Northside Developments Pty Limited v The Registrar General

[1989] HCATrans 28

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No Sl53 of 1988

B e t w e e n -

NORTHSIDE DEVELOPMENTS PTY

LIMITED

Applicant

and

THE REGISTRAR GENERAL

First Respondent

JOHN ROBERT STURGESS and

GERARD JOHN STURGESS

Second Respondent

Application for special

leave to appeal

Northside

MASON CJ
DEANE J

TOOHEY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 FEBRUARY 1989, AT 10.28 AM

Copyright in the High Court of Australia

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MR K.R. HANDLEY, QC: In this matter, if the Court pleases, I

appear for the applicant with MR A.J. SULLIVAN.

(instructed by Minter Ellison)

MR B. COLES:	I appear for the first respondent if Your Honours please. (instructed by the Crown Solicitor
for New South Wales)
MR D.L. WILLIAMS:	May it please the Court, I appear for the

second-named respondents. (instructed by Maxwell

Miles & Co)

MR HANDLEY:	Your Honours, this case raises for possible determination by this Court the true scope of the
indoor management rule or the rule in TURQUAND's
case and we submit that subject to the effect of the amendments of the COMPANIES CODE in 1983 this case is clearly of great public importance.
The precise question, namely, whether execution by
a company under its common seal attracts different
principles in this area from those which are
established by the decision of this Court in
CRABTREE-VICKERS, 133 CLR 72, to be applicable
to informal contracts on behalf of a company, has
never been considered by this Court. The only
decision in the area is CRABTREE-VICKERS where this
Court followed the current English decisions or
accepted them as being applicable to Australia.
And, of course, what has happened as a result of
the Court of Appeal decision is that we have now,
at least in New South Wales, different principles
governing the validity of contracts executed under
common seals by companies than those which would be
applied and followed in England or which would be
applied and followed in Australia in relation to
informal contracts.and we would submit - and in a moment we will seek to develop it - that the
decision of the Court of Appeal in this case is
open to serious challenge on a number of grounds.

I should draw attention at the outset that we

do challenge the dicta by Mr Justice McHugh that

the effect of the court's decision is to harmonize

the rules of general law on this matter with the

rules laid down by Parliament in the COMPANIES CODE

in the 1983 amendments, particularly in section 68A,

and His Honour refers to this at pages 76 and 77 of

the application book. It is our submission that
section 68A does not go nearly as far as His Honour

thought or, at least, it is a question of public

importance whether it does go that far and it

should be decided in a case which arises squarely

under the section.

Could I hand up three copies of the Code

provisions. We draw attention to a number of

matters under this legislation which would require

serious consideration if this case had arisen when

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the Code provisions were in force. Section 68A

starts off by saying:

A person having dealings with a company -

and, in our submission, those words innnediately

import agency principles into everything that

follows. May I just remind Your Honours of what

has been established in relation to Torrens

Title system in relation to dealing with the

registered proprietor where one gets - and

the case law which grew up around that.

Then going to section 68A(3):

The assumptins that a person is, by

virtue of sub-section (1) or (2),

entitled to make in relation to dealings

with a company, or in relation to an

acquisition or purported acquisition

from a company of title to property -

include, and:

(b) that a person who appears, from returns -

and, in our submission, you can only bring yourself

within those provisions if you have searched and

rely upon the returns. These are assumptions that

one is entitled to make. There is no automatic

deeming and, hence, unless you know that someone

appears in returns you are not entitled to make the

assumption, otherwise there is no foundation for the

assumption. The section does not say that you

are entitled to assume that anyone you are dealing

with is a director, for example. And then in

relation to paragraph (e):

that a document has been duly sealed by

the company if -

(i) it bears what appears to be an impression of the seal .....

(ii)   the sealing of the document appears to

be attested by 2 persons, being

persons one of whom ..... may be assumed

to be a director of the company and the
other of whom ..... may be assumed to be

a director or to be a secretary.

That takes one back to (b) and the question of

whether something appears from returns and whether

this requires proof of search and reliance on search.

MASON CJ:  But this is a bit of a makeweight, is it not, in
Mr Justice McHugh's reasoning, notwithstanding - - -

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MR HANDLEY:	Your Honour, I am just dealing with it.	I thought

I should deal with it at the outset because it may be

put against us or the Court may think, well,
the point is academic in the light of the subsequent

legislation and I thought that that might be the principal problem which might engage the Court's

attention and I should face up to it at the outset.

In our submission, sufficient has been drawn to the

Court's attention to indicate, firstly, that it by

no means follows that the Code provisions sweep

away the practical importance of the present case

for the future and, in particular, there is nothing

which says that those provisions in section 68A,

through to D, exclude the general law.	So, it is
cumulative upon the general law.

Putting that to one side, if I may now outline

the challenges we would make to the Court of Appeal

decision.	Mr Justice McHugh - and I deal with
his judgment as the majority judgement - at page 68	says that TURQUAND I s case was originally a rule of canpany
law - a special rule of company law only applicable
to contracts executed by companies under their common
seal and that the distinction between contracts executed under seal and other contracts purporting
to bind the company was maintained well into this
century. That is at lines 21 to 31 on page 68.

Now, in our submission,'Wi.th respect, that is

bad law and bad history, and I would just like to

take Your Honours ever so briefly to a few lines in

Lord Hatherley's speech in MAHONY's case, the

famous case of MAHONY V THE LIQUIDATOR OF THE

EAST HOLYFORD MINING, _.(1815) VI I LR HL, 869

to show that that is not accurate law or

accurate history. If I could go to the speech of

Lord Hatherley which has been treated by text writers

and subsequent cases as a locus classicus.

I might add the case concerned the liability of

a company on cheques. The documents were not

executed under the common seal. The cheques were

not executed under the common seal of the company and at line 3 on page 893:

It is a point of very great importance that those who are concerned in joint stock

companies and those who deal with them

should be aware of what is essential to the

due performance of their duties, both as

customers or dealers with the company, and
as persons forming the company, and dealing

with the outside world -

and then he refers to ROYAL BRITISH BANK V TURQUAND -

it is settled ..... that those who deal with

joint stock companies are bound to take

notice of that which I may call the external

position of the company.

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Now, that proposition is laid down, in a case

which did not involve contracts under corporate

seal, as being of universal application to all

contracts purporting to bind a company and

His Lordship goes on to develop that but I need

not trouble Your Honours with the detail of that.

While the case is before you may I just take

Your Honours to what His Lordship said on the

question of forgery because Mr Justice McHugh
did distinguish a lot of authority on the question

of forgery in his decision at page 80 and we

would submit that serious issues arise in relation

to this area as well. At 899, the new paragraph

commencing seven lines down, he says:

My Lords, two cases -

one of which is referred to in Mr Justice McHugh's

judgment, BANK OF IRELAND V EVANS' CHARITY -

were cited in the argument in which a

fraudulent use was made of the seal of

a company by the secretary of the company

who had been entrusted with that seal.

Those cases, however, can have no bearing

upon the present case, for they are simply

like cases of forgery. It was just as if signatures, not a seal, had been required

and the secretary had forged the names of

the directors. A secretary having no

authority to do so, affixed the seal of

the company, and the instrument to which

that seal was affixed was as void as if

the question had been one of handwriting

and a signature had been forged.

And so the principle that the use of a genuine common seal by a person who is truly an officer of the company and who has custody of that common seal does not take

the case out of the forgery law, has hitherto been

treated as well established.

MASON CJ:	How does Mr Justice McHugh deal with that?
MR HANDLEY:	On page 80, Your Honour - he does not deal with

that case, of course - line 2:

The respondents contended, however,

that the rule in TURQUAND's case does not

apply to a forgery and that a document which

purported to be signed by a person as

secretary, who was not the secretary, was a

forgery. The respondents relied on -

three cases, one in the House of Lords, one in the

Court of Appeal and the first one, WAKE's case, a

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decision of Mr Justice Clauson, as a single judge of

the Chancery Division.

It is unnecessary for the purposes of this

case to determine if there is such an

exception and, if so, what is its extent. If the seal of the company is attested to

by a person who holds a relevant office or

who is permitted by the company to hold

the relevant office, the "forgery" exception

to the rule in TURQUAND's case does not

apply.

The moment His Honour introduces the notion

"permitted by the company to hold the relevant office"

one is in the area, in our submission, of

ostensible and actual authority and agency principles

have come back in the back-door.

It is true that there are statements in

KREDITBANK and WAKE which suggest or hold

that the forgery exception applies to the

signature of a person who purports to act

on behalf of the company but has no authority

to do so. But to apply this proposition

literally would eat up much of the indoor

management rule. In my opinion the so-called

forgery exception does not apply to the

genuine but unauthorised signatures of

persons countersigning the affixing of the

seal.

Well that is, in our submission, in the teeth of what

Lord Hatherley said in MAHONY's case and itself

raises an important question. Might I add, Your Honours,

that the unauthorized use of a corporate seal has been
treated as a forgery for purposes of the criminal law

and Mr Justice McHugh's judgment does, in our

submission, open up a. divergence not only between

what the Court of Appeal has held and what

Lord Hatherley says but also between the civil and

criminal law about forgery.

In our submission, Your Honours, MAHONY's case,

generally, is a formidible authority contrary to the

historical analysis of the case law in the majority

judgment and supports the general application of

CRABTREE-VICKERS, 133 CLR and FREEMAN & LOCKYER

principles over both formal and informal contracts

purporting to be binding on a company. In our

submission, the Court of Appeal judgments are open

to further objections. The court has rejected

principles which have been worked out in England

and Australia over the last 120 years in the context

of modern business conditions in relation to

company contracts generally and has gone back to 1856

to rediscover and apply a principle enunciated when

company law was in its infancy and while return to

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true doctrine is appropriate from time to time,

in our submission, this Court would have misgivings

as to whether it is appropriate in the context of

company law which has been, in this particular area,

an agency law which has been worked out over a long

period of time by the English courts and accepted by

this Court in relation to informal corporate
contracts.

We would also make the point that the Court's

decision elevates form over substance. In
circumstances identical but for the use of a seal,
in informal contract will not be binding but the

formal one will and just because of the seal.

The remaining points concern the question of

whether the outside lender was put on inquiry.

This is dealt with by Mr Justice McHugh at

pages 80 and following and the crucial passages are

at page 83.

MASON CJ:	Now, to what extent is it essential to you to overturn that finding? If you succeed on the forgery argument, you would not be troubled by this finding?
MR HANDLEY:	We would not, no, Your Honour, but we have an

independent attack on this point.

MASON CJ: Yes, I gather that.

MR HANDLEY:  And I am happy to develop it if the Court would be

assisted by it.

MASON CJ: Well, if you can just give us a brief overview of it.

MR HANDLEY:  Yes. Your Honours, the trial judge did find that

the lender was put on inquiry.	So we start with
the findings - - -

MASON CJ: And then the three judges of the Court of Appeal

disagreed with that finding.

MR HANDLEY:  Indeed. Mr Justice McHugh, at line 35 on page 83,

after a reference to UNDERWOOD's case which, of course,

related to banking transactions, went on:

It may appear where the directors apply

the company's property in satisfaction

of or as security for their own debts:

EBM CO LTD V DOMINION BANK -

a decision of the Privy Council on appeal from

Canada. Your Honours, that is this case, of course.

Apart from the question of whether the lender was

put on inquiry, Mr Justice McHugh's sunnnary at

lines 35 to 40 - this is a case where a minority

director and a minority shareholder_-ignoring for a

moment that Sturgess held his shares in the name of

another company - applied Northside's property as

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security for a debt which - or borrowing that was being

raised by this motor vehicle trader, Farola Pty Limited,

which, in fact, had and had no appearance of having

any connection whatever with the property-owning

company owning land in French's Forest. Alone, on

the security of a registrable mortgage over land,

as this Court would know and as the trial judge said,

is a transaction of some formality, typically

involving the employment of solicitors, at least,
for the lender, who prepare the documents and
arrange the loan. It typically involves making of
searches inquiries and typically involves an appreciable
lapse of time between the commencement and the

conclusion of the transaction. So, it is our

submission that the lender either knew or should have

known that it was dealing with only one of three

directors. And Gower, for example, takes the view,

and supports it with authority, and there is some

authority to the same effect in this country that

persons dealing with a company must be taken to

know or cannot claim any rights against the company

inconsistent with the company's registered documents

so far as who the directors are. Bill Smith purports

to act for BHP and the only evidence you have got of

that is his own statement to that effect and Smith

is not a director of BHP, in fact, and is not shown

in thepublic records as being a director of BHP,

his representation as to his authority counts for

nothing. So that the lender must be taken to have known

or its rights cannot be assessed otherwise than that it

knew it was dealing with one of three directors in a

matter in which the company's property was being used

as security for that directo~'s private debt.

There -were some other matters that we would be

drawing attention to but they start to become questions
of fact. Mr Justice McHugh said that Farola was an
apparently associated company. Well, there is just

no basis for that, with respect, other than that they

had a common director. But common directors, in our

submission, is not eno~gh to lead to the compan~es

being associated companies.

In the end, it comes down to, in our submission,

a representation by the director, Sturgess, of his

authority to mortgage Northside's property to
secure an advance to his own company, his authority

to deliver the certificate of title and his authority

to apply the common seal. The case never arises above
that point and if agency principles apply you have

the self-serving representations of an agent benefitting from the transaction, no holding out, nothing else to bind the company.

MASON CJ:	Mr Handley, have you sufficient findings of facts
to support your forgery argument?

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MR HANDLEY:  I believe that is so, Your Honour, because

Mr Justice Young found it was a forgery. The

secretary was never properly appointed. Although

there was a return to the Corporate Affairs Commission

which showed that he was a secretary, that was not
a correct return. There is no evidence that the

company searched and relied upon what was in the

public documents. And if I could just refer

Your Honours to what Professor Gower has said on

the question of directors in his current edition on

page 202, the second paragraph:

One may get even more complicated

cases. Thus all companies today have to

maintain a register of directors and

secretaries and to file a copy at the

Companies' Registry. It is submitted that

if those who act as directors or secretary

are shown as such in the company's register
and the outsider has searched it (but not

otherwise) -

a reference to TOWER CABINET CO V INGRAM, which

was a decision about the REGISTRATION OF BUSINESS

NAMES ACT and there are decisions of Mr Justice Gibbs when a judge of the Bankruptcy Court and

Mr Justice Fox as a judge of the Federal Court

that the fact that someone is wrongly shown under
the BUSINESS NAMES ACT as a partner cannot be

relied upon to fix him with liability for partnership

debts if you did not search and rely upon the

registration. So, Professor Gower and the English

authority referred to and decisions of the Federal

Court and Bankruptcy Court point the same way and

here there is no evidence that Barclays Bank searched

and relied upon the statement that young Sturgess
was a secretary of the company and that makes it a

forgery. And Mr Justice Young, Your Honours, does

find that it was a forgery. Mr Sullivan who was at

the trial tells me so and if I may accept his statement

and refer Your Honours to the actual passage if and

when the submission is challenged. We do have

findings of the trial judge that this was a forgery

and so this Court would not be asked to make findings

of fact ab initio. They are our submissions, if

the Court pleases.

MASON CJ: Thank you, Mr Handley. Yes, Mr Cole.

MR COLE: If Your Honours please. Your Honours, in my

submission, the important feature to stress about

the operation of the rule in TURQUAND's case is, of course, that it is a rule not for the protection of

companies like the applicant but a rule for the

protection of outsiders who deal with the company.

When one looks simply at the facts of this case, one finds an ordinary enough situation where Barclays

appear.- if Your Honours look at page 82, where

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Mr Justice McHugh ~s dealing with the circumstances

that he regards as not putting Barclays on inquiry.

One finds that from Barclays' point of view, as a

matter of fact, this was an ordinary enough

transaction and, indeed, Your Honours, the stark feature of this case which perhaps sets it apart

from other cases of this kind which one might

respectfully submit would be more appropriate

vehicles for the review if that be otherwise

desirable of the operation of the rule in TURQUAND's

case - those other cases, Your Honours, would not

necessarily be cases where one finds the

single feature in this case, namely, that at the

office of the Corporate Affairs Commission one finds

a set of articles which not only authorizes the

attestation of the common seal in a certain way,

including by a person who need not be secretary of

the company at all if the directors appoint him, but

one also finds the registered particulars recording

that the very people who attest to the affixing of
the common seal were persons on public record as

being authorized to do so.

Now, Your Honours, there was an issue at

the trial before Mr Justice Young as some debate before the Court of Appeal as to the question on whom the onus lay of demonstrating whether Barclays

searched or not. One does not know that they did;

equally, one does not know that they did not and,
indeed, there is much to be said for the inference
that they more likely than not may well hav~ given
the size of the transaction and the other considerations

involved. But, Your Honours, if the matter were to

boil down to one of onus, then there is much to be

said for the view that the onus was on the present

applicants, the plaintiffs in the proceedings, to

show that Barclays did not search, and if it failed

to discharge that onus then, if it mattered, that

would be the end of the matter, in my submission.

Your Honours, were one to find a case which is

not this case where the particulars on public record

were quite different then, Your Honours, an appropriate

occasion might arise for considering whether the rule

in ROYAL BRITISH BANK ought to be looked at.

Your Honours, Mr Justice McHugh, in my submission,

assembles a formidable array of authority both in

England and in this country and, in particular,

in the State of New South Wales, indicating that the

principle has the operation which the conclusion of

his judgment leads to. The rule, plainly enough

Your Honours would, with respect, accept, is one,
as His Honour points out, of great commercial

convenience. No doubt much conduct of business has

been carried on in reliance on it and, indeed, much

legal advice and the like been predicated on its

continuing existence.

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Your Honours, there is no occasion, in my

submission, for this Court now to see if one can

assimilate the rule into what is said to be the

current position in the United Kingdom as a part
of the law of agency for at least two reasons:

firstly, there is no reason for this Court to

assimilate what appears to be the authority in

this country to authority in England in principle;

secondly, in 1985, in the UK, the rule was

substantially eroded anyway as a result of some
connnon market legislation. In the result,

Your Honours, the utility of the rule and the ample

demonstration of its subsisting content is such

that a case, in my submission, is simply not made

out so far as the necessity for this Court to

consider it in the context of the facts of this
case.

There is something to be said, one would acknowledge, for consideration of the alleged

exception is simply available to defeat the operation of the rule as it operates in favour of an outsider

forgery exception to the rule. One accepts that.

whenever one finds internally that there is a lack

of authority and to say that that is a forgery

is, of course, to extinguish the rule entirely;

an extinction, Your Honours, which the perpetuation

of part of the rule, at least, by the 1983

statutory amendments would not seem to be justified.

So far as the inquiry and notice point is

concerned, Your Honours, the question was one of

fact and, in my submission, the conclusions which

Mr Justice Kirby and Mr Justice McHugh came to as

to the ordinary nature of the arrangement and the

absence of matters to put the lender on inquiry
are findings of fact with which this Court would not

be disposed to interfere. Those are my submissions,

if the Court pleases.

MASON CJ: Thank you, Mr Cole. Yes, Mr Williams?
MR WILLIAMS:	Your Honours, I do not wish to make any

submissions.

MASON CJ:	Mr Handley, you do seem to have established that
there is a point of general principle in relation
to the so-called forgery exception to the rule in
TURQUAND's case but what about grounds 2, 11 and 12?
Essentially, they seem to turn upon the "put upon inquiry"
issue and they do seem to involve, ex facie at least,
an examination of the facts and that would seem to
present this question for the Court: should we
exclude those grounds at this stage or should we,
as it were, draw your attention quite directly to
the problem that might arise, in other words, that
you may be confronted if you get an unrestricted

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grant of special leave at the present time with a
desire on the part of the Court at some later stage

to exclude these grounds or some of them?

MR HANDLEY: Needless to say, Your Honour, I would prefer the

later course despite he who fights and runs away

lives to fight another day. But in any event,

Your Honour, I would submit we do have findings of

fact in our favour by the trial judge. The points

on which the Court of Appeal considered they were

entitled to reverse the trial judge's findings do

raise in themselves a fairly crisp issue of principle

and if the Court took the view that the various

matters to which I drew attention in our submissions

outlined a few minutes ago had substance in them

then the Court is in a position to restore the

findings of the trial judge and it might artificially

restrict the case if this part of it was excluded.

MASON CJ:	I was inclined to think, and I may be wrong from my
quick reading of the judgment of the trial judge,
that he was putting more weight on the fact that
the security was given over property that was
quite disconnnected with the borrower and that that in itself should put the lender upon inquiry. You,
as I followed your outline of the relevant facts on
which you were relying,were called in aid
perhaps more and placing more weight on other facts.
MR HANDLEY:	The other facts are not in dispute, point l;

they are encapsulated in - the principle is accepted

by the Court of Appeal in their reference to the

EBM V DOMINION BANK case and the question is whether

that recognizes - - -

MASON CJ:	I follow that but if you view it as an issue of fact, the way in which the trial judge treated it would tend to invest that issue of fact and the answer he gave to it with more importance than the
way in which you were dealing with it - more public

importance.

MR HANDLEY: Yes, Your Honour.

MASON CJ: Anyhow, that concludes what you want to say about that.

We will not confine you at this stage,

Mr Handley, but this part of the dialogue in

relation to the special leave application will

continue to lodge in your mind.

MR HANDLEY: Yes, Your Honour, and hand over my head.

MASON CJ:  I do not know about that but we will grant special
leave.

AT 11.01 AM THE MATTER WAS ADJOURNED SINE DIE

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