amendment the claims made could properly be framed: cf. Co-Ownership Land Development Pty. Ltd. v Queensland Estates Pty. Ltd. (1973) 47 ALJR 519 at 521."

1. The new paragraphs 3A, 6A and 10A contain the allegations that the cross-respondents at the time of making the representations did not make it apparent to National Mutual that they were not the source of the information contained in the representations and did not expressly or impliedly disclaim any belief in the truth or falsity of the representaions. The representations alleged to have been made on behalf of the Sentry group of companies were in writing and remained in the same form during the whole of the negotiations leading up to the sale agreement. It is apparent, therefore, that these allegations were not before Gummow J. and no submissions, similar to those made before me, were made to him by counsel for the cross-respondents.

2. The essence of the submissions in support of the orders sought by the motion was that at all relevant times during the negotiations Hoskins and Kent were the relevant officers of N.M.L.A., N.M.C. and National Mutual. Any information received by them as such officers was information received by the companies. Counsel referred to what was said by Lord Reid in Tesco Supermarkets Ltd v. Nattrass (1972) AC 153 at 170, namely:-
   

"I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company."

1. The submission was that the representations made to Hoskins and Kent were in fact and in law representations to the companies. The communication of the representations to the individuals in their capacity of officers was by itself communication to the companies. In these circumstances, it was argued that there was no room for the application of the principles discussed in Yorke and in Plummer. Any communication to National Mutual, of necessity, had to be communication to Hoskins and Kent. At all times they knew the information contained in the representations had been made by the Sentry group of companies. They knew that they, themselves, were not the source of the information and there was no need to disclaim any belief in the truth or falsity of the representations. The representations remained in writing as supplied by the Sentry group of companies. Hoskins and Kent were not at arms length from National Mutual nor were the National Mutual group of companies at arms lengths as between themselves. Hoskins and Kent were the connecting links and thus the views expressed in Yorke and Plummer have no application to the facts of this case. Similar arguments were put with respect to the cross-claim insofar as it was based on negligence. There is no allegation that Hoskins and Kent had any means of knowing whether the representations were true or not. Again, what is suggested is that they should have talked to themselves in their different capacities as officers of different companies.

2. Counsel for Sentry stressed the times at which the different negotiations occurred. They noted that at the time the representations were first made National Mutual was not within the National Mutual group of companies. For the purpose of these reasons I am prepared to accept that allegation even though it is not pleaded. They submitted that when Hoskins and Kent received the information contained in the representations, it could not have been received by National Mutual since Hoskins and Kent, at that time, were not officers of National Mutual. They contend that communication to National Mutual of the information in the representations is an essential element of its claim against Sentry and that the only communication of that information to National Mutual must have been by Hoskins, Kent or the other cross-respondents namely N.M.C. or N.M.L.A.. The essence of the argument was put as follows:-
   

"... either Mr Hoskins and Mr Kent have passed on the information in some way to National Mutual or they have not. If they have not, that is the end of this case on section 52. If they did, then we wish to produce argument and, no doubt evidence at the trial, to indicate that there was no appropriate disclaimer, expressed or implied."

1. The submissions made on behalf of Sentry were not accepted. Hoskins and Kent had knowledge of the representations when they became directors of National Mutual. Of necessity all the knowledge they had resulting from the negotiations likewise became the knowledge of National Mutual. I accept the submissions made on behalf of the cross-respondents. There is no scope to introduce the degree of artificial sophistication inherent in the submissions of counsel for Sentry. In my opinion the facts of the cross-claim challenged were untenable in the sense described in General Steel Industries Inc. v Commissioner for Railways (N.S.W.) (1964) 112 CLR 125 to support the cross-claim against the cross-respondents.

2. Accordingly, the orders sought in the motion relating to this issue were granted.