Thompson Brindal v McLachlan No. Scgrg-97-1238 Judgment No. S189

[1999] SASC 189

THOMPSON BRINDAL LTD  v  McLACHLAN
[1999] SASC 189

Ruling on Application
Nyland J

1. This is an application by the plaintiff for an order that the defendant, whether by himself, his agents or otherwise, be restrained until further order from disposing of or dealing with in any manner whatsoever the 70,000 ordinary shares in the issued capital of Saracen Limited, registered in his name.  The plaintiff is a company duly incorporated under the Companies Code (South Australia) which carried on the business of stock broking.  The defendant was employed by the plaintiff but also had an account with the plaintiff and was trading on his own account.

2. The plaintiff’s allegation against the defendant, as contained in paras 15 to 20 of the amended statement of claim, is that he was engaged in option trading.  In para 20, the plaintiff alleges that the “defendant is and was at all material times indebted to the plaintiff for the fees, realised losses and wasted option premiums in connection with the unauthorised transfers of the open option positions, together totalling 763,036.01”.  The plaintiff therefore claims that sum from the defendant.  In addition, the plaintiff seeks a declaration that the defendant is liable to indemnify the plaintiff in respect of the liability of the plaintiff, if any, to clients of RetireInvest for consequential loss or damage caused by the actions of the defendant.  RetireInvest consisted of a group of clients brought to the plaintiff firm by a person called Laming.

3. The defendant, in para 17 of the amended defence, admits that transfers were made but denies that such transfers were made without the authority of the relevant clients.  It is further pleaded that at all times the defendant “acted as an employee of the plaintiff and on the instructions of Laming ...”.  The defendant also pleads a set-off and counterclaim. 

4. In para 27 of the set off and counterclaim, the defendant says that he is the registered owner of 70,000 ordinary shares in the issued capital of Saracen.  In para 28, it is pleaded inter alia that the defendant has requested the plaintiff to cease as the sponsoring broker of the defendant and to do all things necessary to enable the defendant to appoint another sponsoring broker.  In para 29, the defendant claims that the plaintiff has wrongfully failed and refused to comply with his request.

5. The plaintiff has responded to this allegation in para 8 of its defence to the counterclaim by reference inter alia to the CHESS (Clearing House Electronic Subregister System) sponsorship agreement between the plaintiff as the sponsoring broker and the defendant as sponsored client, dated 24 June 1994.

6. Paras 9.1 and 9.2 of that agreement are set out therein as follows:

   “9.1........... Subject to clause 9.2, if the Sponsoring Broker receives oral or written instructions from the Sponsored Client:

   (a)... for conversion of Securities in a Sponsored Holding to any other mode of holding;

   (b)    to initiate a change of sponsorship for the Securities;

   (c)    to endorse or initiate an off-market transfer of the Securities; or

   (d)... to accept the takeover offer for the Securities on behalf of the Sponsor Client;

   the Sponsoring Broker must, subject to there being sufficient securities available in the Sponsored Clients’ Sponsored Holdings, initiate any transfer, conversion or other action necessary to give effect to the Withdrawal by Instructions within the Prescribed Period.

   9.2If the Sponsored Client gives Withdrawal Instructions to the Sponsoring Broker and at that time:

   (a)... the Sponsoring Broker reasonably claims that an amount is lawfully owed to it by the Sponsored Client in respect of any Securities transactions: and

   (b)... the Withdrawal Instructions would have the effect that Securities and Sponsored Holdings would have a current market value of less than 120% of the claimed amount (in this clause called the ‘minimum value’),

   then

   (c)... the Sponsoring Broker may disregard the Withdrawal Instructions, but only to the extent necessary to retain Securities of the minimum value in Sponsored Holdings;

   (d)..... if the Sponsoring Broker does so, the Sponsoring Broker must inform the Sponsored Client immediately; and

   (e)    if the Sponsored Client objects, the Sponsored Client may refer the matter to the Exchange for a determination in accordance with the ASX Business Rules.”

7. The plaintiff further says that it is entitled to disregard the withdrawal instructions of the defendant pursuant to Clause 9.2(c) of the agreement in view of its claim against the defendant for the sum of $763,036.01 referred to above.  In addition, or in the alternative, the plaintiff claims a common law lien over the shares for the debt alleged to be due by the defendant to the plaintiff.

8. Against the background of those pleadings I turn to a consideration of the events which have given rise to the present application.  I understand that in 1997, the Australian Stock Exchange (ASX), carried out an inspection of the plaintiff company.  The final inspection report was produced on 12 January 1998.  In that report it was alleged that the plaintiff company, as the employer of the defendant, had failed to supervise the defendant with regard to a number of matters.

9. As a result of the various findings contained in the report, the plaintiff was charged with a number of breaches of the ASX Articles and Business Rules.  Those charges were considered by the National Adjudicatory Tribunal.  In December 1998, the plaintiff was advised that the Tribunal had found certain of the charges had been made out as a result of which a number of penalties were imposed.  This included cancellation of the recognition of the plaintiff as a participating organisation in the ASX, such cancellation to take effect on 1 February 1999. 

10. On or about 1 February 1999, the plaintiff received written advice from the ASX Settlement and Transfer Corporation Pty Ltd (ASTC) that as the plaintiff’s participating organisation status had ceased as at that day, the plaintiff was suspended and terminated from participation in CHESS as a broker in accordance with SCH Business Rule 19.21.  Rule 19.7 of those rules deals with the effect of termination of participation as follows:

    “19.7.1...... Subject to Rule 19.7.2, if the Board terminates the participation of a non-compliant Participant, SCH shall terminate the access of that Participant to CHESS.”

    19.7.2..... SCH may make such arrangements with the non-compliant Participant or with the liquidator, receiver, administrator or trustee of that Participant, as the case requires, as may be necessary or desirable to enable:

    (a)... outstanding transactions of the non-compliant Participant that affect a CHESS Holding under the control of that Participant to be completed; and

    (b)Holdings under the control of the non-compliant Participant to be:

    (i)..... Converted or Transferred from CHESS Holdings to Certificated or Issuer Sponsored Holdings; or

    (ii)removed from the control of the non-compliant Participant.

    19.7.3In making arrangements under Rule 19.7.2, SCH and the non-compliant Participant shall, so far as possible, take into account the wishes of the Holders of Holdings controlled by the Participant.

    19.7.4If, by the date specified in the Notice of termination given under Rule 19.3.1, a non-compliant Participant has not:

    (a)completed all outstanding transactions that affect a CHESS Holding under the control of that Participant; or

    (b)removed all CHESS Holdings under the control of the non-compliant Participant from the CHESS Subregister or from the control of that Participant,

    SCH may, without further Notice to the non-compliant Participant, Convert CHESS Holdings under the control of that Participant to Certificated or Issuer Sponsored Holdings.”

11. On 26 February 1999, the plaintiff’s solicitors received a letter from the defendant’s solicitors, advising that as at 1 March 1999, their client would convert the CHESS holdings under the control of the plaintiff to the issuer sponsored sub-register in accordance with SCH Rule 19.7.4, and that such conversion would include any CHESS holding in the name of the defendant.  They confirmed that as at 1 March 1999, the plaintiff’s access to CHESS would be terminated and upon termination, the ASTC intended to convert any sponsored holdings under the control of the plaintiff to the issuer operated sub-register.

12. On 1 March 1999, the plaintiff received a letter from ASX confirming that as of that date the plaintiff’s access to CHESS had been terminated and that the SCH would that day convert all of the plaintiff’s existing sponsored holdings to issuer sponsored.  I understand that the shares which are the subject of this application were so converted on that day. 

13. In these proceedings, however, the plaintiff maintains that pursuant to the CHESS agreement it still has a contractual right to hold the shares as security against the debt alleged to be owed by the defendant.  The plaintiff asserts that the contractual right to that security has only been threatened by reason of the termination of the plaintiff’s access to CHESS on 1 March 1999.  The plaintiff says that the termination was due to factors which arose solely out of the unauthorised actions of the defendant in the trading of securities on behalf of RetireInvest and its clients.  Accordingly, it proposes to contend at trial that the court should find that the sponsored broker agreement continues to operate and, notwithstanding the actions of the ASX, the intent and effect of the CHESS agreement is that the plaintiff continues to have control over these shares.  Accordingly, there should be an interlocutory injunction restraining the defendant from taking the benefit of his own fraud pending trial.  In the alternative, the plaintiff claims to have a common law lien with respect to those shares. 

14. The defendant opposes the orders sought by the plaintiff.  The defendant maintains that the plaintiff does not have, and never has had, either a contractual right to hold the shares, nor a possessory or broker’s lien at common law.  Mr Clayton QC, counsel for the defendant, argued that the plaintiff’s claim, as currently framed, was only a contingent claim as the plaintiff did not have any current liability to the clients of RetireInvest.  He further submitted that Clause 9.2 of the CHESS agreement did not apply as there was no satisfaction of the requirement of 9.2(a), that is, that “the sponsoring broker reasonably claims that an amount is lawfully owed to it by the sponsored client in respect of any securities transactions” as the defendant was an employee of the plaintiff.  Furthermore, if the plaintiff had any right to make the claim it was terminated when the plaintiff ceased to be the sponsoring broker.  Possession was lost by the plaintiff at that time and there was no nexus between the alleged fraud of the defendant and what happened to the plaintiff.  The plaintiff lost possession as a consequence of it ceasing to be a broker.  Mr Clayton argued, in any event, that the plaintiff never had possession of the shares and, if that was the case, there could not be a parting with possession.  Therefore a common law possessory lien did not arise.  Mr Clayton further pointed out that a lien is a concept which attaches to an item of property which is tangible.  In the case of shares on the CHESS system, there was no physical object to which the lien could attach.  In this regard Mr Clayton referred to Colonial Bank v Whinney [1886-90] All ER 468 which distinguishes between choses in action and objects of property which may be in possession of a party.

15. Essentially, the defendant submits that the plaintiff does not and never has had any right to a lien.  If it did have a contractual right by reason of 9.2 of the CHESS agreement, that right came to an end when the plaintiff’s position as sponsoring broker ceased.  The plaintiff never had any claim pursuant to 9.2 of the CHESS agreement because it did not apply to the circumstances of this case.  The plaintiff never had possession of the shares.  There was no amount lawfully owed by the defendant as sponsoring broker and there was no amount lawfully owed in respect of securities transactions.  The application should therefore be dismissed.

16. Mr Whitington QC for the plaintiff, however, pointed out that the statement of claim as formulated includes both a claim for a specific debt as well as the contingent claim arising out of future proceedings by RetireInvest clients.  There was therefore a debt to which the lien could attach.  He rejected the suggestion that Clause 9.2(a) did not apply.  The defendant, although an employee, also traded on his own account.  This is pleaded in paras 13, 14 and 15 of the statement of claim.  It would appear therefore that Clause 9.2 of the CHESS agreement applies to the defendant.  The more difficult problem arises with respect to the issue of whether the plaintiff has either a contractual or common law lien which attaches to the shares in the particular circumstances of this case.

17. Mr Whitington referred to Mercantile Credits Ltd v Jarden Morgan Australia Ltd & Ors (1990) 1 ACSR 805 which would appear to be authority for the proposition that a common law lien continues to subsist, notwithstanding the existence of a contractual lien unless the language of the contract is so clear as to exclude the common law lien. Derrington J said (at 810):

    “The first respondent does not challenge the existence of the appellant’s security and its entitlement to exercise its rights thereunder save in respect of its claim to priority over the shareholder’s lien.  It limits its own claim to that of a possessory lien derived from both an express term of its contract with its client and from common law.  It argues that the latter is also a term of the contract, implied by law.  The express term is a rule of the stock exchange incorporated into the contract.  Its existence does not exclude the common law lien: Jones v Peppercorne (1858) John 430; 70 ER 490; and the contrary was not argued. (emphasis added)

    It is not in issue that a sharebroker is entitled to a common law lien in this way and that it is a general lien; Majeau Carrying Co Pty Ltd v Coastal Rutile Ltd (1973) 129 CLR 48 at 55; 1 ALR 1 at 5, 6 and therefore it has application to all the shares held by the sharebroker, whether paid for or not: see Halsbury, vol 28, 4th ed, para 516 and the authorities noted thereunder; Brandao v Barnett (1846) 12 CL & F in 787, Jones v Peppercorne.”

And at 813:

“Liens may arise expressly from the terms of the contract between the parties, but they may also arise at law from some relationship: Re Leith’s Estate; Chambers v Davidson (1866) LR 1 PC 296 at 305; Fisher v Automobile Finance Co of Australia Ltd (1928) 41 CLR 167 at 175; [1928] ALR 363 at 367. Even though there be no express provision for a lien, this may come into existence as a result of a contractual arrangement, but it is not limited to that. For example, a trustee may have a lien despite the absence of any contractual relationship. However, in the case of a sharebroker’s lien the relationship is the product of the contract between the parties. Because that relationship comes into being immediately upon the formation of the contract and, very importantly, because for all the purposes of this discussion the feature of the relationship cannot be distinguished from those of the contract which brought it into existence, the right to a lien is at least as the equivalent of an implied term.

There is nothing special about an express contractual lien that would distinguish it from a common law lien.  In George Barker (Transport) Ltd v Eynon, supra, Stamp LJ described the former at 473 as ‘not a legal “thing” or “chose in action” arising by the effect of possession, but no more than a description of the bundle of rights belonging to the carriers under [the contract]’.  The common law lien is precisely the same thing, that is, a similar bundle of rights, and the only difference is that it is recognised by law without express agreement.”

1. Mr Whitington therefore submitted that the plaintiff had a sharebroker’s common law lien in addition to the contractual right, both of which would be pursued at trial.  The plaintiff argues that the express contractual agreement still subsists, notwithstanding that the plaintiff is no longer the sponsored broker and the common law lien should not be destroyed as a result of the circumstances in which possession was lost in this case.

2. Mr Whitington also relied on the Mercantile Credit case to submit that the sharebroker’s lien may not even be a possessory lien in the sense that possession is required.  All that is required is some ability to control and prevent disposition of the shares.  In any event he further submitted that there had been no voluntary handing up of possession.  He referred to Frontmond v Rodgers (1993) 6 BPR 13112 in which the court held that where possession had been lost by fraud or by some other improper means, that is, without the consent or approval of the person claiming the lien, it was not necessary for the goods to be repossessed for the purpose of the lien being retained.

3. Mr Clayton sought to distinguish Fontmond v Rodgers on the basis that the loss of possession in this case was not the result of any action by the defendant, but rather the actions of the ASX.  In my opinion, however, there is a sufficient nexus between the alleged fraud of the defendant and the loss of possession by the plaintiff, for the plaintiff to have an arguable case that the security should not be prejudiced as a result of possession being lost in the circumstances of this case.

4. There is considerable force in Mr Clayton’s submission that the plaintiff did not have possession of these shares due to the inability to have possession of an intangible asset.  A sharebroker’s lien is, however, a long established form of security and it would be somewhat surprising if such a well established right over shares (which in the past would have been recorded on a piece of paper), should no longer exist because modern technology now provides for them to be held in an electronic form.  This is a significant matter which needs to be resolved. 

5. I am therefore of the view that the plaintiff has demonstrated that there is a serious issue to be tried as to the existence of a lien, whether it be contractual or common law, and that the balance of convenience in this situation favours the maintenance of the status quo.  I therefore make an order in the terms of the application by the plaintiff, that is, that until further order, the defendant, whether by himself, his agents or otherwise be restrained from disposing of or dealing with in any manner whatsoever the 70,000 ordinary shares in the issued capital of Saracen Limited registered in his name.