Sons of Gwalia Ltd v Margaretic & Anor
[2006] HCATrans 430
[2006] HCATrans 430
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 MONDAY, 7 AUGUST 2006, AT 2.19 PM
Copyright in the High Court of Australia
__________________
MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend, MR K.J. MONY DE KERLOY, for the appellant in S208 and the second respondent in S209. (instructed by Freehills)
MR B.A.J. COLES, QC: If the Court pleases, I appear with my learned friend, MR K.M. RICHARDSON, for the first respondent. (instructed by Jackson McDonald)
MR T.F. BATHURST, QC: If the Court pleases, I appear with my learned friend, MR P.D. CRUTCHFIELD, for the second respondent in matter No S208 and the appellant in matter No S209. (instructed by Arnold Bloch Liebler)
GLEESON CJ: Yes, Mr Walker.
MR WALKER: May it please your Honours. These cases together present a test of the current state of the law in this country as to the priority in which a company which may be treated as being dealt with as if it were in winding up has to meet what are called nowadays shareholder claims. In particular and as the beginning and end of the matter, it is a question of statutory interpretation, the current provision which governs by the adoption for the purposes of the scheme in question being section 563A of the Act. The contextual interpretation of that provision, we accept, is informed not only by the provisions which surround it in the current Act but by the pedigree it displays in history, principally including from 1862 in the United Kingdom.
In short, it is our position in the appeals that the historical background corroborates what one gathers from a proper understanding of the presently enacted text so as to prevent claims of the kind Mr Margaretic seeks to make from being paid except as and when the time arises in light of the resources available to the company given the priority set, we submit, by section 563A, namely it is a claim that cannot be met until other claims relevantly have first been paid.
As your Honours know, the matter is greatly affected and certainly was argued as such below by reference to authority. It was our position below, unsuccessful, that as a matter of stare decisis this Court’s decision in light of the facts and given the reasoning in Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15 governed the matter.
In the division of topics to be covered in argument between my learned friend, Mr Bathurst, and me I shall be addressing what we submit is the proper interpretation of 563A, both textually and contextually, though I do not suggest Mr Bathurst will not of course be touching that as well. I shall also be addressing the question of authority on the basis that Webb binds. Of course, the notion of Webb binding in this Court is one which itself raises questions and the question as to whether leave should be granted to reargue the correctness of the decision in Webb is one which my learned friend, Mr Bathurst, will principally bear as between us and that principally may, of course, emerge in reply.
There are important matters of analogous law in other jurisdictions which have a particular piquancy, bearing in mind the international provision of capital in circumstances such as apply in this case with this company. The North American experience will also principally be a matter for my learned friend, Mr Bathurst. Your Honours will have noted that all parties before your Honours have, we hope in response to some matters raised at the special leave application, referred in particular to some Canadian authorities and to some Canadian statutory law reform.
In our submission, an essential background that emerges from understanding that this is statutory interpretation, that it involves very important matters of finance, including debt finance, debt capital for corporations, is that the arguments below were conducted against a background of facts that your Honours have seen whereby what might be called relatively massive claims, about a quarter of a billion dollars in this case, loom to be considered and taken into account, either together with other kinds of claims, that is other kinds of claims apart from shareholder claims, or, alternatively, need not diminish the body of assets available for distribution to other creditors by reason of the understood meaning of section 563A.
In a nutshell we say of the reasons below that there was error concerning an understanding of Webb, there was excessive interstitial reading or over‑interpretation of section 563A and that there was, in our submission, a failure to appreciate the way in which, in particular, the importance of Webb being understood as a matter of substance rather than by way of the distinction their Honours preferred and how that must have affected persons making decisions as to the commercial risk of advancing money to corporations such as the present, bearing in mind the possibility of failure. Can I then take your Honours to section 563A itself.
HAYNE J: I know we have to end there, but why do we begin there?
MR WALKER: Your Honour, I said in opening it is the beginning and end of the matter because the dispute between the parties is framed and must be framed overtly in terms of whether section 563A has a particular effect on the lawful administration of these assets. That is why one starts there.
HAYNE J: It has a lawful effect only because of the introductory words of 553, I would have thought, “Subject to this Division”. I would have thought it took its place having regard to the provisions of Division 2, provisions dealing with contributories, but there we are.
MR WALKER: Yes, your Honour. My answer as to why we start there is because that is how the dispute is framed. With great respect, of course, the provisions concerning the responsibility of contributories, the provisions concerning what is provable and the provisions concerning the priorities given to certain kinds of claims in the distribution, in particular, of the assets of an insolvent corporation are all critical context. However, the first part of our argument is simply this, that there is nothing in any of the historical antecedents, that is the statutes, including corresponding provisions, which precede the enactment of section 563A which produces, either in the reasoning of the courts below or in the written argument against us by our opponents, any call or justification to construe the words of section 563A differently, let alone more narrowly, than would otherwise be the case.
Now, the most important aspect of that proposition in our argument is that section 563A fastens upon a person’s capacity, that is a claimant’s capacity, as a member of the company and the long‑used expression current in 563A “as a member”. There is another critical provision in the section about which we make the same general proposition, namely, that nothing in the historical antecedents, including the difference of setting in which 563A finds itself compared, for example, with section 38(7) of the 1862 Act. There is no difference which will drive a different, let alone more restricted, meaning of the expression “dividends, profits or otherwise”. That is a second but related point to which I will come.
It is in the dispute before your Honours common ground that Mr Margaretic’s claim is caught by the expression “Payment of a debt owed by a company”. It is greatly in dispute before your Honours as to whether the kind of claim that one sees described in the agreed facts, to which I will come, is a debt owed to him in his capacity as a member of the company. Part of that argument, as we understand it, focuses on whether it can be seen to be a claim by way of dividends, profits or otherwise. Your Honours, in particular, have seen the reference to the ejusdem generis approach which we challenge. We start with the proposition that 563A, which is but one of the priorities provisions ‑ ‑ ‑
GUMMOW J: Do you not have to start at 555?
MR WALKER: I was about to say, 555 and 556 are critical provisions to appreciate ‑ ‑ ‑
GUMMOW J: That talks about debts and claims.
MR WALKER: Yes, debts and claims ‑ ‑ ‑
HAYNE J: That takes you back to 553 where I suggested you might usefully start.
MR WALKER: Yes, your Honour. Section 553 uses the expression “all debts payable by, and all claims against”. Section 563A itself ‑ ‑ ‑
GUMMOW J: Just talks about debts.
MR WALKER: It starts by talking about debts, but your Honour sees that the competition, that is, the contrast, is drawn between that and “all debts owed to, or claims made by” so that the claims expression comes into the other side of the ledger, that is, the preferred category at the end of 563A. We have no explanation on the researches we have made as to any substantive significance which is carried by that usage. One sees, for example, in a current enactment for particular purposes using similar expressions, the way in which the language is found in section 563AA(2), just before the one in question. There, the language used is:
The shareholder’s claim is not a debt owed by the company –
et cetera. Similarly, in subsection (1) of that provision:
The selling shareholder’s claim under a buy‑back agreement is postponed until all debts owed to people –
et cetera.
HAYNE J: One might be forgiven for thinking that the current form of 563A is some drafters’ attempted simplification of the language which used to be in the 1961 Act in 218(1)(g), “a sum due to any member in his character of a member by way of dividends, profits or otherwise, shall not be a debt of the company”. Somebody has seen fit to ram the word “debt” back into the subject of the provision.
MR WALKER: Yes. However, I am at a loss, I confess, to attribute substantive significance to that bearing in mind the complete absence of any suggestion by those advising those voting for the enactment of the legislation that there was any substantive significance in that. We call to attention that the link, which does not appear to be by way of any contrast, simply the link between debts and claims appears, as we say in the second half of 563A, namely, in relation to those calls on the assets of a company to which priority shall be given as against those that the subheading calls “Member’s debts”.
HAYNE J: How are we to begin to understand the provision which is carving out a special rule from otherwise generally applicable provisions without first understanding the generally applicable provisions? Mr Walker, you begin at 563A, why?
MR WALKER: Your Honour, I do not wish to persist in suggesting that is an intellectual starting point. It is the provision that brought the parties into dispute, other provisions they were not in dispute against. Of course, one starts with the general provisions and if one goes back to the 1862 model when it was all, or much of it, contained but in the one section, section 38 rendered the members liable subject to certain qualifications and one of them, notoriously, of course, was contained in subsection (7) in terms which are directly antecedent, historically, to the present provision.
This Court in Webb noted that start point of the issue before them in relation to the authorities which had considered antecedent provisions and one finds the opening words of section 38 of the 1862 Act quoted on page 28 of 179 CLR. The contributories, that is, in those days:
every present and past Member of such Company shall be liable to contribute to the Assets of the Company to an Amount sufficient for Payment –
et cetera, subject to qualifications. Leaving aside the difference between unlimited and limited companies for the time being, it is subsection (7) with which we are concerned. That historical form of drafting illustrates that the starting point in relation to what might be called the legislative policy is a starting point concerning the obligation to contribute towards meeting the liabilities of the company.
The next point to be followed historically as a matter of legislative policy is that when there is limited liability in the sense contained in the historical quotations found, I think, in all the written submissions before your Honours, that the amount paid to subscribe for the share and, where applicable, any amount – the terms of the share issue left available to be called for further payment represented at one and the same time two aspects of the limited liability and what it meant to be a member of a corporation with separate legal personality. One, you were liable to the full extent of that subscribed capital and capital capable of being called for and, two, that was your limit.
HAYNE J: This, simply, is an attempt to paraphrase what we can find in the Act, Mr Walker. Do we not, if we are to consider the position of the contributory, begin with Division 2?
MR WALKER: Yes, your Honour.
HAYNE J: Section 514:
This Division applies where a company is wound up.
It is therefore a division that is presently relevant.
MR WALKER: Yes, your Honour.
HAYNE J: Section 515 is the “GENERAL LIABILITY OF CONTRIBUTORY”.
MR WALKER: That comes from – historically, one sees that in the opening words of section 38 to which I just referred. They are the present manifestation of that. Yes, your Honour.
HAYNE J:
a present or past member is liable to contribute to the company’s property to an amount sufficient:
(a) to pay the company’s debts and liabilities –
et cetera. That is then subject to the cap in 516 in the case of “a company limited by shares”.
MR WALKER: To which I have just referred, yes, your Honour.
HAYNE J: You, therefore, begin from the premise that the Act prescribes that present or past members are liable to contribute, up to an amount.
MR WALKER: Yes, and “subject to qualifications”, as the old expression was, for example, with past members see now section 520.
HAYNE J: One goes from there to Division 6 of Part 5.6 commencing at 553:
Subject to this Division, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages) . . . are admissible to proof ‑ ‑ ‑
MR WALKER: Yes, your Honour. I do not suggest any of these provisions are unimportant, but then one notices the significance in “Subdivision D – Priorities”.
HAYNE J: In particular, 556, that there are certain amounts to be paid first.
MR WALKER: Yes. So 555 adopts the historically mandated form of stating a general proposition to which there will then be many and very considerable qualifications. Section 556 is where most of the important qualifications are found for priorities, yes.
HAYNE J: But the basic rule is that in 555, “Except as otherwise provided . . . all debts and claims proved . . . rank equally”, and if insufficient are paid proportionately.
MR WALKER: Yes, and that is the critical point we have sought to make in our written submission and which I would wish to emphasise on my feet, that 563A finds itself therefore in a not unfamiliar statutory context. It is in reality, as to its principal elements, the same approach as one saw as long ago as 1862 and is a priorities stipulating provision. Now, that is going to be very important as a character of the provision because, although practicality in insolvency means that priorities will in effect eliminate the worth of any such claim, there will be nothing left, as it were, because there was not enough.
The provision ought not to be construed as, for example, a provision which purports to counter or contradict other provisions of the law – I do not mean of the same statute, though they may be in the same statute – which provide for compensation to various aggrieved persons. So we use that character for a matter to which I will come just a little further on, namely, why the approach suggested by Justice McHugh in Webb in dissent should not be followed.
These are priorities. They are provisions which say where there is not enough of claims which, ex hypothesi, one may regard them as good claims, claims whose existence and capacity of enforcement is recognised, in short, nonetheless they shall be met in a certain order only. When one looks at it as a priority claim, there remains only, in our submission, by way of supplement to our written submission, with respect to the historical material, to consider what was the purpose or policy, economic in effect no doubt, which underlay those provisions and perhaps are still to be seen as advanced by a provision such as 563A.
I do not wish simply to say from the Bar table that which has already been set out in our written submissions, but the catchphrase from history is that of the guarantee fund for creditors. The difference between a member and a creditor, at least creditors who are not also members, being that creditors look to what is publicly known about the company and its capital subscribed or yet to be called for and members are the people who have subscribed or are liable to calls or, and critically, are people who have taken a transfer from subscribers.
GUMMOW J: But once the situation is reached that the capital could legitimately be depleted in trading, did not the grundnorm move?
MR WALKER: Yes. Again, historically the way in which ‑ ‑ ‑
GUMMOW J: That is not a guarantee of anything.
MR WALKER: Your Honour, it is a guarantee only against one outcome, namely, the outcome of those who subscribed or those who have taken over the subscriber’s position, that is, transferees, taking back that capital otherwise than by statutorily sanctioned methods. Now, that is what distinguishes a member from any other creditor. The other creditors were never in the position of either having subscribed or taken over the position of somebody who had subscribed the capital which is the subject of what is told to the public in the register.
The point is even more clear as to a distinction in relation obviously to partly paid shares where the register informs those who deal with the company as to how much capital, apart from what the company already has and is risking in venturing a business and may lose entirely in business ‑ ‑ ‑
GUMMOW J: May have lost.
MR WALKER: May have lost utterly, but the register in relation to that which remains to be called will nonetheless tell the world how much more is available and which the statute will compel the contributories to stump up in order to meet debts.
GUMMOW J: I never encountered a bank, when I used to act for these parties, that was worried about that.
GLEESON CJ: The last company that I encountered with contributories was the Standard Insurance Company which failed in the 1960s.
MR WALKER: Your Honours, in relation to the importance of a register and what is held out about a company’s capital, in relation to what is held out about uncalled capital and in particular in relation to what is happening in business to destroy the capital, all may be summarised as risk. The regulation which is constituted by provisions such as those we are arguing about is a regulation of the way in which that risk for those who choose to do so may be understood and ventured.
GLEESON CJ: Mr Walker, have there not been in recent years some substantial changes in the law relating to the maintenance of capital?
MR WALKER: Very much.
GLEESON CJ: What is the reason for those changes?
MR WALKER: Your Honour asks me something I cannot say off the top of my head as to the published explanations of all of the liberalisations – and they have all been liberalisations – of the rule against reduction of capital, but one thing emerges with utmost clarity from the provisions to which we have referred in our written submissions, that none of the liberalisations have been unaccompanied by something in the nature of safeguard for creditors’ interests.
GLEESON CJ: I wondered whether a possible explanation of those changes might be that in modern business practice people are far more concerned with assets and liabilities rather than with a notional fund subscribed when BHP was formed, for example.
MR WALKER: There is, with respect, no question that that is observable in terms of business finance. What is not observable is any element in the statutes. You cannot see any element in the statutes which downgrades the fundamental primacy of the obligation of members to contribute upon the terms which the mixture of the private constitution and the public law imposes upon them. That is still there. The subscribed fund represented either by aggrandisement or diminution by the capital of the company from time to time as the result of its business venture remains of course and critically for a limited liability company, a company limited by shares the classic example, what is available to creditors when the music stops.
It is not possible to say that that fund has ceased to have any importance and it is not possible to say that the statute has reduced contributories to nothing more than another class of claimant. Section 563A, whatever else it means, singles out members’ claims as members for special and lower priority. There is no doubt a treatise, but probably economic rather than legal in nature, to be written concerning the historical development of the availability of and the preference for various forms of capital provision to trading corporations in the western hemisphere but, in our submission, this is a question of statutory interpretation. Whether it be regarded as quaint in any of the survivals of language or of concept, it is nonetheless positive enacted law which no common law technique permits to be read down differently from what the words say.
CALLINAN J: Mr Walker, the claim in this case is made under section 1325, is that correct?
MR WALKER: That is one of the possibilities, yes, your Honour.
CALLINAN J: I think that is the principal claim in the stated case at 498, or a contravention of section 52, is that right?
MR WALKER: Yes, your Honour.
CALLINAN J: Now, under section 1325(5) damages in theory are not limited to what the shareholder or what the new transferee paid for the shares.
MR WALKER: It is obviously going to turn on the facts and the facts may contain a claim going beyond that, yes, your Honour.
CALLINAN J: Exactly. There may be very large claims indeed that can legitimately be made that having regard to what was disclosed and not disclosed are dividends in the future, capital gains, all sorts of things, which could be given a present value higher than the price of the shares paid, would theoretically be claimable.
MR WALKER: Yes. I am not, with respect, taking contest with anything your Honour has just put to me, but it is significant that we are talking primarily about a compensatory order.
CALLINAN J: Well, is that not what the claim is, but under 1325(5), for example, it could be more than that. It may not be in this case, but it could be in other cases, is that right? I am not asserting it; I am just inquiring.
MR WALKER: Your Honour, we would not read subsection (5) as permitting more monetary remedy than compensation, but there are remedies other than monetary compensation, yes.
CALLINAN J: Well, no, but I was looking at 1325(5)(e). Paragraph (e) contemplates a damages claim, if you like, similar to a claim for ‑ ‑ ‑
MR WALKER:
to pay to the person who suffered the loss or damage the amount of the loss or damage.
That is, in our submission, compensatory in the same way as one finds the primary provision in subsection (1):
if the Court considers that the order –
that is in subsection (5) –
will compensate the first‑mentioned person in whole or in part for the loss or damage ‑ ‑ ‑
CALLINAN J: Well, does that mean, Mr Walker, that the claim would always be limited to the price that was paid for the shares?
MR WALKER: I cannot say that because the loss or damage may not always be solely constituted by the difference in value between what one paid and what one obtained, leaving aside this rival theory that one finds, for example, in the articles exchanged concerning the difference between amount represented and amount.
CALLINAN J: What I am trying to find out is whether there would be any basis, leaving aside a discretionary approach perhaps by the court, for a transferee of shares, a person buying shares on the market, claiming considerably more than he or she paid for the shares. Could loss or damage, or loss and damage, exceed that?
MR WALKER: Your Honour, it is what I will call consequential loss that gives rise to the most obvious way in which that might follow.
CALLINAN J: Why I ask that is it might suggest that there could be very, very large claims indeed.
MR WALKER: If one got into lost opportunity possibilities, then they might not only be large but relatively nebulous.
CALLINAN J: Which might argue against a claim of this kind.
MR WALKER: Yes, your Honour.
CALLINAN J: That is just a possibility that I am raising.
MR WALKER: In our submission, the facts of this case, while open at volume 1 of the joint appeal book, at page 498, one finds the agreed proposition A6 at the top of the page. The shares for which he paid just over $20,000 are now worth zero, nothing, and that will, of course, usually be the case if the understanding which, we submit, has hitherto been the understanding of what the statute law construed by Webb meant stands.
CALLINAN J: That is the other problem: how you would ever work out what the multiplicity of shareholders claims for purchases on the market ‑ ‑ ‑
MR WALKER: We have referred in what is frankly an inconvenience argument, and not one that requires distortion of language but corroborates our reading of the language, we have referred to the question of administration. In an earlier Victorian case, Mr Justice Anderson did precisely the same thing referring to the, I think, merry carousel which would be required.
HAYNE J: Have you not just run together two radically separate concepts, namely, the value of the claim and the amount for which the proof would be allowed, or the dividend paid on the proof, rather?
MR WALKER: No, your Honour. Those are two different calculations or figures but they are focused on the same matter: how in an insolvent statutory administration does one deal with a claim for, shall we say, $10 where there is an insufficiency of asset available for the collective claims?
HAYNE J: Yes, I understand that.
MR WALKER: As one knows, there is equality, which means proportionate rateable loss, and then there are priorities, which means that there, in the usual case, will be no hope of a share having any value, for example, as being the means by which a claim might be advanced because there will not be enough money to pay the prior claims in full. If they have not been paid in full ‑ ‑ ‑
HAYNE J: I suggest to you again you are running together radically different concepts, because you are ramming together what you get out of the liquidation as a dividend on liquidation with the separate and distinct question of what the share is worth as an article of commerce. The article commerce is perhaps valueless. If it is, the claim you make and you prove is the full amount you have paid plus the outgoings at least.
MR WALKER: Quite, your Honour. If I have run them together, I should not have and I do not wish them to stay together. Proposition 6 is a different proposition from A6 in the statement of facts, is a quite different proposition from how in practice, if Mr Margaretic’s claim is permitted to go ahead, he and his co‑shareholder claimants will ultimately get calculated any returns. Certainly, I accept that they are quire distinct propositions. For present purposes, what I am trying to point out is that the zero valuation of shares is at least partly a product of the fact that the priorities provisions have been understood as meaning everyone else must be paid in full before you can get anything, whether you are a shareholder claimant in fraud or contract or statutory wrong or simply by way of distribution of a surplus. That, in our submission, is what comes from the plain words of 563A.
GLEESON CJ: But if Mr Margaretic got run over by a motor vehicle owned by Sons of Gwalia Ltd, then his claim would not be postponed, would it?
MR WALKER: No.
HAYNE J: That turns on whether it is in the capacity of member.
MR WALKER: That is right. The test is whether the membership is a coincidence so long as one understands that coincidence will include things which did not come about by chance. First, to take the Chief Justice’s question, that would be a simple chance coincidence that while a member happens to be run down by the company’s vehicle and that will not alter if he is run down as he crosses the road to the annual general meeting. There are also cases – the authorities have been collected in the written submissions – where, for example, there being a share qualification for a director, director’s remuneration has been held not to fall within a category of claim being a debt owed to a person in the person’s capacity as a member of the company.
But, in our submission, it is of significance that the claim which we have been calling in very general terms “the shareholder claim” made by Mr Margaretic in this case is one which depends for its existence on the discrepancy perceived commercially between what was purchased, a share, that which made him a member, and the facts.
GLEESON CJ: What, in your submission, is the discrimen by which you say a claim by a person who happens to be a member is or is not a claim in his or her capacity as a member?
MR WALKER: The discrimen we offer, your Honour, is that where membership is of no legal relevance to any of the causes of action advanced by the person, then the claim is one which may be made because it will not be characterised as one made in his capacity as a member of the company.
HAYNE J: Is that the same proposition as saying that a claim in the capacity of member is a claim in which membership is an element of the cause of action?
MR WALKER: It is not quite the same, your Honour. I have tried to draw it slightly more broadly.
HAYNE J: It is rather wider. Then why do you need to in this case?
MR WALKER: You do not have to in this case.
HAYNE J: Then why do you do it?
MR WALKER: Because, your Honour, if there is legal relevance of being a member in order to make out your cause of action – it may be, your Honour, I am starting at shadows here.
HAYNE J: Legal relevance is the fudge, is it not, Mr Walker? It is just words.
MR WALKER: Yes. Your Honour, it may be I am starting at shadows here. An element in the cause of action, that is, something that needs to be pleaded and proved, not only suffices for this case, but will suffice for the discrimen that will operate.
GUMMOW J: Are all the cases consistent with that, though? There seemed to be a lot of ad hoc‑ery in the decisions.
MR WALKER: There is. The share qualification for director case is the closest I can think of where that might not be so, although you would not need to plead and prove that you were a member.
HAYNE J: Your pleading would suffice. “I am a director”.
MR WALKER: “I have done that which entitles me to the remuneration”. A nice point which is not obtainable, I think, from that report as to whether you would need to plead that you became a member as a pre‑condition of your entitlement to remuneration. A share qualification might in some cases fall out in such a light. That is my answer to Justice Gummow that I think the cases otherwise do fit that model with the possible exception of a share qualification director’s remuneration case where we would respectfully adopt what Justice Hayne has suggested for consideration, namely, that even then it probably, in some cases, at least, will not be necessary to be pleaded and proved.
Your Honours, what I had said earlier, namely, where membership is a coincidence even if not entirely by chance, is just another way of referring to what is the position where membership is not an element in those facts which need to be pleaded and proved in order for the cause of action to succeed, including those matters of causation of loss which, for example in negligence, would be the gist of the action and under section 82 of the Trade Practices Act are necessary in order to obtain damages under section 82.
It is when one comes back then to the words of section 563A that searching for some policy or purpose that may add to an understanding or perhaps influence what would otherwise be an ordinary English interpretation of those provisions but, in our submission, one finds precisely because this is in an order of priorities that it is enough to say that the purpose is to ensure that member’s claims, if I may use that shorthand, come relevantly last.
GLEESON CJ: What is the relevance in interpreting a provision like section 563A of an Act of 2001 that it comes after a long history of previous decisions and previous statutes? For example, all members of this Court in Webb agreed that while they recognised that the decision in Houldsworth’s Case was controversial, the statutory provision with which they were concerned, which I think was of the 1961 Act, was intended to give statutory form to that old decision.
MR WALKER: There are two aspects I would wish to address in answer to that. The first is when Parliament gives effect by an enactment which can stand on its own two feet, as 563A can, we submit, to an understanding of the judge‑made law which may or may not be right, the fact of an error or the fact of a controversy in what the judge‑made law means is of no moment. The enactment is there as a provision. A misunderstanding, if it be a misunderstanding, is simply an historical anecdote about how that statute was made.
GLEESON CJ: In Webb 179 CLR at page 33 four members of the Court agreed with Justice Tadgell:
that the principle in Houldsworth received statutory recognition in s. 360(1) –
and Justice McHugh, although he dissented, said he thought that the rule in Houldsworth had been “expressly considered and approved by the various legislatures of this country”. What did he mean by that “expressly” which he emphasised there?
MR WALKER: I do not know of any extraneous legislative material that his Honour could have been referring to. The emphasised word “expressly” on page 40 of the CLR is presumably ‑ ‑ ‑
KIRBY J: He says at the bottom of page 39:
Numerous pieces of company legislation have been enacted on the basis that it represents the law ‑ ‑ ‑
MR WALKER: I am trying to understand the content of the word “expressly”. It perhaps means that the rule - your Honour, I am at a loss to understand whether that means that they had in mind the eponymous rule, that is the name Houldsworth. Probably his Honour is not saying that. You do not find in Houldsworth – I will just have this checked – words which sufficiently obviously track the words of section 38(7) of the 1862 Act and mere quotation of it ‑ ‑ ‑
GUMMOW J: The section is not referred to.
MR WALKER: No, quite. So that would not be enough to make it express.
GUMMOW J: Their Lordships did not call on the respondents either.
MR WALKER: No. My learned friend, Mr Bathurst, is going to be addressing your Honours in more detail about Houldsworth. I am afraid I cannot go further in my answer to the Chief Justice than that in those two paragraphs of Justice McHugh’s reasons on pages 39 and 40, his Honour is most emphatically, having registered his dissent from in effect the House of Lords ‑ ‑ ‑
GLEESON CJ: In a sense this a very strong holding because he thought that Houldsworth was an unjust rule but he said it is far too late to do anything about it.
MR WALKER: It is too deeply entrenched his Honour said.
GLEESON CJ: Yes, and then he decided the case on the basis of the Trade Practices Act.
MR WALKER: Yes. Your Honours, with great respect, in those paragraphs of Justice McHugh’s reasons one sees a perhaps questionable start in the reasoning from what is spoken of as if it were judge‑made law which is within the power of the Court to alter as judge‑made law but which, for the reasons that have just been noted, ought not to be in that case. However, towards the end of that paragraph, that is the top of page 40, when his Honour turns to the statute, his Honour turns to it, not in terms of simple interpretation which is contextually and historically what the majority have done, but referring to the enactment as having been done “on the basis that it” – presumably meaning the so‑called rule in Houldsworth’s Case – “is an entrenched rule of company law”. Now, entrenchment there seems to mean that too many years have passed with too many courts following Houldsworth for the High Court rather than Parliament to do anything about it.
GLEESON CJ: I thought he meant too many years had passed with too many legislatures.
MR WALKER: He certainly refers to that in the very next sentence, but the idea of an entrenched legislative rule is an absurdity in the context we are here talking about, where parliaments, without any constitutional inhibition, are considering what should be the modern shape, current shape of these provisions of the companies legislation. So “entrenched” is rather difficult to understand in that context. His Honour could not be simply referring to the fact that, as it were, parliaments get into a habit that transcends time and transcends space and somehow could not come up with some different approach to these priorities. Of course they can.
HAYNE J: Does his Honour at any point in his reasons refer to the then equivalent of 553?
MR WALKER: Justice McHugh, no, he does not.
HAYNE J: It would seem at least a possible understanding of what his Honour is there saying as not taking account of the fact that the claim made by a shareholder is apparently within the width of 553, all debts payable, all claims against shall be provable, and that his Honour’s understanding of the intersection between the Trade Practices Act and applicable company law is founded, perhaps, on an understanding that a member has no claim, whereas ‑ ‑ ‑
MR WALKER: It is only priorities we say.
HAYNE J: ‑ ‑ ‑ we are concerned with satisfaction of the claim, not the making of a claim.
MR WALKER: His Honour, as it were, touches on that last point that Justice Hayne has raised at the foot of page 36, the beginning of the last paragraph commencing on the bottom of that page, where he says:
Section 360(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 ‑ ‑ ‑
HAYNE J: Well, that is the joint reasons.
MR WALKER: I am so sorry, your Honour. In the joint reasons that is referred to. Justice McHugh, as I read his reasons, approaches it somewhat differently.
HAYNE J: I had in mind particularly page 40 at just immediately above the subheading “The Trade Practices Act”.
MR WALKER: The words are “would prevent” his Honour uses.
HAYNE J: Yes:
provisions of s. 360(1)(k) would prevent a shareholder proving “a debt” –
and that seems to me perhaps to have some difficulty about it is a proposition.
MR WALKER: Well, I am bound to submit that that is wrong, that that is to take the practical effect and disincentive of a priorities provision for the legal effect of barring or preventing a claim, which are two radically different concepts.
HAYNE J: Concerned only with payment?
MR WALKER: Yes, your Honour.
HAYNE J: Which is all that the claimant is interested in, undoubtedly, but not with whether there is a claim.
MR WALKER: Yes, your Honour. A payment that cannot come until everyone else is paid in full where the assets available are gravely deficient to do so may well feel like a payment the claim for which is prevented but that is not to say they are the same thing legally.
CALLINAN J: Mr Walker, what about a person, not a person who has bought shares at this price but a person who has bought the shares before at a much, much lower price but abstains from selling them because of the breach of the non-disclosure rule. Why should not that person have the same sort of claim as the applicant here?
MR WALKER: That is a species of shareholder claim, there is no doubt about it.
CALLINAN J: Then the potential for enormous claims by practically every shareholder raises its head.
MR WALKER: A quarter of billion in this case is enough to illustrate that.
CALLINAN J: Do any of the claimants include claimants who say they abstained from selling?
MR WALKER: No.
HAYNE J: Not yet.
CALLINAN J: Not yet, but they could, no doubt and then the potential for virtually unlimited liability might arise.
MR WALKER: Very large, yes, your Honour.
CALLINAN J: If not unlimited, very large, whatever the price was immediately before it was detected that the company was insolvent, I suppose.
MR WALKER: Everybody is always very sure that they would have acted differently after a loss is fallen in, your Honour.
CALLINAN J: Of course, but it would not be hard to say that you abstain from selling because you would see the market going up and nobody is telling you that the market is wrong, there is no disclosure by the company that the market has got it wrong.
MR WALKER: Your Honour, I cannot, by way of submission or otherwise add anything to the proposition that the market is not wrong. This, after all, is a case that comes about on the agreed facts by reason of allegations of the market being under or misinformed.
CALLINAN J: Yes, but that what is the price would have been and that would have been the right price had the market been properly informed.
MR WALKER: Yes, at least it would have then been the evidence of what the value would have been.
CALLINAN J: Had the listing rules been complied with?
MR WALKER: Yes, your Honour.
GLEESON CJ: Mr Walker, there is not any dispute that Mr Margaretic has the claim, is there?
MR WALKER: No.
GLEESON CJ: Procedurally, how did this matter get into its present situation? Was there an administrator seeking judicial advice?
MR WALKER: Yes, your Honour. We sought relief in order to understand, in order to repel the proposition that in the administration of the deed of company arrangement, which in terms imported the provisions of 563A, whether claims which had really been made, that is, they were not hypothetical, against us such as Mr Margaretic’s, were claims which would suffer depressed priority under 563A or whether they would share equality otherwise.
GLEESON CJ: Do you seek declaratory relief or something like that?
MR WALKER: In effect, yes, your Honour.
GLEESON CJ: That came on at first instance before Justice Emmett in the Federal Court. It is only because the company happens to be insolvent that we are here. If the company had enough funds to meet all these claims the question would disappear.
MR WALKER: That is right. It would be a matter of massive administrative concern but of no legal concern similar to the present.
GLEESON CJ: So the initiating process seeking declaratory relief asserted or assumed the existence of the claim, did it?
MR WALKER: There were agreed facts concerning the ‑ ‑ ‑
GUMMOW J: No, it assumes it in the application on page 2. Then there was a cross‑application, was there not, by Mr Coles?
MR WALKER: Yes, and then there are agreed facts, as your Honours have seen.
GUMMOW J: So there were competing declarations being sought.
MR WALKER: Yes, your Honour.
GUMMOW J: But all on assumptions.
MR WALKER: There is an agreed statement of facts that one finds starting at 497 in volume 1 but the agreement concerning the claim is about the nature of the claim, so it culminated on page 499 of volume 1 of the appeal book, about line 17:
The parties agree that:
1.On the basis of the facts and matters set out above Mr Margaretic has made a claim ‑ ‑ ‑
GLEESON CJ: What do you say to the proposition, which I understand to be what the House of Lords decided in Soden, that what distinguishes a claim made by a person in the capacity of a member from a claim made by a person who happens to be a member but not in that capacity is whether or not the cause of action is independent of the statutory contract between the member and the corporation?
MR WALKER: That it is wrong, that it lacks any textual support from the statutory provision – here our 563A – and that, although there are quite a few, a considerable number, of references to the statutory contract in some of the cases, it is not possible to read Webb as even beginning to countenance such a distinction. It is of the first importance, in our submission, in understanding Soden, which we submit is erroneous, that there does not seem to have been appreciation in either the Court of Appeal or the House of Lords that the claim being considered in Webb was not a claim on the statutory contract.
HAYNE J: Just before you come to that, the critical passage in Lord Browne‑Wilkinson’s speech in Soden is reproduced at page 340 of the book of authorities – it is [1998] AC 298 at 325 ‑ ‑ ‑
MR WALKER: It starts between F and G perhaps, your Honour.
HAYNE J: ‑ ‑ ‑ at F and G where his Lordship speaks of:
“Dividends” and “profits” represent what might be called positive claims of membership –
How under the statutory contract between member and company is a member entitled to profit?
MR WALKER: I do not know whether there is any standard any more, but the once very common form of articles of association used to provide for the declaration of what was called dividends ‑ ‑ ‑
HAYNE J: Out of profits, yes.
MR WALKER: ‑ ‑ ‑ and the general law, the public law, required that to be out of profits.
HAYNE J: But that was radically distinct from an entitlement to the profit. The shareholder may be entitled to the dividend upon declaration and upon other satisfaction of the steps required both by the statute and by the memorandum and articles.
MR WALKER: The notion of an aliquot share in the profits as profits made sense and makes sense if you see the statutory contract between corporators as akin to a partnership between co‑venturers, but that is language which is now impossible to use given the importance of the separate legal personality of the corporation. “Dividend” in this context almost certainly, in our submission, encompasses that which comes into being upon the arithmetic involving division if there is anything left over according to the number of shares one has and the class rights of shares.
HAYNE J: I can understand a right to dividend being said to be a right arising under the statutory contract between member and company. “Profits or otherwise” being the two other elements of the statutory phrase seem to me perhaps to raise other considerations. His Lordship at 325 of the report, 340 of the bundle of authorities ‑ ‑ ‑
MR WALKER: Does not, in our submission.
GUMMOW J: It does not quare with the analysis that is often repeated of Archibald Howie does it, one assumes?
MR WALKER: No, your Honour. In our submission – perhaps I will do it right now. If one goes first to 331 in the book of authorities in what I submit is a misunderstanding of Webb in England and Wales – it is [1998] AC 298 at 316 – just before F and going down to G, their Lordships state:
But in our judgment when a member claims damages for misrepresentation inducing him to purchase shares in the market, the damages are not due to him in his character of a member.
Well, that is the conclusion in question, of course. Then there is a reference to the majority in Webb that:
the statutory provision “will not prevent claims by members for damages flowing from a breach of contract separate from the contract to subscribe for the shares.” By parity of reasoning a claim for damages in tort for misrepresentation inducing a contract other than one to subscribe for the shares will also not be prevented by the section.
There are several difficulties with that passage and one is that the quotation of that portion of the sentence that one finds in 179 CLR 15 at 35 at the top of the page is immediately followed – the sentence from which that quotation is taken, which is line 5 on that page, is immediately followed by part of the holding or the ratio in Webb, and I quote:
But, in the present case, the members seek to prove in the liquidation damages which amount to the purchase price of their shares, which is a sum directly related to their shareholding.
Et cetera. So that what the majority in the High Court took from their own words leads to an opposite result from that which by so‑called parity of reasoning in the Court of Appeal in England and Wales thought would follow from their observation. There appears no recognition in that passage that the claim in the Australian litigation was not a claim on what is called the statutory contract and was not a claim restricted to a claim on the contract of purchase.
GLEESON CJ: What are the provisions of the statute with which we are concerned now relevant to this statutory contract?
MR WALKER: Your Honour, can I take that on notice so as to give you a complete answer?
GLEESON CJ: Yes, certainly.
GUMMOW J: Have you finished with Soden?
MR WALKER: No, I have not. May I go to page 340 of the authorities book, page 325 of the Appeals Cases Report. Just between F and G there is a reference to Addlestone. It is said that that “must . . . have been based upon the statutory contract”. I am not sure whether that necessarily follows. I query whether their Lordships, that is, Lord Browne‑Wilkinson and those agreeing, intended to assimilate the statutory contract and every contract by which a subscription is made. If so, that would be inaccurate. However, having then gone through the passage to which Justice Hayne has drawn attention – I do not want to say anything further about that – between G and H his Lordship then turns to what are called:
negative claims; claims based upon having paid money to the company under the statutory contract –
again, that presumably means under the contract of subscription –
which the member says that he is entitled to have refunded by way of compensation for misrepresentation or breach of contract. These, too, are claims necessarily made in his character as a member.
Well, yes, quite. Then his Lordship goes on to refer to the 1862 section 38(7) and, with great respect, something in the nature of an assertion at H, referring to the reasons given in Addlestone:
for treating the case as falling within section 38(7) are directed exclusively to matters relevant to a claim involving the issue of shares by the company but irrelevant to a claim relating to the purchase of fully paid shares from a third party.
That is only if one assumes that there is no relevance in the fact that economically, in relation to the capital of a company available for the other creditors, there is no difference whatever between a subscriber shareholder’s claim and the other kind of member shareholder’s claim, namely, a transferee shareholder’s claim. When one considers that a transferee shareholder for partly paid shares, for example, is so assimilated to the position of the subscriber as of course to have imposed on him by reason of the so‑called statutory contract the obligation to pay calls when one sees from the primary provisions in question in the payment priority provisions, namely, that the contributories are liable and that those are members, past and present, and they certainly include transferees, it is, in our submission, impossible to understand how the assertion of irrelevance carries its own demonstration. At [1998] AC 298 at 326 when Lord Browne‑Wilkinson turns quite specifically to Webb ‑ ‑ ‑
GLEESON CJ: In particular the second sentence in that paragraph.
MR WALKER: I am sorry, your Honour, I should have gone to that. That second sentence, in our submission, is completely wrong. It is completely at odds with the passage to which I will be coming in Webb which uses the expression “directly or indirectly”. On any view of it, there is a reduction of capital when somebody who has bought by purchase, that is by transfer, the rights and assumed the obligations of a subscriber, assuming just one transfer of the parcel. There is no difference whatever in the diminution of the share capital of the company by a successful claim by a transfer shareholder compared with a subscriber shareholder.
When one tests it by an example of a kind we gave in our written submission, perfectly plausible in practice, the assertion just between C and D on page 326 by Lord Browne-Wilkinson is impossible to justify. It happens from time to time that shares are offered for subscription and there are more people who wish to subscribe than there are shares available and some people so persist in their valuation of that opportunity that having taken what they were allotted by subscription then go into the market as purchasers the very next day, that is, when the listing in publicly listed securities occurs.
So one would have very frequently people who have been induced to subscribe having their confidence in that issue continue so as to become a purchaser and it is both plausible and of some commercial and regulatory importance that such a person may have been induced both to subscribe and to be an eager purchaser by the one and same lie told by a promoter. In that case, in our submission, to suggest that the claim for the allotted parcel reduces capital and the claim for the purchase parcel does not, in our submission, is nonsense.
CALLINAN J: Mr Walker, what about the case, say, instead of the shares being reduced to zero because the company is not insolvent, shares bought, say, at $1.30 about the price here because of the non-disclosure rules or the continuous disclosure rules turn out to be a month later worth 30 cents but the company is still not insolvent. You do not have the insolvency provisions ‑ ‑ ‑
MR WALKER: When there is no insolvency provision you do not have a priorities problem. So a priorities provision will not concern ‑ ‑ ‑
CALLINAN J: No, but what do you say about that position? It still potentially reduces the capital that might be available if there were some untoward ‑ ‑ ‑
MR WALKER: I should not be understood as suggesting that this is a case that turns on some comprehensive and simple proposition that you cannot reduce the capital of a company. Were that so, ordinary trade creditors would be met with grave difficulty. I do not put it that way at all.
HAYNE J: Questions of maintenance of capital are irrelevant on the winding up, are they not?
MR WALKER: Yes, your Honour. We are talking about priorities of payment of claims in a statutory administration. In relation to Houldsworth’s Case, Mr Bathurst will be addressing a somewhat different argument.
CALLINAN J: What do you say about the case? Obviously, we do not have to decide that here, but what do you say about that sort of case?
MR WALKER: If there is no question of priorities in a statutory administration, then that is a claim that may well raise – does raise I submit – the issue which my learned friend, Mr Bathurst, will address concerning, for want of a better expression, what I will call the rule in Houldsworth’s Case, but it will not fall foul of 563A. But what your Honour has put to me, of course, is where insolvency is neither the present position nor the threatened result of the claim.
Your Honours, going back then in the speech of Lord Browne‑Wilkinson at page 341 of the book of authorities, page 326 of the report, there is a reference at E to the claim being:
to prove for damages in the winding up of the building societies such damages being based on misrepresentations –
That, I think, is the only reference to the fact that the claim in Webb was not a claim on the so‑called statutory contract, nor indeed was it restricted to the contract of subscription or for transfer. Their Lordships say “that the claim was excluded by the Houldsworth principle”, which is perhaps terse to the point of being unconsciously misleading. Yes, the principle or proposition of Houldsworth is at the heart of pages 33 and 34 in 179 CLR, but it is because it has been embodied in the provision which has been interpreted and applied that it decided the case. His Lordship then goes on:
and held that the proposition deducible from that case was that a shareholder may not directly or indirectly receive back any part –
et cetera. That is, with great respect, correct and found at page 33.
The High Court further relied on the Addlestone decision –
of course, this is all part of the majority’s reasoning in Webb which includes the observation that it does not matter for their purposes whether Houldsworth was right or not, and that, of course, included a consideration of Addlestone – and referred to section 360(1), and then his Lordship says of the majority that they “carefully delimited its application” – and that probably should be read as meaning the application of the section, although that is not an inevitable reading – “to cases of contracts to subscribe for shares”.
Now, certainly the passage where the Addlestone decision, which is a subscription case, is referred to is – all those passages are described, paraphrased or quoted in relation to subscription, but there is no reference anywhere to section 360(1) being delimited, as his Lordship puts it, carefully or otherwise, to cases of contracts to subscribe. Then, perhaps a little at odds with that approach, his Lordship then quotes from the High Court’s attribution of policy or purpose to the provision, namely, “the protection of creditors by maintaining the capital of the company”. That has to be read, of course, as meaning by not permitting the capital to be depleted by a member’s claim until a creditor’s claim has been paid. Then his Lordship concludes – this is all on a reading of Webb:
It is therefore quite clear that both the decision and the reasoning of the High Court were dependent upon the same factors as those in the Addlestone case –
that, in our submission, is not demonstrated by what is preceded –
i.e. the protection of creditors from indirect reductions of capital.
Now, that certainly is the case and that is what the High Court held at pages 33 and 34. Then his Lordship returns to the matter which one finds in the Court of Appeal passage to which I went earlier. His Lordship says:
Those are factors relevant to cases of subscription for shares issued by the company but wholly irrelevant to purchases from third parties of already issued shares.
Again, in our submission, an assertion which does not carry its own demonstration or justification and, in our submission, one which is economically wrong.
GUMMOW J: Are you going to take us to the primary judge’s judgment in Soden, the judgment of Lord Walker, as he now is? It is only reported in [1995] 1 BCLC 686, I think.
MR WALKER: Yes, your Honour.
GUMMOW J: It is, if I might say so perhaps, a more sophisticated analysis than that which was given in the House of Lords, though it comes to the same conclusion.
MR WALKER: Yes. Your Honour, I was not going to do that. I am not in a position to do that immediately. I wonder if my friend, Mr Bathurst, and I can discuss how to deal with that, your Honour.
GUMMOW J: Of course, yes. Lord Walker referred to the decision in this Court as well.
MR WALKER: Your Honour, I am familiar with the reasoning. I do not have it with me and I was not going to draw to attention anything in it which, in our submission ‑ ‑ ‑
GUMMOW J: None of this binds us. It is a question of how cogent it is.
MR WALKER: Yes, your Honour, quite. For the reasons I have put, in the Court of Appeal and in the House of Lords there is a deficit of cogency on the relevant point.
GLEESON CJ: In order to succeed in this appeal you have to persuade us, do you not, that all of the English judges in Soden were wrong?
MR WALKER: And all of the Australian judges in this case. Yes, we do. Could I go back ‑ ‑ ‑
GUMMOW J: Just before you do that, so you can think about it, at page 699g what Lord Walker says:
A claim that the company’s wrongful representation induced a purchaser of its shares to overestimate their assets backing -
which sounds like real life –
is not the same as a claim that it misled persons taking up shares as to their legal nature.
MR WALKER: No, but both of those deceptions may produce a discrepancy between a number of different measures: value represented, value received and perhaps also price paid and value received. The legal nature in Webb’s Case of the ‑ ‑ ‑
GUMMOW J: We are really quibbling about this word “capacity”, are we not, in the section?
MR WALKER: Yes, your Honour. That is the phrase at the heart of the question.
HAYNE J: His Lordship Justice Walker, as he then was, in the sentence immediately preceding that which Justice Gummow draws your attention to, understands the principle in Webb as distinguishing between a transaction by which any original holder took up shares and so became a member of the company and other kinds of contract pursuant to which someone may become a member. That presents a temporal element perhaps as well as more general differences about this phrase “in the capacity as member”.
MR WALKER: Yes. The best way to attempt an answer to the observations of Justice Hayne is to move to that part of my argument concerning the facts and decision in Webb. There are a number of references which either give different content or provide a different vantage point on understanding what their Honours understood the phrase “capacity as member” to require. Your Honours are familiar with the passage at the top of page 35 ‑ ‑ ‑
GUMMOW J: Was the phrase given a great deal of attention in the argument in Webb? I am just not sure.
GLEESON CJ: Counsel for the respondent who was successful in Webb on page 20 of the report put the case squarely on the basis of the law about maintenance of capital.
MR WALKER: Yes.
HAYNE J: Again, the question arises, what has maintenance of capital got to do in ordering the priorities in which resort may be had to a fund which by hypothesis is insufficient to meet all of the claims that are being made against it?
MR WALKER: It has but the most tangential relation, your Honour, as we have been putting. In order for that phrase to be both useful and accurate in understanding the policy and purpose of a provision such as 563A and go right back to subsection 38(7) of the 1862 Act, maintenance of capital means and means only ensuring that the capital ex hypothesi insufficient the assets available to be distributed among claimants is distributed on the basis that the others get paid in full before any claims are made by members for or on account of a claim as member – members come last. Maintenance of capital can only be understood in this context in that quite special sense.
Your Honours, I was about to refer to the passage at the top of page 35 in 179 CLR. About point 3 on that page, the sentence commencing “Moreover” does have some temporal element there, it reads:
Moreover, they sue as members, retaining the shares to which they were entitled –
et cetera. However, in our submission, that is inseparable from the sentence which preceded it, which is:
damages which amount to the purchase price of their shares, which is a sum directly related to their shareholding.
The word “Moreover” suggests that what follows is not the only indication of the reasoning but is superadded. In our submission, what one can and should gather from Webb in relation to capacity as member is focused principally upon the nature of the claim and its necessary legal connection as an element in the cause or causes of action on the fact that they became a member.
HAYNE J: It is also wrapped up in the history of the law of deceit.
MR WALKER: Yes, your Honour.
HAYNE J: Can you make your claim for damages without giving up the property?
MR WALKER: Hence the context of Professor ‑ ‑ ‑
HAYNE J: Once you inject statutory claims in on top of that perhaps Houldsworth is really telling you very little.
MR WALKER: Your Honour, can I leave that to my learned friend. That obviously is the context where, for example, Professor Gower’s provocative footnote led to the exchange because that, after all, was a note that started off talking about the rule in Seddon v North Eastern Salt. Your Honours, in footnote 26 of our opponent’s written submissions which is found on their page 8, that is in S 208 ‑ ‑ ‑
GLEESON CJ: Just before you – are you still on Webb?
MR WALKER: I am on Webb and how the question of ‑ ‑ ‑
GUMMOW J: Have we been given Justice Tadgell’s decision [1992] 2 VR 613?
MR WALKER: Yes, your Honour.
HAYNE J: I think it begins at page 385 of the bundle, Justice Tadgell is at 387 and following.
MR WALKER: Yes, your Honour.
GLEESON CJ: Webb was, was it not, a claim by people who said they were defrauded and as a consequence of the fraud they subscribed capital to a company?
MR WALKER: Yes. They also said that would follow under section 52.
GLEESON CJ: But the nature of their claim was that it was a claim related to their subscription for capital?
MR WALKER: Yes. I am not qualifying what your Honour has put to me. You pick that up at 179 CLR 15 at 17 just before point 8:
For the purposes of the application the Court was asked to assume that there had been misleading or deceptive conduct on the part of the societies, such as would found an action in deceit or under s 52 of the Trade Practices Act 1974 (Cth).
The parties before your Honours are at odds about what were the facts upon which the High Court ruled in Webb. In our submission, as your Honours have seen in our written submission, the facts included transferee shareholders. It is the submission against us that somehow that may be overlooked or treated as conventionally to be regarded as not different from subscribers, so that the authority refers only to claims by subscriber shareholders.
We have already put, both in writing and in address, why as a matter of principle, including what may pass for economic policy legislated, there ought to be regarded as no sensible difference between the subscriber claim and the transferee claim, but we take issue with the way in which it is argued against us that what is called the principle in Webb’s Case is confined to subscribing shareholders, to quote from our learned friend’s written submission, paragraph 30. In paragraph 31, footnote 26 refers to:
the High Court . . . proceeded on the basis that the contract that was entered into by the member was a contract with the building society in which he was –
that is, in which he became –
a member.
The footnote is to pages 17, 25, 26, 34 and 35, to which we will go, but also, very significantly, we will go to page 24. On page 17 the references to the acquisition of the shares is in each case a reference simply to purchase. It is equivocal as to subscription or transfer. On page 24, not contained in the footnote, one finds the way the majority expounds the facts and Justice McHugh adopts that exposition of the facts. At 24, the first full paragraph refers to:
The three societies began to market non‑withdrawable shares . . . Their complaints generally focus on statements alleged to have been made on behalf of the societies that the shares were redeemable . . . The societies instituted a system by which one society would take a transfer of the shareholding in another society from an investor wishing to “redeem”, in anticipation of making those shares available to a prospective investor.
Now, those are issued shares held by somebody who wants to redeem. The person wishing to redeem gets the money and the share is parked, as it were, in another society ready to transfer. It has to be, can only be transferred to a prospective investor. Their Honours went on:
Clearly that system depended upon the availability of potential new investors –
we interpolate as transferees –
in the meantime shares were held on what were known as “inter‑society holdings”.
The parking I have referred to.
The “prospectuses” did not explain this system. They stated only that the building societies would maintain a register of persons wishing to take transfers.
That is not language which, in our submission, permits a reading of the decision of Webb in this Court as proceeding on the basis that there were only subscribers.
The next footnoted passage is page 25 where again there are equivocal references to “the contracts under which they acquired their shares”. Now, bearing in mind that where there are transferee shareholders they are acquiring for one of the three societies, all of whom are being sued and who are in cahoots in this deception, that is of course quite equivocal as to whether subscription or transfer is being referred to. On the other hand, the passage from Mr Justice Tadgell’s reasons which are set out at the foot of page 25 plainly uses the expression “subscription”. Page 26, in our submission, one obtains from that only the notion of holding shares. There is nothing there other than the ambiguous possibility of subscription or transfer and no significance is given to the difference.
The same is true of the passage on page 34 which of course is concerned with the facts of Addlestone which was a subscription case. There is nothing in relation to our statutory provision or the provision before the Court in Webb’s Case where there is any subscription as opposed to transfer observation by the Court. The same is also true on page 35 where there is a reference to purchase which of course is quite equivocal as to whether subscription or transfer.
In our submission, all of that adds up to the impossibility of saying that this Court did not have before it in Webb a case of transfer. They did. They knew it and we know that they knew it because they said it.
What it therefore stands as authority for is that there is no material difference in the position as between transferees or subscribers. That fits with what one obtains from a reading of page 33.
GUMMOW J: This would be fine as an argument in the Full Federal Court.
MR WALKER: Your Honour, I am doing that part of the argument that treats this as authority and I entirely accept that this is not a straightforward application of stare decisis.
GUMMOW J: Look, the problem in Webb is, I think, the way the argument was framed for which their Honours then cannot be blamed. I mean, the argument was framed in the fashion that appears ‑ ‑ ‑
MR WALKER: On page 17.
GUMMOW J: - - - at page 20 on the respondent’s part and on the other side there was complaint that the building society’s legislation has nothing to do with this.
MR WALKER: I have not gone to those part of the reasons, but Mr Hayes’ argument was a just ‑ ‑ ‑
GUMMOW J: No, that is true. He also said the Trade Practices Act is an answer.
MR WALKER: Yes.
GUMMOW J: Towards the end.
MR WALKER: Yes, particularly at the foot of page 19.
GUMMOW J: Which obviously struck a chord with Justice McHugh.
MR WALKER: Yes. While on that passage, page 19, could I draw to your Honour’s attention about an inch and a quarter down from the top this argument appears:
The words “or otherwise” should be read eiusdem generis with “dividends” and “profits” and do not include claims to unliquidated damages.
That was rejected quite plainly by the decision of the High Court. In our submission, before one can go down the ejusdem generis route, which is sought to be taken by our opponents, one needs to suggest sensibly what third and other species can be supposed by inference reside in the words “or otherwise” which is indicated by the use of dividends or profits, the first two species, because unless you know that you do not know what genus you are describing, or to put it another way, what genus is thrown up by dividends and profits which can both be articulated and will include something which is not itself dividends or profits. For failure of being able to make good those requirements of an ejusdem generis approach, in our submission, the rejection of that argument in Webb should be reflected in a rejection in this Court.
GUMMOW J: There is an earlier Victorian decision called Re Harlou.
MR WALKER: Yes, your Honour.
GUMMOW J: Are we going to be taken to that, [1950] VLR 449?
MR WALKER: I think everyone has referred to that in their written submissions, your Honour. I was not intending to go to it specifically.
GUMMOW J: Does it not throw some light on what this word “capacity” means?
MR WALKER: Not beyond – that is one of the cases where there was a ‑ ‑ ‑
GUMMOW J: The company had to go out and find a purchaser for this man’s shares.
MR WALKER: That is right.
GUMMOW J: And for breach of that obligation he was allowed to prove ‑ ‑ ‑
MR WALKER: Yes.
GUMMOW J: - - - without the impediment of the section.
MR WALKER: In that case the contract of employment ‑ ‑ ‑
GUMMOW J: It is not in the book of authorities. Is it in the book of authorities?
MR WALKER: No, it is referred to in our footnote 22 in our written submissions in this appeal on pages 8 and 9 of our written submission.
GUMMOW J: Well, we had better be supplied with it tomorrow, I think.
MR WALKER: May it please your Honour. The key in that case, of course, was that it was not in the capacity as member because the claim was based on his contract of employment. The contract of employment stipulated that the company would find a purchaser for his shares.
GUMMOW J: It had two characters, Mr Walker.
MR WALKER: First of all I will explain ‑ ‑ ‑
GUMMOW J: It is as if we are back in some primitive constitutional dispensation in this sort of game.
MR WALKER: No, no, your Honour, I was saying that is how the case was decided.
GUMMOW J: I know. I know that is what they said. We are not going to get anywhere unless we work out what we are doing when we are characterising something as “in the capacity” or not. Does it mean in that capacity and nothing else, or is it enough to find one foot holding on one characterisation?
MR WALKER: Your Honour, in that case this can be said. It was no mere chance coincidence that he was a member at the same time as he was a plaintiff.
GUMMOW J: He was a member and he wanted to flog you shares.
MR WALKER: Because he was a member, he was in court saying, “I do not want to be a member and you promised to remove me from the register by getting a transfer for me”. Now, the particular passage starts at the foot of page 453 and goes to the top of page 454. We will supply those reasons. I am bound to say they do not explore the phrase or the characterisation question beyond ‑ ‑ ‑
GUMMOW J: I do not think anybody does. It has been going on for 140 years now, ever since 1862.
MR WALKER: Quite, your Honour. If I may say so, your Honour, there is some illustration and discussion to be found in the passage I have already taken your Honours to, that one paragraph at the top of page 35 in Webb in the majority. Those two sentences, the first commencing “But, in the present case” and the second commencing “Moreover”, seem to be the reasoning for why this is a claim in that capacity.
GUMMOW J: That is right, but then what guidance does that give that assists or does not assist you in your position?
MR WALKER: “[D]amages which amount to the purchase price of their shares, which is a sum directly related to their shareholding” is ‑ ‑ ‑
GUMMOW J: That seems to help you.
MR WALKER: That is how we use it.
GUMMOW J: Then the next sentence seems not to ‑ ‑ ‑
MR WALKER: It does for us. I am bound to say that in principle the first is the one that seems more attractive, the second does not seem as attractive. One thing we can say suing as members, they are a member when they sue. Now, 563A, like any priorities provision, is drawing lines. It is saying here is a category and here is the line that defines it.
GUMMOW J: So is the Chief Justice’s shareholding. It gets run down the street by the company car as the directors speed off to lunch.
GLEESON CJ: Or come back.
MR WALKER: It is injured, not dead. Your Honour, I have already given my answer to that, namely, there would be no element, that is, fact requiring to be pleaded and proved in either liability or the causation for measurement of loss imported by the fact of that membership, whereas, it was the essence of the claim in Webb, as it is the essence of the claim here, that you have a shareholding which provides a grievance because of the deception practised which produced that fact, that is, you are now a member, and the difference between the price and value. So, in our submission, there has been discussion but not in an overly abstract way. There is a concrete illustration at the top of page 35 which fits this case, in our submission.
Your Honours, it is worth noting that the outcome of Webb was followed by another go. Could I take your Honours to page 93 of the book of authorities. Yet another go was had in Hodgson v Victoria [1995] 2 VR 292. There the question arising and the circumstances are described by Mr Justice Tadgell again, page 295 of the report, referring to the history which had led to the High Court decision at about line 12 or 13. One notes that Mr Justice Vincent had been asked questions relating to the title of what are called “holders of non‑withdrawal investing shares”. That expression “holders” is repeated throughout that paragraph, say, line 17 and line 24. Then the High Court outcome is referred to and then at about line 32 his Honour says:
Now, against that background, the High Court having dismissed their appeal, the second, third and fourth respondents to the originating motion representing the holders of the non‑withdrawable investing shares, issued their summons on 11 May last. By the summons they sought the opinion of the court on behalf of the holders of the shares upon a question which had not so far been raised in any of the foregoing proceedings. In stark terms, the question was whether the holders of non‑withdrawable investing shares who had obtained them, not by allotment or issue from a building society, but by transfer from another building society which had held them, were entitled to prove against the transferring building society –
that is, as opposed to the society which had originally issued the shares and of which they had become member by transfer. So it is a distinction which was clearly in the minds of those advising. I cannot say when the distinction was so starkly clear. We are entitled simply to observe that page 24 of the High Court Report makes clear that their Honours knew they were deciding a case which included transferees’ claims.
GLEESON CJ: What is the provision of the current Act, the Act with which we are concerned, that corresponds to what was, for example, section 22 of the Companies Act 1936 (NSW) which said that:
the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they had respectively been signed and sealed by each member, and contained covenants on the part of each member ‑ ‑ ‑
MR WALKER: Section 140, I think, your Honour.
HAYNE J: Section 140?
MR WALKER: Yes. When I have used the expression “the statutory contract” it is that to which I have been referring.
GLEESON CJ: Section 140?
MR WALKER: Yes, that which is now section 140.
GLEESON CJ: I am just looking at Pilcher and Uther on The Australian Companies Acts, the 1937 edition. There was apparently huge controversy over the years as to the extent to which this contract operated or the capacity in which people were bound by this contract.
MR WALKER: Your Honours, with great diffidence, given all the time that has ensued and all the case law in that area, we would nonetheless submit this. Calling it the statutory contract is not useful except as shorthand label where it is very useful. But in terms of the analysis, this is a matter of statute and it uses language that is the simile of a contract, has effect as a contract, to achieve a result which could have been done without using any reference to a contract. It could have simply been said, as a matter of statute, the Constitution binds, et cetera.
HAYNE J: The notion of the statutory contract is injected as a means of giving content to the expression 563A or its analogues in “the person’s capacity as a member of the company”. There is that possibility on the table. There is the possibility of understanding that phrase as somehow confining claims to those made by subscribers as distinct from transferees. There is the formulation you ultimately adopted in argument: membership is an element of the cause of action. Are there any other candidate paraphrases ‑ ‑ ‑
MR WALKER: For the capacity phrase, your Honour?
HAYNE J: ‑ ‑ ‑ for the capacity expression, recognising, of course, the dangers of paraphrase?
MR WALKER: No. Element in the sense of facts requiring to be pleaded and proved to demonstrate either liability or to make good your causation and measure of loss, using element in that sense, that is the preferred candidate.
GUMMOW J: But capacity as a member may alter, may it not? I mean there are remedies now. Foss v Harbottle is dead and this Act contains all sorts of enhancement of shareholders’ positions and new remedies, as Justice Callinan was referring to earlier, 30, 35.
MR WALKER: Shareholder claims - one only has to think of North American usage of that expression and the industry of shareholder claims – could not sensibly be said to be the same now as they were understood to be 120 years ago. It could not possibly be said. It is not only company law that has moved on. As Justice Gummow has pointed out, by statute, principally, there have been made available grounds of liability and forms of remedy which are quite different from the armoury which was available 120 years ago at common law or in equity.
When one talks about provisions such as the present provision and having a historical pedigree where you can see a very close similarity back to 1862, it is not to be overlooked, and we accept this and seek to call it in aid, but the setting in which the provision now finds itself is of course markedly different from the setting in which 38(7) was found but, in our submission, all the more reason to see that constant members come last approach as being unaltered even when there have been, albeit the safeguards, considerable liberalisations of the maintenance of capital approach to which reference has been made in the authorities.
Your Honours, while on the statute, it is not to be overlooked when understanding the provisions in question in this case that section 231 of the Act familiarly defines “member” or “membership of a company” so as to include, of course, those who agree by executing the transfer to become a member of the company, not just original members, of course. On that point, then, can I come finally, I hope, to a brief pulling together of the strands from page 33 of Webb and from the provisions that we are construing.
At page 33, rather than talking about maintenance of share capital, an inch down, the way their Honours put it is “the preservation of share capital for the protection of creditors” and then their Honours then say of both damages, as well as rescission and restitution, both remedies deplete the assets of the company. Then having importantly disavowed the critical question as being whether Houldsworth was right, they then refer to what they called incorporation of the distilled proposition “in the provisions of the Code.” The proposition is then set out by their Honours, importantly including the expression “directly or indirectly”:
That proposition, namely, that a shareholder may not, directly or indirectly, receive back –
et cetera. Receiving back is obviously a form of words that would suit a subscription only model but, in our submission, for the reasons I have already put, it is impossible to understand their Honours as intending so to limit what they were talking about, particularly bearing in mind that they are talking about the economic effect of remedies depleting the assets of the company. Having then referred to some of the developments up to that point in liberalising return of capital, footnote (96), their Honours then turn to how that fits with what they call “the Houldsworth proposition”.
In relation to the then statutory incursions on maintenance of capital, that is, permission of return of capital and the safeguard for the protection of creditors, their Honours continue:
Hence, the statutory provisions treat the subscribed capital as a protection to creditors and accept that the capital should not be returned –
Then their word of emphasis is -
directly to shareholders.
So the proposition that they say has been incorporated in the law is directly or indirectly. They say direct return cannot be done except with safeguards. Then in the next paragraph, commencing “Tadgell J. concluded”, their Honours agree with the proposition that what is there called “the principle in Houldsworth” – and that is the directly or indirectly – has “received statutory recognition in s. 360(1)”. On that reading, if the reasoning in Webb be persuasive then it is certainly a decision that should have been followed and applied in the courts below. There was not the distinction available which was carried out by the decisions adverse to us.
Your Honours, in our written submission in reply, we have drawn to attention in our paragraph 5 what one gathers from other contexts in this statute concerning what might be called return of capital by disappointed acquirer of shares, of securities. We have referred there to section 737 which by express reference to a possibility of having application money repaid even if the company that issued the securities is being wound up recognises what, in our submission, ought to have been seen and should still be regarded as the effect of section 563A.
GLEESON CJ: Mr Walker, I am sorry to come back to what is only a procedural matter, but there never has been a formulation, has there, of the cause of action between Mr Margaretic and your client? A formulation in legal terms, I mean, not by way of assertion of complaining statements of fact.
MR WALKER: Could I just check one fact please, your Honour. Your Honour, I do not think I have anything that goes beyond the description of matters concerning the nature of the claim ‑ ‑ ‑
GLEESON CJ: At 498 and 499, it is an assumption.
MR WALKER: That is right. It is understandable there is not a pleading but in relation to, as it were, a document of proof containing contentions, I just wanted ‑ ‑ ‑
CALLINAN J: Are not the facts cited in ‑ ‑ ‑
MR WALKER: Yes, your Honour, section B, the nature of the claim, that is what we do rely upon as showing that in the sense I have put it the discrimen between a claim which is made in a capacity as a member and one which is not is satisfied in favour of that claim being made in his capacity as a member.
GLEESON CJ: I just wondered where I would see it formulated as if it were pleaded.
MR WALKER: Nowhere, I think, your Honour.
GLEESON CJ: The reason I ask the question is this. This is all framed on the assumption, is it, that a corporation, as it were, constantly represents to the public or members of the public who might be interested in buying shares in the corporation the value of its undertaking. Is that the assumption behind all this?
MR WALKER: Your Honour, there is no doubt that that is a proposition, particularly in the 19th century authorities, underlying what I will call a generalised requirement for the maintenance of capital, to use that expression.
GLEESON CJ: We are not dealing with a false prospectus here, are we?
MR WALKER: No, we are not. However ‑ ‑ ‑
HAYNE J: De facto, we are, are we not, with the continuous disclosure requirements? You have to keep on disclosing matters of the same kind as you would in prospectus, do you not? Is not that the way it works, or am I misremembering?
MR WALKER: No, your Honour is, of course, correct, but there is a big difference between continuous disclosure on the one hand and a prospectus that speaks at one time on another. At base, of course, they are all about market information.
GLEESON CJ: But there is a kind of ongoing representation by a listed public company being made to anybody who is considering buying shares in that company ‑ ‑ ‑
MR WALKER: Or selling.
GLEESON CJ: ‑ ‑ ‑ or selling shares in the company.
MR WALKER: Query hypothecating.
CALLINAN J: Or holding onto shares in that company.
MR WALKER: Yes, your Honour.
GLEESON CJ: This is then expressed in a cause of action framed in deceit, is it, or negligent misrepresentation?
GUMMOW J: You start at section 674, do you not? Then where do you get the remedy for breach of 674? It is statutory remedy for the statutory obligation. Is it 1325?
MR WALKER: It is 1325.
GUMMOW J: Yes.
MR WALKER: Your Honours, I can answer the Chief Justice’s question about where do you find it, though there is nothing very substantively different. If I could take your Honours in volume 1 of the joint appeal book to pages 170 to 171, there is the informal proof of debt form and your Honours will see the uncoincidental similarity between that schedule on page 170 and 171 and the agreed facts.
GLEESON CJ: The reason I asked the question is because if you are right – and you may well be right – in your proposition that the test of whether a claim is in the capacity of a member or a debt is owed in the capacity of a member is whether or not the fact of membership is an essential ingredient of the cause of action, then I would just like to lay my eyes on the cause of action.
MR WALKER: That was it, your Honour, where I just took you.
HAYNE J: It is the combination of 2(h) and 4, is it not?
MR WALKER: It is, your Honour.
HAYNE J: “I wouldn’t have bought. I have lost.”
MR WALKER: Yes. Your Honours will recall the way in which I have tried to elaborate the notion of being an element in the cause or causes of action, namely, a fact requiring to be pleaded and proved to make good either or both of liability, causation of loss and measurement of loss.
GLEESON CJ: Is that a convenient time, Mr Walker?
MR WALKER: It is, may it please your Honours.
GLEESON CJ: As things are going at the moment, when do you expect the argument in this matter to conclude? I only ask that question for the purpose of fixing a time to sit tomorrow morning.
MR……….: Mr Walker, as I understand it, has got a lot to go.
MR………..: I will be an hour, not much longer.
GLEESON CJ: We will resume at 10.00 am.
AT 4.18 PM THE MATTERS WERE ADJOURNED
UNTIL TUESDAY, 8 AUGUST 2006
Key Legal Topics
Areas of Law
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Civil Procedure
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Insolvency
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Commercial Law
Legal Concepts
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Abuse of Process
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Appeal
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Costs
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Jurisdiction
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Res Judicata
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Standing
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