Orison Pty Ltd v Strategic Minerals Corporation N/L
[1987] FCA 427
•12 AUGUST 1987
Re: ORISON PTY. LTD.
And: STRATEGIC MINERALS CORPORATION NL; PETER GULLAN CROSS; JOHN
SWIRE-THOMPSON; ASHA CAPITAL CORPORATION LTD. and ASHA ENERGY PTY. LTD.
No. WAG42 of 1987
Trade Practices
COURT
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)
CATCHWORDS
Trade Practices - misleading and deceptive conduct - takeover of proprietary limited company by public listed company - special resolution required - memorandum and independent valuation report sent by directors to shareholders - allegedly constituting misleading and deceptive conduct by company - injunctive and declaratory relief sought - strike out motions - mandatory injunctive relief under s.80 - whether pleading of adoption of valuation report supportable - trial of preliminary issue - whether conduct "in trade or commerce" - whether conduct of Board or conduct of company - security for costs.
Trade Practices Act 1974, ss.52, 80
Companies (Western Australia) Code ss.229, 533
Companies (Acquisition of Shares) (Western Australia) Code s.12
Federal Court of Australia Act 1976, s. 56
Securities Industry Code s.42
Foss v. Harbottle (1843) 2 Hare 461
Prudential Assurance Co. Ltd v. Newman Industries Limited (1982) 2 WLR 31
Phelps v. Western Mining Corp. Ltd (1978) 20 ALR 183
Carl Zeiss Stiftung v. Herbert Smith & Co. (1969) 1 Ch 93
OD Transport v. WA Government Railways Commission (1987) 71 ALR 356
Philip Morris Inc. v. Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457
TVW Enterprises Ltd v. Michael John Duffy and Others (unrep. Toohey J. 28 March 1985)
CBS Productions Pty Ltd v. O'Neill (1985) 1 NSWLR 601
Re Ku-ring-gai Co-Operative Building Society (No.12) Ltd (1978) 36 FLR 134
Trade Practices Commission v. Legion Cabs (Trading) Co-Operative Society Ltd (1978) 35 FLR 372
WA McArthur Ltd v. State of Queensland (1920) 28 CLR 530
James v. The Commonwealth (1936) 55 CLR 1
Larmer v. Power Machinery Pty Ltd (1977) 29 FLR 490
Wells v. John R. Lewis (International) Pty Ltd (1975) 25 FLR 194
Glorie v. W.A. Chip and Pulp Co. Pty Ltd (1981) 39 ALR 67
Patrick v. Steel Maines Pty Ltd (unrep. Wilcox J. 8/7/87)
Bevanere v. Lubidineuse (1985) 59 FLR 334
Bulfin v. Bedarfalds Limited (1938) 38 SR(NSW) 4231
Bell Resources Ltd v. The Broken Hill Proprietary Company Ltd (1986) ATPR 40-702
Industrial Equity Ltd v. North Broken Hill Holdings Ltd (1986) 64 ALR 292
Fencott and Associates Pty Ltd v. Eretta Pty Ltd (unrep. 31/3/87 French J.)
Yandil Holdings Pty Ltd v. Insurance Co. of North America (1985) m3 ACLC 542
Tradestock Pty Ltd v. TNT (Management) Pty Ltd (1977) 14 ALR 52
HEARING
PERTH
#DATE 12:8:1987
Counsel for the Applicant: Mr M. Bennett and Mr M. Lewis
Solicitors for the Applicant: Keall Brinsden
Counsel for the First Respondent: Mr K. Martin
Solicitors for the First Respondent: Parker & Parker
Counsel for the Second Respondent: Mr R. Ainslie
Solicitors for the Second Respondent: Mallesons Stephen Jaques
Counsel for the Third and Fourth Respondents: Mr C. Stokes
Solicitors for the Third and Fourth Respondents: Warren McDonald French & Harrison
ORDER
On the First Respondent's motion dated 16 June 1987:-
1. The motion is dismissed.
2. The First Respondent pay the Applicant's costs of the motion.
On the First Respondent's motion dated 14 July 1987:-
1. The Court will determine the preliminary issue set out in the minute of 29 June 1987 as between the Applicant and the First Respondent.
2. The costs of the motion be in the cause.
On the preliminary issue the Court finds that the forwarding to shareholders of Strategic of a notice of extraordinary general meeting for 23 July 1986 together with an explanatory memorandum and report was conduct in trade or commerce for the purposes of s.52 of the Trade Practices Act 1974.
The costs of the preliminary issue be in the cause.
On the Second Respondents' motion filed 24 June 1987:-
1. The application be struck out to the extent of the relief sought in paragraph 5.
2. The motion be otherwise dismissed.
3. There be no order as to costs.
On the Second Respondent's motion filed 23 June 1987:-
1. The Applicant do on or before 24 August 1987 give security for the respondents' costs in the sum of $20,000 in a form to be agreed between the parties or as otherwise ordered by the Court.
2. Proceedings other than proceedings relating to the giving of such security be stayed until the security is given or further order.
3. There be liberty to the applicant to apply to set aside the order within the next 7 days upon evidence of its ability to pay the costs of the application if unsuccessful.
4. The costs of the motion be the Second Respondents in any event.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
This case raises, among others, the question whether a communication from the directors of a trading corporation to its shareholders can constitute conduct of the corporation and whether such communication can be conduct in trade or commerce for the purposes of s.52 of the Trade Practices Act 1974.
Strategic Minerals Corporation NL ("Strategic") is a publicly listed mining company incorporated in Western Australia.
On 23 July 1986 an extraordinary general meeting of its shareholders passed a special resolution authorising the acquisition by the company of the issued capital of Asha Mining Finance Pty Ltd ("AMF") on terms set out in the resolution.
Orison Pty Ltd ("Orison"), a shareholder of Strategic, now complains that the passage of the resolution was procured by misleading information, circulated on the authority of the directors of Strategic, as to the asset backing of the AMF shares.
This conduct is said to be conduct of Strategic in trade or commerce which was misleading or deceptive or likely to mislead or deceive in contravention of s.52 of the Trade Practices Act 1974.
Orison has instituted proceedings against Strategic and two of its directors, Messrs. Cross and Swire-Thompson, and claims against them various forms of injunctive and declaratory relief.
It has also joined two other parties, Asha Capital Corporation Ltd ("Asha Capital") and Asha Energy Pty Ltd ("Asha Energy") and seeks injunctive relief against the latter company.
Defences have been filed by Strategic and the two directors. However the statement of claim has been amended and as yet no consequential amendments have been made to the defences. Discovery has been given by the applicant.
Five motions have been filed by the respondents. Four of them are directed to disposition of the case on threshold issues. The fifth seeks an order for security for costs. They are:-
1. Motion by Strategic to strike out the amended statement of claim or part thereof on the basis that it fails to disclose a cause of action as against Strategic and further and alternatively, that it is otherwise an abuse of the process of the Court.
2. Motion by Strategic for determination of a preliminary issue relating to whether, on agreed facts, the asserted conduct of Strategic was in "trade or commerce" as that expression is used in s.52 of the Trade Practices Act 1974.
3. Motion by Cross and Swire-Thompson to strike out the amended statement of claim on the bases that:-
(i) the alleged representations were not made by Strategic but by its secretary under instructions from the Board of Directors;
(ii) alternatively, if Strategic made the representations, it was not engaging in conduct within the meaning of that term in s.52;
(iii) alternatively, the relief sought in paragraph 5 of the application was not within the power of the court to award.
4. Motion by Asha Capital and Asha Energy to strike out the statement of claim as disclosing no reasonable cause of action or to dismiss the proceedings as frivolous and vexatious or an abuse of process.
5. Motion by Cross and Swire-Thompson for an order that Orison give security for costs in the sum of $20,000.
As to the fourth motion and following concessions on the part of Orison, I made an order on 2 July that proceedings be stayed in relation to the claim for relief against Asha Capital and Asha Energy.
Before turning to the remaining motions it is convenient to refer to the pleadings in some detail.
The PleadingsIt is common ground in the pleadings that Strategic is a publicly listed company and a trading corporation for the purposes of the Trade Practices Act 1974. Cross and Swire-Thompson are directors of Strategic and Orison, a proprietary limited company, is one of its shareholders.
It is also not in dispute that Asha Capital is a public company and Asha Energy a proprietary limited company, is one of its shareholders.
Paragraph 7 of the amended statement of claim, which is admitted, alleges:-
"In July 1986 Strategic forwarded to each of its shareholders:
(a) an undated Notice of an Extraordinary General Meeting to be held on 23rd July 1986 ("the EGM");
(b) an explanatory memorandum prepared by Strategic;
(c) a response dated 26th June 1986 from Hendry Rae Court ("the HRC letter") to Strategic."
The HRC letter is said in paragraph 8 to have been prepared for Strategic at its request. This too is admitted by Strategic although it denies adopting the letter either expressly or by implication.
Strategic is alleged to have made certain representations to each of the shareholders by way of the explanatory memorandum, they being that:-
(a) The independent directors of Strategic recommended the passage at the EGM of a Special Resolution to grant approval to Strategic to acquire 100% of the issued capital of Asha Mining Finance Pty Ltd
("AMF") for a consideration of 8,900,000 ordinary fully paid shares in Strategic issued at a price of 0.30c. per share ("the Special Resolution");
(b) The proposed acquisition and consideration referred to in 9(a) hereof was fair and reasonable having regard to the interests of shareholders other than Asha Capital Corporation Limited.
Strategic admits the first allegation but denies the second. Cross and Swire-Thompson deny this plea in its entirety.
By its adoption of the HRC letter, Strategic is said to have represented:-
(a) That the acquisition of 100% of the issued capital of AMF for the consideration of the issue by Strategic of 8,900,000 shares at an issue price of 0.30c. per share was fair and reasonable;
(b) That the value of the major investment assets of AMF was:
(i) Golden Spec Joint Venture $3,800,000
(ii) Interest in Telluride Mining NL $1,767,500
(iii) Shareholding in Gwalia Deeps NL $ 100,000
TOTAL $5,667,500
=========
The representations arising from the memorandum and the HRC letter are said to have been made in the course of trade and commerce and to have constituted conduct within the meaning of that expression in s.52 of the Trade Practices Act.
Each of them, it is alleged, was false or misleading and deceptive, or likely to mislead or deceive shareholders of Strategic considering whether to approve the special resolution.
All these allegations are denied.
Orison further alleges that the representations conveyed by the memorandum and the HRC letter were false or misleading and deceptive because:-
(a) Mr Devenish-Meares, one of the "independent directors" of Strategic, did not recommend the passage of the special resolution.
(b) The consideration for the purchase of the AMF shares was not fair and reasonable having regard to the interests of shareholders in that:
(i) Strategic represented that AMF had an asset value of $5,667,500;
(ii) As at 30 June 1986 the asset value of AMF was $1,885,079;
(iii) The net worth of AMF as at 30 June 1986 was "in fact a deficiency (or negative) of $108,671";
(iv) The liabilities of AMF as at 30 June 1986 were not less than $4,553,264;
(v) By reason of the true asset worth of AMF the true value of the consideration to Asha Capital Corporation Limited was $7,223,264."
The respondents contend in their defence that Devenish-Meares through his alternate director, Leonis Reisgys, recommended passage of the resolution.
Strategic does not admit that the consideration for AMF was not fair and reasonable, while Cross and Swire-Thompson assert that it was.
The statement of claim goes on to allege a breach by the directors of their common law and statutory duty of care, the latter arising under s.229(2) of the Companies (Western Australia) Code.
They knew or ought to have known, it is said, the true position of AMF in various respects relating to its asset value which are pleaded.
Orison claims that it and other shareholders of Strategic were induced by the representations and the conduct of the directors to vote in favour of the special resolution.
Following the passage of that resolution it is alleged that on 31 July 1986 Strategic entered into an agreement with Asha Capital to acquire 100 per cent of the issued capital of AMF in consideration for 8.9 million Strategic shares at 30c. each, which were ultimately alloted to Asha Energy and were, under s.3T of the listing requirements of the Australia Stock Exchanges, held in escrow.
It was also pleaded that by reason of Strategic's conduct the extraordinary general meeting was conducted in a manner that was oppressive or unfairly prejudicial, or was contrary to the interests of the members as a whole.
The relief claimed in the amended application is as follows:-
1. An injunction requiring the First Respondent
("Strategic") to forthwith do all acts necessary for calling and proceed to call an Extraordinary General Meeting of the shareholders of Strategic such meeting to be held at a date time and venue to be fixed by this Honourable Court if not agreed between the parties wherein the business of the meeting be limited to considering and if thought appropriate passing the following resolutions:
(a) that the acquisition by Strategic Minerals Corporation NL of 100 per centum of the issued capital of Asha Mining Finance Pty Ltd for a consideration of 8,900,000 ordinary fully paid shares in the company, issued at a price of 0.30c. per share and consequently for the shareholding of the Third Respondent ("Asha Capital") to increase from 25.4% to 36% of the issued and voting shares of the company be hereby ratified;
(b) in the event of resolution 1(a) not being carried and subject to the confirmation of this Honourable Court or alternatively the Supreme Court of Western Australia, Strategic Minerals Corporation NL reduce its share capital by accepting the surrender from the Fourth Respondent ("Asha Energy") of 8,900,000 ordinary fully paid shares in the company subject to the re-transfer to Asha Capital Corporation Limited of 100 per centum of the issued capital of Asha Mining Finance Pty Ltd.
2. An injunction restraining the Second Respondents by themselves and by their associates, Asha Capital and Asha Energy and any person or company whether an associate of the Second Respondents or Asha Capital or Asha Energy for the purpose of the Companies (Acquisition of Codes) (Western Australia) Code (sic) restraining them and each of them from voting in respect of the resolutions to be held at the Extraordinary General Meeting referred to in paragraphs 1(a) and (b) of this Application.
3. An injunction be granted restraining Strategic from registering or accepting for registration any transfers of all or any of the 8,900,000 ordinary fully paid shares in the company issued to Asha Energy from the date of judgment of this Honourable Court until:
(a) the Extraordinary General Meeting referred to in paragraph 1 of this Application is held;
(b) in the event of the resolutions referred to in paragraph 1 of this prayer for relief being passed, up to the date of final determination of this Honourable Court in respect of the application by the First Respondent Strategic for reduction of capital.
4. An injunction be granted restraining Asha Energy from transferring or entering into a contract to transfer the 8,900,000 fully paid shares in Strategic from the date of judgment of this Honourable Court until:
(a) the Extraordinary General Meeting referred to in paragraph 1 of this Application is held;
(b) in the event of the resolutions referred to in paragraph 1 of this prayer for relief being passed, up to the date of final determination of this Honourable Court in respect of the application by Strategic for reduction of capital.
5. A declaration that any contract entered into between Strategic and Asha Capital for the acquisition of Asha Mining Finance Pty Ltd in accordance with the terms of the Special Resolution passed at the Extraordinary General Meeting of Strategic held on 23rd July 1986 is void.
6. Such further or other relief as to this Honourable Court may seem just and appropriate;
7. A declaration that the Second Respondents and each of them by reason of the matters referred to in paragraph 15 of the Statement of Claim filed herewith were and continue to be in breach of section 229(2) of the Companies (Western Australia) Code."
Strategic's Strike Out Motion
By its motion of 16 June Strategic seeks to strike out the amended statement of claim "on the basis that it fails to disclose a cause of action" and alternatively as an abuse of the process of the court.
As became apparent from the submissions put by counsel for Strategic, the real basis of the complaint was the terms of the relief sought against his client.
In summary his submissions were:-
1. The amended application claims certain relief against Strategic in paragraphs 1 and 5.
2. What is sought under paragraph 1 is the compulsory holding of a meeting of shareholders to ratify a special resolution passed at the extraordinary meeting of shareholders held on 23 July 1986.
3. The amended statement of claim fails to set out any facts to justify an argument that a court should require ratification of a special resolution, the validity of which special resolution is not sought to be impugned in any way at all and which in those circumstances must be assumed to be valid and subsisting.
This complaint about the relief sought does not go to the issue whether the statement of claim discloses a reasonable cause of action.
On its face the amended statement of claim alleges facts which disclose a cause of action against Strategic arising out of a contravention of s.52 of the Trade Practices Act 1974.
It alleges conduct in trade or commerce by Strategic, a trading corporation, which conduct is said to have been misleading and deceptive.
It alleges that the shareholders of Strategic including Orison were induced by the conduct to vote in favour of the special resolution.
That is enough to disclose a cause of action that may be capable of supporting a grant of injunctive relief under s.80 of the Act quite apart from any question whether the shareholders have suffered damage.
I mention only to put to one side, the rule in Foss v. Harbottle (1843) 2 Hare 461 which may or may not have any application to the present case. While mentioned in argument it was not used to support any attack on Orison's right to bring the action.
The rule has been described as an expression of the general proposition that A cannot bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C - Prudential Assurance Co. Ltd v. Newman Industries Limited (1982) 2 WLR 31 at 37.
Whatever application it may have otherwise in trade practices litigation, that limitation does not appear to apply to persons who seek injunctive relief under s.80 of the Trade Practices Act - Phelps v. Western Mining Corp. Ltd (1978) 20 ALR 183.
Orison's counsel made it clear that the relief sought under para. 1 was sought primarily pursuant to s.80.
It was the position prior to 1983 that the power of the court under this section was limited to the grant of an injunction in joining conduct either as a principal or an accessory in contravention of a provision of Part IV or Part V.
Since the amendments to the section effected by the Statute Law (Miscellaneous Provisions) Act (No.1) (1983), the Court is empowered to "grant an injunction in such terms as the court determines to be appropriate."
That is a wide discretion. It is not necessary for present purposes to embark upon exhaustive consideration of its limits.
Although it is no doubt confined by reference to the scope and purposes of the Act - OD Transport v. WA Government Railways Commission (1987) 71 ALR 356 at 365, it appears wide enough to encompass the grant of a mandatory injunction.
Counsel for Strategic put it as the "heart" of his submissions that there is nothing pleaded in the amended statement of claim to impugn the validity of the special resolution passed on 23 July 1986. Why, he asked rhetorically, should there be an injunction requiring a meeting to consider ratification of that resolution.
Unless and until the validity of the special resolution is challenged, he said, there is no point in seeking to recommit it to the shareholders.
The purpose of the relief sought as explained by counsel for Orison, is to enable the shareholders to decide whether or not to ratify the transaction entered into by Strategic.
If they were to chose not to ratify it, then the company, he said, could not proceed with the transaction.
He submitted that no order declaring void the resolution of 23 July was necessary in order to base the relief sought in para.1.
That may be correct. The invalidity of the resolution may be inferred from the facts pleaded. Its validity or otherwise is a matter of law.
As Barwick C.J. said in Philip Morris Inc. v. Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 473:-
"...in judicature pleading, fact pleading as it was introduced in the judicature system, there is no necessity to assert or identify a legal category of action or suit which the facts asserted may illustrate, involve or demonstrate and on which the particular relief claimed is based or to which it is relevant. It is sufficient in matters in the Federal Court to assert the facts on which the plaintiff or applicant party relies and to nominate the remedies which he seeks as a consequence of the occurrence of those facts."
I suspect that the Court will, if the applicant is successful, require a good deal of persuasion that the relief sought in para.1 is within power and "appropriate". At this stage however, it is not so obviously untenable that it or the pleading which supports it should be struck out.
The second limb of the Strategic motion seeks the striking out of paras. 8, 10, 11 and 12(b) in the amended statement of claim.
The substance of the submission advanced in support of this part of the motion was that in so far as the amended statement of claim alleges the adoption by Strategic of the report prepared by Messrs. Hendry Rae and Court, it is unsupportable having regard to the evidence.
The affidavit filed with the motion exhibited the Notice of Meeting, the explanatory memorandum and the letter from Hendry Rae and Court.
The submission advanced on behalf of Strategic as set out in the supporting affidavit was as follows:-
1. "A reading of the three documents plainly makes out no arguable basis for the plea in paragraph 9(b) of the amended statement of claim that the first respondent by the explanatory memorandum represented to shareholders the matters alleged, but rather that it is plain that the explanatory memorandum expressly refers to the conclusion of the HRC letter. By reason of this circumstance it is submitted that paragraphs 9(b) and 12(b) of the amended statement of claim also be struck out as failing to make out any arguable cause of action for "conduct" or the "engaging in conduct" by the First Respondent under Section 52 of the Trade Practices Act 1974 (as amended)."
2. "The first respondent submits that a reading of these three documents makes out no arguable basis for the submission that the HRC letter was ever expressly adopted by the first respondent as alleged, or that the facts relied upon for the implication that the HRC letter was adopted by the first respondent can make out an arguable case and by reason thereof that paragraphs 8, 10, 11 and 12(b) be struck out as failing to disclose any arguable cause of action contrary to Section 52 of the Trade Practices Act 1974 (as amended)."
In my opinion the issue of the adoption by Strategic of the letter from Hendry Rae and Court is open to argument and is not so unarguable as to warrant the striking out of the paragraphs in the amended statement of claim which embody or rely upon that proposition.
Strategic's strike out motion will therefore be dismissed.
Motion for Trial of Preliminary IssueStrategic seeks the separate trial of the question whether the conduct alleged against it is conduct in "trade or commerce" for the purposes of s.52 of the Trade Practices Act 1974. The motion is not opposed.
Strategic and Orison have prepared a statement of agreed facts to facilitate the hearing of the preliminary issue. The facts are agreed between them for all purposes in these proceedings.
Cross and Swire-Thompson do not consent to be bound by that agreement so that the preliminary issue can only be decided as between Strategic and Orison.
The issue is defined as follows:-
"If the facts set forth in paragraph 7 of the Agreed Facts constitutes conduct of Strategic Minerals Corporation NL (which is to be assumed for the purpose of this Preliminary Issue) is such conduct conduct in "trade or commerce" within the meaning of that expression in section 52(1) of the Trade Practices Act 1974 (as amended)."
Argument on this motion and on the merits of the preliminary question and on Cross and Swire-Thompson's strike out motion was able to be encompassed within the space of one day.
I reserved judgment on the question whether it was appropriate to determine the preliminary issue and, contingently, on the merits of that issue.
The power of the Court to separately decide certain questions or issues in a proceeding is expressed in O.29 of the Federal Court Rules which provides:-
"29(1) In this Order, "question" includes any question or issue in any proceeding, whether of fact or law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties or otherwise.
(2) The Court may make orders for -
(a) the decision of any question separately from any other question, whether before, at or after any trial or further trial in the proceedings; and
(b) the statement of a case and the question for decision.
(3) Where any question is decided under this Order, the Court shall, subject to rule 4, make such order, grant such relief or give such directions as the nature of the case requires.
(4) Where the decision of a question under this Order -
(a) substantially disposes of the proceeding or of the whole or any part of any claim for relief in the proceeding; or
(b) renders unnecessary any trial or further trial in the proceeding or on the whole or any part of any claim for relief in the proceeding,
the Court may, as the nature of the case requires -
(c) dismiss the proceeding or the whole or any part of any claim for relief in the proceeding; or
(d) pronounce any judgment; or
(e) make any other order."
Rule 5 which deals with the question of consolidation of proceedings is not immediately relevant.
As to the way in which the Court should exercise its discretion under O.29, the relevant principles are enunciated in Carl Zeiss Stiftung v. Herbert Smith & Co. (1969) 1 Ch 93. Lord Denning, with whom Diplock and Sachs L.JJ. agreed, said at 98:-
"I know that it has been said on one or two occasions that a preliminary issue should be ordered only when, whichever way it is decided, it is conclusive of the whole matter. That was said by Lord Evershed MR in Windsor Refrigerator Co. Ltd v. Branch Nominees Ltd
((1961) Ch 88; (1961) Ch 375, 396); and Harman L.J. in Yeoman Credit Ltd v. Latter ((1961) 1 WLR 828, 835). I do not think that is correct.
The true rule was stated by Romer L.J. in Everett v. Ribbands ((1952) 1 KB 112):
"Where you have a point of law which, if decided in one way, is going to be decisive of litigation, then advantage ought to be taken of the facilities afforded by the Rules of Court to have it disposed of at the close of pleadings, or very shortly after the close of pleadings."
I have always understood such to be the practice. I quite agree that in many cases the facts and law are so mixed up that it is very undesirable to have a preliminary issue. I always like to know the facts before deciding the law."
In TVW Enterprises Ltd v. Michael John Duffy and Others (Unrep. Toohey J. 28 March 1985), Toohey J. followed that approach and went on to say at page 4 of his reasons:-
"Order 29 Rule 2 provides a useful procedure in certain cases though its usefulness depends upon the obtaining of answers which are likely to make a substantive hearing unnecessary, at least if the questions are answered in a particular way. The decision ultimately is one for the Court though naturally it will have regard to the attitude of the parties...It is also a relevant consideration to weigh the time likely to be taken in the hearing of a preliminary issue and the availability of hearing dates for that purpose against the time and expense of a substantive hearing and the length of time likely to elapse before such a hearing will take place."
In CBS Productions Pty Ltd v. O'Neill (1985) 1 NSWLR 601 at 606 Kirby P. cautioned that care must be taken in utilising the procedures available for the determination of preliminary points to avoid such determination in cases which are not ripe for that treatment:-
"A matter is "ripe" for separate and preliminary determination where it is a central issue in contention between the parties, the resolution of which will either obviate the necessity of litigation altogether or substantially narrow the field of controversy."
In this case the argument on the preliminary issue was able to be encompassed within the space of a day. There is an agreed statement of facts before the Court and a determination of the issue adversely to Orison would dispose substantially, if not entirely, of the litigation between itself and Strategic. I accept and take into account the fact that any determination will not necessarily resolve the issue as between Orison and the two directors.
However, having regard to the agreement on the relevant facts, the narrow point raised on the preliminary issue, and its potential for disposing of a significant part of the litigation if decided in one way, I conclude that I ought to proceed to determine it. Before doing so it is necessary to turn to the agreed statement of facts as between Orison and Strategic.
The Agreed FactsThe agreed facts are as follows:-
"1. The First Respondent ("Strategic") is and at all material times was:
(a) a duly incorporated publicly listed company in Western Australia;
(b) obliged by contract and by the terms of its Articles of Association to comply with the Official Listing Requirements of the Associated Stock Exchanges of Australia.
2. The Applicant ("Orison") is and at all material times was:
(a) a duly incorporated company in New South Wales;
(b) a member of Strategic.
3. Strategic is and was a mining company within the meaning of that expression in section 5(1) of the Companies (Western Australia) Code.
4. Articles 42 and 86 attached hereto as Agreed Document "A" comprise and at all material times have comprised part of the Articles of Strategic.
5. At all material times Strategic was engaged in the conduct principally of:
(a) acquiring mining tenements within Australia;
(b) exploring prospecting and developing mining tenements in Australia.
6. On 11 June 1986 the Directors of Strategic passed resolutions in the form and terms of Agreed Document "B" attached.
7. The attached notices marked as Agreed Documents "C", "D" and "E" were:
(a) forwarded in the form attached hereto to each shareholder of Strategic;
(b) comprised the only documents or notice received by Strategic shareholders of the Extraordinary General Meeting to be held on 23 July 1986;
(c) forwarded pursuant to the resolution of the Directors in Agreed Document "B".
8. The document attached hereto marked as Agreed Document "F" is a true copy of the applicable Listing Requirement 3J.
9. The meeting of Strategic members took place on 23 July 1986 and the resolutions contained in Agreed Document "C" were passed. The attached Minutes marked as Agreed Document "G" constitutes a true copy of the minutes of the Meeting.
10. Pursuant to the resolutions a contract was entered into by Strategic on or about 17th June 1986 to acquire 100% of the issued capital of Asha Mining Finance Pty Ltd and in consideration therefore Strategic issued 8,900,000 ordinary shares to Asha Energy Pty Ltd and credited the same as having been fully paid to a par value of 0.30c. per share."
Articles 42 and 86 of the Articles of Association of Strategic referred to in para. 4 of the statement of agreed facts provide:-
"42. The Board may whenever it shall think fit convene an extraordinary meeting and extraordinary meetings shall also be convened on such requisition or in default may be convened by such requisitionists as provided by Section 137 of the Act. If at any time there are not within the State of Western Australia sufficient Directors capable of acting to form a quorum any Director may convene an extraordinary meeting in the same manner as nearly as possible as that in which meetings may be convened by the Board.
.
.
.
86. The business of the Company shall be managed by the Board, which may exercise all such powers of the Company as are not, by the Act or by the Articles, required to be exercised by the Company in general meeting, subject nevertheless to any of the Articles, to the provisions of the Act, and to such regulations being not inconsistent with the Articles or regulations as may be prescribed by the Company in general meeting; but no regulations made by the Company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made."
The relevant parts of the resolution passed by the directors at their meeting held on 11 June 1986 were:-
"(2) That, subject to the necessary shareholder approvals being obtained that Strategic Minerals would offer to acquire from Asha Capital Corporation Limited 100% of the issued capital of Asha Mining Finance Pty Ltd the consideration for such purchase being the issue of 8.9 million fully paid shares in the company at an issue price of 30c."
The terms of a letter of offer to Asha Capital Corporation Ltd, expressed to be subject to obtaining necessary shareholder approval, were also settled by resolution at that meeting.
As appears from para.7 of the agreed facts, three documents were then forwarded to the shareholders of Strategic.
The first was a notice of an extraordinary general meeting to be held on 23 July 1986.
The notice set out the terms of a special resolution in the following form:-
"That approval is hereby granted for the company to acquire 100% of the issued capital of Asha Mining Finance Pty Ltd for a consideration of 8,900,000 ordinary fully paid shares in the company, issued at a price of 30c. per share, and consequently for the shareholding of Asha Capital Corporation Limited to increase from 25.4% to 36% of the issued and voting shares of the company following completion of the share placement contemplated in Resolution 2."
Resolution number 2 sought authority for the company to place 11,685,000 shares at a price of 28c. per share in the company to a number of institutions and clients of member firms of the AASE within 90 days of passage of the resolution. The proceeds of the issue were to be used to acquire gold production interests for the company and to provide working capital.
The notice went on to say that an explanatory memorandum "describing this transaction and providing all information required under Listing Requirement 3(j)3 of the Australian Associated Stock Exchanges and the Companies (Acquisition of Shares) (Western Australia) Code" was enclosed.
The explanatory memorandum opened with a description of its purpose as being:-
"...to provide additional information in relation to a Special Resolution to be put to the shareholders of the company at a General Meeting of members to be held on 23rd July 1986."
The "additional information" was shortly stated in two paragraphs of the memorandum:-
"1. Asha Capital Corporation Limited is a public company incorporated in Western Australia. The company's administrative office is located at 21st Floor, 44 St. George's Terrace, Perth, Western Australia. Peter Gullan Cross and Jonathan Swire-Thompson are Directors of Asha Capital Corporation Limited and Strategic Minerals Corporation NL.
Neither Asha Capital Corporation Limited nor any of its representatives or associated parties is eligible to vote on the proposed purchase being resolution 1 in the Notice of Meeting for the meeting of members to be held on 23rd July 1986.
2. As required by s.12(g) of the Companies (Acquisition of Shares) (Western Australia) Code and 3(j)3 of the Listing Requirements of the Australian Associated Stock Exchanges a report on the proposed transaction prepared by Hendry Rae and Court, Chartered Accountants, is attached to this memorandum. Hendry Rae and Court conclude that the proposed transaction and consideration is fair and reasonable having regard to the interests of shareholders other than the vendors."
The memorandum ended with a paragraph headed "Conclusion" which said:-
"The independent directors recommend shareholders Special Resolution 1 in the Notice of Meeting for the General Meeting of Members to be held on 23rd July 1986, the passage of which as a Special Resolution, would approve the proposed purchase."
Annexed to the memorandum was a report dated 26 June 1986 on the letterhead of Hendry Rae & Court, Chartered Accountants.
It was addresed to Mr W.A.C. Martin, the managing director of Strategic and was signed by Mr P.D. Eastwood, a partner in Hendry Rae & Court.
It expressed the conclusion that the acquisition of the issued capital of AMF for 8.9 million Strategic shares at 30c. per share was just and reasonable.
The three major investments of AMF were identified and a valuation of each was set out, which in summary was:-
25% interest of AMF in Golden Spec
Joint Venture $ 3,800,000
Issued capital in Telluride Mining NL $ 1,767,500
Shares in Gwalia Deeps NL $ 100,000
The minutes of the extraordinary general meeting held on 23 July record the attendance of 4 directors, Messrs. Cross, Swire-Thompson, Martin and Reisgys (an alternate to Mr Devenish-Meares), the company secretary, the company's solicitor, and one unnamed shareholder by an authorised representative. There were 16 unnamed shareholders represented by proxies tabled by the chairman representing 4,755,290 votes, all of which were votes in favour of the proposed resolutions.
The special resolution and ancillary ordinary resolutions were all passed unanimously.
It is necessary to make reference to the relevant provisions of the AASE Listing Requirements under which the notice of meeting and supporting information were forwarded to shareholders. In particular, s.3J(3) of the Listing Requirements provides as follows:-
"3J(3)(a) A listed company shall not nor shall any of its subsidiaries acquire or dispose of any assets where the amount of the total assets acquired or disposed of (interposed company structures being ignored) is in excess of 5 per cent of the total issued capital and reserves of the listed company as at the date to which the last audited accounts were made up without the prior approval of its shareholders in general meeting if the vendor or purchaser of such assets is -
(i) any person who is or was at any time in the preceding 6 months a director or officer of the listed company or any of its subsidiaries;
(ii) any person or company who is or was at any time in the preceding 6 months a substantial shareholder of the listed company; or
(iii) any person or company who for the purposes of Section 9 of the Act would be regarded as a person or company associated with the listed company or its related corporations; or
(iv) any other person or company whose association with any of the persons or companies referred to above is such that in the opinion of the Home Exchange the proposed acquisition or disposal should be referred to the shareholders of the listed company in general meeting.
(b) Notice of any meeting of shareholders to approve any such acquisition or disposal is to be accompanied by copies of reports, valuations or other material from independent qualified persons sufficient to establish that the purchase or sale price of such assets is a fair price.
(c) The vendor or purchaser or person who for the purposes of Section 9 of the Act would be regarded as a person associated with the vendor or purchaser of any such assets or any other person or company which in the opinion of the Home Exchange is associated with the vendor or purchaser shall not vote on the matter at any meeting of the shareholders of the listed company convened for the purpose of approving such acquisition or disposal.
(d) The Home Exchange may require that securities issued as consideration for the acquisition of assets are deemed to be vendor securities and subject to the provisions of Listing Requirement 3M(1).
(e) To supply to the Home Exchange for examination at least 5 business days before being issued 2 copies of the draft notice of meeting and other documents proposed to be sent to shareholders."
The Listing Requirements are given statutory backing by s.42 of the Securities Industry Code which provides:-
"42(1) Where any person who is under an obligation to comply with, observe, enforce or give effect to the business rules or listing rules of a securities exchange fails to comply with, observe, enforce or give effect to any of those business rules or listing rules, as the case may be, the Court may, on the application of the Commission, the securities exchange or a person aggrieved by the failure and after giving to the person against whom the order is sought an opportunity of being heard, make an order giving directions to the last-mentioned person concerning the compliance with, observance or enforcement of, or the giving effect to, those business rules or listing rules.
(2) For the purposes of sub-section (1), a person (in this sub-section referred to as the "relevant person"), being -
(a) a body corporate that has, with its agreement, consent or acquiesence, been admitted to the official list of a securities exchange and has not been removed from that official list; or
(b) a person associated with a body corporate that has, with its agreement, consent or acquiesence, been admitted to the official list of a securities exchange and has not been removed from that official list,
shall be deemed to be under an obligation to comply with, observe and give effect to the listing rules of that securities exchange to the extent to which those rules purport to apply in relation to the relevant person."
The preliminary issue as defined embodies the assumption in favour of Orison that the conduct of the directors in forwarding the notice of meeting and accompanying material to shareholders was conduct engaged in by Strategic. The question at issue is whether that conduct was in trade or commerce.
It is the strike out motion by Cross and Swire-Thompson that raises the issue whether the conduct was conduct of the corporation Strategic.
Conduct in "Trade or Commerce"Strategic contends on the preliminary issue that the conduct of the directors in forwarding to shareholders the notice of extraordinary general meeting and the supporting documents was not conduct in trade or commerce within the meaning of the Trade Practices Act 1974.
The assumption is made for the purposes of argument that the conduct of the directors in so doing can be attributed to Strategic and treated as its conduct.
The core of the company's argument lies in the proposition that the sending forth of the notice of meeting, the explanatory memorandum and the valuation report were part of its internal processes.
Comprising, as it did, communication between directors and shareholders, the conduct involved, it was said, a degree of "mutuality" inconsistent with the concept of trade and commerce.
The reference to "mutuality" was derived from observations of Bowen C.J. in his dissenting judgment in Re Ku-ring-gai Co-Operative Building Society (No. 12) Ltd (1978) 36 FLR 134.
The applicants in that case, two terminating building societies, sought declarations as to the operation of s.47 of the Trade Practices Act in relation to their practice of imposing, in respect of loans to their members, a requirement that the property mortgaged to secure the loan be insured with a nominated insurer. A special case was stated for the Full Court.
One of the issues raised in argument was whether lending by the applicants to their members was conduct in "trade or commerce" within the meaning of that term in s.47.
Bowen C.J. differed from Deane and Brennan JJ. in holding that it was not. The lending, he said, involved a degree of mutuality inconsistent with the commercial character of "trade or commerce".
Mutuality was demonstrated by the identity between the members contributing and members entitled to participate in a surplus.
In determining whether loan transactions between the societies and their members were "in trade or commerce", it was "relevant to have regard to the substantial degree of mutuality involved".
His Honour took "mutuality" into account as a factor to be weighed in the assessment of the commercial character of the conduct in question.
Deane J., with whom Brennan J. agreed on this issue, accepted that the culmination and objectives of the activities of the two societies was in making low interest loans to their members. Profit, the common dominant objective of trading and commercial dealings in the market place, was lacking.
But his Honour rejected the view that "trade or commerce" in s.47 was restricted to ordinary trading and commercial activities in the open market.
At 167 his Honour said:-
"The terms "trade" and "commerce" are not terms of art. They are expressions of fact and terms of common knowledge."
Although Strategic would confine the impact of those observations to the facts of Ku-ring-gai they have, in my opinion, a significance for the present case.
For the concept of mutuality invoked by Bowen C.J. may be said in one manifestation, to import a distinction in the identification of "trade or commerce" between the "internal" dealings of an organisation and its "external" activity in the market place.
It may be going too far to say that the distinction was rejected by the majority in Ku-ring-gai. However in the light of the approach taken by Deane and Brennan JJ., it cannot be seen as a distinction which is of great assistance in deciding whether or not conduct is in "trade or commerce".
It was a distinction already undermined by the decision of Franki J. in Trade Practices Commission v. Legion Cabs (Trading) Co-Operative Society Ltd (1978) 35 FLR 372.
Legion Cabs provided radio services to its members on condition that they buy their fuel from specified retailers of the Shell Company. The condition was attacked as a contravention of s.47.
On the question whether the transactions between Legion and its members were in trade or commerce, His Honour said at 383:-
"The respondent submitted that transactions between it and its members were not in trade or commerce. This was put, as it was said, as a "simple proposition unsupported by authority". It was also conceded that it had been held that trade or commerce was not to be given any narrow or restricted interpretation.
Whilst this submission at first seemed somewhat attractive I have decided against it. The respondent is a corporation distinct from its members and I consider that even in relation to its members it engaged in trade or commerce in the supply to them of the radio service."
These cases establish that the provision of services by co-operative societies to their members may be conduct in trade or commerce.
The present case is not concerned with the provision of a service but the communication of information.
It is well established that the communication of information may fall within the scope of conduct within trade or commerce.
In WA McArthur Ltd v. State of Queensland (1920) 28 CLR 530, the concepts of "trade" and "commerce" were described for the purposes of s.92 of the Constitution as follows at 547:-
"The mutual communings, the negotiations, verbal and by correspondence, the bargain, the transport and the delivery are all, but not exclusively, parts of that class of relations between mankind which the world calls "trade and commerce"."
See also R. v. Gates Ex parte: Medling (1928) 41 CLR 519 at 530 and Bank of New South Wales v. The Commonwealth
(1948) 76 CLR 1 at 381.
The words bear the same meaning in s.51(i) of the Constitution under which the Commonwealth Parliament is empowered to make laws with respect to "trade and commerce" with other countries and among the states - James v. The Commonwealth (1936) 55 CLR 1 at 60.
As is apparent from decisions on its use in the Trade Practices Act, that broad meaning applies to the term in the Act and specifically in s.52.
Its application in s.52 to the communication of information is beyond doubt - Larmer v. Power Machinery Pty Ltd (1977) 29 FLR 490.
In Wells v. John R. Lewis(International) Pty Ltd (1975) 25 FLR 194 at 205 the Full Court of the Australian Industrial Court adopted the words of Professor Anstey Wynes, in the fourth edition of his book Legislative Executive and Judicial Power in Australia where he wrote at 226 that the power to make laws with respect to trade and commerce among the States, "extends to every negotiation, contract, trade and dealing between persons which contemplates and causes such commerce whether it relates to goods persons or information."
In Glorie v. W.A. Chip and Pulp Co. Pty Ltd (1981) 39 ALR 67 at 75, the exhibition by a timber industry association of a film offering general information about the operation of the industry in the South West of Western Australia, was held to be conduct "in trade or commerce".
On one view a characterisation of an internal communication as conduct in trade or commerce is discernible in the recent decision of Wilcox J. in Patrick v. Steel Mains Pty Ltd (Unrep. Wilcox J. 8/7/87). There the applicants, employees of Steel Mains, claimed that they had been offered transfers to positions in a new plant operated by that company. The offer was said to have involved misleading and deceptive representations. Although the applications were dismissed, his Honour saw no reason to exclude such a case from the ambit of conduct "in trade or commerce" for the purposes of s.52.
At page 8 of his reasons, his Honour said:-
"I see no reason in principle to exclude cases such as this from the operation of s.52. In negotiating with employees, or prospective employees, about future employment a trading company acts "in trade or commerce". These are words of the widest import including all "The mutual communings, the negotiations, verbal and by correspondence, the bargain, the transport and the delivery."....A statement made in negotiations about employment is, in my opinion, capable of being conduct, in trade or commerce, that is misleading or deceptive or is likely to mislead or deceive."
The communication to shareholders was a step that had to be taken before Strategic could acquire the issued shares in AMF.
It was not suggested in argument, nor do I think it open to contend, that the acquisition proposed in this case was of a "one off" or isolated character that might take it out of the description "trade or commerce".
The fact that a sale of property by a corporation is a sale of a capital asset and perhaps its only capital asset, does not put such a sale beyond the category of "trade and commerce" - Bevanere v. Lubidineuse (1985) 59 ALR 334.
At 341 the Full Court said:-
"The appellant submitted that the expression "in trade or commerce" necessarily connoted a course of conduct as opposed to isolated and unusual or extraordinary conduct. The Ku-ring-gai case (22 ALR at 625) and Bank of New South Wales v. Commonwealth (1948) 76 CLR 1 at 284 and 381 were relied upon for this proposition. It was said in those cases that historically the use of the word "trade" was founded upon the elements of use, regularity and course of conduct. But that is not to say that a corporation must engage in multiple transactions of a similar kind for it to be engaged in trade or commerce. It was submitted that, whilst the appellant engaged in trade or commerce when conducting the beauty clinic, the sale of the clinic was not something done in trade or commerce because the sale terminated the appellant's ability to engage in trade or commerce. In our opinion, the making of the arrangements necessary to dispose of the clinic were part and parcel of the totality of the appellant's activities in trade or commerce.....It is not uncommon for a corporation to acquire and dispose of businesses during the course of its corporate life and we see no sound reason for excluding an obviously commercial transaction from a corporation's conduct in trade or commerce merely because the transaction is the sale of the corporation's principal, or sole, business undertaking."
A fortiori in the present case the conduct of Strategic in acquiring a significant asset was conduct in trade or commerce.
The antecedent communication so closely related and necessary to the acquisition was also, in my view, within the scope of conduct in "trade or commerce" for the purposes of s.52.
As between Orison and Strategic therefore, I find that the forwarding to Strategic's shareholders of the notice of extraordinary general meeting together with the explanatory memorandum and the report from Hendry Rae and Court was conduct "in trade or commerce" for the purposes of s.52 of the Trade Practices Act 1974.
Strike Out Motion by Cross and Swire-ThompsonCross and Swire-Thompson move to strike out the amended statement of claim on three bases as set out in their motion, the first of which is that the conduct in question was not that of Strategic, but of its secretary acting on instructions from the Board of Directors.
Their counsel relied upon the statement of agreed facts to the extent that it disclosed that the notice of the extraordinary general meeting was sent to the shareholders by the secretary of Strategic under instruction from its Board of Directors.
He submitted that the notice sent to shareholders was sent by one decision making organ of the company to another. It was not a notice issued by the company.
The internal workings of the company could not, he said, be separated from each other and independently characterised as conduct of the company.
In relation to the proposed acquisition of the shares in AMF the company could only effect the transaction with the approval of a general meeting of shareholders. Such was the effect of s.3J of the AASE Listing Requirements and s.12(g) of the Companies (Acquisition of Shares) (Western Australia) Code.
The effect of the provisions of s.240 and 241 of the Companies (Western Australia) Code was that a decision of such general meeting was the decision of the company. The Board had no power to make a decision to acquire the shares. Its decision to issue the notice was no more than a decision of the Board and could not be attributed to the company.
In reply counsel for Orison without objection, referred to the minutes of the directors' meeting held on 11 June 1986 which was annexed as document B to the statement of agreed facts between Strategic and Orison.
He referred in particular to resolution 8 in the minute which was:-
"The directors take all necessary action to achieve the above resolutions (2)-(7)."
Resolution (2) was the proposed special resolution.
The notice, it was said, was issued as an act of the company because it was issued pursuant to a resolution of the company.
According to the notice, the explanatory memorandum provided "all information required under Listing Requirement 3(j)3 (sic) of the Australian Associated Stock Exchanges and the Companies (Acquisition of Shares) (Western Australia) Code."
Section 3J(3)(a) of the Listing Requirements prohibits listed companies from acquiring assets where the value exceeds 5% of the total issued capital and reserves without the prior approval of the shareholders in general meeting.
Section 3J(3)(b) then provides:-
"Notice of any meeting of shareholders to approve any such acquisition or disposal is to be accompanied by copies of reports, valuations or other material from independent qualified persons sufficient to establish that the purchase or sale price of such assets is a fair price."
This does not expressly impose an obligation on anyone.
In context, against a prohibition imposed on the company in (a) it is arguable that the obligation created in (b) is also directed to the company.
This is reinforced by the provisions of 3J(1)(a) which require "a company" to supply to the Home Exchange copies of documents required to be issued by the company for the information of holders of any of the company's securities.
There is a duty on directors qua directors to keep shareholders properly informed in relation to proposed action by a company. That is a duty which on one view does not fall on the company:-
"...directors bona fide acting in the interests of the corporation and not bound to serve their own interests are entitled and bound to inform and guide the corporators in matters affecting the corporate interests." - per Buckley L.J. in Peel v. London and North Western Railway Company (1907) 1 Ch 5.
In Bulfin v. Bebarfalds Limited (1938) 38 SR (NSW) 4231, a preference shareholder instituted proceedings against a company and its directors in relation to a proposed reduction of the company's capital.
The action was based in part upon non disclosure and misrepresentation by the directors.
The judgment of Long Innes C.J. in Equity and the cases reviewed by him clearly established the existence of the duty on directors to properly inform shareholders in relation to proposed action of the company:-
"The duty to take care to make a sufficient statement of the material facts is particularly insistent where the individual interests of the directors purporting to discharge that duty are adverse, as in the present case, to those of the corporators whom they are advising."
There is therefore , in my opinion, some basis for the proposition that the conduct concerned was not that of the corporation but of the directors purporting to discharge a duty imposed on them by law and reflected in the Listing Requirements of the AASE.
There are constructional aspects of the Listing Requirements which may support the contention that the conduct in question was the discharge by the company of its obligations under those rules.
The operation of sub-s.84(2) of the Trade Practices Act was not canvassed before me. That sub-section provides:-
"84(2) Any conduct engaged in on behalf of a body corporate -
(a) by a director, servant or agent of the body corporate within the scope of the person's actual or apparent authority; or
(b) by any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, servant or agent,
shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate."
It may be that the limitation inherent in the words "on behalf of a body corporate" means that the sub-section does not advance the argument one way or the other. But its possible application was not the subject of any debate.
I note also that there have been two recent s.52 cases decided which have involved communications between a board of directors of a company and its shareholders and where it seems to have been assumed in the proceedings that the conduct of the board was conduct of the company.
In Bell Resources Ltd v. The Broken Hill Proprietary Company Ltd (1986) ATPR 40-702, Bell Resources had made a takeover offer for BHP. The Board of BHP issued to its shareholders a forecast of the company's profitibility for the year ended 31 May 1987.
Bell sued BHP, its chairman and its managing director, alleging that they had, in issuing the forecast, engaged in misleading or deceptive conduct contrary to s.52.
The application was dismissed by Smithers J. on the basis that there was no misleading or deceptive conduct. The question whether the conduct was that of the company does not appear to have arisen.
Another rather similar case was Industrial Equity Ltd v. North Broken Hill Holdings Ltd (1986) 64 ALR 292.
Industrial Equity Ltd ("IEL") had announced a partial takeover offer of North Broken Hill Holdings Ltd ("North"). It released a brochure entitled "The Demerger of North - The IEL Plan for the Future". North replied with newspaper advertisements which IEL and a shareholder in North, PSL, said were misleading or deceptive.
They commenced proceedings against North and some of its directors.
Burchett J. dismissed the application upon a motion for summary judgment holding that the advertisements in question were of a persuasive or argumentative character only.
Again, no point seems to have been taken that it was not North but its directors who were addressing shareholders through the advertisements.
A point was made that the shareholders were not relevantly consumers and for that reason the advertisements could not infringe s.52. That was a submission, however, which was rejected by His Honour.
In the event I am not persuaded by the argument so far that the characterisation of the conduct in question as that of Strategic is so untenable as to render the applicant's pleading unsustainable.
The pleading alleges that the conduct in question was that of Strategic. On the face of it the pleading discloses a cause of action. The directors' attack is based upon evidence partly derived from the statement of facts agreed between Strategic and Orison so that the preliminary issue might be determined.
In my opinion and for the above reasons, it would be wrong to dispose of the action summarily on this basis and before all relevant evidence is in.
The second limb of the motion relating to whether Strategic was "engaging in conduct" was not pursued.
As to the third limb attacking the relief sought by Orison in paragraph 5 of the application, it was in effect conceded by counsel for Orison that that claim should be struck out subject to leave to Orison to reamend its application , which leave I am prepared to give.
Security for CostsCross and Swire-Thompson also move for the following orders:-
1. That the Applicant do by 3 July 1987 give security in the sum of $20,000.00 for the payment to the Second Respondents of costs that may be awarded against the applicant in this proceeding.
2. Security be given by payment into Court of the sum of $20,000.00.
3. If the Applicant fails to comply with the order for security by 3 July 1987 the proceeding be thereupon stayed.
The dates proposed for payment were plainly academic when the motion was argued but the question for decision remains.
In support of the motion evidence was adduced to show that Orison is a company with an issued share capital of $3.00.
It has two shareholders, a Mr Peter Holmes a'Court of Mosman in Sydney with two ordinary shares and Mr Denis Devenish-Meares of Gulgong in New South Wales, with one share.
Mr Devenish-Meares is himself a director of Strategic and has 3,500 shares in that company.
A company of which he is a director, Northryrie Pty Ltd, is the holder of 360,000 shares in Strategic and 200,000 options exerciseable at 22c.
On 24 June 1987 the solicitors for Cross and Swire-Thompson asked the solicitors for Orison to provide a copy of their client's last balance sheet, but to no avail.
On 29 June the directors' solicitors wrote to Orison's solicitors seeking an indication of Orison's financial status.
On the same day they received a reply in the following terms:-
"The reason why details will not be provided in relation to Orison Pty Ltd (rather than cannot be provided) is:
(a) we have our client's instructions not to provide these details to you;
(b) we have advised our client that it is appropriate to defend the application for security of costs on the basis that your clients were dilatory in bringing such an application and your clients have an onus to make out a case for security for costs.
It appears to us that your present affidavit simply seeks to rely some inference (sic) that in our opinion cannot be drawn from the facts deposed to.
In addition, Mr Lewis has indicated to you that there is an argument that in litigation such as this the proper party to bear the costs of the application is the company, Strategic Minerals Corporation NL. Part of our submission will be that it is the company's obligation to indemnify parties as to costs."
Counsel for Orison submitted that there was no evidence before the court that Orison was impecunious and that there was no credible testimony grounding a reason to believe that his client would be unable to pay the costs of the respondents if unsuccessful. Counsel also claimed that there had been delay in bringing the application for security which should disentitle the directors to any such order.
As to that, these proceedings were instituted on 10 April 1987 and defences were filed on 7 and 8 May. Orison gave discovery of documents on 8 June and Strategic on 9 June. The directors gave discovery on 15 June.
The motion for security was filed on 23 June.
While Orison has incurred some costs since it instituted these proceedings, the delay in bringing the present application must be viewed against the likely overall cost and complexity of the case.
In my opinion, it has the potential to be an expensive and time consuming piece of litigation. There is a lot of money involved, reputations may be at stake, and there are issues of fact which will turn in part upon expert evidence relating to the valuation of AMF's assets.
I do not consider that the directors' application for security should be refused on account of delay in bringing it. In the context of the case as a whole, the delay was not, in my opinion, a significant one.
The sources of power to make the orders sought are to be found in s.56 of the Federal Court of Australia Act and s.533 of the Companies Code (WA) by way of s.79 of the Judiciary Act - Fencott and Associates Pty Ltd v. Eretta Pty Ltd (unrep. 31/3/87 French J.)
The power is conditioned by the existence of the requisite belief on the part of the Court and by some reason for that belief based on evidence.
In this case the evidence is that Orison is a $3.00 company. One of its directors and shareholders, who is a shareholder in his own right in Strategic, could have brought this application in his own name but has chosen not to do so. That choice may of course be based upon a number of factors.
More particularly, Orison having it within its power to show that it has the ability to meet a costs order has declined to do so for reasons which remain shrouded in mystery. It is significant that Orison has at no stage contended that it has the ability to pay the costs and has asserted through its solicitors that Strategic is the proper party to bear any order for costs.
I make no comment upon the latter assertion. However it seems to me that the evidence, including that of the applicant's reticence, gives reason to believe that it will be unable to pay the costs of the respondents if they be successful.
The condition for the exercise of the discretion being satisfied, it is necessary to consider whether any order should be made.
The exercise of the discretion is approached without any predisposition in favour of an order for security.
There are a number of factors to be considered which were set out in Bryan E. Fencott & Associates Pty Ltd v. Eretta Pty Ltd (supra):-
1. Whether an order will frustrate the applicant's claim.
2. The merits of the claim.
3. The cause of the applicant's impecuniosity.
4. Any delay in bringing the application for security.
There is no evidence to suggest that to make an order in this case will put the applicant in a position where it is unable to prosecute its claim.
The claim is plainly enough an arguable one, although it is not without difficulty on the threshold question of whether the conduct relied upon as the basis of the cause of action was in truth the conduct of the company.
There is no ground for concluding that the claim is brought other than bona fide, or that it does not have a reasonable prospect of success.
There is no suggestion that anything done by the respondents is responsible for any financial embarrassment facing Orison.
Orison has declined to make any disclosure of its financial standing. Apart therefore from the belief as to impecuniosity which that non-disclosure supports, I have been unable to draw any other inference in relation to the causes of it.
The question of delay has already been dealt with and cannot be regarded as significant in the particular circumstances of this case.
It should also be noted that there is no suggestion that those who stand behind Orison are impecunious. I am prepared to infer from the materials that Mr Devenish-Meares is a man of some means. He is described in the annual return as a chartered accountant and is the director of a company with a substantial shareholding in Strategic. He is also a shareholder in his own right in Strategic albeit his holding is modest.
Where the persons standing behind a company are financially able to provide security, then it has been said that generally speaking it is inappropriate to refuse an order - Yandil Holdings Pty Ltd v. Insurance Co. of North America (1985) 3 ACLC 542 at 545.
In the present case the words of Smithers J. in Tradestock Pty Ltd v. TNT (Management) Pty Ltd (1977) 14 ALR 52 at 59 seem apposite:-
"...indeed it is a major, if not a dominating, consideration in this case that the plaintiff company is but a legal entity without substance, a convenient financially bereft alter ego for the two shareholders. Its capital is minimal, its assets are not disclosed but the inference to be drawn is that they are minimal, and it is not shown that it has any business of substance. This is not the case of a company whose shareholders have committed capital and established a real business but finds itself currently without funds for some business reverse. This company would appear to be the type of legal entity, par excellence, which Parliament had in mind when it passed s.363(1)."
In my opinion, this is a proper case in which the applicant should be ordered to pay security for costs. I am prepared to reconsider that decision if the applicant is able to demonstrate that it will be able to pay the respondents' costs if they are successful in the action. I will allow liberty to apply for that purpose.
As to the question of security it must, in the words of s.533, be "sufficient".
In my opinion the figure of $20,000.00 advanced by Cross and Swire-Thompson and supported by a draft bill of costs is a reasonably conservative estimate in the circumstances.
I have no basis for forming the view that the case will collapse before trial. In my opinion, therefore, the appropriate figure is $20,000.00 and I will make an order on the motion accordingly.
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