Pitcairn Investments P/L & Anor. v Birwick March P/L

[1993] FCA 183

Re: PITCAIRN INVESTMENTS PTY LTD and JOHN EDWARD LOCAL
And: BIRWICK MARCH PTY LTD and ANTHONY STANLEY MARWICK
No. WAG210 of 1992
FED No. 183
Number of pages - 16
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J(1)

CATCHWORDS

Practice and Procedure - pleadings - misleading or deceptive conduct - claim by shareholder for diminution in value of shares - shares acquired in company - reliance upon misrepresentations - misrepresentations relating to business to be acquired by company - rule in Foss v. Harbottle applies - representations as to future matters - inadequacy of pleading.

Foss v. Harbottle (1843) 2 Hare 461

Wallersteiner v. Moir (No. 2) (1975) QB 373

Prudential Assurance Co. Ltd v. Newman Industries Ltd and Others (No. 2) (1982) Ch 204

Gould v. Vaggelas (1983-1985) 157 CLR 215

Scarel Pty Ltd v. City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344

HEARING

PERTH, 24 March 1993

#DATE 2:4:1993

Counsel for the Applicant : Mr S.G. Leslie

Solicitors for the Applicant : Phillips Fox

Counsel for the Respondent : Mr W. Martin and Mr D. Bishop

Solicitors for the Respondent: Clayton Utz

ORDER

The Court orders that:

On the Respondents' notice of motion filed 8 January 1993:

1. The proposed amendments to the statement of claim not be allowed.

2. The applicants have leave on or before 16 April 1993 to file and serve a statement of claim amended in accordance with these reasons.

3. The costs of the motion be the respondents in the proceedings.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

FRENCH J In these proceedings, which were instituted on 16 December 1992, Pitcairn Investments Pty Ltd and John Local, one of its directors, claim damages against Birwick March Pty Ltd and one of its directors, Anthony Marwick. By a motion filed on 8 January 1993 the respondents seek an order that the statement of claim be struck out as disclosing no reasonable cause of action or having a tendency to cause prejudice, embarrassment or delay. Abuse of process is also invoked. On 11 January, Registrar Rayney gave directions for the filing of written submissions in relation to the motion which eventually came on for hearing on 24 March 1993. In the meantime on 18 March 1993, a minute of proposed amended statement of claim was filed with a view to covering some of Birwick's objections. Argument proceeded on the motion in relation to the proposed amended pleading.

The Proposed Amended Statement of Claim
2. Pitcairn alleges that Birwick carried on the business of the design, development, manufacture and sale of products described as Solar Systems and Non Solar Products in Australia and elsewhere. "Solar Systems" are defined to mean solar manufacturing systems and solar hot water units developed by Birwick using intellectual property and know-how (called "the Technology") developed by it for the manufacture and supply of such products. "Non Solar Products" is a reference to such things as chemical tanks, water tanks, insulated boxes and other like products developed by Birwick using a rotational moulding manufacturing process and applying its intellectual property and know-how.

1. In November and December 1991 certain representations are said to have been made to Local in the course of negotiations which led to Pitcairn acquiring an interest in Birwick's business. The representations related to a variety of matters to do with the business including projected sales from Non Solar Products and solar hot water units, the projected net profit from the business in the first year of operation following acquisition, the sufficiency of an annual advertising budget of $6,000 to maintain the business at an appropriate sales level, the test marketing and readiness of the solar hot water system units for commercial release in Australia and the readiness with which the business could be franchised throughout Australia. Other representations related to the reasons for the lack of success of previous attempts to promote and develop the sale of the solar hot water system units in Western Australia through other parties, the cancellation of an agreement with a business called Swan Blinds to sell solar hot water units in Western Australia, the commercial advantage of Birwick's business over that of its competitors because of the differential in the retail price of the solar hot water units and the on-selling of licence agreements in the Australasian region. Further representations related to in-roads allegedly already made into markets in the Australasian region, the automated nature of the manufacturing process for the solar hot water units, the existence of a contract between Birwick and the West Australian Egg Marketing Board to supply it with plastic crates and the annual rent and rates payable for the lease of the premises from which the business was conducted. It is also alleged that it was represented that the business was able to immediately provide a monthly remuneration of $4,750 for a general manager and return a profit of about $300,000 per annum. The claim was allegedly made that the business enjoyed the services of two top class coppersmiths and, according to Birwick's broker, was the best business he had ever sold. It is also said to have been represented that all accounts, dates and information relating to the trading history of the business provided by Birwick had been provided with all due diligence and were not misleading in any way.

2. Various particulars of the representations are set out which indicate that certain of them were made orally by Birwick's agent, Ross Goldstein, and certain of them by Mr Marwick. Some elements of some of the representations are said to have been made in writing. Each of the representations is said to have been made in trade or commerce and with the intent that Pitcairn and Local should rely upon them and with a view to inducing Pitcairn and Local to enter into the contract for the acquisition of Birwick's business.

3. Pitcairn and Local contend that they entered into an agreement with Birwick on or about 28 November 1991 under which Pitcairn would purchase shares in a company (the vehicle company) to be acquired by itself, Local, Birwick and Marwick. Pitcairn would have a 75% shareholding at a cost of $150,000. Birwick would have a 25% shareholding at a cost of $50,000. It was also a term of the alleged agreement that Birwick would enter into a written licensing agreement with the vehicle company under which it would licence to it the Technology and marketing rights in Australasia for a term of two years and a fee of $200,000. Birwick would also rent to the vehicle company for two years all the property of the business other than the technology. There would be a written option agreement under which the vehicle company would have an option to purchase from Birwick all the property of the business other than the Technology. Marwick would be General Manager of the vehicle company. An agreement between Pitcairn and Local on the one hand and Birwick on the other under which terms and conditions of Marwick's employment as General Manager of the vehicle company were agreed, is also pleaded.

4. Pitcairn and Birwick acquired the vehicle company which became Advanced Rotomoulding Technology Pty Ltd. Pitcairn says that on or about 7 February 1992 it paid $150,000 to Advanced Rotomoulding for seventy five shares and advanced it a loan of $45,000. Local became a director and secretary and the general manager of Advanced Rotomoulding and entered into a management agreement with the company. He caused and allowed Advanced Rotomoulding to execute various agreements, particulars of which will be provided after discovery. It is said to have been an express written term of the agreement that Birwick warranted and alternatively represented that its technology had been sufficiently tested and developed to be ready and suitable for commercial sale and that the Solar Systems and Non Solar Products complied with stated warranty conditions. The representations earlier pleaded and that embodied in the warranty are each said to have been false, misleading or deceptive, or likely to mislead or deceive, and each made fraudulently. The various facts apparently relied upon to falsify the representations are then set out by way of particulars. It is said that insofar as the representations were representations as to future matters, they were made without reasonable grounds for making them.

5. By reason of the alleged misrepresentations characterised alternatively as fraud and misleading or deceptive conduct, Pitcairn and Local say they have each suffered loss and damage. That is particularised as follows:
   

1. The fact that the business is worth less than was represented.

2. That Pitcairn and Local entered into the agreement and paid Advanced Rotomoulding money where they would not otherwise have entered into the agreements or made the payments. Further they claim to have incurred $6,357.50 by way of financing costs.

Further and alternatively, it is said that to the knowledge of Birwick and Marwick the solar hot water units had a poor reputation in the Australian and Western Australian markets, there were many ongoing complaints from people who had purchased the units through Swan Blinds and Advanced Rotomoulding would be required to attend to the complaints by existing customers of Birwick and Swan Blinds at the expense of Advanced Rotomoulding. The design deficiencies and limitations of the solar hot water units are then referred to. It is said that the knowledge of Birwick and Marwick of these matters and the acceptance by Pitcairn with the knowledge of Marwick of the warranty referred to earlier was conduct giving rise to an obligation to make disclosure to Pitcairn and Local. Birwick and Marwick are said to have failed to make the necessary disclosures and in so doing to have engaged in conduct that was misleading or deceptive or likely to mislead or deceive. Pitcairn and Local say they were in fact misled and deceived. Marwick is therefore said to have engaged in misleading and deceptive conduct and to have been directly or indirectly knowingly concerned in the contravention of s.52 of the Trade Practices Act 1974 by Birwick.

1. In the particulars of loss or damage, Pitcairn and Local say:
   

"19.1 (Pitcairn) sold its shares in Advanced Rotomoulding to (Birwick) for $75.00; 19.2 (Pitcairn) recovered from Advanced Rotomoulding the sum of $45,000 advanced to Advanced Rotomoulding by way of loan; 19.3 (Local) received from Advanced Rotomoulding by way of management fee the sum of $35,000 of which $21,375 has been allocated to (Local) and the balance of $13,625 has been credited to (Pitcairn)."

The only claim for relief is that made on behalf of Pitcairn, namely damages in the amount of $142,657.50 together with interest and costs.

Criticisms of the Proposed Amended Statement of Claim
1. The Incidence of the Loss
9. The first point that is made on behalf of the respondents is that while Pitcairn and Local claim damages arising from the acquisition of the Birwick business, neither of them acquired the business. It was Advanced Rotomoulding Pty Ltd which did that. A shareholder, it was said, cannot ignore the corporate veil and assert a claim for damage suffered by a company in which he has shares merely because the suffering of that damage has had an adverse effect upon their value. And if the shares were acquired by way of allotment for cash, then the cash reserves would have been reflected in the value of the shares acquired. In reply, Pitcairn says that the claim is not for damages suffered by the company. The damages sought are said to be "the difference between the purchase price of the shares and the proceeds of sale of the shares - their value".

1. The proposition advanced for the respondent invokes the logic of the general principle that underlies the rule in Foss v. Harbottle (1843) 2 Hare 461. The rule itself is stated thus:
   

"It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors and shareholders, and with its own property rights and interests to which it alone is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v. Harbottle (1843) 2 Hare 461." - Wallersteiner v. Moir (No. 2) (1975) QB 373 at 390 per Lord Denning MR

The general principle which underlies the rule was enunciated by the Court of Appeal in Prudential Assurance Co. Ltd v. Newman Industries Ltd and Others (No. 2) (1982) Ch 204 at 210:

"... A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C."

In that case, Prudential sued, inter alia, in its personal capacity as a shareholder of Newman Industries. The Court of Appeal said at 222-223:

"In our judgment the personal claim is misconceived... what he (i.e., a shareholder) cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a "loss" is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only "loss" is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company."

The above passage was cited with approval by Wilson J in Gould v. Vaggelas (1983-1985) 157 CLR 215 at 245. Dawson J in his dissenting judgment at 269 pointed out that when a company suffers loss by the deceit of another that loss gives rise to a good cause of action which if pursued to judgment would allow recovery. Shareholders in the company would be entitled to the benefit of the company's assets which must be taken to have included the cause of action in deceit. Upon that basis, their investment of the company would cause them no loss.

1. The application of the rule in Foss v. Harbottle in a case involving a claim for damages under s.82 of the Trade Practices Act was considered by Gummow J in Scarel Pty Ltd v. City Loan and Credit Corporation Pty Ltd (1988) 17 FCR 344. There the applicant company was wound up and its liquidator declined to continue with the action. His Honour proceeded upon the assumption that the rule applied in the case of an action under s.82. He dismissed the application by a shareholder to take over the conduct of the claim on the ground that, upon the winding up of the company, the carriage of its claims was brought within the control of the supervising court (at 352). The premise upon which his Honour proceeded does not involve cutting down the operation of s.82 by reference to the common law. For the wide principle underlying the rule in Foss v. Harbottle is a rule of logic and causation. In the circumstances to which it applies, where there is a wrong done to the company which causes it to suffer loss, the asset backing of the shares will include the cause of action in respect of the wrong. Having said that however, the statement of claim as presently framed does not appear to depend upon a wrong done to the company. The company is said to have been established and shares in it acquired by Pitcairn upon the basis of the representations made by the respondents to Pitcairn and Local. Unlike the situation contemplated by the rule in Foss v. Harbottle it is not a case of a wrong done to the company. In my opinion the position is best assessed in the light of all the evidence and it would be dangerous to either strike out the existing statement of claim or refuse the amended statement of claim on the basis of the argument advanced by the respondents.

2. Specific Criticisms
   12. I do not propose to traverse all of the specific criticisms made of various of the paragraphs in the proposed amended statement of claim. I will merely state my conclusions in respect of them.

3. There is no merit in the criticism of para.3.1. The term "solar manufacturing system" in para.3.2 can be elaborated in particulars. It has no significant role to play in the definition of the cause of action. As to para.5, Pitcairn's interest in Birwick's business is clearly, in context, a reference to its shareholding in Advanced Rotomoulding Pty Ltd. I do not accept that the reference to its interest is imprecise. There are various terms used in paras.5.1 to 5.14 inclusive as part of the content of alleged representations which terms, it is said, require further definition. In my opinion the pleading is clear enough. The terms being part of the content of alleged representations, it is not for the pleader to define them unless it is desired to indicate that they conveyed some particular sense. Their meaning and whether they are falsified by what are said to be the true facts is a question of fact for determination at trial. There are various particulars of para.5 which are said to be material facts which should have been pleaded as such. The material facts in para.5 do not say by or on whose behalf the representations there alleged were made. In this respect that paragraph is defective. The identity of the representor, whether natural person or body corporate, should be spelt out. If all representations are to be attributed to a corporation then that may be pleaded as fact and particularised. I do not accept the submission that the particulars are otherwise confusing or embarrassing.

4. Paragraph 6 should identify the repository of the alleged intent in each case, if necessary by reference to the representors properly identified (as material facts) in para.5. Paragraph 7 appears to be a rather infelicitous way of trying to say either that Local was Pitcairn's agent or that Pitcairn was Local's agent. I agree that the attempt fails on either view. The paragraph in its present form is embarrassing.

5. Paragraph 9.1 alleges entry by Pitcairn and Local into an agreement with Birwick on or about 28 November 1991. The terms of the agreement are set out. The particulars refer to an oral agreement between Local, on behalf of himself and Pitcairn on the one hand, and Marwick and a man called Birch on behalf of Birwick on the other hand. The written part of the agreement is constituted, inter alia, by "a letter from (Birwick) dated 2 December 1991". That particular cannot stand in support of an agreement made on 28 November 1991. Nor can particular 9.2.2(a). This says of the oral part of a management agreement between the applicants and Birwick for the employment of Local as general manager of the vehicle company:
   

"(a) insofar as the agreement was oral it was constituted by an oral agreement between

(Birwick) and (Local)."

1. The various objections to para.10 can be overcome by a request for particulars if that is really thought to be necessary in this case. Paragraph 11 pleads the falsity of the various representations and sets out the falsifying facts by way of particulars. I agree that the falsifying facts are material facts and should be pleaded as such. The question whether they do falsify the representations can be debated at trial when the evidence is in. I do not accept that further definition of terms used in this part of the pleading is necessary.

1. I accept the objection which is made to para.12. That paragraph reads:
   

"Insofar as the representations pleaded in paragraphs 5.1, 5.2, 5.3, 5.9, 5.10, 5.12 and 5.14 were representations to a future matter the representations were made by the Respondents without reasonable grounds for making the representations."

If the representations are said to be representations as to future matters, that can be pleaded. If there are some implied representations associated with any of them which are in that category, they can be so pleaded. The pleading in its present form does not make clear what representations are said to be representations as to future matters. Paragraph 12 in this form is embarrassing.

1. As to para. 13, which purports to set out the damages suffered by Pitcairn and Local, the first particular is that "the business is worth less than was represented". There is no pleaded representation as to the value of the business. Nor is it clear how the difference between represented and actual value can form part of the measure of damage under s.82 of the Trade Practices Act or in deceit. That head has the character of a loss of bargain claimed on a contractual measure of damage. Although a contractual term is pleaded at para.10, it is not clear that a breach of that term is alleged. The other principal element of loss is said to arise by reason of the fact that Pitcairn and Local entered into the agreement and paid Advanced Rotomoulding Pty Ltd monies where they would not otherwise have entered into the agreements or made the payments. Just how this links up with the claim for relief at the end of the statement of claim is not apparent. Unless this paragraph can be shown to have a relationship to the relief actually claimed it should not stand.

2. I do not accept the objection to para.14. The plea in paragraph 15 is somewhat opaque, but seems to be a plea turning partly on questions of law. To that extent it is not necessary but despite it infelicity of expression it can stand. The remaining paragraphs of the proposed amended statement of claim in my opinion can stand although the way in which the sum of $142,657.50 referred to in para.20 is made up should be specified.

CONCLUSION
20. On the respondents' notice of motion filed 8 January 1993, which sought to strike out the preceding statement of claim and was met by the proposed amended statement of claim, I will order that the amendment not be allowed but the applicants have leave to file and serve a statement of claim amended in accordance with these reasons.