Satna Holdings Pty Ltd v Jokade Pty Ltd
[1984] FCA 308
•03 OCTOBER 1984
Re: SATNA HOLDINGS PTY. LIMITED
And: JOKADE PTY. LIMITED; GARY OWEN CROCKETT; COUNCIL OF THE CITY OF THE BLUE
MOUNTAINS AND EDWARD McGUCKIN
No. NSW G.102 of 1984
Trade Practices Act 1974
(1985) ATPR para 40 - 529
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
St. John J.
CATCHWORDS
Trade Practices Act 1974 - motion to strike out Statement of Claim as no reasonable cause of action disclosed - contract to purchase and sell hotel premises - applicant to proceedings a "shelf company" - meaning of "in trade or commerce" - relevance of objects in memorandum of association when "activities test" fails Fencott and Ors. v. Muller and Anor. (1983) 57 A.L.J.R. 317 - application for security for costs - width of discretion Caruso Australia Pty. Limited v. Portec (Australia) Pty. Limited (unreported Toohey, J. 30 March 1984).
HEARING
SYDNEY
#DATE 3:10:1984
ORDER
The application by the first and second respondents
to strike out the Statement of Claim is dismissed.
The first and second respondents to pay the costs of
the applicant.
The applicant is to provide security for costs of the
first and second respondents in the sum of three thousand dollars ($3,000) and three thousand dollars
($3,000) in respect of the third respondent's costs; both sums payable at least twenty-eight (28) days before the date fixed for hearing.
The costs of the motion for security of costs are
reserved.
JUDGE1
There are two motions before me. I will deal first with the motion to strike out the Statement of Claim on the grounds that no resonable cause of action is disclosed therein. In that pleading, the applicant, Satna Holdings Pty. Limited ("Satna") seeks damages pursuant to S.82 of the Trade Practices Act 1974 ("the Act") for alleged breach of S.52 of that Act and also for the common law causes of action of deceit and negligent misrepresentation. The substance of the alleged breach of S.52 is that the first respondent, Jokade Pty. Limited ("Jokade"), by its agent Gary Owen Crockett ("Crockett"), engaged in misleading conduct by failing to fully disclose a report of the Board of Fire Commissioners relating to the hotel premises which Satna entered into a contract to purchase from Jockade. It is agreed by counsel that the Statement of Claim should be read as if it was alleged that the misleading conduct was "in trade or commerce".2. In support of the application, Mr. Young of Queens Counsel for Jokade and Crockett, has submitted that the sale of the hotel premises was not, on the evidence, as to which there is no dispute, in trade or commerce for a number of reasons.
3. The facts that he relies upon are that Satna was a "shelf company" which, so far as trading was concerned, entered into a contract to purchase the California Hotel at Katoomba for seven hundred thousand dollars ($700,000). A deposit of fifty thousand dollars ($50,000) was paid pursuant to that contract but before completion, that contract was terminated and Satna removed from possession after another company had run the hotel business for some months. Jokade, the vendor company, ran the hotel business on the subject premises, it originally having been a "shelf company" and of which the memorandum of association contained objects of great width and included the purchase and sale of real estate.
4. Jokade contends that, because its only dealing in land was the contract to purchase and sell to Satna the hotel premises, that contract could not be regarded as being "in trade or commerce" within the meaning of S.52 of the Act.
5. Mr. Young reminded me that, in Westham Dredging Company Pty. Limited v. Woodside Petroleum Development Pty. Limited (1983) 46 ALR 287, I had expressed the view that that phrase "in trade or commerce" imported some continuity of activity and he referred to other authorities in which similar expressions had been made. The case cited, of course, was decided before Fencott and Ors. v. Muller and Anor. (1983) 57 ALJR 317 where, on appeal from a decision of Toohey, J. of this court, the Full High Court of Australia considered the meaning of "trading corporation" in S.51(XX) of the Constitution and as defined by S.4 of the Act. In the majority judgment, Mason, Murphy, Brennan and Deane JJ. at p. 328 considered the character of one of the parties designated Oakland. Their Honours firstly expressed the opinion that the "activities test" adopted by the majority of that court in Reg. v. Federal Court of Australia: Ex parte W. A. National Football League (Adamson's Case) (1979) 143 CLR 190 did not by itself establish that Oakland was a trading or financial corporation. Their Honours went on:-
"The activities in which Oakland had engaged were limited to suing for the balance of the purchase price and negotiating with the unpaid trade creditors of the business. Prior to the sale of the business to Mr. Muller, Oakland was a "shelf company", awaiting acquisition by owners who might cause it to engage in activities of their choosing. When it became trustee of the O'Connors Unit Trust it came under the control of Mr. and Mrs. Fencott and their accountant. Mr. Fencott described in evidence the functions Oakland was to perform: to receive the balance of the purchase price, to pay off creditors and to distribute any surplus to the unit holders of O'Connors Unit Trust. No decision had been made as to its engaging in any further activity."
After setting out some other details of the facts before the High Court, their Honours went on, at p. 328:-
"It follows that Oakland has not engaged in trading activities. Nor has it engaged in any financial activity, for it has not hitherto engaged in any financial transactions. And so the question arises whether a corporation with objects and powers appropriate for a trading or financial corporation can bear that character before it engaged in any trading or financial activity. That question did not arise for consideration in Adamson's Case. The majority judgments in that case which held that the established activities of the football league concluded its character as a trading corporation did not suggest that trading activities are the sole criterion of character. Absent those activities, the character of a corporation must be found in other indicia. While its constitution will never be completely irrelevant, it is in a case such as the present where a corporation has not begun, or has barely begun, to carry on business that its constitution, including its objects, assumes particular significance as a guide (see State Superannuation Board v. Trade Practices Commission (1982), 44 ALR 1 at p 15). Oakland's memorandum and articles of association reveal that the objects for which it was established include engaging in financial activities and carrying on a large variety of businesses, though it lay dormant -- "on the shelf" -- after its incorporation. In the circumstances of the present case, there is no better guide to its character than its constitution and its constitution establishes its character as a trading or financial corporation. It is immaterial whether it is a trading corporation or a financial corporation or which of those characters its future activities may give it."
Mr. Rolfe of Queens Counsel for Satna relies strongly upon this quotation to argue that Jokade's memorandum of association places it in the category of a trading corporation and further as characterising the contract to sell the hotel premises as being "in trade or commerce".
Mr. Young also sought to rely upon an analogy with the distinction between capital and revenue concepts in taxation law, quoting a United States of America case which likened that concept to the distinction between the fruit and the tree which bore it.
That the phrase "trade or commerce" in the context of the Act is elusive of comprehensive definition need not be repeated. As to the status of the company's memorandum in determining the question, Mr. Young submitted that objects enumerated therein have no relevance and, until a course of similar dealing is undertaken, those objects are to be regarded only as options to be exercised. The result of acceptance of this proposition would be that the first dealing, and perhaps the second and third dealings, by a company would not be caught by the relevant provisions of the Trade Practices Act, but the fourth and subsequent such dealings would be. If this view were accepted, the formation of a new company for each transaction could be used to avoid the provisions of the Act in many circumstances. It seems to me that when the High Court in Fencott v. Muller (supra) stated that "...there is no better guide to its character than its constitution and its constitution establishes its character as a trading or financial corporation.", their Honours were in effect saying, by use of the word "character", that activity pursuant to that character in the case of a trading corporation would be "in trade or commerce". Except for charitable purposes, corporations are not formed except in rare instances other than for the purpose of trading in some manner and the first exercise of any of its objects should, in my view, be regarded as being in trade or commerce.
I would therefore dismiss the application to strike out the Statement of Claim with costs.
I proceed now to the application for security of costs which is made by the first, second and third respondents.
Satna concedes that it is impecunious, but at my suggestion, the means of the two persons who would be likely to benefit from the successful pursuit of the action, namely Paul Barry Freeman and Linda Margaret Freeman, were investigated, but not satisfactorily so because cross-examination revealed that Mrs. Freeman had an interest in her father's property, probably contingent on his death, details of which she was unable to provide.
Both counsel properly emphasised the width of discretion in ordering security of costs and referred me to the relevant authorities, many of which are collected by Toohey, J. in Caruso Australia Pty. Limited v. Portec (Australia) Pty. Limited (unreported 30 March 1984). Mr. Rolfe relied upon a number of significant admissions (to allegations) made in the Statement of Defence of Jokade and Crockett to emphasize that Satna's case was not lacking in substance. It is unnecessary for me to set them out in detail, but I refer to one such allegation in paragraph 18 where Satna alleged that Jokade and Crockett "were at all material times in the possession of a report dated 14th January, 1980, by the Board of Fire Commissioners addressed to the Third Respondent which recommended large and extensive alterations and additions to the said Hotel for the purpose of fire prevention and prevention of fire hazards." By paragraph 12 of the Defence, Jokade and Crockett admitted that at all material times they were in possession of the relevant document, but go on to allege that they did not consider or believe that the letter reflected the requirements in relation to the hotel of the third respondent or of the Board of Fire Commissioners. I agree with the submission that such an admission adds strength to Satna's case and that should be reflected in any order for security of costs.
Having regard to the impecuniosity of Satna, the financial position of Mr. and Mrs. Freeman and the other considerations which I am bound to take into account, I propose to order that Satna, the applicant, provide security for the costs of the first and second respondents in the sum of three thousand dollars ($3,000) and three thousand dollars ($3,000) in respect of the third respondent's costs, both sums payable at least twenty-eight (28) days before the date fixed for hearing.
0