Sons of Gwalia Ltd v Margaretic

[2006] HCATrans 431

[2006] HCATrans 431

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S208 of 2006

B e t w e e n -

SONS OF GWALIA LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Appellant

and

LUKA MARGARETIC

First Respondent

ING INVESTMENT MANAGEMENT LLC

Second Respondent

Office of the Registry
  Sydney  No S209 of 2006

B e t w e e n -

ING INVESTMENT MANAGEMENT LLC

Appellant

and

LUKA MARGARETIC

First Respondent

SONS OF GWALIA LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Second Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON TUESDAY, 8 AUGUST 2006, AT 10.01 AM

(Continued from 7/8/06)

Copyright in the High Court of Australia

__________________

GLEESON CJ:   Yes, Mr Walker.

MR WALKER:   I have two final points to make, your Honours.  The first is in relation to the reasons given at first instance in Soden [1995] BCC 531. Your Honours will find the description of the two actions in question in what his Lordship described as the good deal of litigation involved at page 532 between

F and H.  I draw to attention in particular what is called the main action in which British & Commonwealth were suing Atlantic for damages for negligent misrepresentations said to have been made, et cetera, “so as to induce B & C to acquire Atlantic’s shares”.  So it is an action which, in the sense that I sought to submit yesterday, would answer the description caught by the provisions.

However, at page 540, second full paragraph, your Honours will see his Lordship’s conclusion in relation to that after a rather more extended discussion of the provisions and case law than one finds in the courts above, and his Lordship concludes in the second sentence of that paragraph by following what he understands:

to be the principle stated by the majority of the High Court of Australia in the Webb Distributors case -.

After the colon then his Lordship sums that up in application to the facts before him as being:

the wrong of which B & C and BZW complain is separate from any transaction by which any original holder ‑ ‑ ‑

and we interpolate, we understand that to mean presumably subscriber –

took up shares and so became a member of the company.

Now, there are two comments to be made about that.  First, the principle that his Lordship is professing to understand from Webb is presumably that which one finds in particular at the top of page 35 of 179 CLR, upon which I have already sufficiently addressed, this notion of a contract separate from the contract to subscribe.  As we have already put, the principle really to be gathered from Webb is rather found in the discussion at pages 33 and 34 upon which I have already sufficiently addressed.

The second thing is that in that explanation by his Lordship which concludes with the process by which the original holder became a member, there is no explanation whatever as to how one distinguishes between becoming a member in that fashion and becoming a member by an accomplished transfer.  It is to be recalled that the statutory provision in question uses the word “member” without any textual discrimination arising on the words of the statute.

The second and final matter to which I wish to refer concerns the reasons why were, contrary to submissions to be made by my learned friend, Mr Bathurst, your Honours to grant leave to entertain questions as to the correctness of Webb, nonetheless your Honours ought not to prefer the approach taken by Justice McHugh in dissent.  Now, we do not suggest that is the only possible way in which one could depart from Webb; far from it.

But as to that approach taken, we add to what I have already put yesterday in that regard the following.  First, nothing appears from his Honour’s reasons as to why the approach taken to the Trade Practices Act claim, which is a common factor with this case as well, and with the other so‑called remedial and protectionist or protective provisions such as are in play in this case, nothing is said as to how the effect his Honour would have given to the Trade Practices Act over the companies legislation would not also work exactly the same effect to the priorities set by section 556, priorities which are in current form and recognise an evolving and policy‑laden decision as to who comes first - not who comes last in this case, but who comes first - according to political and social decisions by Parliament from time to time when there are not enough assets for everyone to be paid.

Nothing appears in the reasoning of Justice McHugh as to why the paramountcy given to what his Honour describes as the fundamental piece of remedial and protectionist legislation embodied in the Trade Practices Act would not also have that effect on 556.  In our submission, whether by way of applying special, not being derogated from general, or whether one seeks to ascertain the intention of the Parliament when it enacts legislation such as the Trade Practices Act compared with the specific regime focused on specific circumstances in the statutory administration of insolvent corporations ‑ ‑ ‑

HAYNE J:   Well, is Justice McHugh’s dissenting opinion in Webb to be understood as proceeding from the premise identified at page 39 of 179 CLR, that you understand Houldsworth as a rule regulating whether a shareholder should be able to sue a company for damages in modern day terms that understands Houldsworth as a case concerning the application of section 553; that is to say, whether there is a debt payable by or a claim against the company rather than a decision concerning the priority in which claims are to be met?

MR WALKER:   Yes, with respect, your Honours, as to something, perhaps rather oddly in an area created by and governed by statute conceived of as a common law rule, the rule in Houldsworth’s Case, as to that, it may be, with respect, that that is in modern nomenclature more a 553 point than a priorities point.

HAYNE J:   But Houldsworth was concerned with the law of deceit.

MR WALKER:   It was.

HAYNE J:   It was concerned with common law rules.

MR WALKER:   It was, your Honour, yes.

HAYNE J:   And true it is, it is of legendary impenetrability, but ‑ ‑ ‑

MR WALKER:   And it is regarded obviously as having an integral relation with provisions of the relevant statutes.  See Webb itself in the majority ‑ ‑ ‑

HAYNE J:   Well, their Lordships do not stay to reveal that relationship in their speeches in Houldsworth.

MR WALKER:   They were not to foresee the process of so‑called incorporation of their rule, so‑called, in later Australian statutes.  But it may well be that the premise at page 39 under the heading “The rule in Houldsworth” affects or informs a reading of everything that follows in Justice McHugh’s reasons, including what starts on page 40 under the heading “The Trade Practices Act”.

However, under the heading “The Trade Practices Act”, the method taken by his Honour is to look at relevantly two pieces of legislation and to ask how to reconcile them on the necessary simultaneous reading.  We submit, of course, that his Honour was wrong in the result, but we also submit that the method is faulty because there is no consideration given to the consequences, and we would submit the large and startling consequences of extending, as one would logically suppose it ought to be extended, this same approach to all the priorities in 556.

Now, when one is talking about remedial and protectionist, as his Honour puts it, or protective legislation, 556 is about as remedial and protective of special favoured groups or accounts as one could imagine.  So it will not be enough to say the Trade Practices Act is remedial and protectionist and therefore it triumphs over legislation which, as his Honour appeared to conceive it, would bar an action, because that same reasoning would apply to 556.  That is the first point.

The second point is that, in relation to what I will call the regulation of the making of claims which may eventually fall to be paid by an insolvent corporation, his Honour at page 42 did not see any difficulty in the requirement of prior leave to proceed.  One picks that up at page 42 about point 4.  In our submission, that too is an inconsistency.  The regulation involves not only the question of whether leave should be given, because after all if leave is not given that is the end of the action, but also the priority of payment if a claim is to be admitted at all.

For those reasons, in our submission, there are fundamental flaws in the reasoning of Justice McHugh which would, in our submission, render it an unattractive choice for your Honours were your Honours, contrary to our principal submission, to reopen Webb.

GLEESON CJ:   Mr Walker, your submission yesterday as I noted it was that a debt is owed by a company to a person in the person’s capacity as a member if a fact of membership is an essential ingredient of the cause of action.  Is there a temporal element in that?  Does he have to be a member at the time the action is commenced ‑ ‑ ‑

MR WALKER:   Yes.

GLEESON CJ:   ‑ ‑ ‑ or is it good enough that you are a member once in the past?

MR WALKER:   No, it has to be a member’s claim by a member involving membership as something to be pleaded and proved to make good liability or the causation and measure of loss.

GLEESON CJ:   So what if you crystallise the loss by selling your shares and then sue?

MR WALKER:   Then it is not a member’s claim.  In other words, there is a line to be drawn, and it involves a temporal element.

GLEESON CJ:   So you have to be a member at the time of the making of the claim?

MR WALKER:   That is right.  That is because in the case of such a prior crystallisation, that is, before the winding up, for example, there would be somebody else whose attribution to a part of the capital is there still present and not making a claim on the fund which, with all the qualifications that have to be expressed, still represents that which is available for creditors before members.

GLEESON CJ:   And of course if you are a derivatives trader who suffered loss on this basis, this issue never arises?

MR WALKER:   Quite.

GLEESON CJ:   Similarly, if you bought and sold options on the basis of misinformation.

MR WALKER:   Quite.  So that means if you were never a member then you are not caught.  How could you be?  The text would not permit that.  So

that some kind of broad economic equivalence is not a permissible method of interpreting so as to expand the ambit of the priorities provision.  You must be a member, and we submit that the ordinary meaning of the words means that you must be a member when you are claiming, a former member not relevantly being a member.

GLEESON CJ:   Thank you.

GUMMOW J:   You might want to consider this in your reply, Mr Walker, but one point of view is that this phrase “capacity as a member” in 563A is referring back to the membership and statutory contract in 140.

MR WALKER:   Yes, your Honour.

GUMMOW J:   There is detailed consideration of that by Justice McHugh and myself in Bailey 184 CLR 399 at 433 to 440 which seems to have escaped attention.

MR WALKER:   I am sorry, your Honour.  What I can say immediately about that is that if it were only the statutory contract and if one focuses upon section 140 that ‑ ‑ ‑

GUMMOW J:   It is a question of construction.

MR WALKER:   Yes, it is, your Honour.  It would exclude ‑ ‑ ‑

GUMMOW J:   And in these company legislation situations of legislative history.

MR WALKER:   Yes, your Honour.  It would exclude the contract of subscription and that, in our submission, would be an extremely startling result, (a) in light of the history which has already been canvassed; (b) in light of the purpose which has been attributable, or the policy which has been attributed, including by this Court in Webb, to the provision; and (c), surprising because it has not hitherto been argued, including in this case, that a contract of subscription by an original member is outside the sources of causes of action which would be described as being brought in one’s capacity as a member.

GLEESON CJ:   Thank you, Mr Walker.  Yes, Mr Bathurst.

MR BATHURST:   We adopt, with respect, Mr Walker’s submissions and would just seek to put a few additional propositions for the Court’s consideration.  In our written submissions we advanced the proposition that the principle to be derived from Houldsworth prevents, at least in the case of a company going into liquidation, the maintenance of a claim.  Houldsworth was never a case that was dealing with priorities in the context in which it arose.  It was rather a decision which had the effect of barring claims in the circumstances where it applied.  We accept, with respect, what Justice Hayne said in argument that it related to claims in deceit, or, at the very least, claims in misrepresentation.

We also, however, accept that this Court in Webb treated Houldsworth as being, as it were, subsumed in the case of insolvent companies by section 360(1)(k) and then dealt with it as a matter of priorities.  That was contrary to what was done by Justice Tadgell in the court below who effectively said he did not have to get to section 360(1)(k).  However, for our purposes, we submit, in common with Mr Walker, it is appropriate for this Court to decide the decision on the question of construction of that section.

Where Houldsworth is important, however, in our respectful submission, is that the adoption of the Houldsworth principle, as it were, by the High Court in the interpretation of section 360(1)(k), the predecessor to section 563A, demonstrates that at the very least the phrase “capacity as a member” in that case is wider than merely a claim arising out of the statutory contract.

Whatever else Houldsworth was, Houldsworth was a claim for deceit inducing the entry into a contract.  It could not be said that the claim arose out of a contract and it was said the claim could not be brought unless, prior to liquidation, the shareholder had rescinded the contractor’s shares, namely, that the shareholder was no longer a member.  In that context we submit that the expression in his “capacity as a member” in section 563A would include at least these claims:  firstly, claims where the title to sue, dependent upon the claimant being “a member of the company”; secondly, claims for money to which a member becomes entitled directly or indirectly by virtue of the statutory contract or a company or a contract with the company relating to the terms of issue of the shares.

So, for example, we would submit, and we think this would be uncontroversial, that a claim for dividends declared before liquidation but are not paid would fall within the ambit of the section.  Similarly, we would submit that a claim in respect of redeemable preference shares where there was a liability under the terms of issue to redeem at a particular time before liquidation would fall within the ambit of the section.  In addition to that, however, informed by Houldsworth, we submit that the section would include claims against the company depended upon the fact that a shareholder became a member or continued to retain his or her membership.  A claim by a subscriber of shares would fall within that category and a claim by Mr Margaretic, in our respectful submission, in this case also does.

GLEESON CJ:   But it is not a claim if Mr Margaretic had crystallised his loss by selling his shares to a third party.

MR BATHURST:   If Mr Margaretic had crystallised his loss by selling shares to a third party we would accept that that would fall outside the claim, as does Mr Walker.  The claim is based on “the person’s capacity as a member”.

GUMMOW J:   What was the first category, Mr Bathurst, again?

MR BATHURST:   Claims where title to sue depended on being “a member of the company”, for example, an oppression suit at least subject to the further amendments.

GLEESON CJ:   One of the things that commonly follows corporate collapses now is a letter from somebody in Victoria offering to buy your shares for tuppence halfpenny on the basis that you can crystallise your loss for tax purposes.  That is a very common fact situation, now.

MR BATHURST:   That only arises, of course, before the company goes into liquidation.

GLEESON CJ:   Yes.

MR BATHURST:   Because the company – the transfer after insolvency occurs.  We accept that, but we cannot properly put the proposition that a person who has crystallised a loss and is no longer a member falls within that category.  It is dependent on membership.  That third class of category gives effect to a principle which – on the policy, we submit, which underpins Houldsworth and the section.  Could I identify that policy in this way.  There is, experience teaches, a considerable element of risk in investing in companies which are apparently profitable and, for that matter, in lending money to those companies.

One of the risks that emerge from time to time is that the accounts of the company and other material disclosed by the company in its public statements is false or misleading.  Each of investors, lenders and trade creditors take a risk in that regard and take a risk that in the worst case the company will become insolvent.  The risk the creditor does not take is the risk that he or she will rank equally with investors.  The protection a creditor has is a protection of priorities in accordance with the provisions of the Act and the general law.  Investors, on the other hand, take the greater risk because of the anticipation of a greater return.  The construction that Mr Walker and I seek to put on section 563A, in our respectful submission, gives effect to that underlying policy.

CALLINAN J:   There is an intermediate position, too, debentures, where you do not take the same risk as shareholders do and you have some measure of protection.

MR BATHURST:   Debentures can be, of course, either secured or unsecured.

CALLINAN J:   I am talking about secured debentures.

MR BATHURST:   Yes.  We would accept that some people obviously protect themselves by taking security but it is equally common, in our respectful submission, for people to lend unsecured and equally significantly for trade creditors to trade with companies on an unsecured basis.  It is all very well, in one sense, to talk about consumer protection, but what the effect of the contrary propositions to which we are putting it is to have trade creditors ranking equally with persons who, as it were – and this does not reflect any general attitude to the share market – but took a punt on particular shares in the hope they would get a return.  We would submit that when one considers the policy underlying these sections that is exactly what it was desired to prevent.

CALLINAN J:   If you buy shares you do automatically put yourself in the hands of other people.  That is a risk itself.

MR BATHURST:   That is right, and you are banking on, as it were, their honesty in disclosure.

CALLINAN J:   Honesty and diligence and ability.

MR BATHURST:   Yes, and one of the factors that influences those matters of course is a person’s assessment of the controllers of the company.  Sometimes it turns out wrong but that does not provide a basis for giving priority to creditors.

HAYNE J:   Now, in understanding what is meant by in the “capacity as a member”, the current form of 563A speaks of postponement of the claims, whatever they may be:

until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.

That is different language from that which we used to find which is that the claims in question may be taken into account for the purposes of the final adjustment of the rights of the contributories among themselves.

MR BATHURST:   Yes.

HAYNE J:   There are two questions bound up.   Is the different language achieving the same effect?  If it is, is the notion of the final adjustment of rights of contributories among themselves telling you anything about the meaning of “member in that capacity”.  That is, is it driving you back to this notion of statutory contract?

MR BATHURST:   The exclusion of the words in section 563A for that matter and its predecessor was said not to have made any material difference to the interpretation – it was said in Webb not to have made any material difference to the interpretation of the section.  Your Honours will pick that up in Webb.  Could I give you that reference in a moment, your Honours.  The reference your Honours will find at page 34 of the report, page 433 of the book where the majority point out that section 563A differs in that it draws more strongly on the language of priority.

We submit it makes no difference.  The power of the court to vary the rights of contributories is found in section 485(2).  That division deals generally with contributories so one has, by combination, in our respectful submission, the same position in the present Act as existed under section 360.

To answer your Honour’s second question, we do not submit that that draws you back into the statutory contract.  The legislation recognises that adjustments can be made to the rights of the contributories themselves.  For example, section 482(2), I think it is, enables a contributory to set‑off against a claim to contribute a contributory’s separate and independent claim.  Your Honours will find that in section 483(2)(a), for example:

in the case of an unlimited company – allow to the contributory by way of set‑off any money due to the contributory or to the estate . . . on any independent dealing or contract –

We submit that that is a different area of discourse, as it were, to dealing with claims that members may otherwise have.  The language of postponement suggests of itself that the debt remains a debt that is postponed to other creditors.  We submit that that does not force one in any way back to the statutory contract.  The Act provides a scheme, as it were, for the regulation of the company on a winding up outside the statutory contract.  Section 563A forms part of that scheme and does not lead the words “capacity as a member” to have distinction between the statutory contract and what I think was described in Bailey as a special contract.

It is accepted, as we understand the position, by the respondent that 563A would apply to a claim by a subscriber.  Can we just, with respect, point to one anomaly which would arise immediately if that be the case.  Your Honours are, of course, familiar with the provisions, the short form prospectus provisions, in the Act.  They are now to be found, I think, in section 712 and section 713.  What they do is enable a company which is seeking to issue shares of a class then being traded on the market to issue what are described as short form prospectuses.  The key section is section 713.  Section 713(2) provides what is to be included in the prospectus and your Honours will see that the subsections relate primarily to rights and liabilities of the securities concerned.

The prospectus, however, has to indicate that the proposed investor can obtain various documents from the Australian Securities Investments Commission and they include – if your Honours go to subsection (4) – the annual financial reports, half‑yearly reports and continuous disclosure notices.  So investors in these types of securities are told to go and find the information from the publicly available documents, exactly the same type of documents which a person acquiring the same class of securities on market would seek to use. 

There cannot be any reason in principle, in our respectful submission, and certainly no policy reason to confine Houldsworth to those persons who – sorry, to confine the right to sue or limit the right to sue to those persons who went to the market to purchase their shares as distinct from those persons who, relying on exactly the same information as they are entitled to do, subscribed.  There is no rational reason for the distinction and, we submit with respect, the legislature cannot have been intending to draw that distinction in using the words “capacity as a member”.

GLEESON CJ:   Those words were in earlier versions of corresponding legislation, “character of a member”.

MR BATHURST:   They are the English words.  They are still the words in the United Kingdom legislation and they were certainly in the earlier legislation at the time of Harlou which I think was section 158 of the 1936 Act.

GLEESON CJ:   I wanted just to ask you this as a matter of history.  In the 1961 Companies Act (NSW), for example, and in the 1936 Companies Act (NSW), for example, this provision found itself as a qualification in a section dealing with liabilities of members as contributories, and both in the 1936 Act and in the 1961 Act, the relevant sections, which were respectively sections 200 and 218, in their principal operation referred to the liability of members as contributories and then they said that was subject to the following qualifications.

MR BATHURST:   That is right.

GLEESON CJ:   One of the qualifications was:

a sum due to any member of a company, in his character of a member, by way of dividends, profits or otherwise, shall not be deemed to be a debt of the company, payable to that member in a case of competition between himself and any other creditor not a member ‑ ‑ ‑

MR BATHURST:   That is right.  That is correct.

GLEESON CJ:   The continued use of that expression throughout all the history of this legislation, that rather puzzling expression, “sum due by way of profits” indicates that successive drafters were taking considerable pains to stick with words that had been used for a long time.

MR BATHURST:   Yes.  Well, the section certainly has varied since its inception in the 1862 English Companies Act, which I think was section 38(7).

GLEESON CJ:   What do you think the expression “sum due by way of profits” means?

MR BATHURST:   “Sum due by way of profits” means a right to share in any distribution of a company after payment of debts and liabilities and it involves the proposition that for the purpose, as it were, of working out the rights and liabilities of persons a contributory is entitled to contribute his or her amount and cannot set that off against any profits that maybe ultimately emerge on a winding up.  So the first step on a winding up was, in the old days – partly paid shares are not as common now, of course – to settle a list of contributories and make a call on those.  A contributory could not say, well, I may be entitled to some money at the end of the day by way of profits and thereby set them off.  That is the best explanation I can give to your Honour.

HAYNE J:   Well, it may also owe much to the references in the 1862 Act to carrying on business in partnership which lie at the root of whatever it is, section 4 or 7, the principal prohibition about which the whole Act hinges.

MR BATHURST:   Quite, quite.  One of the difficulties of this is that interpretative difficulty with the earlier cases has been pointed out ‑ ‑ ‑

GUMMOW J:   That would not give it much work to do now in 563A.

MR BATHURST:   It would give it very little work to do in section 563A because “contributory” is dealt with under an entirely different division of the Act.  What contributories are now entitled to do is to set off claims under a separate and independent contract and ‑ ‑ ‑

HAYNE J:   All this in the name of clarity of drafting, I suspect, Mr Bathurst.

MR BATHURST:   I do not think I had better make a submission in relation to that.  We would, with respect, adopt what Mr Walker said about Soden.  There is nothing I can usefully add to assist your Honours, except to say this.  In Mr Justice Walker’s, as his Lordship then was, judgment he referred in the concluding paragraph on page…..of the report to the claim not being a claim as to the nature of the share.  We submit, with respect, there is that – sorry.  That may be a reference to, and with the greatest respect, a little bit elliptical, to the proposition that what the section is directed to is something relating back directly to the statutory contract.

HAYNE J:   Just apropos of the statutory contract, take the subscriber who contends correctly that he/she was deceived by the prospectus, how do you relate that claim to the statutory contract?

MR BATHURST:   You cannot directly because the claim by a subscriber that he or she was deceived must be a claim that – or generally speaking would be a claim that they were induced to enter into a contract to acquire the shares.

GUMMOW J:   Yes, but the remedy is bound….., the remedy is to get yourself off the books as a member by the rescission, is it not?

MR BATHURST:   Yes, but again, the claim does not arise in the statutory contract.  The remedy may be, we accept, to rescind that contract.

GUMMOW J:   Well, that is why I mentioned it to you.  There is an assumption that we are talking about rights, not remedies, in these analyses we have been given.  I am not sure that is necessarily right.  …..against what remedies?

MR BATHURST:   The section, in our respectful submission, talks about a claim in the ‑ ‑ ‑

GUMMOW J:   Claim to what?  Claim to a remedy?

MR BATHURST:   Claim to a remedy.

GUMMOW J:   Yes.

MR BATHURST:   A claim against – to put it another way, in insolvency the claim must be a claim to prove in liquidation.

GUMMOW J:   That is right.

MR BATHURST:   There can, in our respectful submission, be no other remedy.

GUMMOW J:   Of course.

MR BATHURST:   What the section is saying is, your claim to prove in liquidation, if it is a claim in the capacity of a member, is postponed.  It does not in that context, in our respectful submission, refer back to statutory contract.

GLEESON CJ:   What the section deals with is debts.

MR BATHURST:   Yes, and we submit the words “debts” and “claims” are used interchangeably.

HAYNE J:   The assumption being, is it not, that whether or not a court has awarded a particular remedy, the claim is one which the liquidator may admit to proof?

MR BATHURST:   That is right.

HAYNE J:   So that perhaps rights and remedies may be a distinction that may be difficult of application in considering a statutory scheme where it is the liquidator’s decision to admit to proof and then accord priority of payment according to the statutory regime.

MR BATHURST:   If one had a claim, it could be against a company in liquidation.  It could be established in one of two ways, by judgment in proceedings in respect of which leave had been given or, alternatively, by a liquidator accepting the proof of debt or a liquidator’s rejection of a proof of debt being overturned by a court.  At the end of the day, however, any rights, whether it be the debts or claims of an unliquidated amount, fall to be determined in accordance with the procedures for winding up and to be paid in accordance with the priority.

GUMMOW J:   What is the explanation, if there is one, of why 553(1) talks about debts and claims and 563A just about debts, do you know?

MR BATHURST:   The best explanation we can give, and it is not an explanation, it in effect happens all the time.  Justice Emmett at first instance provided a schedule setting out where the words are used interchangeably.  In volume 2 of the joint appeal book it is at page 520.  In the bundle your Honours will find it at page 384.  Your Honours will see a schedule.

GUMMOW J:   It is not complete, is it?  It does not have 553 in it.

MR BATHURST:   To that extent we accept it is not, with respect, complete.  It does not also have section 563A in it.  But what it does show – this was the conclusion his Honour reached, which has not been controverted - tested certainly in the courts below, was that it was no more than effectively a matter of sloppy drafting that words were used interchangeably.  That is the best explanation I can give your Honours.

GUMMOW J:   So what does “debt” then mean?

MR BATHURST:   “Debt” in the context of liquidation is a liquidated sum provable in a winding up.  A claim would relate to an unliquidated demand or an unqualified demand, also provable in a winding up, but the section, the relevant sections where they use “debts” or “claims” in this division, are not drawing a specific division between them.  If it merely related to a debt it would follow, we would submit, that the only claims which would fall within section 563A would probably be ‑ members’ claims - claims for unpaid dividends or possibly moneys due pursuant to the terms of issue.  It has never been suggested the section has that limited effect and having regard to the incorporation of Houldsworth, this Court in Webb did not take that view.

GUMMOW J:   Well, 38(7) of the 1862 said “No sum due”.

HAYNE J:  

shall be deemed to be a debt.

GUMMOW J:   That is right.

MR BATHURST:   I cannot give a better explanation than that.  The words are used interchangeably ‑ ‑ ‑

HAYNE J:   Well, is 563A intended to be engaged after the process of proof is complete, that is to say, is it intended to have its bite after there is, in effect, an ascertainment?

MR BATHURST:   Yes, we would submit so.

HAYNE J:   That may give a rather slim hook on which the drafter might have chosen to hang the word “debt” but ‑ ‑ ‑

MR BATHURST:   I cannot find any authority on it, your Honour, but we accept, with respect, what your Honour says.  What happens to the winding up, of course, is that claims are – debts and claims – I should stop.

HAYNE J:   I will take a note of that, Mr Bathurst.

MR BATHURST:   Debts and claims are quantified, assets are got in and then, having regard to the priorities, they are distributed.  So we would respectfully submit it certainly does bite at that particular point of time.  Can I just say something about Harlou.  Harlou is not, with respect, a case which provides any detailed analysis of the topic.  Harlou, of course, was a subscription case, but we submit Harlou can be explained because the contract in that case was a contract of employment.  It was a contract that did not relate to membership and the claim that was being made was a claim for damages for breach of that contract, namely the failure to procure a purchase for the shares.  We submit that is quite different from the claims which fall within the three categories or classes which we respectfully suggest this Court should find as appropriate. 

The only other matter I want to deal with is the overseas position.  We deal with it in our written submissions in an appendix.  I do not want to go much beyond that.  In the United Kingdom, of course, the position is that Houldsworth has been effectively abolished by section 111 of the 1985 Companies Act.  In the United States, the position is governed by statute.  The relevant provision of the United States Bankruptcy Code is section 510(b), which we have set out on page 18 of our submissions.  That section has been given an extremely liberal interpretation by the courts in the United States.  It has been held to include claims by subscription, claims by transfer or claims arising out of retention of shares in reliance upon misleading information. 

Can I just take your Honours to one case which we submit demonstrates the approach of the United States courts.  That is Re Geneva Steel Co which your Honours will find at page 178 of the book.  That was a claim based on retention of shares in reliance on misleading and deceptive conduct.  The court held, as your Honours will pick up at page 179, that such a claim was postponed under section 510(b).  It is paragraph 3 of the headnote.  The reasoning reflects a policy which, we respectfully submit, should be adopted in considering section 563A.  If your Honours could go to page 1179 of the report, page 184, commencing from the last two lines on that page:

Two separate but related policy reasons convinced the Granite Partners court to treat retention claims no differently than inducements claims:

First, from the creditors’ point of view, it does not matter whether the investors initially buy or subsequently hold on to their investments as a result of fraud.  In either case, the enterprise’s balance sheet looks the same, and the creditors continue to rely on the equity cushion of the investment.

Second, a fraudulent retention claim involves a risk that only the investors should shoulder.  In essence, the claim involves the wrongful manipulation of the information needed to make an investment decision. The [investors] charge that the debtors’ [sic] wrongfully deprived them of the opportunity to profit from their investment (or minimize their losses ) by supplying misinformation which affected their decision to sell.  Just as the opportunity to sell or hold belongs exclusively to the investors, the risk of illegal deprivation of that opportunity should too.  In this regard, there is no good reason to distinguish between allocating the risks of fraud in the purchase of a security and post-investment fraud that adversely affects the ability to sell (or hold) the investment; both are investment risks that the investors have assumed.

We find the risk allocation argument persuasive in this case.  Allen’s claim, at its essence, accuses Geneva of manipulation information concerning his investment.  He acquired and held that investment with the belief that its value would increase, though he no doubt recognized that for any number of reasons it might not; indeed, he recognized that it might even lose value.  In contrast, a mere creditor of Geneva could expect nothing more than to recoup the value of goods or services supplied to the company.  Yet now, having watched his investment gamble turn sour, Allen would shift his losses to those same creditors.  We think this effort clashes with the legislative –

purpose.

GLEESON CJ:   Where do we find the statutory provision?

MR BATHURST:   The statutory provision is in our written submissions.

GUMMOW J:   Page 18.

MR BATHURST:   Page 18.  In the book we have provided your Honours with this material as well; the report of the House of Representatives which led to the passing of section 510 and an article by Professors Slain and Kripke which Congress relied on significantly to pass the legislation.  Your Honours will also see that article, with respect, usefully summarised in the decision of the Federal District Court in Geneva Steel.

GLEESON CJ:   It is not in the report of Geneva Steel itself?

MR BATHURST:   Section 510?  I do not think so.

CRENNAN J:   It is at page 47 of the book.

MR BATHURST:   Yes.

HAYNE J:   And in Geneva Steel it is set out at 1177, 182 of the reasons, I think, is it not?

MR BATHURST:   Yes.  That is correct.  Your Honours will find in Geneva Steel a summary of the legislative history at page 1179, including reference to the Slain and Kripke article to which I ‑ ‑ ‑

GLEESON CJ:   Yes.  It is at page 1177, left‑hand column, about three‑quarters of the way down the page.

MR BATHURST:   Yes.  We have also given the Court, in the book, a reference to the case referred to in Geneva Steel.  I regret it, but I do not think it would be of assistance if I took your Honours to it at this particular point of time.

The Canadian position is this, that Canada has passed an Act to regulate these matters in similar terms to section 510(b) of the United States legislation.  That Bill received Royal Assent on 25 November last year.  It is not yet in force.  We set out the provisions of the Act at page 23, paragraph 22 of our submission.  Your Honour will see that the proposed legislation is in wide terms in respect to the:

claim for damages arising from the purchase or sale of a share or unit of the bankrupt -

Now, Canada has dealt with these matters, generally speaking, on the basis that as a matter of the Canadian general law those claims or claims of that nature are subrogated to claims of other creditors.

GLEESON CJ:   Do you mean subrogated or subordinated?

MR BATHURST:   I am so sorry – subordinated.  I am sorry.  We have given your Honours a reference in the book to a decision in a matter of Blue Range Resource Corporation (2000) 259 AR 30 which is a decision of the Alberta Court. Your Honours will find that at page 159 of the book. The relevant principle is set out in paragraphs [22] and [23] which appear at pages 164 and 165 of the book. Paragraph [22]:

In this case, the true nature of Big Bear’s claim is more difficult to characterize.  There may well be scenarios where the fact that a party with a claim in tort or debt is a shareholder is coincidental and incidental, such as where a shareholder is also a regular trade creditor of a corporation, or slips and falls outside the corporate office and thus has a claim in negligence against the corporation.  In the current situation, however, the very core of the claim is the acquisition of Blue Range shares by Big Bear and whether the consideration paid for such shares was based on misrepresentation.  Big Bear had no cause of action until it acquired shares of Blue Range, which it did through share purchases for cash prior to becoming a majority shareholder, as it suffered no damage until it acquired such shares.  This tort claim derives from Big Bear’s status as a shareholder, and not from a tort unrelated to that status.  The claim for misrepresentation therefore is hybrid in nature and combines elements of both a claim in tort and a claim as shareholder.  It must be determined what character it has in substance.

[23]     It is true that Big Bear does not claim rescission.  Therefore, this is not a claim for return of capital in the direct sense.  What is being claimed, however, is an award of damages measured as the difference between the “true” value of Blue Range shares and their “misrepresented” value – in other words, money back from what Big Bear “paid” by way of consideration.  Although the matter is complicated by reason that the consideration paid for Blue Range shares by Big Bear was Big Bear treasury shares, the Notice of Claim filed by Big Bear quantifies the loss by assigning a value to the treasury shares.  A tort award to Big Bear could only represent a return of what Big Bear invested in equity of Blue Range.  It is that kind of return that is limited by the basic common law principal that shareholders rank after creditors in respect of any return on their equity investment.  Whether payment of the tort liability by Blue Range would affect Blue Range’s stated capital account is irrelevant, since the shares were not acquired from Blue Range but from its shareholders.

HAYNE J:   Now, is there any amplification of where this basic common law principle is found or identified?

MR BATHURST:   The only amplification is and it seems to be derived from a decision In re Beale – we have dealt with this in our submissions at paragraph 29.  In the Supreme Court the matter was considered in a case called Sukloff v Rushforth.  In that case the Supreme Court relied on the proposition which we repeat – or it proved the proposition which we repeat in paragraph 29:

“If a person advances money to another not by way of loan but as a contribution to the capital of a business carried on for their joint benefit, the person who has made the advance, even though he is not a partner in the business and has received no share of the profits as such, is debarred from proving in the bankruptcy of the recipient of the money in competition with the creditors of the business.”

That seems to be the origin of it.  It has been applied, not only in Alberta, but as your Honours will also see from the submission, in Ontario and it followed in Alberta in a subsequent case we refer to.

GLEESON CJ:   Soden was decided two years before this Canadian decision, and Soden rejected the idea that there was a general common law principle that said members last.

MR BATHURST:   That is right.

GLEESON CJ:   Was that drawn to the attention of this Court?

MR BATHURST:   I do not know.  The only reference to any English decisions is a somewhat, with respect, elliptical reference in paragraph [37] of the report, page 167 of the book.  Your Honour will see there are references to some of the earlier cases, but no reference to Soden.  It does not appear that they refer to Soden.

I do not want to go over what Mr Walker has covered, with respect, adequately, but it must be remembered that Soden took place in a different legislative context by contrast to Webb which effectively said that Houldsworth was incorporated into section 360(1)(k).  Section 74(2)(f) of the English Insolvency Act fell to be considered by Soden in a context where the legislature had adopted an entirely different course, because section 111 of the English Companies Act effectively abolished the rule in Houldsworth.

Now, that certainly did not seem – I accept did not seem to be determinative of the decision in that case at any level, but when one considers the approach taken here which has been to re‑enact this legislation by the legislature in the knowledge, we would submit, that said the section was being interpreted in the way we have described in Webb and in circumstances where the legislature has made it clear when it wants to when the provision will not apply, then in our respectful submission, the policy which underpinned the Canadian decision and for that matter the United States legislation should be followed here.

Can I just give your Honours one reference to the Act where the legislature has specifically sought to exclude or limit the application of the section, and that section is 737 which relates to misleading conduct in relation to prospectuses.  Section 737 provides that:

If securities are issued to a person in contravention of section 724 (situation calling for a supplementary or replacement document), the person has the right to return the securities and to have their application money repaid.  This is so even if the company that issued the securities is being wound up.

737(2)           [Need for written notice]  A right referred to in subsection (1) is exercisable by written notice –

and the directors are liable where the seller does not repay.

GUMMOW J:   Does not 737 reverse one of the grounds of Houldsworth?

MR BATHURST:   Yes, and what we submit is that where the legislation wanted to do it explicitly they did so.  That is the proposition.

GUMMOW J:   But Mr Coles, I think, makes the point with respect to your submissions that your submissions seem to assume on one hand you have Houldsworth alive and flourishing, and in the other hand you have this specific statutory provision and the two sail on together rather than simply looking at the statutory provision.

MR BATHURST:   The way we put our submissions today and the way we submit, with respect, the Court ‑ ‑ ‑

GUMMOW J:   There is no relevant common law.  There is just this corporations statute from time to time with an equitable overlay.

MR BATHURST:   We accept the Court should decide this case on that basis.  That is what I said at the outset of my submissions this morning ‑ ‑ ‑

GUMMOW J:   I know what they said in Webb, but I am just not sure that is a correct view.

MR BATHURST:   We submit this turns on a construction of section 563A informed by the common law principles which we say, consistent with Webb, were recognised in the statute.

GUMMOW J:   Part of the trouble with Houldsworth is they do not refer to 38(7) in the 1862 Act.

MR BATHURST:   But that problem is endemic throughout the earlier cases, your Honours.  One of the best examples is Addlestone – if one goes to Addlestone, Justice Kay seemed to decide it on the basis of section 38(7).  Lord Justice Lindley who is most frequently cited in Addlestone did not decide it on the basis of general or principle.  Lord Justice Cotton, if I could say so with the greatest of respect, seemed to have a bit each way, and Lord Justice Lopes relied on section 38(7), and one of the problems is that throughout the earlier cases, at least, the two concepts seem to have been intermingled, but ‑ ‑ ‑

GUMMOW J:   They had not yet got to Sullivan’s Case either ‑ ‑ ‑

MR BATHURST:   Yes, that is right, but for our part, as I indicated, or sought to at the outset, we submit that this Court should look at it by reference to the statute and not otherwise.  They are our submissions, if the Court pleases.

GLEESON CJ:   Thank you, Mr Bathurst.  Yes, Mr Coles.

MR COLES:   If your Honours please.  In our submission, a debt is one in a capacity as a member if the claim is one in connection with the contractual and statutory rights which a person becomes entitled to enjoy or assert by virtue of his entry on the register of members of the company and that extends, in our submission, to claims made in opposition to obligations which are imposed on members under the corporations legislation.

The references that have been made to the notion of the statutory contract, in effect, exhausting the universe of debts in a person’s capacity ‑ ‑ ‑

GUMMOW J:   I am sorry, I cannot hear you, Mr Coles.

MR COLES:   I am sorry, your Honour.  One would not regard obviously, in our respectful submission, the statutory contract in the limited sense of that contract as described in section 140 of the Corporations Act as exhausting the content of a claim or debt made by a person in his capacity as a member.  It is important, in our respectful submission, in that regard to note what Lord Browne‑Wilkinson said in Soden in that regard.  He used throughout his judgment the expression “statutory contract” but he did so, it is important in our respectful submission to note, not in the limited or confined sense of the contract inter se between the members of the company and the company itself, but in the wider sense that he described in his speech.

If your Honours would please go to Soden [1998] AC 298 at 323, to which you have been previously taken. The relevant page in the House of Lords judgment appears at 338 of the bundle of authorities. Commencing at the letter D his Lordship said in dealing with a submission recorded earlier on the page, a submission that there was no reason why a claimant induced to acquire shares by purchase should be in a different position to a subscriber, his Lordship said at D:

I cannot accept these submissions.  Section 74(2)(f) requires a distinction to be drawn between, on the one hand, sums due to a member in his character of a member by way of dividends, profits or otherwise and, on the other hand, sums due to a member otherwise than in his character as a member.  In the absence of any other indication to the contrary, sums due in the character of a member must be sums falling due under and by virtue of the statutory contract between the members and the company and the members inter se constituted by section 14(1) –

which he then sets out, and is in substantial similar terms to section 140.  He then goes on to say importantly:

A contract to similar effect was prescribed by section 16 of the Act of 1862 and all Acts since then.

We would say the next passage is of some importance in understanding or appreciating his Lordship’s view of the content of character or capacity as a member.  He said:

To the bundle of rights and liabilities created by the memorandum and articles of the company must be added those rights and obligations of members conferred and imposed on members by the Companies Acts.  For ease of reference I will refer to the combined effect of section 14 and the other rights and liabilities of members imposed by the Companies Acts as “the statutory contract.”

His Lordship, in effect, is defining the expression “statutory contract” for the purposes of his judgment in terms so evidently wider than merely the provisions of section 140.  His Lordship then goes on to say:

That this is the correct interpretation is supported by the words in section 74(2)(f) “by way of dividends, profits or otherwise.”

Passing over some observations about whether they are to be construed ejusdem generis or not which, in our submission, does not very much matter, he does go on to say on the following page:

They neither widen nor restrict the meaning of that phrase.  But the reference to dividends and profits as examples of sums due in the character of a member entirely accords with the view I have reached as to the meaning of the section since they indicate rights founded on the statutory contract –

in the expanded sense in which it is to find that expression –

and not otherwise.

And perhaps the next passage is also of importance:

Moreover, the construction of the section which I favour accords with principle.  The principle is not “members come last:”  a member having a cause of action independent of the statutory contract is in no worse a position than any other creditor.  The relevant principle is that the rights of members as members come last, i.e. rights founded on the statutory contract are, as the price of limited liability, subordinated to the rights of creditors based on other legal causes of action . . . 

If this is the correct dividing line between sums due in the character of a member and those not so due, there is no room for including in the former class cases where membership, though an essential qualification for acquiring the claim, is not the foundation of the cause of action.

He then refers by way of illustration to the directors’ remuneration cases.  Accordingly, in our submission, claims made in connection with the contractual and statutory rights which come to a person whose name is entered on the register of members are necessarily claims which are made in the capacity as members.  That would of course not deal with the conclusion in Webb which holds also that a claim by a person who is defrauded by representations made by the company and seeks to in effect recover his subscription money also makes a claim in a capacity as a member, a conclusion which we do not dispute, but that is a claim which can be seen, in our submission, to be made by a person in his capacity as a member because it is simply ‑ ‑ ‑

HAYNE J:   Let me just interrupt you and understand where you have got to at this point in the submission.  I understand you are going on, but step one is in the capacity of member is confined to rights under the memorandum and articles, or now constitution, and rights and obligations conferred or imposed by the relevant legislation.

MR COLES:   By the corporations legislation, yes.

HAYNE J:   But you add to that, do you, the right of a subscribing shareholder to recover subscription money?

MR COLES:   Because, in our submission, that can be accommodated to the proposition we are putting because that is simply the opposite of the position.  It is a claim made by a member of a company in opposition to the obligations imposed upon that member by the corporations legislation.  That is to say the provisions, for example, that were referred to yesterday, particularly by your Honour Justice Hayne, in connection with what was the first part of section 38 of the 1862 Act before it became disembodied ‑ ‑ ‑

GUMMOW J:   Does section 737 have any impact here?

MR COLES:   Can I come to that in a moment, your Honour?

GUMMOW J:   That is the rescission provision.

MR COLES:   Yes, that had relevance in a way explained by the Full Court.

GUMMOW J:   Only a particular contravention unfortunately for you.  It is linked to 724.

MR COLES:   Yes, that is right.  Section 737 I think was considered by a differently constituted Federal Court in the Cadence decision which your Honours have included in the appeal cases.  It was made easier in that case to come to the conclusion the differently constituted Federal Court there reached because of the explicit rescission provision in 737 which they said was yet another reason for not bothering too much about the absorption of Houldsworth into the general fabric or as a continuing thread in the fabric of the law, because they said the fourth reason, I think it was, we do not need to continue to be concerned about Houldsworth is that in the context with which section 737 is dealing there is a statutory right of rescission anyway, so why would you need to invoke the general law.  That is a little away from the current territory here, in our respectful submission, but your Honour’s reference to it is reflected in point.

HAYNE J:   But how do your submissions accommodate then 1325?  In part the claim that is at issue here is a claim that can be characterised as one under section 1325, a particular set of rights given by the law.  The particular application for section 1325, can that be seen in Lord Browne‑Wilkinson’s words as containing as an essential qualification for acquiring the claim ‑ ‑ ‑

MR COLES:   No, certainly not, your Honour.

HAYNE J:   ‑ ‑ ‑ that the claimant has become a member?

MR COLES:   No.

HAYNE J:   Is that not his complaint?  “I bought shares.  I became a member.  I was misled.  I have a claim under 1325.”

MR COLES:   Well, of course, to come straight to that point now, we say, of course, his complaint is “I bought shares”.  His complaint is not “I bought shares and I became a member”.  Harking back to the page your Honours were shown yesterday – this was at page 498 of volume 1 of the appeal book – your Honours were shown yesterday the articulation of Mr Margaretic’s claim directed towards answering your Honour the Chief Justice’s question about a quasi‑pleading or articulation of what that claim was.  I should really deal with that now rather than come to it in a moment. 

The elements of the claim are particularised in Part B on page 498 of the book and, as I think your Honour Justice Hayne pointed out yesterday, element (h) is of importance.  Mr Margaretic’s assertion is that he would not have purchased the shares in SOG had he been aware of the information, a claim he would make, in our respectful submission, whether or not he ever got onto the register because, as we pointed out in our written submissions, you can buy shares as a result of market misinformation, you can submit the share transfer, or the people who attend to these things can submit the share transfer for registration, but administration might intercept the registration of that share transfer and you might never get onto the register.  In other words, it is not ‑ ‑ ‑

HAYNE J:   What is a matter of fact because the company is maladministered, but you have a right be registered, have you not?

MR COLES:   What we say is if Mr Margaretic were pleading his claim, he would plead that he purchased the shares, he did so in reliance upon a state of information available to the market.  That state of information was conduced by the failure of the company to perform its statutory obligations under section 674 and as a result he suffered loss.  It would form no part, in our respectful submission – and here we embrace, although we do not agree with, Mr Walker’s formulation of the test, whether it is an essential ingredient of the claim one should be a member. 

In our respectful submission, Mr Margaretic could maintain or could have maintained this claim even if supervening administration had by a matter of days intercepted his orderly progress to entry on the register of members.  After all, section 231 is of importance, in our respectful submission, because section 231 tells you what a member is.  A member is a person who has agreed to be so and whose name is entered on the list of members.  Now, it is perfectly possible in the circumstances which section 674 is concerned with and section 1325 and the other remedies supplying provisions are concerned with to suffer the loss and maintain, in our submission, the remedy, even if one never gets onto the register.

GLEESON CJ:   Well, it seems that whichever way you turn this case, you are going to have to draw an odd distinction.  On your argument, you have to distinguish between a defrauded subscriber and a defrauded purchaser, and on the other side’s argument you have to distinguish between a defrauded purchaser who has remained on the register of members and a defrauded purchaser who has crystallised his loss by selling his shares.

MR COLES:   Yes, those issues are in play, but can I say this, your Honour, assuming, as is the fact here, Mr Margaretic attains, as he did, registration, it is not an essential averment in his statement of claim, in our respectful submission, that he in fact attained entry on the register.  He has suffered his loss, in short, at the moment he parts with his purchase money in favour of the transferor and receives from the transferor the scrip, the transfer and no doubt in return for his promise to become a member of the company in due course but ‑ ‑ ‑

HEYDON J:   Strictly speaking, at the moment of the contract.

MR COLES:   At the moment of the contract, yes, and his measure of damages is fixed by reference to the market circumstances at the moment of the contract, in our respectful submission, conventionally.

GLEESON CJ:   Lord Browne‑Wilkinson’s reasoning seems to turn upon this distinction drawn at page 324 between an essential qualification for acquiring the claim and the foundation of the cause of action.

MR COLES:   Yes.

GLEESON CJ:   I would just like to understand that distinction a little better than I do at the moment.

MR COLES:   Well, if your Honour is referring to – just below C his Honour says ‑ ‑ ‑

GLEESON CJ:   D on page 324.

MR COLES:   Yes, he says:

there is no room for including in the former class cases where membership, though an essential qualification for acquiring the claim, is not the foundation of the cause of action.

He is there, in our respectful submission, simply drawing attention to those – well, that would accommodate, for example, I suppose, cases like Harlou.  In Harlou’s Case you would have had to plea, I suppose, that you became entered on the share register as an essential element of your cause of action, but it would not make any difference to the outcome because your claim would still not be in the capacity ‑ ‑ ‑

GLEESON CJ:   I think it may be very dangerous to discuss this in terms of the rules of pleading because rules of pleading are overlaid by rules about not surprising your opponent and what might have been regarded as a rule of pleading, if you looked at the old edition of Bullen and Leake, might be different from what you would now be expected to put in a statement of claim.  But Lord Browne‑Wilkinson says it is one thing to say he would not have had this claim if he had not been a member and it is another thing to say membership is the foundation of the claim.  But I understood you to say he would have had exactly the same claim even if he had never been a member.

MR COLES:   Mr Margaretic would have?

GLEESON CJ:   Yes.

MR COLES:   Yes, indeed, that is our submission.  So that, in other words, although he has become a member because of entry on the register, he would have had exactly the same claim even if that process had for some reason been intercepted or even if before the company went into liquidation he had on‑sold his shares to a third party.

HAYNE J:   This distinction which you draw is one which may invite the closest attention to the notion of contributory ‑ ‑ ‑

MR COLES:   In our submission, yes.

HAYNE J:   ‑ ‑ ‑ as may also the difficulty apparently presented by the shareholder crystallising loss.  The class of contributories may not be confined I think to those who are on the register at the moment of liquidation.  The class of contributory extends backwards, does it not?

MR COLES:   It does, and that is one of the other reasons ‑ ‑ ‑

HAYNE J:   Thus, if you go back into the history and the adjustment of rights as between the contributories, which was the tailpiece to the old 38(7) and the early forms of legislation, the bare fact of crystallising loss may not have taken you outside the reach and the bare fact that for any of a number of reasons you had not got yourself onto the register may not take you outside the range.  Thus I think that the apparently absolute divide that you earlier agreed to when put to you by the Chief Justice may be one that may invite rather closer attention to the law of contributories.

MR COLES:   Well, it sustains this qualification, in our respectful submission, at least, and this may be its only qualification – and this is one reason why, although it is not in our interest to do so, we have to disagree with Mr Walker’s contention that you have to be a member at the time of making the claim.  That seems, if we may respectfully say so, opposed to the substitution of member by the word “person” in section 563A, but put that to one side.  Under the earlier provisions, around 514, 515 of the Corporations Act there is specific reference made to the liability of past members; that is to say a past member is liable to contribute in the particular events, which are very limited.  You are firstly looking at partly paid shares; you are secondly looking at events occurring within a year before he ceased to be a member; and you are thirdly looking at the circumstance where, as we understand the provisions, the currently registered member or contributory has in some way defaulted.  Then and only then ‑ ‑ ‑

HAYNE J:   But the proper construction of 563A is not to be confined according the current fashions of capital raising in which partly paid shares are now to be regarded as a thing of the past.  That happens to be the current fashion of capital raising.

MR COLES:   Yes.  That is why we say, with the utmost respect, that the policy position which was described in the United States cases, for example, to which Mr Bathurst took you, simply can find no place, apart from legislative intervention, in the resolution of the issues in these proceedings.

GUMMOW J:   Do you construe 563A as owed by a company to a person in the person’s present or past capacity as a member?

MR COLES:   Well, my proposition, your Honour, really adopting or paraphrasing Lord Browne‑Wilkinson and I think borrowing from something said in the Court of Appeal to which I will come in a moment about the obligations, the obligations being the reciprocal of rights so far as the corporate statutory contract is concerned.  Our proposition is you would only construe member to include past member – I am sorry, you would not, because where the legislation means past member, it says so.

GUMMOW J:   It talks about “person”.

MR COLES:   “Person” may include past member.  For example, this in a sense is against us, but a person who had suffered a loss and was no longer a member would still be entitled to claim as a person if that loss was sustained in the capacity of a member.

HAYNE J:   But the temporal element required by 563A is coincidence, temporal coincidence between the arising of the debt and membership, non constat that you have to be a member at the time of the liquidation.  That is a separate set of issues that lurk beneath these beautifully deceptive and exquisitely simple words that we now have.

MR COLES:   It may be correct to say that the principal temporal component of 563A is that its provisions are operative at the time for the lodgement of proofs of debt.

HAYNE J:   Why?

MR COLES:   Well, they are looking at the apparatus for the lodgement, appraisal and eventually acceptance and payment of claims lodged in the liquidation.  But, in our respectful submission, once one recognises that the expanded concept of statutory contract, including the entitlement to the rights conferred by the corporations legislation, once one accepts the proposition that seems to be inherent in Soden that that also extends to not controverting or making an assertion in opposition to the obligations which the corporations legislation imposes, that is to say the paramount obligation to contribute to the winding up of a company to the extent of your paid up capital, once one accepts that is an obligation as well as a right, the reciprocal right being the conferral of limited liability, then any claim made in opposition to the statutory obligations, the statutory obligation to contribute to the company’s capital in its winding up, is fairly to be seen as a claim made by a member, albeit one adverse to the company, in his capacity as a member, because it is destructive of or subversive of the obligations which the member assumed upon entry to the register of members.  That explains why ‑ ‑ ‑

GLEESON CJ:   That was the place that this statutory provision originally occupied as a matter of history.  It was expressed as a qualification to the provisions about liability to contribute.

MR COLES:   Yes, and, in our respectful submission, that is important.  Section 38 of the 1862 Act followed that structure or that fairly harmonious architecture uniformly.  It was exactly the case in Victoria at the time of Webb in section 360 of the Companies Code. It was, as your Honour the Chief Justice pointed out, the same in 218 of 1961 Act. It remained intact more or less until it became, I think, disembodied, which seems to have happened when section 525 of the Corporations Law from 1 January 1991 took it out of the division relating to contributories and parked it in a later division of the corporations legislation.  But, in our respectful submission, nothing much can turn on the dismemberment of the provisions that had their origin in section 38 of the 1862 Act.  It would be reasonable, in our respectful submission, to continue to interpret and apply them according to the learning that informs their meaning, notwithstanding the relative violence inflicted on the architecture of the statutory provisions by their relocation.

GLEESON CJ:   You may be right about that, but it is a question that has to be addressed, is it not?

MR COLES:   It is.

GLEESON CJ:   In the UK legislation being considered in Soden there was still what you described as the original architecture, that is, the words with which we were concerned were part of a qualification to liabilities of contributories.

MR COLES:   Yes, and they have been detached from that position and been made a standalone provision in a priority section, but, in our respectful submission, that ought not in point of context alter the meaning of the expression capacity or character in the UK as a member.  If that is right, in our respectful submission, then nothing in Mr Margaretic’s claim is a claim which he makes obviously pursuant to some right or entitlement under the articles or constitution of the company.  It is plainly not a right he would make under any statutory provision conferring some benefit upon him, such as, for example, the benefit of an order in an oppression proceeding or the entitlement to a distribution in a winding up or the like, nor ‑ ‑ ‑

HAYNE J:   Could an oppression petition give rise to a debt?

MR COLES:   Well, it could because a member may, for example, claim very wide relief under, I think, 232 and the court can make any order it likes, including, for example, an order that the company pay to the member a sum of money.  That would seem to us to be an entitlement or a right stemming from the corporations legislation package and thus falling within the concept of a claim or a debt in one’s capacity as a member.  One could no doubt multiply – I mean, for example, an uncompleted buy‑back arrangement where the moneys have not been handed over would produce the same result, as in the Dividend Fund case, for example, an uncompleted redemption and so forth, would all give rise to claims brought pursuant to statutory authority conferring benefits on members.  Whereas, of course, Mr Margaretic’s claim stands in very stark contradistinction to a claim as a member, we would submit.

GUMMOW J:   What do you see is the distinction between your case and the case put against you?  You seem to be able to accept a fair amount of what is put against you, not all of it.

MR COLES:   I can, but we simply say, dealing with the first part of the concept of claim in a capacity as a member, which I am dealing with now, we do not make any claim pursuant to a statutory right or a provision in the articles – put that to one side – nor, we say – and this the essential feature –do we make a claim in a capacity as a member in the second or negative respect.  That is to say we do not advance a claim in opposition to or in derogation of any of the obligations under corporations legislation which are imposed upon a member.

GLEESON CJ:   You mean the nature of your claim is not destructive of any obligations to contribute, for example?

MR COLES:   That is right, exactly.  If one looks at Addlestone and Webb alone – and one can see Webb in a fairly narrow light as really an application, we would think, of Addlestone.  But there, of course, the very claim made in each case is a claim made in derogation of the obligation of a contributory.  In the case of Addlestone Linoleum that was the very plainest thing.  The shares were issued for £10 and at a price of three‑quarters of that amount and when entered on the list of contributories the shareholders said, “This was misrepresented and we have paid the calls and we want our money back”.  That is a clear example, in our respectful submission, of seeking to subtract from an obligation imposed upon a shareholder via the provisions of the statute.

GLEESON CJ:   Is part of the reason for the concentration in these cases on concepts of raising and maintenance of capital and obligation to contribute the historical circumstance that until relatively recently this language was in a provision that was part of a qualification to the statutory liability to contribute?

MR COLES:   Well, indeed, your Honour.  I may be repeating myself, but we do not see its detachment as altering the disqualification that it imposes.  What we would say, however, is this, that, likewise in Webb’s Case, the plain contention of the withdrawing of the shareholders who bought their shares on the faith of the company’s promise that they were withdrawable shares were seeking to do the very thing that they were not entitled to do, namely, have their subscription moneys repaid to them, a claim made in derogation of an obligation made essential by the Act.

Now, what on the other hand is Mr Margaretic’s claim, to come back to the question your Honour has asked me, that is very much tied up with the idea or the notion, in our submission, of maintenance of capital.  I should return to some observations about that in a moment, but let me say at the outset one can readily enough characterise a claim by a shareholder to recover his subscription moneys because of fraud or breach of contract as a claim to recover those subscription moneys in derogation of the obligation to have them answer for the debts of the company in a winding up, readily characterise that as a claim made by a member in his capacity as a member and note the policy ingredient informing it, namely, the preservation of the company’s capital intact and the impropriety of that claimant seeking by means otherwise than authorised by company law, that is to say, an approved reduction of capital, the payment of a dividend or a liquidation return in a winding up. 

At the time of, of course, Houldsworth, that was the only way you could get your money back out of the company, whereby, as Sir Owen Dixon pointed out, I think, in Archibald Howie and later in Davis Investments, the only way you could get your money back out of the company.  Our learned friends seek to elide this notion of reduction of capital impermissibly by, in effect, equating the payment out of the assets of a company of a sum of money to a shareholder where there is some connection unspecified between the claim and the holding of shares as if it were a return of capital.  They then say it is not authorised by any of the provisions of the statute.  Therefore, they say it must be at odds with the policy which informs, amongst others, the relevant provision, in this case section 563A.

Our contention is rather simpler.  We say, if this is a claim made available by a statute a fortiori where it is a claim made available by the same statute as contains the very qualifications with which we are presently concerned, which is a claim available to a person not expressed in terms of a person who is or becomes a member of the company, then that claim is simply a claim by a person who by virtue of it is a creditor of the company and the company’s payment of that claim is doing no more than making an application of the very thing that our learned friends complain of, namely, the capital of the company, not by way of returning the capital, but merely by using that capital for the very thing for which it is intended, namely, the payment of the company’s debts. 

If the shareholder’s claim here under 1325, or any of the other relevant provisions, generates a statutory entitlement to be paid a sum of money, that is a debt and the company commits no violence to its objects and commits no contravention of the return of capital restrictions by simply paying that creditor’s claim.  Likewise, when the company is in liquidation, 563A stands as no qualification on its priority.

GUMMOW J:   You say the risk allocation theory, differential risk allocation between investors and creditors trading, simply cannot be accommodated to this particular structure?

MR COLES:   It cannot and is irrelevant in any event.  There was mention of the prospect, for example, of massive claims besetting a liquidator.  We say that may or may not matter and, indeed, one would find in the large number of liquidations the rights of a secured creditor are likely to prevail over these sort of claims anyway so that the matter may often be academic.  But more broadly we would say that when one is looking at the investing public, there are those who want to advance unsecured to the company with the expectation of a return of interest and achieve a gain by those means.  There are others perhaps more courageous who want to advance money to the company by way of capital and hope to achieve a return by way of dividend.  But in each case they are largely indistinguishable as a class of investing consumers and there is no reason to suppose that those remedial or consumer protection provisions are any the less likely to be intended to benefit everybody.  In other words, there is no point. 

Persons may without particular discrimination be investing or lending, as the case may be, in each case the only matter of significance to them being some return on their invested funds.  So we do not see that the process of statutory construction accommodates, let alone yields to, any theory of the way of allocating risks in subscribing or advancing working or other capital to the company.  I was going to just put some brief submissions then, your Honours ‑ ‑ ‑

HAYNE J:   Just before you do, would you mind restating how it is that the subscribing shareholder case is accommodated with the words of 563A?

MR COLES:   Yes, the subscribing shareholder can be accommodated to a claim or debt to a member in his capacity as a member only if, in our respectful submission, one accepts the proposition that that claim is a claim in opposition to the obligation of that member being an obligation imposed on it by the corporations legislation.  If the member is saying, “Notwithstanding my liability to contribute to the company, I want my money back”, then that is a claim that can be fairly described – if one wants to uphold the reasoning in Webb, one would have to do it by these means, in our respectful submission.

HAYNE J:   But do you confine it therefore to the partly paid – what of the fully paid shareholder by subscription who is not liable as a contributory having contributed the whole, can that person recover the subscription moneys from the company or does that claim come within or without 563A?

MR COLES:   Well, on this view, it would come within 563A because it is a claim put really in opposition to section 515.

GLEESON CJ:   There is a provision, is there not, that when you subscribe for shares in a company, a company can only allot shares in return for cash or kind?

MR COLES:   Yes.

GLEESON CJ:   Is it the obligation to pay up the shares for which you have subscribed that this is in opposition to?

MR COLES:   Yes, it is the obligation to either, in the case of fully paid or partly paid shares, leave with the company the amount you have already subscribed and, in the case of partly paid shares, to top up that amount to the necessary amount to make them fully paid shares, which is your obligation.  So it accommodates fully paid shares because the duty statutorily is to leave that sum of money with the company to be available as the funds, at least classically, to meet the claims creditors.

HAYNE J:   The difficulty that is presented by the submission is the need to resort to this expression “in opposition to” as somehow coming within the reach of “in the capacity of”.

MR COLES:   Otherwise you cannot accommodate the conclusion in Webb.

HAYNE J:   But that is the difficulty, is it not?

MR COLES:   That is the difficulty.  You cannot accommodate Lord Browne‑Wilkinson’s theory of incapacity or character of a member as easily with Webb unless you also take on board that part of his observations which refer to obligation.

GUMMOW J:   But if that was so, that would not be fatal to your case, would it?

MR COLES:   It would not.

HAYNE J:   It may suggest only that Webb, or a circumstance like Webb, should have been resolved otherwise.

GUMMOW J:   Yes.

MR COLES:   Yes, Webb should, we can now say, I suppose, without ‑ ‑ ‑

GUMMOW J:   Out with it, Mr Coles.

MR COLES:   It might have been easier for our learned friends and ourselves if Webb had been resolved in the plain straightforward way, for example, that Soden itself was resolved but in the context with which Webb was concerned by first going to 563A or its then equivalent, 360(1)(k) and analysing why the claim in Webb was a claim in the capacity as member.

GLEESON CJ:   That gets you back to the fact that in Webb they thought the problem was related to reduction of capital.  You only have to look at the first sentence in Mr Finkelstein’s argument and that, in turn, drives you back to a very old controversy about what Houldsworth was all about.

MR COLES:   Yes, and the submission advanced, even, I think, as I read the report of the argument, to the analogy with the subscribed capital as something in the nature of a trust fund for creditors which, with respect, could never have been right.  Could we say these things about where Houldsworth, we think, fits into the scheme of things and where, perhaps, it provided the long way home in Webb where there was a shorter path.  Houldsworth, in our respectful submission, is absorbed, to use I hope a neutral word, by 563A.  There is not – and we say this respectfully in short answer to our learned friend Mr Bathurst’s written submissions – an independent stream of common law described by the Houldsworth doctrine if ‑ ‑ ‑

HEYDON J:   You say it has in effect been repealed and stated in a modified form?

MR COLES:   I said absorbed but, yes, our submission on that is really that – and perhaps that is more particularly seen in the immediate predecessor of 563A when we did have those provisions such as 218 of 1961 Act and 525 of the Corporations Law where you had the rider provisions which authorised you to take into account not where there is a competition between members but where there is a final adjustment of the rights of contributories between themselves.

That legislation, in our respectful submission, was in a sense inconsistent with the proposition in Houldsworth that you simply had no claim at all.  At least the statutory provision says you have a claim and merely demotes it in the case of a competition between members or in the present statutory formulation until all the debts owed to other persons who are not members have been paid.  So, in a sense, Houldsworth really would have been at odds with the statutory provision, even in 1862, if any one had thought about it, because it just did not accommodate the rider in subsection (7).

A problem with Webb really is that, although plainly their Honours were aware that it was not the case, Webb seemed to assume that section 360 of the Victorian Corporations Code, 360(1)(k), was somehow the statutory embodiment of Houldsworth which it was not because it merely mirrored almost in identical terms the statutory provisions that had been in place some 18 years before Houldsworth was decided.  What Houldsworth does have to say, in our respectful submission, in relation to the statutory provision is it provides a very discursive – I put this, I hope, respectfully – discussion of policy reasons why the legislature had back in 1862 enacted the provisions that were section 38(7) and it seems to do that ‑ ‑ ‑

GLEESON CJ:   I am not sure you are really fair to Webb, if I may say so, because the basis on which Webb was decided is very much in line with Professor Gower’s rationalisation of the decision in Houldsworth which was that a shareholder who wishes to rescind the agreement for subscription must do so promptly since the existence of his shares may have led others to extend credit to the company.

MR COLES:   Yes.

GLEESON CJ:   The idea, as I understand it, is that when the original subscriber subscribes capital to the company people then extend credit to the company on the faith of its capital structure, its capital basis, but whether that is representative of current business practices or not may be another matter.

MR COLES:   That is a theory, in our respectful submission, which harks to the day when people looked at public registers rather than balance sheets and profit and loss accounts because, as your Honours will have noted, the accounting provisions in the 1862 Act were rather limited and a register of members probably had a more inducing effect to take up shares than ‑ ‑ ‑

GLEESON CJ:   Houldsworth preceded Salomon, did it not?

MR COLES:   Yes, by 17 years, I think.

GLEESON CJ:   There are some very basic concepts of company law that had not even yet been worked out at the time Houldsworth was decided.

MR COLES:   We have put, I hope accurately enough, in our written submissions the proposition that Houldsworth really looks primarily at the situation to be discerned from the law of partnership and when one is looking at notions of the necessity of rescission their Lordships, it seems to us, must have had very firmly in mind the notion that a new partner who comes into the firm and discovers he is being misled may want to rescind the contract of partnership but there will be difficulties if in the meantime the firm has received credit from others and he will still remain liable – and it is a concept of that kind.

In our respectful submission, the difficulties which beset the rescission of a contract of partnership for misrepresentation were assumed as appropriate to what was after all in Houldsworth an unlimited company so that the analogy was not utterly imprecise or inaccurate.  If the circumstances had required their Lordships in Houldsworth to give attention to a company limited by shares which we knew to be a separate legal entity and the like, one would imagine a different discourse.

The only other things we want to say about Houldsworth – we draw attention, I think as I have mentioned before, to the Full Court’s decision in the Cadence Case where, in our respectful submission, the interplay between Houldsworth and 563A is sufficiently discussed.  We would also add this, that Houldsworth – and indeed the situation was the same up until relatively modern times – came from an era, it needs to be noted, where the right to prove for those sort of claims was much more limited.  Indeed even up until the time of Webb claims in a winding up were based upon the applicable bankruptcy legislation, which in the days of Webb were incorporated by section 438 of the Companies Code and simply picked up, with some modifications, section 82 of the Bankruptcy Act.

GUMMOW J:   Kipping’s Case was running around it, was it not?

MR COLES:   I am sorry, your Honour.

GUMMOW J:   Kipping.

MR COLES:   It is Jack v Kipping, yes.  Your Honours dealt with the matter extensively in, I think, Coventry v Charter Pacific and explicated the interface between the section 82 confined range of proofs of debt with the rather more expansive set‑off provisions.  That case, for example, does illustrate, in our respectful submission, that there was a much more confined area in which one could prove claims in the time of Houldsworth and they had to be claims arising, in effect, in contract, promise or breach of trust.

Later, and after Webb, of course 553 came in.  Back in the days of Webb they were still concerned, as indeed question 1 in the liquidator’s summons posed, they were still concerned with whether a claim under section 82 of the Trade Practices Act was a provable debt in the winding up having regard to section 82 and whether a deception claim fell within promise, contract or breach of trust, an issue your Honours probably would have resolved on one viewing perhaps in the Charter Pacific Case adversely if that had been in play in Webb.

In our respectful submission, the door opens rather more widely when one realises that after Webb section 553 in its present form came in, I think in about 1992, which of course authorises all claims, in effect, without qualification or limitation, to be proved in a winding up.  One, of course, therefore asks:  why would not a claim of Mr Margaretic’s kind be provable?  That does not seem now, I think, to be much in contest.  The only issue is why must it be postponed or deferred or subordinated to ‑ ‑ ‑

CALLINAN J:   Mr Coles, there would be no doubt, would there, that your client would have an action for breach of the listing rules against the directors or the executives concerned?

MR COLES:   To be frank, I am not sure of that, your Honour.

CALLINAN J:   It would be an act of diligence, would it not?

MR COLES:   This is not like a 736 claim where there is a raft of identified people who are made responsible.  A prospectus claim casts the net very wide.

CALLINAN J:   But so do the listing rules, do they not?  They refer to an executive or directors who are bound as a continuing positive obligation.

MR COLES:   I agree with that, but I think one may need to contrast the provisions of section 730 – yes, I am sorry,729 of the Corporations Act deals very specifically with the breadth or width of the net that can be cast for prospectus contraventions and tells you that persons making the offer, each director of the company, a person named in the prospectus or disclosure document, the underwriter, persons named as having consented to the mention in the prospectus, they are all targets. 

We do not necessarily find the same expression of breadth of legislative intent so far as the objects of liability for a contravention of section 674 are concerned, around 674, which is why one needs to look, for example, at 1325 as one example.  The answer to your Honour’s question is probably yes, at least if only because, although they are not referred to in – I am sorry, 1325 I should finish first.  Section 674, of course, puts the obligation on the entity.  The question is whether one finds another provision such as – 1325 says where there are proceedings instituted for a contravention of, amongst other things, 6CA, which is where you find 674, if you find loss or damage engaged in a contravention, make an order “against the person who engaged in the conduct or a person who was involved in the contravention”.

HAYNE J:   The persons involved include 674(2A) as qualified by (2B).

MR COLES:   Yes.  So I think the answer to the question is probably yes, if your Honour pleases.  I am sorry, that took me longer than it should have.

CALLINAN J:   It might be a negligent non‑disclosure which would be protected by directors’ indemnity insurance.

MR COLES:   It might be, your Honour, yes.

CALLINAN J:   Or which might be indemnified, anyway.

MR COLES:   In our respectful submission, the availability of other targets or other defendants is not a reason for a conclusion that an otherwise apparently identified target ‑ ‑ ‑

CALLINAN J:   It may be a relevant policy consideration, though.

MR COLES:   It may, your Honour.

CALLINAN J:   The fact that there are other remedies, quite specific remedies, under the Act which might be good remedies may argue again perhaps against your case.

MR COLES:   I cannot claim it is not a factor one could not take into account as a legitimate process of statutory construction but, in our respectful submission, it would be subtracting by implication from what are otherwise general words.

HEYDON J:   Mr Coles, do you say that Webb’s Case is wrong only so far as it applies to transferees or do you say it is wrong, even if it applies only to subscribers?

MR COLES:     No.  Our first submission is Webb’s Case is correct so far as it is considered to hold what we contend it holds, namely, that it is concerned with subscribers or in that case a transaction so closely analogous or connected with subscription as to be indistinguishable from.  That is to say, if the deeming is between the shareholder and the company concerned in connection with the acquisition of the company’s securities and is vitiated by a representation by the company itself to the shareholder, then one has an indistinguishable situation from the Houldsworth line of country and it is not really to the point, as perhaps Mr Walker wished your Honours to accept, that the company might in some circumstances, without telling anybody, not actually allot the shares fresh but might have them parked on a shelf in a convenient nearby warehouse.

In our respectful submission, one cannot draw any distinction there.  But the situation on the other hand that Mr Margaretic is in, which is a situation of transfer from a third party for consideration paid to that third party, the loss being sustained by back payments not to the company in circumstances where the original subscriber’s capital is left utterly intact and where Mr Margaretic’s damages have absolutely no correspondence or direct or necessary relationship with the quantum of that originally subscribed capital, in our respectful submission, distinguishes his claim significantly and we have dealt with that.

GUMMOW J:   What is your second proposition about Webb?  You said that is the first, is it not?

MR COLES:   Yes.  Our second proposition is, if contrary to the first, Webb’s Case applies to transferees, then we say that your Honours ought to reconsider it in the light of all of the things that have happened in the intervening time.  Without going into excessive detail, your Honours, there are, of course, the proof of debts provisions that I mentioned.  There are the provisions in 2H and 2J of the Corporations Act relating to the raising and maintaining of capital.  The entitlement, for example, now to issue shares without a par value which necessarily has destroyed the substratum, for example, of the Ooregum Gold Company Case which depended on a recognition that the statute imposed a duty to divide one’s share capital into classes which has now gone by, in effect, the proscription on issuing shares with a par value. 

Let me summarise, your Honours, as shortly as I can why we say the landscape has sufficiently changed since Webb to suggest that a different conclusion could be reached.

GLEESON CJ:   Were share buybacks possible at the time of Webb?

MR COLES:   Not in the form they appear in 2J I do not think, your Honour, no.  I think that is common ground.

HEYDON J:   Are you referring to what is in paragraph 43 of your written submissions‑in‑chief?

MR COLES:   Yes, I think so.  The other thing that has happened since Webb is, of course, Soden which would justify a – and in a negative sense Soden not only represents an authority available for application in this context but also highlights a deficiency in Webb, namely, their Honours did not in Webb zero straight in on the 563A issue.  Of course, the conclusion or the holding in Webb is that the shareholder’s claim in that case was a claim in that person’s capacity as member and, as I say, we are not disposed to be particularly hostile to that conclusion, but if the holding were to extend to transferees, then we would want the Court to reconsider that in the light of these methods that have happened, including, for example, the abolition of objects clauses and the extinction of corporate capacity and, most importantly of course, the enactment since Webb of the very statutory consumer protection remedies on which Mr Margaretic relies which were not there then and which are, if anything, statutory authorisations to the company to apply its capital in meeting those claims. 

So they transcend any prohibition on misapplication of capital and they overcome any suggestion that the payment of damages to a person who is very often going to make his claim as – be a member or have been a member when the claim is made.  There is no point creating a right which would normally be available to people who are or become or have been, even if they have ceased to be members, and taking away the value of the right in a liquidation context because, after all, when is the right of any use…..  Those are matters – however, having said that, I do have to deal with an observation that was put this morning about Justice McHugh’s judgment.

In our respectful submission, Justice McHugh’s judgment can be seen in a sense as correct and not out of kilter with the majority judgment, inasmuch as his Honour has held or would hold that section 82 of the Trade Practices Act supplied a remedy to the shareholder in the Houldsworth‑type of circumstances.  Correctly, his Honour can identify that a section 82 remedy for damages does not require rescission of the contract as an element of its availability and, as his Honour was probably also intending to point out by his references to section 87, the court would have power, subject to the limitation that the majority judgment referred to, to make orders under section 87 which could accommodate the Houldsworth conundrum in any event.

In our respectful submission, one can accept the first part of Justice McHugh’s proposition, namely, section 52 and section 82 are available to provide a remedy which does not suffer from the Houldsworth infirmity, that is to say, requiring rescission.  The difficulty we have, I think, in that respect, however, your Honour, is what is the answer to the question:  why is not the section 82 remedy just as much a claim by a person in his capacity as a member as the tort law remedy in deceit or any other representation or remedy under the general law if it falls into the category I previously described of being an abrogation of the statutory obligation to contribute to the assets of the company? 

That is a difficulty we face and that would be an answer to so much of Mr Margaretic’s claim as depends on one view under the Trade Practices Act.  It would not, however, in our submission, answer his claim so far as it falls under some of the other consumer protection provisions, we would say, because they are not – well, I am sorry.  If I put that badly, I do apologise and I withdraw it.  It would not help the subscribers in Webb even if one did recognise the availability of the section 82 remedy under the Trade Practices Act.  It would give them avenue for the recovery of damages but their claim would remain subordinated by section 563A.

That is not a problem Mr Margaretic has for reasons already put if your Honour accepts our submissions that he does not make his claim in his capacity as a member.  Insofar as he makes other claims under other sections of other legislation, including the corporations legislation, he does so, in our submission, not in his capacity as a member but simply in his capacity as a person aggrieved by a statutory provision conferring remedies without limitation or qualification in the particular circumstances which the facts applicable to Mr Margaretic’s situation engage.  So he claims as a person who has suffered loss or damage in connection with a non‑subscription claim and therefore there is no reason why Webb – if Webb were in other words found to apply to transferees, then an answer to that would be that might be a problem so far as the Trade Practices Act is concerned on one view, but that is overtaken by the generality of the other statutory provisions to which we have referred.

CALLINAN J:   Do you make any distinction between your client and a person who has retained shares on the basis of non‑disclosure?

MR COLES:   No, in our submission, that would fulfil one of Mr Walker’s essential ingredients of being on the register, but that does not matter, in our submission.

CALLINAN J:   You would have potential for very large claims ‑ ‑ ‑

MR COLES:   A person who has sold shares too cheaply because useful information was not fed into the market in breach of listing rule 3.1 and who is not a member, because the hypothesis is he suffered his loss by selling the shares, you can hardly say he makes a claim in his capacity as a member because the very thing that brought about his entitlement to damages is the loss of his membership.  If that is right, it seems to us the converse must also be true.

CALLINAN J:   Practically every shareholder is going to have a claim.  Every shareholder will say, one imagines, with some degree of credibility, “I would have sold but for non‑disclosure”.

MR COLES:   We do not see the spectre of massive volumes of proofs of debts as either a realistic prospect or a difficulty in liquidation.  Let me say why.  Firstly, of course, one has the…..example supplied by Justice Gzell’s judgment, which your Honours have seen, that is Johnson v McGrath.  The Margaretic claimant failed before Justice Gzell.  He failed for the simple reason, as many such claimants would, the simple inability to prove any reliance on the state of the information ‑ ‑ ‑

CALLINAN J:   It would be much more sophisticated to a class of litigants if this case were to succeed.  A lot more hindsight.

MR COLES:   One bears in mind that people who make claims in the winding up of insolvent companies may be required by the liquidator to verify them.  It is not to be assumed they are all going to tell untruths in support of their proof of debt if the fact was that they did not rely on the marketplace information.  Some may, and the court system is apt to test that outcome.

CALLINAN J:   But most people hold or buy shares on the basis of what is happening in the market in relation to them, and the whole of the market, including all the financial advisers who are part of it, are totally reliant upon what the company says about its business or what it does not say about it.  Reliance would be very easy to establish.

MR COLES:   Indeed.  As a practical measure, can we offer this observation, if your Honour pleases.  One can more usually expect a serious contravention of the listing rule disclosure or continuous disclosure obligations the closer it is the company gets to its terminal point.  So one is going to be looking at a fairly closed period of consumers or market participants in the period between the egregious non‑disclosure and the corporate collapse.  The two are going to be very related.

GLEESON CJ:   Not only that, but by hypothesis we are fighting over what is left over after the secured creditors have attended to their business.

MR COLES:   That is right, exactly, and that is in our submission.  Can I add only one further observation to that.  Liquidators are quite accustomed to dealing with large numbers of claims.  Indeed, it is probably correct to say that one of the biggest problems in at least one contemporary liquidation is not massive claims for large sums of money.  One of the liquidators of a well‑known telecommunications company has as one of his principal problems the number of small claimants, telephone subscribers with residual accounts of $5, $6, $8, $10, $12, and what do you do with 250,000 people?  How do you administer those claims except at vast expense to the company?  It is not only big claims that cause problems for liquidators.  Little claims can do it too, in our submission. 

The point is the legislature has chosen the chartered accountancy or accountancy profession to carry out these things.  If they become a big legal problem, the legislature can decide to go the American way and get lawyers

to do windings up, and some people might want to favour that course, but, in our respectful submission, it cannot be resolutive of the proper interpretation of 563A that a recognition of Mr Margaretic’s claim will generate further fresh or more complicated claims.  As commerce becomes more problematical and more complicated, so likewise are the range of claims upon which a liquidator will be required to adjudicate.  So, in our respectful submission, spectres of floodgates and the like are necessarily, as always, to be put to one side.  Unless there are any other matters in which we can be of assistance, your Honour, they are our submissions.

GLEESON CJ:   Thank you, Mr Coles.  Yes, Mr Walker.

MR WALKER:   Your Honours, in answer to my learned friend’s, I think, second alternative reading so as not to be totally destructive of the correctness of Webb, of that decision, we would submit, with respect, that notwithstanding all the commercial differences, no doubt, and social differences as well, between the setting in which the claims came to be made in relation to those three building societies and the setting in which the current claims are made in relation to this mining company, the same character appears in both settings, namely, the company itself whose capital is in question. 

The company itself is the main defendant against allegations that by its conduct it caused someone to become a member by acquiring a share upon an accomplished and registered transfer.  It is impossible to detect in the facts upon which the High Court opined in Webb and the facts which this Court has in the agreed statements that you have seen in volume 1 of the appeal book here, it is impossible to detect any greater remoteness in this case or any greater proximity in Webb between the conduct which induced the acquisition and the eventual membership in the one case or in the other.  So if that is a way of vindicating the correctness of Webb, it is a way of also demonstrating that as an authority it covers the current case in the way in which we have argued it.

GLEESON CJ:   Mr Walker, just on the structure of this litigation, is ING here to represent the unsecured creditors?

MR WALKER:   There is no representative order.  I am sorry, that was in question at first instance and refused.

GLEESON CJ:   What is the structure in terms of parties in this litigation and how come there are two appeals?

MR WALKER:   There are the administrators on the one hand, and there are the unsecured creditors, for whom my friend appears.  There is no representative order.

GLEESON CJ:   You are representing the administrators?

MR WALKER:   Yes, your Honour.

GLEESON CJ:   Mr Coles is representing Mr Margaretic?

MR WALKER:   The claimant.

GLEESON CJ:   Who in turn is representing a whole lot of other people who might be in a similar situation?

MR WALKER:   His case is regarded as representative as a matter of English.

GLEESON CJ:   Typical.

MR WALKER:   Yes.

GLEESON CJ:   And Mr Bathurst is appearing for an unsecured creditor and the spectre absent from the feast is the secured creditors?

MR WALKER:   But they are absent from this feast.

GLEESON CJ:   The banks and the like?

MR WALKER:   They are.  That is because there is nobody with such an interest.

GLEESON CJ:   I see.  So although this has not been framed explicitly as a representative action, we have before us people who are ‑ ‑ ‑

MR WALKER:   Those who are queued up with their cutlery, yes, your Honour.  This is not a case where, as it were, a mortgagee is going to sweep in and take everything.

GUMMOW J:   Are you saying there were secured creditors but they have been satisfied and gone?

MR WALKER:   No, there are not.

GLEESON CJ:   There is no relevant competition between any classes of unsecured creditors with which we need to be concerned?

MR WALKER:   That is correct.  Of course, this is unlikely, uniquely to be the case in which secured creditors’ claims do not exhaust the pot.

GLEESON CJ:   Are there two appeals just because there were two respondents?

MR WALKER:   Yes.

HAYNE J:   …..administrator took a contending role?

MR WALKER:   Yes.  Next, in relation to the characterisation of Mr Margaretic’s claim, my learned friend, Mr Coles, refers to a possibility, not real in this case, of what he characterised as a claim that must be for damages upon a person either taking a transfer before registration or as Justice Heydon, with great respect, pointed out correctly, simply upon entering into an executory contract which eventually would call for settlement by delivery of a registrable transfer.

Now, first of all, that is not this case.  We know that from the way in which the facts are recited.  Most attention, of course, has been paid to that in section B on page 498 of the appeal book but 497 in section A4 makes it plain that what is thereafter called “the purchase” is one that was completed and which led in the ordinary course to the ordinary outcome, namely, entry on the shareholder register.  Now, that is what renders meaningful what is then and importantly recited in A6 at the top of page 498, the value of the shares is nil.  That is something that matters because he is a holder of those shares and thereby a member of the company.

Your Honours, my learned friend’s proffered reading of 463A requires the articulation of a policy or principle which fastens upon what my learned friend variously described – I hope I capture it correctly by the phrase‑ the obligations of a contributory, and it apparently means the obligation to contribute, and it is anything that opposes that, and it would appear my friend means by that, not by as it were declaratory relief or an injunction against calls, but rather anything which has an economic effect of eliminating or detracting.  That appears to be what my learned friend means by the phrase “in opposition to”.

The first thing to note, even before attacking this question of contributoryship as the unexpressed essential character of the class whose debts are affected by 463A, is if my friend is correct about the economic effect upon it then that certainly applies to subscriber claims and my learned friend’s argument has conceded as much.  Because it is economic effect and because it has to do with membership and membership is the same for a subscriber as for a transferee, then it will also apply to transferee claims.  My friend does not concede that, but the premises of his argument make that inevitable.

Now, my learned friend elaborated the notion by referring positively to an obligation which was seen, as we understand it, to be the obverse of the obligation to contribute in a winding up, which is an obligation, as he put it, “to leave the capital in”, language which, of course, is redolent of the person who actually supplied capital upon subscription.

Now, the first thing, of course, is that that is simply an incomplete phrase to describe what the statute, regardless of current practice or popularity of financing methods, what the statute contemplates which is, of course, that you will only contribute some of the capital which eventually may be called for by dint of your membership.  That is not simply true of a subscriber for partly‑paid shares.  It is even more true for the person who acquires by transfer a partly‑paid share.  They are obliged to contribute as well.

So this notion of leaving capital in is an incomplete description of the obligation which, for the reasons we have put in‑chief, sees 463A as a statutory requirement that what I will call generally speaking other creditors or claimants are paid first before any debts are paid owed to a person in their capacity as a member.

Now, for the reasons I have already put, my learned friend’s proffered paraphrases or discovery of this principle or policy about contributoryship and its obligations does not, with respect, advance the matter of construing the words which have been found, which as Justice Hayne has pointed out, may simply be something in the nature of an attempted linguistic improvement on older language which is now found in the phrase “in the capacity as a member”.

We, of course, draw to attention that if there is an obligation to leave capital in with the qualification that it includes “and to contribute” in the case of partly‑paid shares to pay up further.  That is an obligation which my learned friend in the statute must be locating only in 563A itself – in other words, it concedes the major conclusion of our argument – or it is found in the mixture of the particular terms of issue and rights and obligations of a particular class of shares and section 140, and either way, in our submission, it comes back to 563A being interpreted in a way which supports the argument for which we contend.

Now, it may or may not matter in relation to an argument expressed in terms of contributoryship, but it is worth pointing out that section 9 of the statute defines “contributor” in a way that recognises that but for the extended definition of “contributory” it would leave out of account the holders of fully‑paid shares.  That is why one finds the first two limbs of the definition of “contributory” in section 9.  The first is – and the words used include the notion of member and the notion of holder of shares.  The first is those who are liable to contribute on winding up, but we know that the qualifications, which although – the qualifications to liability to contribute, of course, including that you do not have to contribute in the case of a company limited by share if your share is fully paid.

CALLINAN J:   That is the symmetry of it.  You get that advantage.  You get the advantage without that risk and then on the other side you can get the advantages for which you contend or you do not get the further advantage for which Mr Coles contends.

MR WALKER:   The defined term “contributory” goes on to include holder of fully‑paid shares, and for obvious reasons, bearing in mind some of the provisions in which “contributory” is found because holders of fully‑paid shares do not have any subsisting or continuing or future obligation to contribute anything further in a winding up.

Now, in one sense, none of this matters but it is important for a point we make in reply.  The word “contributory” does not appear in section 463A.  The very definition of “contributory” shows the problem understood by the legislators or by the draftsmen with respect to what characterises “contributory”, namely, that you either have contributed, fully‑paid; or you will be obliged to contribute in winding up, in the case of non‑shares or in the case of shares not fully paid.

When one then considers the focus of section 563A one sees that in relation to status as a member 563A is not concerned with unwinding that by rescission, a matter raised by the Chief Justice.  The word in 563A is “debt”.  It is a monetary matter.  Now, in any event, one has the provisions which we do not need to dwell on in relation to undoing your status as a member which, if the statutory contract were the focus, one would expect to be to the forefront of 563A.  One has in any event the provisions of 468(1) and 471B, to which I do not need to go.  One has the limited cases in which settling lists of contributories is necessary, see subsection 478(1A), and there is an element of creditors first ‑ and if that means members last so be it – to be found in section 483(2).

Your Honours have asked my friends about the use of the word “debt” without its accompaniment claim in 563A.  I do not think we have in reply further to offer than my learned friend, Mr Bathurst, offered.  Could I draw to attention a similar usage in section 553A?  I do not suggest that it is in such a context as to give any further explanation of what one is reluctant to but may be driven to suggesting derives from switching between context when one talks about “admissible debts” and context in which one talks about “claims”.  That may be a matter of temporal context leading to “debt” alone being used where “debt or claim” could as well have been used.

HEYDON J:   You do not challenge what Justice Emmett said, namely, that no significance should be attached to the use of one term or another because of the table which we have had several additions to.

MR WALKER:   Quite.  That is our argument.  There have been several attempts from the Bench to extract from the Bar what there might be by way of explanation for it.  I confess I do not have anything further to add to that.  Section 553A certainly is a provision which, in our submission, is all foursquare with the arguments we have put about the meaning and proper interpretation of 563A.  That then leads, of course, to a consideration of the matter which we respectfully accept is an appropriate characterisation by the Chief Justice, namely, that on the opposed arguments it is necessary for their respective successors to regard as valid or as cogent what might be called somewhat striking distinctions which are necessarily involved in the arguments.

Now, at least our distinction with the, as it were, stark temporal element of being a member when the claim to the debt, when the debt is claimed, at least that has the virtue of textual support by referring to a person in their capacity as a member.  It has this textual support as well.  As your Honour knows from the provisions that have been rehearsed yesterday as well as today, the expression “past and present member” is not unknown in the linguistic armoury of this draftsmen.  It is found in a number of provisions to which reference has been made.

So when there is intended to be an embrace of the past or former member as well as the present in a stipulation, one finds it in the statute.  Now, that is an argument I have to put diffidently or tentatively because it requires saying that every word in the statute has been chosen with lapidary care so as to produce no wastage and full work by every part of the verbiage.

That would be a brave submission, but it is nonetheless, in our submission, one which provides linguistic and textual support for our position of a kind that is not present for the distinctions that are necessary for the success of our opponent’s argument.

GUMMOW J:   You say 563A speaks to the situation of a person who is a member at the relevant time, but could be a later time?

MR WALKER:   Yes, it is a person who, if a list of contributories came to be compiled, as a member would be on it, but is not included within that extension or component of that class of contributories, namely, past member, because the expression “past” is not used.

GUMMOW J:   So it is a reference back to 478 temporally?

MR WALKER:   Yes, when your Honour says “a reference back”, I am quite unable to say that is the way in which this drafting style allows one to proceed.  Reference back is asking too much of the text.  However, it may be I am saying the same thing when I submit that of course one takes into account the context and the structure that includes section 478(1A), for example.  So it is for those reasons, in our submission, that there are distinctions to be drawn.  There is a line to be drawn.  Section 463A draws a line in the sense that it describes a class.  The fact that there are borderline cases is of no moment.  That is in the nature of there being a line.

GUMMOW J:   What is the difference, if you can just encapsulate it, between your construction and Mr Coles’ construction?

MR WALKER:   The difference is that if Mr Coles’ construction is that subscriber claims are caught by 563A, and we apprehend that is his position, then the difference is that we say that textually and commercially economically there is no warrant for distinguishing between subscriber claims and transferee claims, and that the word “member” has at its core – not on its periphery – but as its core the inclusion of transferees in the same class as subscribers.  It is a word which says, “There is no difference between subscribers and transferees.  You are members and we are looking at the fact that your name is entered on a register in a company limited by shares, as in this case, as a holder of shares”.  That is the difference between us.

Now, in relation to this notion that there may have been another claim, which one does not see from the agreed facts, by Mr Margaretic before there was registration, we would submit that as a matter of substance – and these matters have to be matters of substance – what Mr Margaretic claims is that he exchanged good money for bad shares, that he became a member – he became registered with a member’s rights rather than somebody still with money in his pocket.  He became registered with a member’s rights, including a share worth zero or nil, as the facts say, rather than any allegation that he became a purchaser with a right to compel either money’s worth or, perhaps an unlikely event, specific performance, for shares by then he did not want.  Not surprisingly, that is no part of his case.  It is for those reasons that that part of my learned friend’s argument can safely be put to one side.

The Chief Justice asked concerning the word “profits” in 563A.  One of the suggested readings of that from the Bar table was that it is what is left over by way of a surplus after all the debts and liabilities have been paid.  Generally speaking, that may well be an entirely acceptable 19th century understanding, particularly at a time when partnership or an association of co‑venturers was in reality the model, newly being regulated by the incorporated joint stock legislation.

However, the problem in 563A, which is after all a priorities or competition‑resolving provision, the problem with reading “profits” in that way is that there would be no competition with those creditors whose liabilities have to be taken into account before you produce the profit in question.  So “profit” presumably means something even more diffuse than the ordinary commercial understanding of it, and we would definitely suggest that “profit” simply means the perceived surplus to which the co‑venturers severally or together regard themselves as from time to time able to take back into their several or aliquot private control.

In that very general sense it covers, of course, any attempt by the member to get back money’s worth for their having risked their capital.  That is why the words “or otherwise” are very important, because they must be adding something to the general notion of dividends or profits, and it is for those reasons that they are easily capable of including the kind of claim which is made here.

Justice Gummow asked apropos the possibility that the section 140 so‑called statutory contract is the universe of that which is postponed, that is, debts arising from its enforcement, the universe of that which is postponed in priority for payment in a winding up by 563A, and particularly drew to attention the discussion by Justices McHugh and Gummow in Bailey v New South Wales Medical Defence Union.  I just might hand up copies of that.

The discussion in question which commences at page 433, but which of course requires the context of the exposition of the articles of association, the insurance arrangement and the changes in the articles which precede it, it commences at 433 and it is, with great respect, a discussion concerning the difficulties, both in practice and conceptually, of understanding what it means to refer to a “memorandum and articles, pursuant to” relevant legislative provisions constituting a contract, as it is put at page 435, point 7:

between the members inter se, the contract is of an unusual type.

Their Honours then go on ‑ ‑ ‑

GUMMOW J:   This phrase “in his character as a member” creeps in in this clause as well, in the case law.

MR WALKER:   Yes, although one finds that at page 434 with Mr Justice Cussen ‑ ‑ ‑

GUMMOW J:   And later at 437, I think.

MR WALKER:   Yes, but it has to be said, although there is discussion concerning the so‑called statutory contract and whether or not it was available to be enforced by Dr Bailey’s estate in the manner proposed, there is not discussion of the particular phrase which is at the heart of the problem here.  I draw to attention, for what it may be worth, the epigram from Professor Sealy which is extracted at the middle of page 435.

There is then the discussion which continues on to page 436 which includes halfway down that text important reference to the historical evolution from deeds of settlements and partnership and trust.  Page 437 about the middle of the page, the passage leading up to that, there is discussion in that paragraph commencing “Hence” which does provide some discussion of the matters in question in this case.  Interestingly, the quotation from Mr Justice Cussen with which that paragraph concludes talks about:

persons who are members may also deal with the company or be involved in its affairs in some further capacity as “an outsider”.

In our submission, an outsider is a very difficult concept to apply to a person who says, “I have become a member in a way which has been tainted by your fraud.  I want damages to compensate for that sorry state of affairs”.  So the notion of “outsider” is one which, if I can say so, is as difficult in this area as it would be for perhaps section 51(xx).

When one goes to page 438, there is again a reference at the top of the page to the difficult distinction between a member as a member as an outsider, and then something which probably means that these reasons cannot supply an authoritative answer today:

Nevertheless, on this appeal it was not disputed that, where rights are by the articles given to members in some other capacity -

and in Bailey it was presumably argumentatively the capacity as an insured doctor, but of course being a member was – you became a member in order to be an insured doctor, using the word “insured” loosely, it turns out –

reliance cannot be placed on the “statutory contract” as the source of contractual rights.

What does follow from that negatively and in support of our position for this case is that one can say, according to that understanding of the matter, that the statutory contract is neither exhaustive nor sufficient as the way or source of obtaining a debt in your capacity as a member.

GUMMOW J:   Why I referred you to what is said in Bailey is that it perhaps helps flesh out what Lord Browne‑Wilkinson was doing at page 338 of Soden when he came up with this expression statutory contract as the – section 14 it was of that legislation, plus what you have to have in the Act as well.

MR WALKER:   Your Honour, what the discussion in Bailey demonstrates is that you cannot just look, as it were, in a discrete way and say, “There’s the statutory contract.  Anything that arises from that arises and is enforceable in your capacity as a member”.  Perhaps that does not follow.  That rather disqualifies the statutory contract as the only touchstone for the operation of 563A.  There are similar references over on page 439 following the quotation from the New Zealand authority in the paragraph commencing with the reference to:

the broad trend of authority referred to . . . the subject matter of the “statutory contract”, so far as concerns the relations between the corporation and the members, not as commercial rights but as the government of the corporation and the exercise of the constitutional powers of the corporation.

Then some specific examples of what they may turn out to be.  Then one has a similar kind of distinction in one of the paragraphs of conclusion which commence at the foot of page 439 and go to the top of page 440 with the expression as:

particular rights –

not being able to:

be described as flowing from the general regulations of the Union as applicable alike to all shareholders.

For all those reasons, in our submission, one would pass over or reject the possibility that the so-called statutory contract provides the only way in which a debt caught by section 563A and thereby postponed in payment is to be described.  That is not to say that enforcement of obligations which may be enforced by a member in their capacity as a member under the statutory contract is not within debts caught by 563A.  They would be.

HAYNE J:   But the reference to “statutory contract” may reveal what is the root of the problem that now confronts us.  At the time of the 1862 Act until the advent of the modern consumer protection provisions money claims by shareholders against the company which were on account of or connected with becoming a shareholder were limited to deceit claims.

For the most part those claims were conceived by those considering them as a deceit occurring in connection with a bargain between the company and the shareholder, that is deceit on subscription not as a misrepresentation made by the company with the intention that it should be relied on with respect to on‑market transactions.  Those were not present to the minds of the framers of the 1862 Act or, I suspect, to those judges who subsequently came to consider its operation.

The question which now confronts the Court is whether claims of the kind specified in 563A which by hypothesis are now much broader, or may be much broader – not are much broader, but to assume the answer – may be much broader should be read as covering claims concerning deceits, other misrepresentations or omissions in bargains made on‑market leading to acquisition of shares.

MR WALKER:   Yes.  One reason why one would not be bound to what may perhaps have been the limited conceptions of those framing claims in the 19th century, one reason why you should not is that this is, after all, one of the qualifications expressed upon the generalised description of the debts that may be admitted to proof and it is part of the ordering of competition among claimants or claimed creditors by a system of priorities, 556, 563A but they go back to 553.

As the class of those, what I will call provable debts, expands so it would appear naturally as a matter of interpretation that the class of claims within that generalised class that must be postponed by reason of a certain character can also expand and one would have thought it would be salutary for it to be so for something in your capacity as a member which would never have been admissible once upon a time.  It seems odd to be elevated to the general body of creditors simply because when the first qualification upon admissible debts was expressed it was not dreamed of and therefore could not be regarded as practically within the category of claims in your capacity as a member.

HAYNE J:   That seems to be a contention which amounts to investors who are creditors are treated differently from other creditors, at least to some extent.

MR WALKER:   Yes, it does, your Honour.

HAYNE J:   Why limit the class of debt?

MR WALKER:   It does amount to that.

HAYNE J:   The answer to it may be its origin, the origin of the limitation.

MR WALKER:   Yes, but the origin of the limitation, your Honour, does not attach to subscribers as such - 38(7) does not talk about subscribers as such.  One looks at the possibility.  It was expressly noted – I think it is in
Turquand where your Honours will recall the two claimants, the subscriber and the transferee, the argument disposed of both of their claims and the court I think proceeded on the basis that if the subscriber could not succeed the transferee could not either, leaving, tantalisingly, the possibility that the court considered there may have been an in limine bar against the transferee not available to the subscriber, but there is not a whisper of what it might have been.

GUMMOW J:   What was the action in Turquand’s Case?

MR WALKER:   I think it was deceit, your Honour.  In our submission, one cannot read either the text of 38(7) or the course of judicial decision and legislative action and inaction thereafter as requiring the current wording to be limited to subscription.  The words certainly do not do so and the history does not unequivocally require it.

GLEESON CJ:   Is that a convenient time, Mr Walker?

MR WALKER:   Yes, may it please, your Honours.

GLEESON CJ:   We will resume at 2.00 pm.

AT 12.49 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.03 PM:

GLEESON CJ:   Yes, Mr Walker.

MR WALKER:   …..

GLEESON CJ:   Mr Bathurst.

MR BATHURST:   Your Honour Justice Hayne observed to my learned friend just before the adjournment that Houldsworth and the principles based on it were, as it were, founded on claims in deceit.  We accept that that is, with respect, undoubtedly correct, but the claims which this Court is dealing with now are claims for misrepresentation.  Admittedly, the remedies for misrepresentation are wider than were the case previously where there had to be fraud, but that is in one sense the only relevant difference.

All other elements for the purpose of the claims made, at least by Mr Margaretic, are the same.  They are induced by shares either by silence that was deceptive or by representations which were deceptive.  There can, in those circumstances, be no difference, we submit, in principle in considering that type of case than in the traditional deceit action of course of which Houldsworth was an example.

My learned friend, Mr Coles, suggested, at least inferentially, that the High Court in Webb was, as it were, seduced by Houldsworth and the doctrine of maintenance of capital and, in those circumstances, did not do what the task required, namely, construe the particular provisions of the statute.  It is certainly true that they were influenced by the historical background to the statute, but it is not, with the greatest respect, correct to say that they did not consider the meaning of the words.

That appears from page 34 of the report, page 433 of the book.  I will not read it.  Mr Walker has already referred you to the passages, but could I just ask the Court respectfully to note that the Court firstly concluded that 360(1)(k) was in material respects identical to section 38(7) of the 1862 Act, then considered the construction put on it by Mr Justice Kay in Addlestone and reached a conclusion firstly, that that interpretation was correct and, second, that 563A, having regard to the explanatory memorandum of the corporate law reform Bill, led to the same conclusion.  That is, a typical, we would submit, statutory construction, and in that regard the Court differed from Justice Tadgell’s judgment in the court below, who did found his conclusion on Houldsworth as distinct from the terms of the section.

My learned friend, Mr Coles’, construction allows for subscriber shareholders and the way he put it orally allows for some slight variation on that to take account of the fact that Webb was dealing with transferee shares.  It is reminiscent with respect to what the Full Court described as an impure form of subscription.  They were the words of Justices Gyles and Jacobson.  There is no such thing as that, in our respectful submission.  These shares were either acquired by allotment in issue or they were acquired by way of transfer.  Once, as Mr Coles, we respectfully submit, had to do was concede that his proposition carries further than subscribers, then there is no logical reason to exclude the class of persons who Mr Walker and I submit should be ‑ ‑ ‑

GUMMOW J:   Just go back to page 35, Mr Bathurst, in Webb.

MR BATHURST:   Yes.

GUMMOW J:   I understand what you say about the first sentence in that paragraph, beginning “Paragraph k”, the next sentence, the next one, but it is the last one, “Accordingly”, that may have a wrinkle in it; namely, the area which 360(1)(k) seeks to regulate “the protection of creditors by maintaining the capital of the company”.

MR BATHURST:   I accepted, and we continue to accept ‑ ‑ ‑

GUMMOW J:   That, undoubtedly, would reflect Mr Finkelstein’s argument in that case.

MR BATHURST:   Yes.

HAYNE J:   An argument couched in terms of whether 360(1) prevents claims.  Section 360(1) has nothing to do with preventing the claims.

MR BATHURST:   That flowed through the decision as it went through the courts.  It flowed through and once it has had its genesis in the separate questions, if you go to the way the separate questions were framed ‑ ‑ ‑

HAYNE J:   You can see it at 388 of the book, I think, in the decision in the Full Court of the Supreme Court, can you not?

MR BATHURST:   It is certainly in the Full Court.  I thought it was in the High Court as well, but I could not find it.  Your Honours will see that the way the questions were framed did not in effect invite a consideration or a direction of the court’s attention to what we say is the correct issue, namely, the statutory construction.  That probably explains why Justice Tadgell dealt with it in Houldsworth terms.  The fact that he did appears at page 631 of the report, page 403 of the book, where at line 14 your Honours will notice that his Honour noticed the submission of 360(1)(k) could not compete in the distribution of assets.

HAYNE J:   But his Honour there is responding, is he not, to the question as framed at 388 of the book, 616 of the report, about whether the claim is provable and whether it is provable under 438(2) of the Code incorporating 82 of the Bankruptcy Act.

MR BATHURST:   Yes.

HAYNE J:   And questions of “is the claim provable” invite attention to whether there is a claim.

MR BATHURST:   I accept that, but when the case got to the High Court, with respect, the Court recognised the difference, although there are occasions, with the greatest respect to their Honours, where their reasoning obviously reflected what Mr Finkelstein had put to the Court.  But I have already referred you to page – the construction which I put, but could I also remind your Honours that at page 435 of the book, page 36 of the report, their Honours clearly recognised that section 360(1)(k) was dealing with priorities.  They say there:

Section 306(1)(k) of the Code does not, in terms, preclude an action under s. 52 of the Trade Practices Act.  It looks only to the situation of a competition between a member to whom a sum is due by the company and a creditor who is not a member.  It provides that in such a case the sum due shall not be treated as a debt owed to the company.

Their Honours recognised, with respect, that the section was looking to priorities and reached a conclusion as to construction of the section.  The difficulty with the judgment, to the extent there is one, relates, in our respectful submission, to the framing of the question and the emphasis placed in the Full Court and in argument in the High Court on the Houldsworth maintenance of capital type approach.

My learned friend suggested that Webb ought to be reconsidered in light of what he described as changed circumstances.  Although there certainly was a change to eliminate par value, the basis for that as I recall it in the relevant material was because it was more likely to confuse or deceive investors as to the position of the company rather than inform them of it.  The protections for creditors still remain, albeit in a different form.  Reduction of capital can only take place if it does not prejudice the materially prejudiced creditors.  That is section 256C.  A buy‑back can only take place if there is no material prejudice to creditors.  That is section 257A.  Section 588G provides that if a buy‑back or a reduction of capital renders the company insolvent, that amounts to insolvent trading, with the common civil and criminal liability.  Section 254A still provides for the issue of partly paid shares.

What there has been in truth is a difference perhaps in approach to protection of creditors, but the underlying objective of preserving their position in that area remains, and that was what we submit Webb and section 563A were ultimately focusing on.  Webb has now been the law for some 10 years or 13 years or thereabouts.  People have been lending – the legislature has not sought to amend or change its effects.  People have been

lending in some cases large amounts of money on the basis of decisions such as that on the basis they get such protection as Webb extends to them.  This case is a good example and does, with respect, give lie to the proposition that sometimes large amounts are loaned unsecured.

If your Honours could go to the book for a moment at volume 1, page 16, your Honours will see that unsecured creditors in this case, excluding employees and trade creditors, amount to some $800‑odd million.  There are, on the administrator’s submissions, some 5,200 potential claimants who are shareholders.  The costs of administering those claims if they are entitled to be administered, if they are entitled to prove in competition, will be astronomical.  It involves investigating 5,200 fraud cases.

There are very powerful reasons, in our respectful submission, when one considers those matters, not only that Webb should not be reopened, but further that the principle should be maintained and, to the extent that we seek an extension, extended in the way we submit.  If your Honours please.

GLEESON CJ:   Thank you, Mr Bathurst.

MR COLES:   Could I repair an omission before your Honours rise to proceed to the next appeal?  Your Honours, in dealing with Lord Browne‑Wilkinson’s explication of the statutory contract in the sense he intended to use that expression, I referred your Honours to what his Lordship said at 323 of the Appeals Cases judgment, page 338 of the volume of authorities.  I should have added in the same context, your Honour, what appears in the same speech at page 340 of the court bundle, page 325 of the Appeals Cases, in the passage commencing just below the letter F where his Lordship develops the concept of the positive and negative features of claims which are a component of the statutory contract which he was explicating.  May it please the Court.

GLEESON CJ:   Thank you.  We will reserve our decision in this matter and we will adjourn for a couple of minutes in preparation for the next case.

AT 2.17 PM THE MATTERS WERE ADJOURNED