Sheahan & SA Service Stations P/L v Verco & Hodge No. Scgrg-96-1303 Judgment No. S263

SHEAHAN and SA SERVICE STATIONS PTY LTD v VERCO and HODGE
[1999] SASC 263

Appeal from a Master

BLEBY J (ex tempore): This appeal arises in the course of an action by a company in liquidation against two of its former directors. The company was placed in liquidation on 8 July 1992. Mr John Sheahan was appointed liquidator by this Court. The defendant Verco became a director on 23 June 1990. The defendant Hodge became a director on 28 May 1991.
Paragraph 6 of the amended Statement of Claim alleges that throughout the whole of their respective directorships of the company the two defendants:
failed to hold or to attend any or any sufficient meeting or meetings of directors of the company, including any annual general meeting or meetings;
failed to make any formal or sufficient enquiry as to the company's financial fortunes;
failed to make any examination of the company's books;
failed to make any effort to verify information concerning the company provided to them from time to time by Mr Linke (another director);
failed to ensure that the company kept or maintained proper financial statements or records;
failed to seek even basic information as to the financial position of the company from time to time;
failed to insist upon any record of the entry by the company into contracts;
failed to insist upon any record of the use of the company seal;
put implicit trust in Mr Linke concerning the ongoing running and management of the affairs of the company; and

(10)failed to make any enquiry at all as to whether the company could pay all or any of its debts.

All of these allegations are denied by the defendants. They also plead there was no obligation to perform any of the acts allegedly omitted and that they reasonably relied on the actions of Mr Linke.
Paragraph 7 of the Statement of Claim alleges that in the circumstances referred to in paragraph 6 the defendants abrogated all of, and carried out none of, their responsibilities as directors of the company and thereby acted in breach of their duties to the company, including their duties under s.232(4)of the Corporations Law as it then stood. That subsection provided:
“(4).. An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties.'
Paragraph 8 alleges that from at least 23 June 1990 until the appointment of the liquidator the company was irretrievably insolvent and unable to pay its debts as and when they fell due, that it was continuing to incur debts which it was unable to pay, that it was unable to trade profitably and that it was continuing to incur trading losses. Particulars of those allegations are then set out. I need not go into the details. These allegations are also denied by the defence, at least such was the case before the appointment of receivers and managers of the company on 12 March 1992.
Paragraph 9 alleges that but for the failures and breaches referred to in paragraph 6 and paragraph 7 the defendants should have ascertained the facts alleged in paragraph 8, and should have taken steps available to them in consequence of that and to properly deal with the matters in question. Particulars are then given of steps they should have taken in order to deal with those matters. The allegations in paragraph 9 are denied by the defendants and they further allege that nothing which they could have, or should have ascertained in respect of the allegations in paragraph 8 would or should have caused the defendants to take any of the steps alleged in paragraph 9 of the Statement of Claim.
By paragraph 10 of the Statement of Claim it is alleged that the failure amounted to a breach of the directors’ duty of care, including that imposed on them by s232(4) of the Corporations Law. It is further alleged that but for the breaches of duty the company would have been wound up or would have entered some other form of external administration, and losses would not have been incurred. That allegation is also denied by the defence.
The defendants further deny that the company suffered any loss or damage that was caused by either of the two defendants or that was claimable from the two defendants, and allege that they are entitled to a set-off which exceeds the amount of the claim against them.
On 9 March 1999 the defendants filed by way of substitution for an earlier application an application for order in the following terms:
“That the following legal questions be disposed of before the matter proceeds to trial:
(1)... That ‘Trading losses’ are not loss or damage within the meaning of Section 232(8) of the Corporations Law.
(2) If ‘trading losses’ are loss or damage within the meaning of Section 232(8) of the Corporations Law, then on the pleadings there is no nexus between that loss or damage and any act or omission by either Verco or Hodge which caused such loss or damage.
(3)... Neither of the plaintiffs have suffered any loss or damage claimable from the first or second defendants.
(4) If Verco and Hodge would otherwise be liable to Sheahan or the company then the contributions totalling $325,000 made by the defendants are capable in equity and at common law of being set off against any loss or damage that the company can claim against the defendants pursuant to Section 232(8) of the Corporations Law.”
The application was brought pursuant to rule 75.02(c) of the Supreme Court Rules. That rule relevantly reads as follows:
“75.02...... Subject to the preceding subrules, the Court may at any time or from time to time in any proceeding, order:
......
(c).... that any point or points of law arising on the pleadings be disposed of before proceeding to trial of the facts.”
On 15 March 1999, a Master decided that the matters raised by the defendants’ application are not capable of resolution by determination under rule 75.02(c) of the Supreme Court Rules. The master dismissed the defendants’ application with costs. The defendants now appeal against that order.
I am prepared to accept for present purposes, without deciding, that a point of law decided under rule 75.02(c) need not be decisive of the whole action. However, it is important to note that the only point of law which can be disposed of in this manner is a point of law “arising on the pleadings”. The most obvious case for the use of this rule would be where the factual allegations contained in the pleadings are admitted and a question arises whether as a matter of law those admitted facts, for example, give rise to a cause of action, or where the necessary facts relevant to the determination of the point of law are otherwise agreed. The court will not deal with a merely hypothetical point of law. It must arise on the facts of the case: Rogers v Baillieu Bullock Wilkinson Pty Ltd (1981) 28 SASR 594.
On the pleadings as they stand at present, there is a denial that the defendants have done anything that is said to give rise to the right to recover the alleged loss, a denial that whatever they did or did not do constituted a breach of their duties to the company, a denial that the company was at any material time insolvent and unable to pay its debts as and when they fell due, a denial that the company continued at the relevant time to incur any trading losses, a denial that the company has suffered any loss and damage, a denial in the alternative that the company has suffered any loss caused by the defendants or either of them, and a denial in the further alternative that any loss or damage is claimable against the defendants. In the light of all those denials of fact, there are obviously many factual issues arising between the parties before any questions of law can even begin to be considered, let alone resolved. Any one of those denials, if successful, may render the questions of law now sought to be answered quite theoretical.
This court has made it quite clear that it will not answer hypothetical questions not based on firm factual foundations: WorkCover Corporation v The Broken Hill Proprietary Company Limited and Jagermann v WorkCover Corporation (1999) SASC 194. See also Bass v Permanent Trustee Company Limited (1999) HCA 9, especially at [56].
In my opinion, before the power available under rule 75.02(c) can be invoked, there must at least be some indication from the pleadings that the answer to the question of law will go some way, if not all the way, to resolving the proceedings. At this stage, the question of law cannot be related to any facts. The answers will be entirely hypothetical. If they were to be answered, there is no guarantee that the answer would resolve anything, as a resolution of the factual issues may not even raise the question of law. In any event, the questions raised relate to the specific terms used in the Statement of Claim and the relation of them to the words used in s232(8) of the Corporations Law. The plaintiffs’ claim is not limited to liability under s232. It is framed in such a way as to include a claim for damages for breach of duty of care at common law. There may or may not be any difference between the two but to answer the questions posed may well, for that reason alone, render the preliminary resolution of the questions a pointless exercise. It cannot be said that the determination of the questions will go any way to resolving the ultimate issues in the case.
There is yet one further and perhaps more important reason why the questions should not now be answered. If the plaintiff is to succeed under s232, it must establish that if trading losses were incurred by the company they constituted loss and damage “as a result of” the alleged contravention (s232(8)). That immediately gives rise to the need to resolve disputed questions of causation. Whether an auditor’s breach of duty or breach of contract gives rise to trading losses may be one question. It was held not to in Galoo Ltd v Bright Grahame Murray (1994) 1 WLR 1360. A similar conclusion was reached in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310. It will be a very different question as to whether a director’s breach of duty gives rise to trading losses, a question which will have to be determined on the facts as they are either agreed, which they are not in this case, or as they are revealed in the evidence.
To the extent that it is pleaded by the defence in clause 16D of the Statement of Claim that any loss is suffered by the unpaid creditors and not the company, and that that question of law should be resolved in favour of the defendants, it does not follow that although the unpaid creditors have suffered loss, the company has not. The company has still incurred obligations to creditors by trading. The extent of the losses incurred by creditors will depend on a great many matters relating to the administration of the company, not only the alleged conduct in question of the directors. To the extent, if at all, that the losses incurred by the company are recouped from the defendants, the losses incurred by the creditors will be diminished or possibly extinguished. It is not only the unpaid creditors who might stand to benefit from a successful action but also in some circumstances the shareholders. The rule in Foss v Harbottle (1843) 22 Hare 461; 67 ER 189, will in most cases preclude shareholders from suing.
Finally, to the extent that the defendants claim a set‑off which equals or exceeds the amount of the plaintiff’s claim against them, the entitlement to set‑off is denied and the amounts paid to the company by the respective defendants is in dispute, as appears from the Reply in paragraph 14. It is inappropriate that that issue should be determined on the pleadings.
It might be said that paragraph 16C of the amended Defence, which pleads that the company has not suffered any loss and/or damage claimable from the defendants, is a plea by way of demurrer. Although the plea is not in such terms, a demurrer was a form of pleading by which a party objected that his opponent’s pleading disclosed no cause of action, or ground of defence, as the case might be. When pleaded the question was forthwith set down as of right for argument and decision.
The pleading by way of demurrer was abolished by Order 25, Rule 1, of the Supreme Court Rules 1947. Rule 1.11 of the present Supreme Court Rules provides:
“1.11......... No Order or Rule or practice annulled by the 1947 Rules, or any former Rules, shall be revived by any of these rules, unless expressly so declared.”

Whilst rule 75.02 may allow, by way of exercise of a discretion by the court, a procedure akin to the former demurrer, it does not allow that procedure to be followed as of course.

It is for the court to decide whether, on the totality of the pleadings, the question of law which is said to arise on the pleadings will be determined. That discretion was exercised by the Master in the way in which I have described. The Court will not generally allow that to occur where, as here, there are wide ranging factual issues to be determined, some of which will, if determined in a certain way, not even give rise to the question of law which the defendants wish to agitate.
The defendants’ appeal from the decision of the Master is dismissed.
The formal order of the court will be:
Appeal dismissed;
The defendants are to pay the plaintiff’s costs of the appeal to be taxed.

[1999] SASC 263

21 May 1999