Webb Distributors (Aust) Pty Ltd & Ors v State of Victoria

[1993] HCATrans 118

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M53 of 1992

B e t w e e n -

WEBB DISTRIBUTORS (AUST) PTY

LTD, SUSAN INNESS and SARZANA

NOMINEES PTY LTD

Appellants

and

STATE OF VICTORIA and ANTHONY

GEORGE HODGSON

Respondents

MASON CJ
DEANE J
DAWSON J
TOOHEY J

Webb(2) 1 18/5/93

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 18 MAY 1993, AT 10.20 AM

Copyright in the High Court of Australia

MR P.R. HAYES, QC:  May it please the Court, I appear with

my learned friends, MR M.C. HINES and

MR J.A. DODDS, for the appellant. (instructed by

Gadens Ridgeway)

MR R.A. FINKELSTEIN, OC:  May it please the Court, I appear

with my learned friend, MR D.J. O'CALLAGHAN, for

the first respondent, the State of Victoria.

(instructed by the Victorian Government Solicitor)

MR S.P. WHELAN:	If it please the Court, I appear on behalf of the second respondent, Anthony George Hodgson.
(instructed by Madgwicks)

MASON CJ: Yes, Mr Hayes?

MR HAYES:  Might I distribute to the Court our outline of

argument, together with some material from the

liquidators.	I will explain to the Court when they
are distributed what is there.	You have our

outline called Written Submissions, but it is an

outline. Following it is a short chronology of

legal history relevant to looking at some of the
early cases, we hope.

Then you have three documents prepared by the liquidator which I understand to be agreed between

all the parties as an accurate summary of what they

relate to, namely Summary of Facts, Summary of

Relevant Steps in the Proceeding and Summary of

Steps Taken in Relation to Joinder and Notification

of Parties. Of those, the document likely to be of

most direct relevance to the Court, at least in the

first place, is the Summary of Facts and

Chronology. The Court should also have received

from the State of Victoria two bound volumes of

legislation.

MASON CJ: It seems that Justice Deane has not got the

Summary of Steps Taken in Relation to Joinder and

Notification of Parties. It is the last of the

documents that were handed up.

MR HAYES:  I apologize for that, and I have one of those if

that might be handed to His Honour. So there

should be five documents in all: outline,

chronology, three documents from the liquidator

being Summary of Facts, Summary of Steps Taken in

Relation to Joinder and Summary of Relevant Steps

in the Proceeding.

The Court should also have received from the

State of Victoria two bound volumes of legislation, past and present, thought to be relevant to this

appeal.

Webb(2) 2 18/5/93

MASON CJ: Yes, well we have that. Are you trying to drown

us in material?

MR HAYES:- I am just trying to sort of give the Court a path

to the surface at the moment to try and indicate

what is there. We have also given the Court a

bound volume this morning of text book references

that are referred to. Again, it was agreed between

us and the State of Victoria what references might

be relevant and we each bound our respective

halves.

MASON CJ:	We have got that.
MR HAYES:	And finally we have given the Court this morning

a list of our authorities numbered so that we can

make reference to the materials without having to

cite them all the time and to indicate the cases

often that are relevant without having to take the

Court too tediously to material, hopefully.

MASON CJ: Yes, we have that as well.

MR HAYES:  Together with such cases as are on the

supplementary list that would not have been able to

have been produced by the library in time, because

our supplementary list came yesterday.

MASON CJ: Yes, we have that.

MR HAYES:  That is all of the material that the Court should

have.

Now, if I may then take the Court to the questions that are to be answered and that were the

subject of the decision of the Victorian

Full Supreme Court below. The Court will find them

variously in the court book, but at page 51 they

appear in the summons and the questions that were

answered by the Full Court were (a) and (b), (b)

being the operative question in the mind of

Mr Justice Tadgell, who delivered the lead judgment	in the Full Court and the other two justices of the
supreme court and he answered that question (b),
yes, and his answer to question (b) dictated his
answer to question (a). Mr Justice Vincent before
had answered the questions in the opposite way,
leading to the appeal by the State of Victoria.

Now, Your Honours, question l(a) relates to

whether or not in the event that a claim for

damages can be maintained by these shareholders

they can prove them, having regard to section 82(2)

of the Bankruptcy Act. My learned friend,

Mr Finkelstein has at both stages below advanced

arguments to the effect that independently of the

operation of the Houldsworth principle, section 360

Webb(2) 3 18/5/93

of the Companies Code, ie the matters relevant to

question l(b), there are reasons of the

interpretation of section 82(2) which would

~reclude proofs of debt if claims were able to

succeed in maintaining a claim for damages, but the

Full Court only dealt with question l(a) as a

corollary to its answer to question l(b).

Yet there is a substantive issue raised by

question l(a), and it was answered by Mr Justice

Vincent on the substantive grounds, rejecting the

arguments of the State of Victoria. But it was

question l(b) that was the focus of the judgment

that we appeal from.

Now, the decision of the Victorian Full

Supreme Court, the Court will find, commences in

the appeal book at page 80 and the substantive

judgment adopted by the other two justices,

Fullagar and Gobbo, was that of Mr Justice Tadgell,

commencing at page 83.

The Court will find the judgment, apart from

anything else, a very good summary of the rules and

the operation of the Building Societies Act

relevant to the principles at issue, although we

take issue with the extent of the references that

Mr Justice Tadgell made.

DAWSON J:  Can you remind me why the State of Victoria is a

party?

MR HAYES:  What happened, Your Honour, was that the

liquidator, faced with a number of potential claims

by shareholders, sought directions from the court

as to whether or not these three legal issues were

a bar to the claims. The State of Victoria took an

assignment of the claims of depositors in the

societies and thus are the major creditor of the
societies, and they were joined because of that.

Ninety three per cent, approximately, my friend

Mr Finkelstein tells me, is the extent of their holding as a creditor.

Your Honours, the judgment of

Mr Justice Tadgell states as the central issue, at

page 87 of the appeal book, at line 23:

whether a person who has subscribed share

capital, and would in a winding up rank for

repayment of capital behind unsecured

creditors, may, instead of being left to his

rights as a contributory, prove as an

unsecured creditor for an unliquidated sum if

he can make out a cause of action sounding in

damages designed to compensate him for having

subscribed the share capital.

Webb(2) 4 18/5/93

Mr Justice Tadgell has in mind that claimants

might have two basic causes of action, having

fegard to the facts put forward by the Liquidator in his affidavit, the substance of which, I might say, is summarized in the Liquidator's summary of

facts, just handed to the Court, and at pages 80 -

I cannot find the reference in the judgment, but it

is the fact that Mr Justice Tadgell proceeded on

the basis that the two claims that he was

contemplating as being barred or not by this

principle, were fraudulent misrepresentation and

for breach of section 52 of the Trade Practices

Act.

In fact, as we will endeavour to develop, a

great many other causes of action, some purely

equitable, may be available to shareholders,

particularly having regard to the apparent

fiduciary relationship that existed between the

societies and them, and so it is not enough to just

look at the two causes of action that

Mr Justice Tadgell did, to see whether, in the modern era, having regard to various legislation

and developments in the law of fiduciary duties, a

claim would be barred, but I will come to that

shortly. At the moment I am just introducing the

matter.

Mr Justice Tadgell - the basis of his decision

starts at page 108 of the Court book where, at

line 10 - His Honour, having previously gone

through certain difficulties with the reasoning of

Houldsworth's case, to which I will refer later, at line 10 at page 108, says:

In my opinion the principle of limited

liability leads inevitably to the conclusion

that a member at the commencement of the

winding up of a company limited by shares

cannot prove in the winding up for damages

designed to indemnify him for loss sustained

in subscribing share capital to the company.

The member's only title to such damages would

depend on his having sustained loss through a
subscription of share capital.

And His Honour then, at line 23 onwards, develops

his reasoning, which is centrally based upon

section 360(1) of the Companies (Victoria) Code,

which was the applicable legislation at the time of

this action, and concludes that it is implicit in

section 360 that a shareholder cannot maintain

against a company in liquidation, a claim for

damages designed to compensate the shareholder for

having purchased the shares. Previously the

rationale in Houldsworth's case had not been based

on the then equivalent to section 360, which was

Webb(2) 18/5/93

section 38 of the English companies legislation,

but had rather rationalized it in various ways in

terms of contracts between shareholders and so on,

~hich I will analyse.

Mr Justice Tadgell saw the foundation for what

to him was a fundamental principle of limited

liability, that, if you like, you cannot approbate

and reprobate. You cannot be a shareholder and

consistently, with your obligation to contribute,

maintain a claim for damages which, according to

His Honour, would have the effect of you getting

your share capital back, and he thought that

section 360 was a reason why that was so, and read

it as containing a bar on the claim.

So that at page 113 of His Honour's judgment,

at line 7, His Honour says:

The winding-up provisions of the Code

lead to the result that, even if a proof were
lodged claiming unliquidated damages by way of

indemnity against a shareholder's loss arising

from his subscription for shares, it would be

ultimately unavailing.

Now, Your Honours, Mr Justice Vincent at pages 65

to 66 of the Court book had arrived at a different

conclusion. He had the benefit of my learned

friend, Mr Finkelstein's arguments based in part

upon section 360, although Mr Finkelstein, both

before Mr Justice Vincent, and before the
Full Court, concentrated his attention, not only on

Houldsworth's case but on section 360(l)(k) to

which I will refer later.

But, His Honour, Mr Justice Vincent, at

page 65, line 25, said:

Houldsworth presents a number of

difficulties, important in the consideration

of which is the fact that it was decided at a

very early stage in the development of the
modern law of corporations. This is reflected

in the language employed by the learned law lords which would these days be regarded as

clearly more appropriate when dealing with the

relationships between partners than those

between members of a corporation and the

entity itself. Two possible explanations

immediately present themselves ..... First, the

law had not yet given the clear recognition to

the status of corporations as legal entities

which were distinct from their members that

emerged in later cases (see, for example,

Salomon v A Salomon & Co Ltd.

Webb(2) 6 18/5/93

Second, the nature of the body under

consideration may have necessitated the

adoption of a different approach to that which

would be regarded as appropriate to a limited

liability company.

Houldsworth being a case about an unlimited

liability company. And, then at line 15 on that

page, His Honour says:

The historical context of the judgments

is significant in another respect. There has

been a substantial evolution of both the

common and statutory law relating to corporate

responsibility, tortious liability, and the

consequences of deceptive and misleading
conduct and with respect to the available
remedies for wrongdoing, over the last one

hundred years, much of which it is unlikely, was within the contemplation of the learned law lords who dealt with the case.

Now if I might at that point ask the Court to

look at our chronology which appears immediately

behind the outline. Now, in 1884 as will be

apparent from materials to which we will refer, the

George Stock Company Winding Up Act, the basis of

it was to treat shareholders as partners who could

be sued personally and in 1855 there was a Winding

Up Act passed and I am sorry, Your Honours, there

is a more precise reference to that but r·did not

have it at the time of preparing this chronology

but will seek to supplement it before we finish,

which provided limited liability to some companies

but not banks.

Henderson v The Royal British Bank followed

the 1855 Winding Up Act. It concerned a bank.	So
Henderson was decided on the principles that

shareholders were treated as partners. Then in the

same year we had the Joint Stock Banking Companies

Act which extended limited liability to bank.

Then we get to the beginning of modern companies legislation in 1862 with the Companies

Act which included in it more developed concepts of limited liability and included in it section 38

which is the forerunner of section 360(1) of the

Victorian Companies Code referred to by Mr Justice

Tadgell.

In 1867 we had some, I think it was either a

consolidation-or amendments to the 1862 Act - it
was amendments I am told. Now, in 1867 we had the

landmark decision in Oaks v Turquand and in Oaks v Turquand it was decided by the House of Lords that

once a company goes into liquidation it is too late

Webb(2) 18/5/93

for a shareholder to rescind the contract pursuant

to which he purchased the shares and there are

various reasons given for the decision but a lot of

reliance is based upon section 38, but also a lot

of reliance is based upon Henderson's case and the.
language of the decision, as we will seek to show

the Court, is very much in the context of still seeing companies, or shareholders, as effective partners and that subsequent developments of

company law make a lot of the reasoning in Oakes v

Turquand inappropriate.

So, Oakes v Turquand introduces a limitation

on the right to sue to rescind a contract for the

purchase of shares where there has been fraudulent

misrepresentation. The Judicature Act is put there

to show its historical context, in part to trace
the developments of equitable principles, rather

undeveloped at this time.

Houldsworth's case, which has already been

referred to as decided in 1880. It was an unlimited

liability company so one can understand the

language of being equivalent to partners there and the case for that reason, as such, is different to ours because there is limited liability with the

building societies.

But it was Houldsworth that built on to Oakes

v Turquand to say that, unlike in other cases of

fraudulent misrepresentation, when dealing with

share purchases you can only claim damages upon

rescission and, because you cannot rescind once the

company goes into liquidation, you cannot claim
damages, and that was so, regardless of whether you

were totally ignorant and innocent of any laches up

to the date of liquidation.

In other words, you might have been still

totally affected by the fraudulent

misrepresentation, have done everything diligent,

but the fact is that you would be taken to have

elected, upon liquidation - the rationale varies

but it is all to do with notions of limited

liability.

Mr Justice Tadgell did not like much the reasoning of Houldsworth but thought the principle

correct, but found the source of the principle in

section 361(1) rather than in the reasoning of the

House of the Lords in Houldsworth.

Then there comes Re Addlestone, which followed

Houldsworth, but significantly applied it to a limited liability company and most of the judgments there relied heavily upon section 38 as the source

of reasoning. Now we have Derry v Peake, at the

Webb(2) 8 18/5/93

top of page 2 - I do not think it is correctly

spelt - and the Directors Liability Act, towards

the end of the nineteenth century.

The Directors Liability Act, Your Honours, was

an act that followed what was thought to be a

partially unsatisfactory result of Derry v Peake,

extending liability of directors for false
prospectuses, but not extending to the liability of

the seller of the shares, the company itself. That

comes later through other legislation to which we

will refer.

In 1894 you had the House of Lords decision in

Tennent v The City of Glasgow.	It followed the
Oakes v Turquand line.	The reasoning given by the

House of Lords was that, upon liquidation, rights

of creditors, which have crystallized, are to be

regarded as intervening rights, so that, if you

like, the equity is in favour of the creditors in

having the capital base of the company available,

the assets available, to meet their claims overrode
the equities in favour of the person who had been

the victim of fraudulent misrepresentation.

Now, again we would say, however, that Tennent

was very much influenced by the legal history that

followed it, and shortly after Tennent we had the
landmark decision of the House of Lords in

Salomon v Salomon where, interestingly - I have to

slightly correct what is there - the House of Lords

allowed an appeal from the Court of Appeal which

comprised the judge at first instance, and two

other members of the Court of Appeal who had sat on

Re Addlestone, and they overturned them in deciding

Salomon v Salomon, the company standing for the landmark principle that has, thereafter, always

been followed, that a company is a separate entity

from its shareholders and directors, and putting in

sharp contrast the notions of partnership and some

kind of direct responsibility of shareholders to

creditors that had been the origins of earlier

company law.

Then we get Nocton v Lord Ashburton, so we are

getting into the more modern development of
fiduciary duties. Here, Your Honours, the facts

are consistent with there being a fiduciary

relationship because persons were going to their

Pyramid/Geelong/Countrywide branches and being

given advice that shares were a better option for

them to take than to invest in deposits and were

told the advantages of shares over deposits.

We would submit that it is, and all it has to

be for the purpose of this appeal, arguable that

there was a fiduciary relationship, the giving of

Webb(2) 9 18/5/93

investment advice. Many of the people who sought

that advice were what you would call

non-speculators; people off the street, retired

people putting in their life savings, some with

limited comprehension and English, some with
better, but a range of people. There are more than

5000 shareholders in all affected by this, worth

more than $100 million; very, very substantial

involvement there has been.

The concepts of the fiduciary relationship

were not identified at least at the time of

Houldsworth and the cases referred to in the legal

history, nor were the modern principles of

negligent misstatement in Hedley Byrne v Heller

which we find in 1964. Then as the 20th century

moved more towards consumerism and, we would say,

away from the caveat emptor principles of the

Victorian era, we got a rash of legislation like the Misrepresentation Act of the United Kingdom

which is like our Misleading Conduct Act. There

are provisions, the Court will see, now in the

Corporations Law and, at the time of these events,

in the Securities Industries Act which make it not
only an offence in some cases, but give rise to
civil liability for making false or misleading

statements in respect of the purchase of shares.

This is a far cry from the limited notions of

responsibility for false prospectuses and

misleading statements about shares that came from

Derry v Peake and the Directors' Liability Act of

1890.       We now have liability for false statements,

liability against the company itself, sounding in a

range of remedies, if we look at the Trade

Practices Act, including the power to award

damages, to rescind, to avoid ab initio, a whole

range of remedies.

There has been a lot of academic discussion

and discussion in the House of Lords at the time of

considering the Corporations Law 1989,(UK), the	last item on the list there where, according to
Lord Fraser of Carmyllie, it was necessary to bring
in the particular section - I will take the Court to it - to make sure that any remaining vestiges of
the Houldsworth principle that remain in the light
of modern developments - and he cited in particular the Misrepresentation Act in England - were not a
bar to bringing a claim for damages.

Indeed, in the same legislation that we find

section 360(1) by the incorporation of the

provisions of the Securities Industries Act, we see

that there is a civil remedy for damages provided
to a shareholder who has been the victim of

misleading conduct in the purchase of shares. The

Webb(2) 10 18/5/93

Court finds that in sections 999 and following of

the Corporations Law as it now stands, and I will

take the Court to sections 125 to 127 of the the time of these matters.

When we come to look at whether section 360

contains an implied prohibition on claims for

damages by shareholders designed to compensate them

for having purchased shares, we will invite the

Court to say, "Well, at the same time the

legislation provided an apparently unfettered right

to sue for damages for false statements in respect

of shares" and, indeed, the most obvious time in

which someone is going to want to take action for

misleading conduct in relation to the purchase of shares is when the company goes into liquidation, suggesting very strongly, we would say, that

section 360 was not intended to have that effect.

Even if it was, we would say, it is subject to

the Trade Practices Act and would not prevent the

operation of certain equities. The equities may

arise because a trust was created; the equities may

take the form of an estoppel. People who were told

that what they were buying was just like a deposit,

they could withdraw their shares at any time or on

30 days notice, they may well have a claim in

contract, and the societies may well be estopped
from asserting section 360 as a bar, or referring

to the fact that they had become members subject to

these principles of limited liability, if they in

fact go that far.

At the moment, I simply want to show the Court

that the historical context in which we now are,

compared to what existed in the Victorian times of
the decisions just referred to, really make - and

we say this with the greatest of respect - the

judgment of Mr Justice Tadgell in the 1990s, which

upheld and indeed embellished the reasoning of

Oakes v Turquand and Houldsworth's case, as being

the equivalent of unleashing a dinosaur down

Collins Street on unsuspecting consumers. It is

something from a forgotten era brought in, in the

age of modern consumerism, with a raft of

legislation and common law and equitable principles

available to protect people who are the victim of

fraud, breach of fiduciary duty, negligence and

other related concepts.

So we, Your Honours, will seek to develop an argument that will say that there is in fact no bar

to any claim for damages by a shareholder seeking

compensation in respect of the purchase of shares.

If there is a bar, it is a very limited one. At

most, it extends to certain causes of action for

Webb(2) 11 18/5/93

fraudulent misrepresentation but not, we would say,
on the proper understanding of the cases or in the

light of modern concepts, where the purchaser was a

non-speculator. And we would say that there is no

bar to a claim for breach of contract and, if

necessary, the raising of an estoppel against the

company now in liquidation against resiling from

assumptions imparted or allowed to be had by

purchasers. We would say that there is no bar,

whatever else you say, against claims for damages

or relief under section 87 of the Trade Practices
Act.

We say there is no bar for a claim for

equitable compensation for breach of fiduciary duty
or for a claim of an account of profits, or to

establish that in fact the taking of the

shareholders' money by the societies in

circumstances where there was a breach of trust or

a breach of fiduciary duty gave rise to an

immediate trust in favour of the shareholders, at

least to say that the shareholders had a superior

equity to that of the creditors. And so notions of

the supervening rights or equity of creditors have

to be looked at in the context of in fact a

superior equity in favour of the shareholder.

DAWSON J:  Is that not really what the case is all about,

priorities?

MR HAYES:  Yes, it is Your Honour; that is why I do say it,

because the reasoning in Tennent's case, which we

submit is powerful reasoning that we have to

overcome, is that creditors' rights have intervened

as a result of liquidation.

DAWSON J:  By creditors here we really mean depositors, do

we not?

MR HAYES:  We do, yes. We have an interesting status of the

State of Victoria as the major creditor having

taken an assignment with notice later on, but

probably nothing turns on that. Their claim is probably as good as that of the depositors that

they took it from, but they are relying on a

principle based on a form of estoppel, it is the

way it is reasoned in some cases, against a

shareholder who has allowed their name to appear on

the share register as having contributed or having

agreed to contribute their ratable share of capital
to resile from that representation, because they
have relied on that representation in the public

record to give credit to the company. That is part

of the reasoning associated with the point Your

Honour just asked me.

Webb(2) 12 18/5/93

But other cases, particularly in America, have

struggled with the Houldsworth principle. In

America you do not have the same provisions for register of members and indeed you have different

provisions for keeping records of members in the source of difference from a building society to a

company in any event; I will seek to develop that.

But in America they say it is a question of whether the equity in the sense of the fraud perpetrated on the shareholder outweighs the equity in favour of

the creditor whose rights have crystallized upon

liquidation, a crude putting of what I will read to

Your Honour, but that is the essence, I would

think.

Now it may be that when we look at the purely equitable remedies, the courts of equity, which are

looking not just at compensating the victim but at

enforcing trusts and punishing defaulting trustees, or the Trade Practices Act, which is concerned with the public good of not allowing misleading conduct

to occur, or the fact that there might have been a

trust created, might all affect the equities, and

it is far too simple to think in terms of

fraudulent misrepresentation, section 52, that is
it. There are a great many other possible sources
of equities in favour of the shareholders, we would

say, than is recognized in Houldsworth or Oakes

v Turquand, and that is explicable by the period in

history when it was decided or, we say with the

greatest of respect, in the judgments of the

Full Court below.

MASON CJ: Did you put these arguments to the Full Court?

MR HALLIDAY:  I did not appear in the Full Court, but I

understand that the only argument of equities that

were run below was estoppel, although the general

notion of equities were put. Section 87 was also

argued. Mr Finkelstein is saying estoppel was not

put; Mr Hines told me it was. I would have to work

that one out, but I do not believe that the

concepts of fiduciary duties were put.

MASON CJ: No. Well, that is certainly my impression from

reading the judgments.

MR HAYES: That, Your Honour, I think, seems to be the fact

but, given that here the Court is concerned with

the answer to a question that would create a bar to

virtually all claims of damages, because that is

the way the question is posed and answered by a

shareholder, and given that there are no further

facts that have to be looked at, the facts are as

contained in the Liquidator's affidavit and the

material that goes with it, we would respectfully

Webb(2) 13 18/5/93

submit that it is appropriate for the Court to look at the breach of fiduciary duty and, as I work this

case up, I did give my learned friend some notice

Qf the fact that I intended to seek to argue

fiduciary duty, equitable compensation as a ground.

I do believe, from what I am told by those on

my right, that estoppel was raised but not

emphasized. It might have been so under-emphasized

that Mr Finkelstein did not notice it had been

raised at all, that might be the explanation for

the differing views, but I had been told that that

was the case, Your Honours.

I was just going through the list of where

people would not be barred; if I might just briefly complete that. Mr Justice Tadgell would not not, I

think, see his judgment as a bar to a person

maintaining a claim if the contract was in fact

void because of mistake, say, and he himself says

that he does not see his judgment as standing in

the way of people who took a transfer. That is,

you went to Pyramid to buy shares, but in fact the

shares you got were transferred from shares owned

by Countrywide or Geelong; that being a materially different situation to where you simply bought the

shares directly from the society in which you had

purchased.

So, we are submitting on this appeal that any

bar there is is very limited; limited at most to
fraudulent misrepresentation, and even then there

should not be a bar or, if there is, it should not apply where you have non-speculators as purchasers

of the shares. Now, that is the thrust of the

section 360 point in very short summary, or the

limited liability point.

There is also the Bankruptcy Act point,

because the argument that has been put twice below

is that section 82(2) of the Bankruptcy Act, which
is relevantly incorporated into the Companies Law,

says that you cannot lodge a proof of debt for

unliquidated damages other than in respect of

breach of contract, breach of promise, breach of

trust, and the argument as I apprehend it is that

most or all of the bases for compensation that we

seek to argue would be futile because you would not

be able to lodge a proof of debt.

Now, if we take fraudulent misrepresentation,

one can more readily understand the argument, we

would say, because there would be a good argument

for saying, "That is a claim for unliquidated

damages - a tort", although, there are cases to

which we will refer which say that no, that is a

claim arising from, which is the relevant

Webb(2) 14 18/5/93

expression in the Act, the contract. There is a

sufficient connection so that, in fact, it is not

excluded.

It is also sought to be argued - it was

below - that a claim for damages under section 52

would not be caught - sought to be argued that you

could not lodge a proof, and we would respectfully

submit that that just cannot be so, because

section 52 claims are not a claim in tort. That is

clear.

Section 82(2), properly understood in its

historical context, only ever sought to exclude
unliquidated damages claims for what were called

personal torts. When we go back to the history of

bankruptcy legislation, once the - in the 19th

century the legislation started to be, or it may

have been in the 18th century, forgiving of certain

debts that were not paid. Indeed, before that,

people had their ears pinned to stocks and were

imprisoned and so on. Then you got some forgiveness

of debts by traders. Then you got more wholesale

bankruptcy legislation, the idea being to relieve a person of all the claims, but some claims where the

damages were assessed by juries, which were most

personal torts, were not able to be the subject of

a proof of debt.

The sorts of torts that were around then were

detinue, trover, assault and trespass, and

whatever. Since then, juries are used less, the

concept of torts have changed, very few torts are committed without there being some other cause of

action as well. Countless parliamentary committees

and legislatures have doubted the wisdom of there

being any restriction on being able to lodge proofs

of debt in the company.

After all, in bankruptcy, if you cannot lodge

a proof of debt when the person comes out of

bankruptcy, you can wait for them with an

unpleasant surprise. In liquidation, if you cannot

lodge a proof of debt, you cannot maintain the

claim at all. And, there is a lot of judicial

commentary about the apparent lack of any public

purpose behind such a section. Indeed, in most

jurisdictions in the world, including Australia, it

is about to happen. The limitation on being able

to lodge proofs of debt of these kinds has been

removed.

TOOHEY J: But Mr Hayes, what are you asking us to do about

the first question: to answer it simply by

reference to section 52 of the Trade Practices Act

or to identify a range of causes of action and to

Webb(2) 15 18/5/93

answer the question by reference to identified

causes of action?

MR HAYES:- Your Honour, we would ask the Court to answer the

question by reference to as many of the causes of
action as possible, because the more the matter is
resolved the more claims the Liquidator will be

able to deal with, having regard to the scheme that

he has put in place.

TOOHEY J: Yes, I understand that, but in the end you

propose to offer the Court a range of causes of

action_and ask for an answer in respect of each of

them?

MR HAYES:  We do, but if our submissions are accepted the

answer to the question would be either,

section 82(2) does not bar any of the claims sought

or, if there is a bar, it is restricted to certain

kinds of torts and they could be defined. In other

words, the answer could be given in that short

compass.

TOOHEY J: Yes.

MR HAYES:  I should remind the Court that when we sought and

obtained special leave in this matter, the Court

had some concerns, and expressed them, about the

first question, having regard to the range of

factual situations that may arise and, although the

Court granted us leave to appeal generally on the

two questions, it reserved its attitude as to what

it could do about the first question, having regard

to that problem.

I have discussed it with my learned friend,

Mr Finkelstein, and we do respectfully believe and

submit that it would be possible for the Court to

give a meaningful definitive answer which will not

necessitate delving into the precise facts.

MASON CJ:  When you say "we", that includes Mr Finkelstein,

does it?

MR HAYES: 

I speak for us both, Your Honour, yes. But, of

course, I raise it because I know the Court is
concerned about such matters and did express those

concerns to me when we sought special leave, but I

hope to develop submissions that give the Court a

way of answering that question in a precise way

that will assist the parties in the way they go

about their business hereafter.  And if it turns

out that it is not possible to answer other than by
reference to the individual facts, that is

obviously going to have a big impact on the approach the Court takes to that particular

question.

Webb(2) 16 18/5/93

As I say, Mr Justice Tadgell contented himself

by saying, "Because you cannot maintain a claim for

damages you cannot lodge a proof", and he did not

9evelop the second side of the argument; he felt it

was not necessary, having regard to what he had

decided in answer to question (b).

Your Honours, then if I might turn more

precisely to our argument and to the order of our

outline. The first paragraph of the outline makes

the simple point that the question posed and the

answer given by Mr Justice Tadgell are very far

reaching and, even though he only considered

directly claims for deceit under the Trade

Practices Act, the question asked and the answer

given have much wider effect than that.

Now, we then refer in paragraph 2 to the

Liquidator's summary, and might I take the Court to

that summary of facts. What I propose to do is to

shortly speak to the document. If the Court would

rather just take five minutes and read it, I would adopt the course most comfortable to the Court. I

could shortly point to the Court the highlights, I

think, but - - -

MASON CJ:  I think that would be of assistance, if you did

that, Mr Hayes.

MR HAYES:	Thank you, Your Honour. Well, paragraph 1 refers to the three related societies, they were all part
of what was known as the Farrow group - - -

DEANE J: Mr Hayes, could I take you back to paragraph 1 of

your submission, line 4, the parenthesis should

open before the word "if"?

MR HAYES: Yes, Your Honour, thank you.

DEANE J:  And the comma after the parenthesis should not be

there?

MR HAYES:  It is an alternative, Your Honour, it might be

void by mistake, for example.

DEANE J:	Does the "or if" - or is the "or if" governed by
"other than"?
MR HAYES:	I mean that "or if" to relate to a separate exclusion from what His Honour reasoned, namely
that the contract might later be found to have been
void for mistake, say.
DEANE J:	So the "or if" is governed by "other than"?

MR HAYES: Yes, Your Honour, thank you.

Webb(2) 17 18/5/93

DEANE J:  I would have thought the comma should go in that

case, but as long as we know what it means.

MR HAYES:- I will remove the comma. Yes, Your Honour.

If I may now take the Court to the

Liquidator's summary of facts. I was pointing out

that there were three what we call pyramid

societies. Pyramid, Geelong and Countrywide, all

of which were part of the Farrow group which had

their head office in Geelong in Victoria and they

were regulated by the Building Societies Act and

the relevant Act is the 1986 Act.

As we will develop shortly it was the 1986 Act

that introduced the concept of permanent shares and
all of the shares in question here were sold after

the introduction of the 1986 Act.

Pyramid was a very big building society,

it had many branches throughout Victoria.

That is paragraph two. Pyramid was by far the

biggest of the societies and they were administered

by a group board.

In February, 1990 they experienced a run on

their funds, which abated and then accelerated

again in May 1990 and, paragraph 6, on 22 June 1990

an administrator was appointed by the Registrar to

the society pursuant to the Building Societies Act

and seven, on 13 December 1990 Mr Hobson, for whom

Mr Wheelan acts, was appointed Liquidator of the

three societies.

The Act had in it section 48 that provided

that a society could raise funds by the issue of

shares and provided a ranking and its permanent

shares that are referred to there, that are

otherwise known throughout as "non-withdrawal

shares".	The Act provided for a need to maintain a
capital account being permanent shares and

undistributed net profits equal to 2.5 per cent of

total assets and the rules provided for various classes of shares, set out in paragraph 10, and

provided in the rules a ranking of the bearing of

losses in the event of liquidation making the

permanent shareholders as the first to bear the

losses.

The Liquidator says he has identified

imprudent lending practices as the source of

failure of the societies and in paragraph 12,

second sentence:

In order to finance this expansion, and

to comply with regulatory requirements whilst

Webb(2) 18 18/5/93

expanding, the societies sought to attract new

depositors by offering high interest rates,

actively marketed non-withdrawable investing

shares -

And so on.

The societies began marketing these non-

withdrawable shares in late 1986. As at

22 June 1990 there were 10,124 ..... who had

invested $122,594,000 - - -

DAWSON J: What was the idea behind non-withdrawable

investing shares? That you could transfer them more

easily or?

They could be sold but they could not be

withdrawn, although, Your Honour, when we come to
look at this, there were quite different provisions
for maintenance of capital than there are, say,

with a company; there is no apparent restriction on

a reduction of capital, although you had to

maintain a ratio and you had to keep at least

10,000,000 shares. So, presumably, if you had more

than 10,000,000 shares and your ratio was higher,
there would be nothing to stop converting them into

non-permanent shares. But the idea was - I think

it was at the time when the societies were given

expanded powers of activity in investment to

maintain a minimum base of capital, I suppose, of

which the permanent shares and undistributed

profits were to make it up.

The selling of these shares was of crucial

importance to those who owned and controlled the

societies, the Farrow group, because without

selling a lot of these non-withdrawable shares,

they would not be able to maintain their ratios,

keep their numbers up and therefore, as we will see

under the Act, face intervention by the regulatory

concerted campaign by the controllers of the group,	authorities and, indeed, the facts go on to show a
Mr Farrow and Mr Clark, to sell as many
non-withdrawable shares as they could, including
offering commissions to the sales staff and regular sales meetings to urge greater activity in that
area.

DAWSON J: Are they the brainchild of the Farrow group?

MR HAYES:  They came in in the 1986 Act. The Farrow group,

no doubt, consulted at the time of that Act. Where

the idea came from, Your Honour, I could not say.

DAWSON J:  The 1968 Act had permanent shares and

withdrawable shares, but the permanent shares then

Webb(2) 19 18/5/93

were divided by the group into ordinary sort of

permanent shares and non-withdrawable shares.

MR HAYES: That is right, yes.

DAWSON J:  So the Act did not suggest this. Was it the

group itself that devised this division of

permanent shares into two classes?

MR HAYES:  No, I think that is a gloss on the Act,

Your Honour. It is way the actual group did it,

Your Honour, yes.

DAWSON J:	The way the group did it?
MR HAYES:	The way the group did it, I believe.

DAWSON J: Yes, I see.

MR HAYES:  The rules actually provide for it.

DAWSON J: But the Act does not?

MR HAYES:  The Act does not, no. The Act provides for

rules but does not say what is to be in the rules

other than a skeleton.

DAWSON J:  So that it was the brainchild of the Farrow

group, in that sense?

MR HAYES: Yes, Your Honour.

DAWSON J: Yes, thank you.

MR HAYES:  Now, the source of a breach of fiduciary duty, we

would say, is immediately obvious here; a very

great interest in the societies and those who owned

and controlled them, to persuade people to buy

these non-withdrawable shares rather than deposits,

and for that they offered a slightly higher

interest rate, and most of the misleading conduct

complained of are people saying, "Oh but are shares

safe?", you know, "What does it mean?", and they

are told, "Look they are safe, they are just like a

deposit; you can get your money out."

DAWSON J:  How do you have an interest rate on shares rather

than dividends? That is just that the rules

provide for it?

MR HAYES:  The rules, yes. appearance of just being like a deposit, except It had all the outward

they were called shares. If you bothered to study

the literature closely, you might have seen that it

was something else, although if you went back to

the societies to have it clarified, you were

usually assured in terms of, "Look, it is alright,

Webb(2) 20 18/5/93

it's just like a deposit, you get it out; it might

take you 30 days", that kind of thing, which is

!ater summarized in this summary, if I could go on.

TO0OHEY J: But could I just ask you this: was an interest

rate on the non-withdrawable investing shares

struck from time to time, or are you told that your

shares would attract X rate of interest and that

would be it?

MR HAYES:  Would Your Honour just pardon me? May Mr Whelan

fill me in on that little bit of ignorance.

MASON CJ: Yes, Mr Whelan.

MR WHELAN:  Your Honours, the rate was struck

retrospectively shortly after 30 June each year.

The directors would resolve the rate for

non-withdrawable shares for the previous year.

Non-withdrawable shareholders were told that the

directors expected that the rate they would strike

would be 1 per cent above the average highest term

deposit rate for that year. Except for the year

ended 30 June 1990, which is when the administrator

was appointed on 22 June 1990, that_ is what was

done, and the rules provide for that.

MASON CJ: Thank you. Yes, Mr Hayes?

MR HAYES:  It has been pointed out to me, Your Honour, that

three aspects of the shares are perhaps significant
to point out to the Court at this stage. These

shares were not traded on the stock exchange.

There ·was no right to dividends and there was no

right to more than a return of paid up capital, ie

no ability to share in the profits. It was an

interest rate that was the return to the so-called

shareholder.

DAWSON J: And the only way you could rid of them otherwise

than the winding up was to transfer them to

someone, but you could transfer them, as thence

turned out, to one of the Farrow group companies.

MR HAYES:  Yes. Most of the people who actually took their

shares by transfer - none of them knew that they

were getting transfers; that was just something

that happened. So when faced with this point by

the State, many plaintiffs who may have faced a

problem found to their pleasant surprise that when

inquiries were made on their behalf, in fact they

had taken their share by transfer but they did not

know it. It had just been internally allocated.

Paragraph 14:

Since 22 June 1990 a large number of

non-withdrawable shareholders have made

Webb(2) 21 18/5/93

complaints to the Administrator, the Registrar
of Building Societies, the Premier of
Victoria, the Attorney-General of Victoria,

the liquidator, and Mr Habersberger QC who is

conducting an enquiry into the societies -

which is still proceeding.

In the course of proceedings between Mr Farrow

and others and the State of Victoria and

others in late 1990 the State filed a number
of witness statements by persons claiming that

they had been misled when purchasing shares.

I will go through this outline first and then come

to it, but in the bundle of materials we have

handed Your Honours are five sample statements of

that kind to give Your Honours an idea of the sorts

of things that are said by people giving rise to

why the Liquidator has taken this proceeding.

DEANE J:  Why are we troubled by all these facts? Why is it

not sufficient to proceed on the basis that there

are claims for rescission which, but for the

liquidation, would succeed, that there are claims

for damages for misrepresentation and that there

are claims under the Trade Practices Act and,

following on what you have said, though it may be a

bit difficult to concede the facts, there are

claims for declaration of trust.

MR HAYES:  It is probably is just sufficient to just assert

that, Your Honour. The statements which are in

short form just give the Court a less clinical

statement of the sorts of complaints that underlie those general categories. If the Court feels that

there is no assistance in that, I certainly do not

want to - - -

DEANE J:  I understand your anxiety to impress us with the

practical significance of the case, and that it

affects many people but, ultimately, the questions

that we are concerned with are pure questions of

law, are they not?

MR HAYES:  They are all pure questions of law that are as

good as the facts that may ultimately underlie

them.

DEANE J: But it seems that, with s·o many people involved,

we could proceed on the basis that there does exist

the sort of variety of claims that you would want

us to assume?

MR HAYES: Well, I accept that, Your Honour. I will not try

the Court with some of the statements. They are

actually summarized in short form hereafter.

Webb(2) 22 18/5/93

MASON CJ: Perhaps we ought to ask Mr Finkelstein if he is

content with the Court to proceed on that basis.	I
gather that he is from what you said earlier.
-

MR FINKELSTEIN: Yes, and I might say that the courts below,

both at first instance and on appeal, proceeded on

that basis, that is, assumed that there were

various courses of action of one sort or another

and looked at the question whether, as a matter of
law, they were either actions that could be

proceeded within the liquidation and everybody left

aside the proof question.

McHUGH J:  What about the statement there would be claims

for breach of fiduciary duties?

MR FINKELSTEIN: That has never been pressed.

McHUGH J: That is a claim that may be in a very strong

category, is it not?

MR FINKELSTEIN:  It may be, and we are content to deal with

that as well. The one position that may cause some

difficulty is - and it is a completely different

question from the one that arises on this appeal -

whether or not there is any true trust, that is to

say, whether any property went to any of these

societies and was held in a true trust. None of

the rules that we are worried about would have any

application to that fact because the assets would

be taken out of the liquidation by the true owner.

Again, that was another issue that was never

explored and I do not know whether there is - well,

the rule in Houldsworth, the rule in Oakes v

Turquand, the bankruptcy laws will not have any

application at all, if there is a true trust.	The
owner just comes along and says, "I demand my

property back", provided the property exists. It

may be a question of what can happen in the event

that the property is no longer identifiable and how

the Bankruptcy Act treats proofs of that kind - it

is a quite different question - but - - -

McHUGH J: Well, that is a bit removed from what we are

asked to determine.

MR FINKELSTEIN: Yes, I think so.

DEANE J: And you would be content if it was simply said

putting aside any question of an actual trust?

MR FINKELSTEIN: A true trust, yes. By that I would include

also not an express trust, but a constructive

trust. I think Mr Whelan would rather have it a

bit wider that I have allowed it; that is to say,

any proprietary claim should be outside the

Webb(2) 23 MR FINKELSTEIN, QC 18/5/93

proceeding because a proprietary claim has never

been articulated, and I do not know whether -

nobody has ever suggested to any court that there

J.s a proprietary claim.

MASON CJ: Yes. Well, perhaps we ought to hear what

Mr Whelan has to say.

MR FINKELSTEIN: Yes, thank you, Your Honour.

MR WHELAN:  Our only concern about proprietary claims,

Your Honours, is that this proceeding started as a

directions proceeding where the Liquidator simply

wanted advice about damages claims. If proprietary

claims had been asserted the Liquidator's duty

would have been quite different. While damages

claims were being asserted the persons asserting

them were potential creditors to whom the

Liquidator himself owed duties and he embarked upon

this course precisely for that reason to determine

whether these persons were creditors to whom he

owed duties and how he should deal with them in the

light of their contingent claims, if I can put it

that way. Proprietary claims would have raised a

completely different issue from the Liquidator's

point of view. His duty would have been to resist

them in the interests of the creditors.	So it
would put the Liquidator in a difficult position if.	proprietary claims were advanced now. 1 That is not
the nature of the proceeding that we instituted,
notwithstanding that the parties have changed the
nature of the proceeding by consent in the Full
Court. To change it from a directions proceeding
to a declaration proceeding, it would put the Liquidator in a difficult position if this Court
were now to embark upon a consideration of
proprietary claims because we would want to oppose
such claims and we would not have commenced this
proceeding if that was what was to be determined.

MASON CJ: Yes. Yes, Mr Hayes; well, you have heard what

has been said.

MR HAYES:  I have, Your Honour. meant to convey by what I said to date that I would I might say, I had not

seek to develop here an argument that there was a

trust. I would simply highlight it as one of the

limiting factors to which the decision below could

go and there are some cases on equitable

compensation I have in mind referring the Court to,

but not to develop an argument here of the kind

that concerns by learned friends.

Paragraph 15, Your Honour, says what the

Liquidator's inquiries revealed - - -

Webb(2) 24 18/5/93

MASON CJ: Well now, bearing in mind what has just been

stated, and the attitude that the Court will take

in relation to the questions that arise, is it

necessary for us to go through the rest of this

material?

MR HAYES:  I do believe it is desirable; it can be done very

shortly, Your Honour.

MASON CJ: Very well.

MR HAYES:  To see the context in which it is in, I would

think would be a help. That is the only basis on which I am putting it forward. It will only take

me a minute to go through the rest of this

document.

The liquidator's enquiries revealed -

that:

(a) Non-withdrawable shares were continuously

available -

selling them, the staff placed great "importance

upon personal explanation.

Staff received encouragement ..... to maximize

sales ..... were paid commission of .5 per cent.

The public were not aware the staff were paid

commissions.

(d) The commission earned by staff on the

sale ..... could constitute a significant

percentage of their gross wage and -

in some cases, staff members were very substantial

commission paid.

(e) Management wished to build up shareholding

well beyond the 2.5% requirement in the 1986

Act.

(f) "Prospectuses" were issued from time to

time .....

(h) when a non-withdrawable shareholder

requested recovery of his investment the

societies arranged for those shares to be

purchased by one of the other societies. This

led to shareholdings known as "inter-society

holdings".

And that is what I was referring to a moment ago to

Mr Justice Dawson. And:

Webb(2) 25 18/5/93

(i) Staff of the societies have advised the

liquidator that non-withdrawable shareholders

were sent a brochure correctly describing the

non-withdrawable investing shares (save as to

the matter referred to in (h) above) together

with a share certificate ..... In some cases,

however, non-withdrawable shareholders deny

this.

16.      The liquidator concluded that

non-withdrawable shares were designed by

management to be very similar to deposits.	He
concluded that management of the societies
attempted, by the use of inter-society
transfers and other means, to create shares
which were for practical purposes
"withdrawable" whilst at the same time
preserving or appearing to preserve their

"non-withdrawable" nature ..... The liquidator

approached the Court for directions and, with

the consent of the State as the representative
of unsecured creditors and the Appellants as

the representatives of a large group of

non-withdrawable shareholders, he was directed

to send a questionnaire to all

non-withdrawable shareholders.

18. Approximately 8,000 responses to the

questionnaire were received. A sample of 200

responses was selected for analysis.

Paragraph 19 sets out the sorts of response: Told that ..... were like a deposit, as good as

a deposit, as safe as a deposit - - -

MASON CJ:  We can read that for ourselves.

MR HAYES: Yes, Your Honour. Advice was sought from counsel

and the Liquidator issued a summons for directions.

Then there follows a chronology which may become of

assistance to the Court when later on considering
the matter - that is the summary of facts.	It is

necessary, however, for me to take the Court,
having referred to certain of the sections and the

rules, to the relevant provisions of the Building

Societies Act and to the relevant provisions of the

rules. The Building Societies Act I think the

Court should have, because it was on the list of

authorities.

MASON CJ: Yes, we have that.

MR HAYES:  In the bundle of materials handed up this morning

are a set of the Pyramid rules, and so the Court

should each have a set of the Pyramid rules which

are for practical purposes applicable to the three

Webb(2) 26 18/5/93

societies. It is our submission that three
significant principles emerge from looking at the

§uilding Societies Act. If I can briefly tell the

Court what the three are and then take the Court to

the sections. The Act contains no requirement for

a public register of members, neither does it

appear in the Act itself nor in the matters to be

provided in the rules, although I will make

reference in a moment to clause 13 in Schedule 2.

Secondly, there are very different provisions or regulations as to the preservation of share

capital to companies. In particular, there are

sections 37(2)(d) and 49(3). There is nothing to

prevent a reduction downwards of capital subject to

maintaining the limits contained in those two

sections, namely 10 million shares and a 2.5 per

cent ratio.

Thirdly, there is no requirement in the Act

for accounts to be made open for inspection by

creditors. Indeed, we submit that the scheme of

the Act and the rules enacted pursuant to them show
that unlike companies, the public disclosure
provisions, the registers required to be kept under

the Building Societies Act, are directed primarily

to the regulatory authorities, the Registrar of

Building Societies, and to the members but not to

the creditors, unlike companies where there is

obliged to be kept under the companies legislation

a register of members with a whole lot of details

fully available to the public.

The significance of that will be that when we come to look at cases predicated on companies

legislation and the importance of the register,

notions of estoppel, of misleading shareholders and

so on, we see a quite different scheme for building

societies.

Mr Justice Tadgell, in his judgment, treats

the Building Society as being for all practical

purposes, the same as a company. In our respectful

submission, these material differences alone, show

that the cases to which we will later refer, are

inapplicable.

The first proposition about there being no

register of members is a fact. Either there is or

there is not. We cannot find one. We do refer the

Court to clause 13 in Schedule 2, for completeness

of reference, but say that that does not reduce the

force of the proposition just made.

As to the second proposition, the regulations

as to preservation of share capital, we refer the

Court to sections 37(2)(d) which says:

Webb(2) 27 18/5/93

(2) If the Registrar is satisfied that -

(d) as from the date of registration, the building society will have at least

$10,000,000 in issued paid up permanent share

capital -

the Registrar must register the building

society -

And, 49(3) which says:

A building society may apply any amount

maintained in its capital account for any

purpose to which the capital of the building

society may be applied.

Looking at the rest of that section:

(2) As from 1 January 1989 a building

society must establish and maintain a capital

account which is equal to 2.5% or such other percentage as is determined ..... of the value

of the total assets of the building society.

As to the third of the propositions I put to the

Court, we refer specifically to section 88. The

Court will find throughout the Act there is an emphasis on information being available to the

registrar and to members from time to time.

McHUGH J:	Mr Hayes, why is the figure of 2.5 per cent selected? It seems a very narrow safety net.
MR HAYES:	It is connected with the restrictions on the

investments that can be made, but how it was

arrived at, Your Honour, and why it seems so low, I

cannot say. I do not know whether Mr Whelan can

fill me in on that one as well, but I cannot take -

and he cannot either, Your Honour, I am sorry. It

might have had something to do with the pull that

the promoters of this group had with the Government
at the time.	It might have been thought through

and there might be some analysis that supports it,

but I have not seen it, Your Honour. It turned out

to be inadequate.

McHUGH J: That is not surprising.

MR HAYES:  No, it did in fact. Now, Your Honour, then we

come to the rules. The rules, Your Honours - there

is a provision for rules in the Act, if

Your Honours will just pardon me while I find the

section. I am indebted to my learned friend.

Section 39 says that:

Webb(2) 28 18/5/93

The rules of a building society must provide

for the matters specified in Schedule 1.

and -

The rules of a building society have effect as a contract between each member and between members and the building society.

Now, if the Court then looks at Schedule 1, the

Court will see a narrow range of matters to which

the rules are to relate. The rules go a lot

further, as will be apparent if the Court has now

got before it the rules of the Pyramid Building

Society.

MASON CJ:	We have it.
MR HAYES:	Now, in the rules we refer the Court to these matters: rule 36 is under the heading "Cessation of
Membership" and:

A person shall cease to be a member in any of

the following circumstances:

(f)	Where the contract of membership is
rescinded on the grounds of misrepresentation or mistake.

Now these rules, Your Honours, are a matter of public record and any creditor going through the,

as we would respectfully submit it, artificial

process involved in the reading of Houldsworth and

Oakes v Turquand and of familiarizing himself

thoroughly with the public record before giving

credit to the company, who wanted to see the status

of the members, would know from looking at the

rules that, although a person may be shown as being

a permanent shareholder - what he would find was

that any member may have his contract rescinded if

he could make out a case of misrepresentation or
mistake.	And that, we would submit alone, is a

great distinction from any facts that were before

the courts in the 19th century cases which we have

to tackle in our arguments.

There is provision for records to be kept,

rule 121:

The Board shall cause to be kept at the

registered office of the Society:

The Court sees:

(b) a copy of the Rules of the Society;

and:

Webb(2) 29 18/5/93

(d) a register of Directors, members and

shares held by them;

The provisions relating to inspections of books and

records do not indicate any general right of public

inspection of the accounts kept.

TOOHEY J: But would not information furnished to the

Registrar be a matter of public record as opposed

to the right to go to the office of the building

society and demand to inspect some documents?

MR HAYES:	Yes, there would be a public record.
TOOHEY J:	Now, I ask you that because you haved identified

as one of the features of the Act there is no

requirement for accounts to be opened for

inspection by creditors, and that is no doubt true in so far as the registered office of the building society is concerned, but is it true in relation to

the office of the registrar?

MR HAYES:  The registrar, I would take it, was a public

office where people could inspect and there is a

public right as Mr Finkelstein points out under

section 5(3) of the Act on payment of the fee to do

so. So, I accept the force of what Your Honour

says.

TOOHEY J: So it is really a qualified feature. In other

words it relates only to the office of the building
society itself, not that the records are not

available for inspection somewhere?

MR HAYES: That is true, but it is also true that the

emphasis lies on keeping the members informed. All

through the rules there is reference to that and it

is an altogether different kind of record of

members kept than is required to be kept under the

Companies legislation by way of membership

register. Quite different provisions in here than

there are in the Companies legislation dealing with

what records are kept, Your Honour, but I accept

the force of what Your Honour's question poses.

Now, Your Honour, we refer in that regard to

Companies relevant purposes a building society is to be

sections 256 to 257 in particular of the

Code dealing with the provision of a share register.

treated as a company in voluntary liquidation to

which Part 12 of the Companies Act relevantly

applies. Section 360 relevantly comes in to Part 12

if it is capable of applying to the different

creature of a building society to a company. It

applies with such adaptation as is necessary.	Now
that is the statutory basis, the rules are the

Webb(2) 30 18/5/93

equivalent of the memorandum and articles of the

company.

Now, it is pointed out to me, Your Honour

Mr Justice Toohey, that section 5(3) is qualified

as saying:

Any person may inspect at the public

office any document required to be lodged with

the Registrar ..... other than by section 90.

And, section 90 is the monthly returns in which the society.must lodge with the Registrar particulars of, "(l)(c) paid up share capital". So, the public access for a fee is limited.

TOOHEY J: It is limited to the annual returns.

MR HAYES: Limited to the annual returns, Your Honour, yes.

TOOHEY J: Yes, thank you.

MR HAYES:  Now, going back to the outline, Your Honours,

paragraph 2 are some comments that we say followed

from the facts as they are to be taken for present

purposes before us.

We make the point in (a)? because in some of the cases that we will come to the notion of the

shareholder as a speculator has been thought to be

a significant factor in the application of the

principle. It may, or may not, be a good point in

the cases, but it is one of the points of

distinction often made.

(b) is mentioned because, if investment advice

was given, as on the short summary of facts the

Court has, it may be the case, which is all the

Court has to know, then there would be fiduciary

duties owed.

(c), inducement, indicating that the

inducement, in many cases, was as to the nature of

the rights being acquired, and that might be very

relevant because in all the cases, we would say,

which we come to look at in the Houldsworth and

Oakes v Turquand territory, there was no doubt that

the plaintiff knew full well that they were a

shareholder and what their rights were.	The
dispute was external to that.

Now here, a lot of these potential claimants

did not have a lot of knowledge of what it was they
were doing and, indeed, were, in many cases,
arguably misled into thinking that they were really
depositors, and certainly not comprehending the
ramifications of being a permanent shareholder,

Webb(2) 31 18/5/93

last ranking in terms of getting money out, first ranking in terms of paying any losses at the end,

and so on.

(d) is a comment to the share register

requirements that has to be qualified in the light

of the discussion that has just occurred, but

certainly, we have quite different requirements for

share register with the societies than we do with

the companies, the subject of all the cases.

Now 3 is where we get into the substantive

territory and we are here seeking, with respect, to

challenge the bases of the decisions in Oakes v

Turquand and Tennent v Glasgow Bank, to submit to

the Court that they are either not good law, or

should be qualified, having regard to a number of

factors so as to present no practical bar to the

claims sought to be brought here.

We take the Court to the decision in

Oakes v Turquand which, I think, appears on

everybody's list, but it is case 2 in our list of authorities. In the hope of assisting the Court,

we had marked up and given to the Court this

morning our list of authorities and· there is a

supplementary list with the numbers of the cases,

and I will take Your Honours to case 2 in that

list.

Now, Your Honours, the case concerned a

situation where a person had, by fraudulent

misrepresentation of directors, or their fraudulent

concealment of facts, been drawn into a contract to

purchase shares and it concerned the Limited

Liability Acts of 1862, which are pinpointed in the

historical chronology that is appended to our

outline.

In the judgment of the Lord Chancellor,

commencing at page 340 of the report, the Lord

Chancellor starts off: 

My Lords, these are appeals ..... refusing to

remove the names of the Appellants from the
register of members ..... and from the list of

contributories of the said company, and to

rectify the register accordingly.

Then the next paragraph:

The Appellants dispute their liability to be

placed upon the list of contributories, on the

ground that they were induced to take shares

in the company by false and fraudulent

representations made by the directors in a

prospectus ..... that, consequently their

Webb(2) 32 18/5/93

agreements to become shareholders in the

company are not binding upon them, and that

they never, by any subsequent act, affirmed or

acquiesced in their validity.

Then, Your Honours, if you would go to page 344,

the last paragraph starting on that page:

It is quite clear, therefore, that Oakes

might originally have disaffirmed that

contract, and divested himself of his shares,

and that he never did any act to affirm it,

nor was aware of the true state of the

firm ..... at the time of the formation of the

new company, nor until after the failure.

And then further on down page 345, at about point 6

on the page:

On the part of the creditors, it is said

that every person whose name is found upon the

register at the time when the order for

winding up is made is a shareholder, and

liable to contribute towards the payment of

the debts of the company to the extent of the

sums due upon his shares, unless he can prove

that his name was put upon the register

without his consent.

On the part of the shareholders it is

contended that a person who has been induced

by fraud to enter into a contract to take

shares, and whose name is afterwards placed

upon the register, never becomes a

shareholder, because his agreement, being

obtained by fraud, is of no validity.

And then at the very bottom of page 347, the last

paragraph there:

Bank upon which, in his judgment, the The case of Henderson v The Royal British

Vice-Chancellor Malins placed great reliance,

seems to me, unless the law has been altered

by the Companies Act, 1862, to be an authority

of great weight against the Appellant. shareholder to relieve himself from liability

under similar circumstances to those in which

the Appellant is placed, expressed his opinion

in the strongest language. He said:  "It

would be monstrous to say, he having become a

partner and a shareholder, and having held

himself out to the world as such, and having

so remained until the concern stopped payment,

could by repudiating the shares on the ground

that he had been defrauded, make himself no

Webb(2) 33 18/5/93

longer a shareholder, and thus get rid of his

liability to the creditors of the bank.

A little further down:

The case of Henderson v The Royal British

Bank, being supported by such a weight of

authority, will materially influence my

opinion upon the present case, unless I can be

satisfied that the Companies Act, 1862, has

placed creditor and shareholders in a

different relation to each other than that in

which they previously stood.

And, to remind the Court, Henderson's case was based on a statutory scheme treating the

shareholders as partners, a change that was only

coming about with the 1862 Act. At the bottom of

page 348 the Lord Chancellor says:

The real question in this appeal is,

whether the Companies Act of 1862 has placed a

shareholder on such a different footing from

that in which he stood at the time of the

decision in Henderson v The Royal British

Bank, that his name being upon the register

when the order for winding up was made, it is

competent to him to defend himself against his

prima facie liability to contribute, by

alleging and proving that he was induced by

fraud -

And then on page 349, at about point 4 on the page:

The 38th section is here referred to -

which was section 360, Your Honours -

which, amongst the qualifications of the

liabilities of contributories, provides that,

in the case of a company limited by shares, no

contribution shall be required from any member	exceeding the amount (if any) unpaid -
Then, Your Honours, at page 350, last

paragraph on the page:

It is not the mere fact of the name

appearing upon the register which makes a

person liable as a member of the company.

Then, to page 351, last paragraph:

I confess that these decisions are not at

all satisfactory to my mind. I think that

persons who have taken shares in a company are

bound to make themselves acquainted with the

Webb(2) 34 18/5/93

memorandum of association, which is the basis
upon which the company is established. If
they fail to do so, and the objects of the

company are extended beyond those described in

the prospectus (a fact which may easily be

ascertained), the persons who have so taken

shares on the faith of the prospectus ought,

in my opinion, to be held to be bound by

acquiescence.

Then, Lord Cranworth, whose judgment commences at page 356, at page 359, sets out some of the

legislative history which I have used as part of

the basis for the chronology I have handed to the

Court, simply to identify that. That is the last

paragraph on page 359 and the last paragraph on

page 360, and the first paragraph on page 361, and

again in the first paragraph on page 361

Lord Cranworth is placing considerable reliance upon the decision in Henderson's case.

Then, at page 362, middle paragraph:

There are important differences between

the provisions of the Act of 186.2 and the two

Acts of 1844. In the first place, all the

enactments contained in the previous Acts for

enforcing a debt or demand ..... are repealed.

The creditor must, as under the former Acts,

proceed against the company ..... He must obtain

an order for winding up the affairs of the

company, by causing all its assets to be

called in and distributed among all the

creditors rateably, as in a bankruptcy. But

there is another very material distinction

between the two statutes, arising from the

power given by the Act of 1862, of

constituting a company whose shareholders

shall not, like partners at common law, or

like shareholders under the Acts of 7 & 8 Viet

c 110 and c 113, be indefinitely liable for

all obligations of the partnership, but whose

liability shall be limited to the extent and

in the manner specified in the articles -

Then, Your Honours, at page 364, last paragraph:

it was argued that there are provisions in the

Acts of 1844 expressly declaring the liability of shareholders to be the same as that of ordinary partners, but which provisions are

not found in the Act of 1862. The difference,

it was said, makes the principle of

Henderson's Case inapplicable.

And His Honour goes on to reason that he does not

think that is so.

Webb(2) 35 18/5/93

At the bottom of page 365, His Lordship says:

In the first place, I will refer to the

49th section of the Act of 1844 ..... rt is

there provided that the directors of every

company shall keep a register of shareholders

containing their names and addresses, showing
also the number of shares they respectively

hold, and the amount paid up; and, by the 50th

section, every shareholder is to have liberty

to search this register at all reasonable

times. Nobody, however, was to be at liberty

to search it who was not a shareholder. There

is· a similar obligation in the Act of 1862 as

to keeping a register; but there is an

important change; for, by the 32nd section of

that Act, it is provided that the register

shall be open to the inspection not only of

shareholders, but, on payment of one shilling,
of all other persons, which would therefore

include creditors.

Your Honours, the decision to the extent that

it relied upon Henderson's case relied upon a case
on an altogether different basis of company law.

That is, Henderson's case was influenced by the previous concepts of partnership.

Secondly, Your Honours, the principle in Oakes

is very much dependent upon the misleading of

creditors through the fact that the public record

records the members' status and the details of

their holding.

In this case the public record includes the

rules which, apart from anything else, provide that

shares can be rescinded for misrepresentation or
mistake. There are different, and we would say

materially different, provisions dealing with the

details to be kept and how the details of share

membership are to be kept.

Further, we submit that it is not a sound

principle or one compelled by any other legal

principle that puts the interests of the creditors

above those of a person who has been defrauded.	To
the extent that the decision is based on what is
thought to be the operation of section 360, then

section 38 of the companies legislation, we

respectfully submit that that is a section that is

taken well beyond its intended application if used

to support an argument that would prevent

rescission.

The normal rule is to allow rescission. An

equity is created, in a sense, in favour of the

person who has been defrauded immediately upon the

Webb(2) 36 18/5/93

fraudulent misrepresentation having induced the

purchase and, in a number of the American and

Canadian cases to which we will shortly refer, the

eourts have really struggled very hard with the

concept of putting the equity in favour of the

creditor ahead of the equity in favour of the

defrauded shareholder.

McHUGH J: This is a loose sense that you use the word

"equity" in this, is it?

MR HAYES:  It is an expression used in the cases,

Your Honour.	It is an expression often used in the
case of fraudulent misrepresentation.	You will

find it is said there is an equity created. I

suppose another way of saying it is a right to

rescind is created - that is probably why that is

called an equity - immediately upon the fraudulent

misrepresentation having induced.

McHUGH J:  I have no problem about that, but talking about

creditors having equity.

MR HAYES:  Yes, that is true. Again, that is an expression

that you find in the cases various described as a

basis of estoppel, a statutory right, an equity.	I
mean by it to describe the way it is described in
the cases, and I think that description is meant to
emphasize the statutory scheme in companies legislation upon winding up to maximize the money
available for creditors who have, it is thought,
contracted on the basis that this is the share capital available to meet their debts. That is the sense I take it in which equity is then used.

Your Honours, the other case that is of great

authority that we have to overcome to succeed on

this point is the decision of Tennent.

McHUGH J: Just before you move on to Tennent, even if the

basic principle in Oakes was accepted, namely that

you could not rescind, what has that really got to do with your case?

MR HAYES:	Houldsworth says you can only claim damages for fraudulent misrepresentation once you rescind.
Oakes says once liquidation intervenes, you cannot
rescind.  You read the two together and we cannot
claim damages here unless either Houldsworth is
wrong and the fact that you cannot rescind is no
bar to damages, or Oakes is wrong, in which case
Houldsworth does not stand in the way. That is why
we are tackling Oakes, Your Honour, but we are
tackling it because we submit it is wrong.

McHUGH J: But one can hold Houldsworth wrong without

overruling Oakes.

Webb(2)	37	18/5/93
MR HAYES:	You could, yes.	Now, Your Honour, Tennent v The

City of Glasgow Bank & Liquidators (1894) 4 AC 615,

case No 3 on our primary list, was a similar case.

The Lord Chancellor, Earl Cairns, whose judgment eommences at page 620, sets out the facts

succinctly in the first paragraph of his judgment.·

The principle underlying his judgment appears at

page 621, about point 2 on the page:

The case of Oakes v Turquand in this

House has established that it is too late,

after winding-up has commenced, to rescind a

contract for shares on the ground of fraud.

This, no doubt, is on the grounds stated by

the Lord President, that innocent third

parties have acquired rights which would be

defeated by the rescission. The case of Oakes

v Turquand, however, while it decided

negatively that a contract could not be

rescinded on the ground of fraud after a

winding-up had commenced, did not decide

affirmatively the converse proposition, that

up to the time of the commencement of a

winding-up a contract to take shares could be

rescinded upon the ground of fraud. Whether

it can or not be so rescinded up to that time

must, I think, depend upon the particular

circumstances of the case.

In an ordinary partnership, not formed on

the joint stock principle, it is impossible,

as a general rule, for a partner at any time

to retire from or repudiate the partnership

without satisfying, or remaining bound to

satisfy, the liabilities of the partnership.

He may have been induced by his copartners by

fraud to enter into the partnership, and that

may be a ground for relief against them, but

it is no ground for getting rid of a liability

to creditors. This is the case whether the

partnership is a going concern, or whether it

has stopped payment or become insolvent. In

the case of a joint stock company, however,
the shares are in their nature and creation

transferable, and transferable without the

consent of creditors, and a shareholder, so

long as the company is a going concern, can,

by transferring his shares, get rid of his

liability to creditors -

And then at page 622:

It is on the same or on a similar principle that, so long as the company is a

going concern, a shareholder who has been

induced to take up shares by the fraud of the

company has a right to throw back his shares

Webb(2) 38 18/5/93

upon the company without reference to any

claim of creditors.	He would have a right to
transfer -

But if the company has become insolvent -

That is point 3 on the page -

and has stopped payment, then, even

irrespective of winding-up, a wholly different

state of things appears to me to arise.

McHUGH J:  I have some difficulty with this reasoning. One

would have thought that the critical point of time

was the point of time at which the credit was

extended and it makes no difference concerning the

subsequent winding-up.

MR HAYES:  A number of American cases so reason,

Your Honour. There is some tension between some

judgments using that line, some saying there is an

automatic cut-off at winding up, some saying as

long as you announce your intention to renounce, it

is all right, others saying as long as you act

promptly afterwards, and a lot of that tension

comes from an ill ease certainly felt by a number

of the American courts which seem to have more

frequently considered this principle about the very

sort of matter Your Honour mentions.	I will cite
some of those shortly.

But if the company has become insolvent, and has stopped payment, then, even irrespective

of winding-up, a wholly different state of

things appears to me to arise. The assumption

of new liabilities under such circumstances is

an affair not of the company but of its

creditors.

And so on. So the essence of what Lord Cairns is

saying is that rights of creditors have intervened,

those rights have intervened at the time when the

company has become insolvent, certainly by the time

the company has commenced to be wound up and,

consistently with Oakes v Turquand, you cannot

rescind. Tennent is based squarely on a principle

of intervening rights of third party creditors.

Oakes v Turquand is based on a broader range of

principles but, in particular, the operation of

section 38 of the Companies Act.

McHUGH J:  Mr Hayes, is there some notion permeating or at

back of this reasoning that a new equity is created

by reason of your right to claim in the winding up?

Is that what we are really talking about?

Webb(2) 39 18/5/93

MR HAYES:  That is again language used in some of the

American cases, Your Honour. A right to be paid

out of the capital agreed to have been contributed

hy shareholders has arisen. As Your Honour, we would respectfully submit, properly queries why

that would arise at winding up, say, rather than

the credit was extended, is not easy to understand

but it is called an equity, an intervening right of

third parties, variously in the judgments. It is

said to be of such importance that it overrides the

right or the equity of the shareholder to rescind

for fraud. We would respectfully submit that that

is not the correct priority.

DAWSON J:	How do you determine what is the correct priority?
MR HAYES:	Your Honour, we will try and develop this

shortly, but the right to rescind or seek damages

for fraudulent misrepresentation should not be seen
just as an incident of having bought the shares.

The fact is you are a shareholder and that is what you want to get out of being, but what is important is that you are a person who has been the victim of

a fraud. The fact that you are a shareholder is

incidental to that.

It is the right of the person who has been

defrauded or, as we will later try to develop, the

right of the person, the victim of a breach of
fiduciary duty, to be compensated for the fraud,

the breach of fiduciary duty, that exists and

should not be interfered with by a notion of

intervening rights. After all, the company is a separate entity, separate from the shareholders, separate from the directors. The creditors have

contracted with the company. The creditors are, in

effect, getting the benefit of the fraud of the

directors if people are unable to rescind. It is

because it has been a policy question that has

underlain a lot of the reasoning, Your Honour, that I have to address on those competing policy issues. We respectfully submit that it is not,

probably understood, a matter of competing

priorities, but simply a fact that, when a person

is the victim of fraud, they have got a right and

that right stands and cannot be interfered with by

the fictitious notion of creditors being third

parties whose rights have intervened.

But it is certainly the language,

Your Honours, of a lot of the cases, battling with the notion of some kind of priority, and it

underlies cases like Houldsworth and Oakes v

Turquand that what is paramount is that the person

who has been defrauded is a shareholder, rather

Webb(2) 18/5/93

than what is paramount being the fact that the

person has been defrauded.

DAWSON J:- Well, in this case, what it comes to, you say,

"These people thought they were being mere

depositors, and therefore they should not be

treated any differently from those who were

depositors".

MR HAYES:  Yes, we do say that, and at the end of the day,

it might be as simple as that, although you have

got various kinds of misrepresentations, Your

Honour.· You have got some people who are told,

"Look, it is safe", those kinds of representations.

You have got others who are told, "You are just

like a depositor". Although, the whole scheme of

the thing, you can understand people thinking they

were like a depositor, having regard to the sort of

basic features that we went through before.

Now, Your Honours, the point that

Mr Justice Dawson just raised is, in fact, the

point meant to be covered by the second sentence in
paragraph 3 of our outline, the notion that a

liquidator cannot rely upon section 360 of the

Companies Code if it otherwise does apply, given conduct by the societies before he became liquidator, in which shareholders may have been

induced to believe that they were being treated

just like a depositor.

Now, there is a quite difficult issue of

principle involved here, because there is a tension

in the cases as to whether or not an estoppel can

bind the company in liquidation, in relevant
circumstances, having arisen from conduct before

the company was in liquidation.

There are cases, a number of House of Lords

decisions, where the estoppel has run against the

company in liquidation. There are other cases, one

not so long ago by this Court, Tanning's case, in

which there was not an estoppel, although we would

say, a very different case to here.

But, before developing that argument - because

if we are right about the estoppal then, even if

section 360 otherwise applies, the Liquidator could be estopped from asserting it and thus we put it as

we do in paragraph 3.

Could I ask the Court to look at section 360

in the Companies (Victoria) Code. You will find it

very similar to section 38 as it appeared back in

the 19th century in England:

Webb(2) 41 18/5/93

Liability as contributories of present

and past members -

the Court sees -

On a company being wound up, every

present and past member is liable to
contribute to the property of the company to

an amount sufficient for payment of its debts

and liabilities and the costs, charges and

expenses of the winding up and for the

adjustment of the rights of the contributories

among themselves, subject to the following

qualifications:

(k) a sum due to a member in his capacity as

a member by way of dividends, profits or

otherwise shall not be treated as a debt of

the company payable to that member in a case

of competition between himself and any other

creditor who is not a member -

and so on.

Now, Mr Finkelstein has below on both occasions sought to develop arguments based on

section 360(l)(k). Mr Justice Tadgell did not find

it necessary to decide that argument; Mr Justice

Vincent did not find favour with it; but it is

section 360(1) that is the basis of Oaks v Turquand

and also later on In re Addlestone when we come to

that.

Now, here is a section that does not, on the

face of it, prohibit a claim for damages. Yet

Mr Justice Tadgell construed it as containing an

implied prohibition on a shareholder maintaining a

claim for damages. Now, this implied prohibition

has the effect of taking away accrued rights because rights have accrued in favour of the

shareholder immediately upon the fraudulent

misrepresentation or the breach of fiduciary duty

having occurred, and elsewhere in the legislation -

and for this I ask the Court to look at the

Securities Industries Act (Victoria Code)

sections 125, 6 and 7. It is in Mr Finkelstein's

volume, number 31, thank you.

The Court will find, starting at section 125,

some sections dealing with false or misleading

statements inducing people to purchase securities.

These provisions existed relevantly at the

time of section 360. They are now in a more

extended form in the Corporations Law in a number

of sections commencing at 999. So, apparently, the implied limitation contained in section 360 against

Webb(2) 42 18/5/93

a claim for damages, also impliedly prevents a

claim for damages under section 125 and it sections 52 and 82 of the Trade Practices Act. In

other words, it is not just common law or equitable

rights that Mr Justice Tadgell finds to have been

impliedly abrogated by section 360, but statutory

rights, both in the same scheme of legislation and

in the consumer protection provisions in the

Trade Practices Act.

Now, there are like provisions in the

Misrepresentation Act in England, and although no case has decided the point that we have found, a

number of academic commentators have opined that

Houldsworth has not survived the Misrepresentation

Act, and we would respectfully submit that

Houldsworth, section 360, if it does go as far as

Mr Justice Tadgell says it does, does not stand in

the way of the statutory claims given throughout,
Securities Industries Code, Trade Practices Act,

Fair Trading Act and so on.

So that is an introduction to section 360 in

the context of looking at the question of estoppel,

but having started on that I might take the Court

and finish our arguments as to why section 360 does

not apply, which you find in paragraph 6 of the

outline, namely, if a claim for damages exist

before liquidations, it is a debt or liability for
the payment of which, by section 360(1),

contributors become liable, and we refer to other

complementary sections. It should not be read as

taking away vested rights and it would undermine

the utility of the statutory provisions and, we

would add, it is not expressed in the section and

indeed, on many of the cases, when we come to look

at cases that have considered Oakes v Turquand, the

section may well be regarded as being a section of

quite limited effect, concerned with the placing of

contributors on the list of contribution rather

than being a substantive barrier to a claim for

damages.

Obviously, if Parliament intended to be a

restriction on the right to claim damages for the

fraudulent purchase of shares, Parliament could so

easily have said so and it no where says so,

certainly expressly and, in our respectful

submission, you cannot read it into section 360.

If that is right and that reasoning is right, then

a lot of the reasoning in Oakes v Turquand and the

Addelstone decision, to which I will come, falls.

Now, as to estoppel, Your Honours, I do not

have to remind the Court, I am sure, of the

principles of estoppel recently laid down in

Webb(2) 43 18/5/93

Verwayen's case. Where the controversy may lie in

relation to estoppel is whether the company in

liquidation would be bound by the conduct of the

company before liquidation.

There are a number of cases that would support

our contention that - and there are really two
propositions we make on estoppel, Your Honours, of

some importance. One is: you can have an estoppel

that binds the company in liquidation; two, that

estoppel can extend to preventing reliance upon a

statutory provision, such as section 360. Now, in

the c~se of Burkinshaw v Nicolls, (1878) - it is

case No 10 in the principal list. In that
decision, Your Honours, the House of Lords had to

look at a situation where a company issued shares

as fully paid and certificates describing them as

fully paid, and made annual returns giving the same

description. The company entered into a

contractual arrangement and litigation ensued in

which, in part, the question was whether or not the

certificates and the conduct of the company, as to
the shares being fully paid, gave rise to an

estoppel.

As appears from the headnote of the decision,

at page 1005, the Lord Chancellor, Lord Cairns,

said that:

In a matter of this kind the official

liquidator is not entitled, when putting in

force the 25th section of the Act of 1867, to
disregard the actual transactions that have

taken place between the parties.

The 25th section - the section of the 1867 Act

appears in my learned friend's two volumes of

legislation, volume 2, at tab 33, and section 25

appears there very close to the end of the volume,

and Your Honours see that is the section that the

Liquidator wanted to rely upon and in respect of

which the claim that the company in liquidation was

to be estopped from doing so, arose.

Do Your Honours have section 25 in 1867 Act?

MASON CJ: Yes.

MR HAYES:  The Court found that, one, an estoppel would go

against the company in liquidation, and it would

operate to prevent the reliance upon section 25.

DAWSON J: was it framed in terms of estoppel?

MR HAYES:  If Your Honour will just pardon me, I think so.

I do not believe that the term "estoppel" was used,

Webb(2) 44 18/5/93

but that is the reasoning of it, Your Honour. r

was just -

TOOHEY J:- The term does appear, Mr Hayes, not in the

judgment of Lord Cairns, but in the judgment of

Lord Hatherley at page 1021, about ten lines down

the page.

MR HAYES:  Thank you, Your Honour.

TOOHEY J: That just - happened to stumble on that.

MR HAYES:  Yes. Also, Lord Blackburn at page 1026, at about

point 4 on the page:

degree of odium thrown upon the doctrine of

estoppel -

He says that:

Now sometimes there is a degree of odium

thrown upon the doctrine of estoppal, because
the same word is used occasionally in a very

technical sense, and the doctrine of estoppel

in pais has even been thought to deserve some

of the odium of the more technical classes of

homologation. But, the moment the doctrine is

looked at in its true light, it will be found

to be a most equitable one -

and so on. At page 1027, in the judgment of

Lord Backburn, at point 5 in the page, the last two sentences of that paragraph.

We also refer Your Honours to another decision of the House of Lords in The Balkis Consolidated

Company v Tomkinson and Another. That is case

No 11 in our primary list of authorities. This was a case where:

company, transferred them to persons who were

the owner of numbered shares in a joint stock

registered in the company's books as

proprietors of the shares. P afterwards

fraudulently executed a transfer of the shares
for value to T, who sent the transfer to the

company, and received from them a certificate
under their common seal stating that he was

the proprietor of the shares. T, acting bona
fide on the faith of the certificate, sold the
shares; but the company refused to register
the purchaser as the proprietor, on the ground

that after granting the certificate to T they

had discovered that he was not the real owner

of the shares. T then, to fulfil his contract with the purchaser, bought other shares in the

market and sued the company for the price:

Webb(2) 45 18/5/93

Held, affirming the decision of the Court

of Appeal, that the company were estopped by

their certificate from denying that Twas the

proprietor of the shares, and that he was

entitled to recover ..... the damages -

At page 407, in Lord Herschell's judgment, at the

very top of the page the argument was put.	He goes
on to say:

A person to whom the company is liable by

estoppel to pay damages -

and he talks about if his right by estoppel is
established, and so on. In the judgment of

Lord Macnaghten at page 410, at the top of the

page:

a principle of universal application, that if
a person makes a false representation to

another and that other acts upon that false

representation the person who has made it

shall not afterwards be allowed to set up that

what he said was false and to assert the real

truth in place of the falsehood -

Then, Your Honours, we refer the Court to a

case on our supplementary list, In re

South American and Mexican Company, Ex parte Bank of England. It is case No 81 on the supplementary

list. Does the Court have a copy of that case from

our supplementary file?

MASON CJ: Yes.

MR HAYES:	It is simply another application of estoppel against a company that has gone into liquidation,
Your Honours. And then, Your Honours, there is
Bloomenthal v Ford, case No 12 on the original list and again, Your Honours, it is a case that is an
application of principles of estoppel against a
company that has gone into liquidation.

Now, on my learned friend's list of cases are

some cases which suggest a different or qualified

principle. Properly understood, they do not, we
say, affect the potential application of an

estoppal here. The first of those cases is

In re Exchange Securities Ltd, (1988) Ch 46, which

is case No 74 on the State of Victoria's list.

This is a decision of Mr Justice Harman concerning

two companies in the business of speculating
internationally in commodities and stocks and

shares on behalf of the public who provided money for those purposes and, prior to liquidation, the first respondent had paid moneys into the

respective companies which, over 18 months, issued

Webb(2) 46 18/5/93

monthly reports purporting to show large profits.

They were fictitious; they were reported as having

been placed to the credit of the first respondent's
accounts and the official receiver, who was the
provisional liquidator of the companies, sought

directions as to how the unsecured claims of the

respondents were to be valued.

A question arose whether the first respondents could raise estoppels against the Liquidator in

respect of the representations alleged to have been

made by them regarding the fictitious profits.

His Honour held that, since it was the companies,

and not the liquidators, which had issued the

monthly reports upon which the alleged estoppel

sought to be relied upon were based, the Liquidator

was not estopped from resiling from such

representations and that, moreover, since the
raising of estoppels would deplete the estates,

thus defeating the statutory scheme which obliged
the liquidator to distribute the real assets
amongst the true creditors, the Liquidator was

constrained to value the unsecured claims in

conformity with their true values without regard to

any alleged estoppels arising against the

companies.

Mr Justice Harman, at page 54, Your Honours,

point 5 in the page:

It is important, however, to remember ..... that

estoppel is a rule of evidence. It is a

prevention of the giving of certain evidence

on the ground that so to do would be to allow

a man, as it is sometimes said, to approbate

and reprobate, to change the assertions that

he had made.

We would, respectfully, submit that that does not

appear to be the modern way the principle is

regarded. At page 57 of his judgement, at line C: He asserted that the rule was that a	liquidator can only admit to proof real claims
by real creditors and that estoppel by
representation was not available against the
liquidator, although it might (and it was not
necessary to determine) be available against the company. He said further that it is not
open ever to set up an estoppel against a
statute. Here the statutory scheme, as it is
called in liquidation, requires the liquidator to distribute the assets of the insolvent
company amongst its true creditors.

Webb(2) 47 18/5/93

He referred me to In re Van Laun, the

judgment of Bigham J, as expressly approved in that same case in the Court of Appeal, where -

Ehe Master of the Rolls -

expressly adopts and approves Bigham J's

judgment and refers to the estoppel created by

a judgment in that case.

And then there is a passage read that starts at

line Fon the page:

"The trustee's right and duty when examining a

proof for the purpose of admitting or

rejecting it is to require some satisfactory

evidence that the debt on which the proof is

founded is a real debt. No judgment recovered

against the bankrupt, no covenant given by or

account stated with him, can deprive the

trustee of this right. He is entitled to go

behind such forms to get at the truth, and the
estoppel to which the bankrupt may have

subjected himself will not prevail against

( the trustee).

Now, of course, Your Honours, we would say that in

a case when you are looking at the Liquidator's

distribution of assets and you are arguing that no estoppel arises so as to make a person a creditor,

you - I will start that again. We would submit

that in so far as Justice Harman's judgment differs

from the House of Lords decisions to which we have

referred, it is limited to a situation where the

Liquidator is ascertaining to whom to distribute

assets and he cannot be taken, and it would be

wrong if he was, to say that an estoppel as to a

substantive right created by the company in

liquidation - a substantive right sought to be

asserted against the company now in liquidation,

would not arise.

At page 58, His Honour, at the top of the page

talks about Lord Justice Vaughan Williams,

expressly saying that he thought, "that Bigham J

had laid down the law in the clearest" manner, and

Lord Justice Buckley gives a quote at the top of

the page:

"Whether the creditor alleges that there has

resulted, and that he relies upon an account

stated, or a covenant entered into by the
debtor, or a judgment which he has obtained,

the principle, I apprehend, is exactly the

same, and is this - that the trustee is not

the person who has stated the account, is not

the covenanter, is not the judgment debtor,

Webb(2) 48 18/5/93

but is entitled to say, "It is my business to

see that those who seek to rank against this

estate are persons who are really creditors of

that estate."

As it seems to me that observation that the trustee is not a person who has stated the

account is exactly material to the
consideration of this case. If it be the case

that a trustee in bankruptcy and a liquidator

stand exactly in pari materia, and it has been

common ground between all parties here that

they do, then those observations must apply,

unless there be some other reason why they do

not, with the result that the liquidator here

is not the person who made the statement upon

which the estoppel is sought to be relied upon

is based. If the liquidator did not make the

statement, it does not follow within the fifth

probandum of the requirements of estoppel by

representation as stated in Spencer Bower and

Turner, Estoppel by Representation" 3rd ed.

The liquidator, and I have used the words

"trustee" and "liquidator" entirely

interchangeably in this set of observations,

is entirely free to say, "I am not the company

for this purpose. I am here fulfilling the

statutory function of considering the debts of

the company and paying its true creditors.

Let all creditors come in and satisfy me as to

their true debts regardless of what may have

been the position caused by estoppels, which

are only, of course, rules of evidence, as

between the company and you before it went

into liquidation".

It is for that reason, it seems to me

that this passage of Buckley LJ ..... is of such

fundamental and vital importance.

How does it run with the other decisions

both of Harris v Truman and of Bloomenthal v

Ford, which is a House of Lords decision,

where estoppels have been held to bind

liquidators? Mr Joffe, who has argued this

matter admirably, has cited to me In re Pilet

and the judgments in that case. He considered

In re South Essex Estuary Co ..... and observed

of that case that it was decided five years

before the bankruptcy rules were imported into

company liquidations, as they were in 1875 and

have remained ever since ..... The reason why

that decision -

that is South Essex Estuary -

Webb(2) 49 18/5/93

is not of any guidance or value today is

because the law today and the law ever since

1875 is quite different from the law

then. Then he referred to a passage from Ex parte

Kibble, a passage from the judgment of

Lord Justice James at page 376 which referred to it

being:

settled rule of the Court of Bankruptcy - - -

MASON CJ:  You need to go down to the bottom of the page, do

you not, where His Lordship offers a distinction

which is not consistent with your argument.

MR HAYES:  I was going to go to line G, Your Honour.

MASON CJ: Yes, that is right.

MR HAYES:  Yes:

The reason why, Mr Joffe submitted,

estoppels are relevant and applicable in cases

such as ..... Bloomenthal v Ford is that in

those cases the liquidator is trying to

recover money for the statutory estate, as it

is called. There are no special rules that

apply to getting in the assets. The rules

apply to dealing with the assets after they

have been got in under the statutory scheme.

If an estoppel were allowed to operate or a

judgment or other binding obligation allowed

to operate against the liquidator or trustee

in bankruptcy, he would be prevented from

exercising his statutory duty to consider the

true liabilities of his debtor. In getting in
assets for the estate he is not under any

different position to any assignee or person

entitled to sue on behalf of an assignor -

That is the principle that is sought to say is
different.	We seek to say that really that

distinction does not get in the way of our case

here. I will develop that, if it is convenient to

the Court, first thing after lunch.

MASON CJ: Yes, we will adjourn until 2.15.

AT 12.46 PM LUNCHEON ADJOURNMENT

Webb(2)	50	18/5/93
UPON RESUMING AT 1.18 PM:
MASON CJ: Yes, Mr Hayes.
MR HAYES:	Thank you, Your Honour.	Your Honours, if the

distinction made by Mr Justice Harman is right, and

we submit it is not, it might mean that an estoppel
would not operate so as to enable the appellant to

claim a debt, but it would still operate to allow

the claimants to claim damages because it would

operate to prevent the company in liquidation from

relying upon section 360. I say the distinction is

correct because, in our respectful submission, the

correct view of a liquidator is that he takes

subject to all the equities that then exist, and

there is a lot of learning to that general effect,

that a liquidator takes possession of the rights

and liabilities of the company as they stand, and

is normally in no better position than that of the

company. You find that said in many cases, for

example in a case of Vagrand Pty Limited v

Fielding, a case on our list of authorities, No 27,

Your Honours.

Vagrand is a decision of the Full Federal Court delivered in April this year. It concerned

the correctness of the granting of leave by an
applicant to proceed for relief under section 87 of

the Trade Practices Act against a company in

liquidation.

In the course of the Full Court's judgment, at

page 5 of the report, you see that they say:

The decision of Merling J was an

interlocutory one -

It was submitted by counsel, he:	was wrong in principle because he failed to	give effect to a fundamental rule ..... that,
upon liquidation of a company, its assets are
available only for the purposes stipulated by the Companies Code ..... and for not other
purpose ..... no s 87 order may be made against
those assets -

it was argued -

the s 87 claim must fail.

They say that that submission is wrong:

It overstates the true position ..... upon a

winding up of a company, the appointed

Webb(2) 51 18/5/95

Liquidator comes under an obligation to take

control of the company's assets and realize

them for the benefit of the creditors, after
payment of all proper outgoings. But the

Liquidator takes the assets subject to such

liabilities as then attach to them. If a

particular asset is subject to a mortgage, the

Liquidator takes the asset subject to the

mortgage. If an asset is held by the company

in trust for somebody else, the Liquidator is

bound by the trust.

And, over the page, 6, the middle of the page:

The point, of course, is that the assets

come to the Liquidator with their history and

inherent characteristics. Although the

Liquidator takes the assets on behalf of the

creditors, third parties retain any rights

which enure to them as a result of that

history or those characteristics.

Now, that has been said in other places, for

example, by the House of Lords in

Waterhouse v Jamieson, No 13 on the list of cases.

There are differing passages in the judgment. The

Lord Chancellor at page 32 of the report talks

about:

A preliminary point was raised, namely,

whether or not the official Liquidator could

institute proceedings of this character. It is said to the official Liquidator: "You, as

the representative of the company, are bound

by the statements of the company; and you have

no right to raise for the benefit of
creditors, as against the company, this

question that you attempt to raise."

He says:

I apprehend, my Lords, that it is unnecessary

to come to any precise determination upon that

point here, but if the

Joint Stock Companies Acts be thoroughly

sifted, there will, no doubt, be considerable

ground for coming to the conclusion when the

proper time comes (I say no more about it now)

that the official Liquidator, who in that

capacity is bound to collect all the assets of
the company, and distribute them by the

direction of the Court among the creditors, is in a position in which he may assert rights as

against the company, and assume a position
against the members of the company which the
company itself possibly might not be in a

position to assert.

Webb(2) 52 18/5/95

On the other hand, Lord Chelmsford at page 37

of the report at point 2 on the page, said:

Upon examining the Companies Act, 1862, I

find nothing to warrant the assertion that the
powers of the liquidator are as extensive and

searching into the constitution of a company

as is thus alleged. He is appointed for the

purpose of assisting the Court in the winding

up of a company, but in all his proceedings he

appears to be merely substituted for the

company.

Lord Westbury, at the bottom of that page, talks

about it being:

settled that the rights of creditors against

the shareholders of a company when enforced by

a liquidator must be enforced by him in right

of the company. What is to be paid by the

shareholders is to be recovered in that right.

What is due to the company is that only which

is in fact recoverable by the company. The

liquidator, therefore, standing in the place

of the company, the question is, has he a

right to impeach the memorandum -

and so on. There is another case on our list of

authorities on the same point, to which I simply

refer the Court. It is case 14, Re Dronfield

Silkstone Coal Co, (1880) 17 Ch D 76. In our

respectful submission, it is correct in principle

that an estoppal could operate against these

societies in liquidation against representations

made by the societies to the effect that the

societies would not rely upon section 360 to bar a

claim or, more broadly, that the societies would

not seek to deny that the claimants have a contract

which enables them to be treated as depositors.

It is only if the distinction made by

Mr Justice Harman be correct that we need to make

distinction but even with that distinction, a

relevant estoppal might operate here. But we would

respectfully submit that no such distinction should

properly be regarded as the law. There is no

reason in principle why that should be so and no

authority compelling that to be the result.

The Re Exchange case was cited with apparent approval by the High Court in Tanning's case,

169 CLR 332. That will be on my learned friend's

list of authorities. The case was very different. The issue of estoppal that was said to arise there

was a Port of Melbourne Authority v Anshun type

estoppal. The judgments of Justices Dawson and

Brennan mention the case at page 340. Having first

Webb(2) 53 18/5/93

cited a passage at page 339, at page 339, point 5

on the page, Their Honours talked about:

The principles which determine enforceability

of the liability to which a proof of debt relates are, in the main, the same as the

principles which would be applied in an action

brought directly against the company to

enforce that liability ..... But this general

rule is qualified. As the parties whose

interests are affected by admission of a proof

of debt are the general body of creditors and the contributories rather than the company in

liquidation, there are some liabilities which

would be enforceable against the company but
which a liquidator is not bound to admit to

proof of debt lest the interests of creditors

and contributories may be unjustly affected.

A liquidator may properly reject a proof of

debt if the liability, through enforceable

against the company, is not a true liability

of the company but is founded merely on some

act or omission on the part of the company

which unjustly prejudices the interests of the
creditors or contributories in the assets

available for distribution. In this respect,

there is no reason to distinguish between the

position of a liquidator and that of a trustee

in bankruptcy.

Passages cited from Lord Justice Buckley in

Van Laun; Ex parte Chatterton which, if we go over

to page 340, emphasizes the concept of a

miscarriage of justice. And then Their Honours go

on to say:

The same approach is equally applicable to

estoppels which would defeat the distribution

of assets among the true creditors of the

company.

In our respectful submission, that is not a

principle that stands in the way of the raising of the estoppal that we say might arise in this case,

having regard to the distinctions that we seek to

draw.

Also on my learned friend's list of cases is a

Canadian case of North-West Electric v Walsh. If I

could briefly refer the Court to that case. It

does deal with Bloomenthal v Ford. Does the Court have that decision - it was on my learned friend's

list of cases?

MASON CJ: Yes, we have it.

Webb(2) 54 18/5/93

MR HAYES: There, Your Honour, there was a claim for

estoppel in a case where the plaintiff, seeking to raise the estoppel, had relevant knowledge and had apparently been involved in a fraudulent scheme.

So, immediately, the case is of a very different kind and of very little assistance, we would say,

to this case.

At page 50, in the judgment of

Mr Justice Sedgewick, at point 5 of the page,

His Honour says:

Apart from the operation of the doctrine

of estoppel I know of no reason why any holder
of stock which has not been paid for in full

should not be liable for the balance due in

respect of it. The latest case dealing with

this particular phase of the question is

Bloomenthal v Ford. That was a case where the

appellant lent money to a limited

company ..... No money had in fact been paid

upon the shares, but the appellant did not

know this and believed the representation that

they were fully paid up shares. It was held

by the House of Lords that he was not liable

to contribute in respect of these shares, but

solely upon the ground of estoppel. Had he

taken the shares as security for the loan

knowing the fact that they had.never been

issued at all and had come direct from the

company's treasury to him, it is clear that

the House of Lords would have held him liable

as a contributory.

We would not seek to challenge that proposition but we cite the case to the Court for completeness and

submit that it is no bar to the claim for estoppel

that might here arise.

So, Your Honours, going back to paragraph 3 of

our outline, which started this excursion into the

cases on estoppel, we say that the conduct of the

societies may give rise to an estoppel against the

company in liquidation against relying on

section 360 of the Companies Code and that is what

we submit about that particular matter.

Your Honours, before dealing with the cases dealing with Oakes v Turquand might I just say

something about section 360(l)(k) of the Companies

Code. I drew the Court's attention to that

subsection before lunch. It talks about:

a sum due to a member in his capacity as a

member by way of dividends, profits or

otherwise shall not be treated as a debt -

Webb(2) 55 18/5/93

and, in our respectful submission, the claims by

these appellants for damages, for the variety of
relief that they might have available to them, are
not sums due to them as "a member in his capacity

as a member", it is coincidental that they are

members but that is not the basis upon which the

sum is due.

DEANE J:  What would you say the position was if the company

and the shareholder agreed that section 360 would

not apply? Behind my question is a further

question, and that is if it is incompetent for the

company and the shareholder to agree that
section 360 will not apply, how can you get that

position by way of estoppel?

MR HAYES:  The way the estoppel is put, Your Honour, is that

you have conducted yourself in a way to represent

that the nature of the rights you have are not

rights to which the section applies, rather than

that you have agreed as such that you are not bound

by a statutory section that applies.

DEANE J: Well, I am being obscure. If the answer to the

question was, "It is not within the competence of

the company to agree or do anything else in

relation to waiving 360 because one is not

concerned with rights of the company.", could you

have any room for estoppel working?

MR HAYES: 

We submit you can because we are not alleging the

equivalent of an agreement to not rely on
section 360. It is within the competence of the

company to issue withdrawable shares, and we are submitting that the conduct of the societies may

have been to represent that that is what they were

doing and it is because of that conduct that they

are estopped from relying upon the consequence of

having issued non-withdrawable shares. We would

submit that is a real distinction, but in any event

that is the distinction that I would give in answer to Your Honour's question. Section 360(l)(k), Your Honours, for it to

apply, there would have to be a sum due to the

appellants in their capacity as a member, and it

has to be by way of "dividends, profits, or

otherwise".  We would submit that the words, "or

otherwise" would be read ejusdem generis with
"dividends or profits", and you would not naturally

read "damages" for "fraudulent misrepresentations",
or whatever, ejusdem generis, with "dividends or

profits".

If that argument is accepted, it provides the

most powerful of reasons why section 360 itself is

not intended to apply to stop a claim for damages,

Webb(2) 56 18/5/93

because the section itself provides a code of what

claims cannot be brought. Relevantly, it is in

this subsection (l)(k), and relevantly its claims

by way of dividends, profits or the like, and that

goes to emphasize the narrow sense in which "as a

member" is used.

We would submit that the existence in section 360(l)(k) is a powerful reason why the

section does not apply, and particularly we say,

that (l)(k) does not apply because these are not claims due as a member. They are not dividends,

profits or the like

If then section 360 does not provide a good

reason for the rule in Oakes v Turquand, we are

left with some kind of an argument of priority of

creditors or intervening rights. They are very

loose terms indeed, we would submit, and we are

certainly not looking at a priorities claim in any

property sense. We would submit, it is a relative

fiction to look of it in terms of creditors having

been mislead into giving credit because of their

knowledge or taken knowledge of the state of the

share register of the company.

The creditor has no absolute right to be paid.

What the creditor has got is a right to his ratable

proportion of whatever assets there are available

upon liquidation. What we are concerned with here

is what property is available to be distributed and

who is going to share in that distribution.

It is not really a priorities question other than in a very loose sense, at all. It is really a

question of who is going to share in the cake, and

what is the size of the cake, and we would submit

that there is no good reason to postpone the claims

of a person who happens to be a shareholder who was

defrauded, to a claim of a person who was not
defrauded and who is a depositor, but who would

stand to benefit from the fraud of the company if

the claim for fraud could not proceed because of
the fact of a share holding.

There are a number of cases, particularly in the United States, that have looked at

Oakes v Turquand. I will just read from a small

number and give the Court some - - -

MASON CJ:	What are they going to demonstrate?
MR HAYES:	They are going to query the basis of any

principle that would support Oakes v Turquand,

Your Honour. That is what they are designed to do.

Not to show the Court that there is any authority

of a kind that as such should be followed against

Webb(2) 57 18/5/93

the principle but, rather, to articulate reasons

why the principle is not good, and I will do it

shortly. I have basically stated those reasons in

my address, and I am conscious of that.

MASON CJ: Yes.

MR HAYES:  One of them, Your Honour, is a case of

Scott v Latimer. It is case No 70 in the

supplementary list of authorities, 89 Fed Rep 843.

I want to refer the Court to a passage in the

dissenting judgment of Circuit Judge Sanborn, where

he is dealing with this principle at pages 856 and

following of his judgment, down to page 862, but I

will not read all those pages. At page 856 at

about point five on the page, the judge is there

reading from the facts:

To induce the plaintiff in error to purchase

some shares of a proposed increase of its

worthless stock, the bank falsely represented

to him that it was solvent, and in a

flourishing condition; that it was earning

dividends on its stock;

And then, at the bottom of that page:

Here is a case where a bank, by the grossest

false representations, has induced a stranger

to pay -

money -

and to incur a liability ..... for a certificate
of worthless stock that furnished no

consideration for the contract ..... Upon every

principle of equity and justice this

subscriber was entitled to repudiate this

purchase, to rescind his contract, and to

recover back his money, as soon as he

discovered the facts. Contracts for stock in

a corporation which are induced by fraud

create no obligation, and the victim of the

fraud has the right to their abrogation ..... It

is true that this contract was voidable, and

not void, and that the duty to rescind it as

soon as the facts were discovered, or as soon

as they could be discovered with reasonable

diligence, was imposed upon this subscriber.

But he avers in his answer - and this

allegation stands admitted in this record -

that the bank systematically, skillfully, and

cunningly falsified its books, concealed the

facts, and continued its false representations

until it closed, in May, 1894, so that he

could not, with the utmost diligence, discover

the fraud, and so that he had no suspicion of

Webb(2) 58 18/5/93

it. How can he be said to be guilty of such negligence or laches as will deprive him of

relief in the face of these facts?

And there is more to like effect in the remainder of that judgment.

McHUGH J: Well I must say, it is a dissenting judgment; it

does not seem to me to have anything at all to do

with what we are really dealing with now or if it

has it is on the borderland of remoteness.

MR HAYES: Well, Your Honour, I am sorry if it is off the

point; we would say here, it was a case of

systematic fraud, where people did not know the

facts right up to the moment of liquidation.

McHUGH J: That may be so, but what assistance do we get by

having read a dissenting judgment in 1898 in the

United States Federal Court?

MR HAYES:  I thought as an articulation of an argument only.

I do not rest my case on that dissenting judgment.

McHUGH J:  I think the argument would be better put by you,

Mr Hayes.

MR HAYES:  Thank you, Your Honour, with less authority,

unfortunately, but I will just give the Court some

other cases then, some citations which in the

American cases doubt the basis of the principle:

they are Upton v Englehart, which is a case on my

learned friend's list, 28 Fed Cas 835 -

McHUGH J: Federal Cases or Federal Supplement?

MR HAYES:  I think so, Your Honour, yes, Federal Cases; case

No 33 in my learned friend's list. There is

General Finance Corporation v Keystone Credit

Corporation, which is case No 36 in my learned

friend's list; there is Goodin V Palace Stores,

case No 37. Then, Your Honours, from our list, a

Canadian decision of Farmers Pack Co v Tully,

(1927) 2 DLR 749. They are all cases which

question the appropriateness of any principle
providing an absolute bar to rescission where the

shareholder has had no means of knowledge of the

true facts or the fraud that has been perpetrated

as of the moment of liquidation as to whether that

was a bar.

Then, if the Court pleases, I move on to what

we say about Houldsworth's case. That is dealt
with in paragraph 5 of the outline. In

Houldsworth's case various rationales were put forward for the principle, one of them being

preservation of share capital. We respectfully

Webb(2) 59 18/5/93

submit that the preservation of share capital does

not justify the bar because rescission is available

while the company is a going concern. The

provisions as to maintenance of share capital in

the Companies Act are not present in the Building

Societies Act.

Then there was the argument, Your Honours,

that there was some kind of implied term in the

contract with the shareholders against claiming

damages so as to both affirm the contract and sue

for damages, or approbate and reprobate. We submit

that the normal rule is that a person suing for

misrepresentation can both affirm the contract and

sue for damages. It is only if a term precluding a

right to damages is implied that shareholders

claiming damages can be said in any sense to be

approbating and reprobating. The implication of

such a term does not satisfy any of the accepted

tests for the implication of contractual terms. It

is a fiction to so suggest.

Any such bar has in any event been abrogated

by the various provisions to which I have already

referred the Court. Indeed, Mr Justice Tadgell in
his reasons for judgment, whilst finding a

principle consistent with Houldsworth, does not

accept, does not adopt, the reasoning of

Houldsworth as such. We would respectfully submit

that the reasoning is not of great assistance in

the outcome of this case. It is all pre-Salomon v

Salomon reasoning. It was an unlimited liability

company, it was decided at a time when companies

were seen very much as partnerships involving

shareholders as partners and it is a principle that

does not sit well with more modern developments,

both in equity and of statutory consumer protection

remedies.

There has been a lot of academic questioning of Houldsworth's case but very little judicial

consideration of it. I will take the Court shortly

to a decision of Mr Justice Anderson in Re Dividend

Fund, and there are a large number of American

cases, some liking it, some not, and, in our

submission, the preponderance of authority being

against its application as a correct principle.

First, might I shortly take the Court to

Houldsworth's case itself just to indicate the passages in the judgment which give rise to the

various arguments said to arise. Houldsworth is, I

think, the fourth case on our list of authorities,

(1880) 5 App Cas. The first thing to note about

Houldsworth's case, Your Honours, is that it was an unlimited liability company that was involved.

Webb(2) 60 18/5/93

The second thing to note is that at page 321

in the argument of counsel, reference was made to

section 38 as a possible basis for the decision.

The first judgment was delivered by the

Lord Chancellor, Earl Cairns, commencing at

page 322 of the report. At the bottom of page 322

it is said:

It was admitted ..... as indeed it could not be denied, that after the winding-up of

the company commenced it was too late for the

Appellant to repudiate his stock, and he must remain, as the liquidation found him, a

partner in the bank and a contributory as

such.

And then at page 323, at point 6 of the page:

The question, therefore, mainly argued at

Your Lordships' Bar, and upon which the

decision of this case must, as I think,

depend, was this: Can a man, induced by the

fraudulent misrepresentations of agents of a

company to take shares in the company, after

he discovers the fraud, elect to retain the shares, and to sue the company for damages?

At the bottom of page 323:

But does the same rule apply to the case

of shares or stock in a partnership or

company -

and he goes on to argue that it does not and, at

the bottom of page 325, at about point 8 on the

page:

The result is, he is making a claim which is

inconsistent with the contract into which he

has entered, and by which he wishes to abide;

in other words, he is in substance, if not in form, taking the course which is described as	approbating and reprobating, a course which is
not allowed either in Scotch or English law.

And it is to that particular passage of reasoning

that Mr Justice Tadgell refers in his reasoning and

which we respectfully submit is not an appropriate

reasoning to today's situation.

Lord Selborne, at page 329, point 8 of the

page, talks about:

Such an action of damages as the present

is really not against the corporation as an

aggregate body, but is against all the members

of it except one, viz, the Pursuer -

Webb(2) 61 18/5/93

and a little further down the page:

They are all as innocent of the fraud as the

Pursuer himself; if it were imputable to them it must, on the same principle, be imputable to Pursuer himself as long as he remains a

shareholder; and they are no more liable for

any consequences of fraudulent or other

wrongful acts of the company's agent than he

is. Rescission of the contract in such a case
is the only remedy for which there is any

precedent, and it is in my opinion the only

way in which the company could justly be made

answerable for a fraud of this kind. But for

rescission the Appellant is confessedly too

late.

Again, the reasoning at the bottom of page 329, we

respectfully seek to challenge, in paragraph S(b)

of our outline.

Lord Hatherley, at the bottom of page 332, at

about point 7 of the page, says:

It appears to me to be fatal to the

Appellant's right to the relief he asks that

he is still, or was at the date of the

liquidation, a shareholder in the company

against which he asks it. No case has been

cited in which such a remedy as that sought by

the Appellant in the present case has been

allowed to take effect by any Court either in

Scotland or in England.

What became the position of the Appellant

when he had paid his money in respect of the

transfer of shares into his name? He thereby

became on the one hand entitled to any profits

made by the employment of the capital of the
company according to the proportion which his

shares bore to all the other shares in the

company.

We would say in passing, not the case with these shares.

And at the same time he undertook to bear a

like aliquot share of all the debts and
liabilities of the company incurred, or to be

incurred, in respect of the business which the

company was carrying on.

Then at page 333, the first paragraph starting on

that page:

Now suppose ..... that there should be some

ten or twelve other shareholders in a like

Webb(2) 62 18/5/93

position with the Appellant with regard to

purchasing shares under misrepresentation on

the part of the company's agents, some of them

having purchased shares before him and others

after him; those ten or twelve shareholders

would each of them have the same claim in

respect of damages against the company ..... as

is now claimed by the present Appellant. The

present Appellant would by his partnership

contract have to bear his aliquot share of the

damages that might be claimed by other misled

shareholders who had been placed on the list

by the same course or misrepresentation as

himself. What end would there ever be to the

interlacing claims on the part of misled

shareholders inter seas to dividends received

whereby the fund which might have been applied

towards recouping and making good the debts of
the company, including the damages claimed by
the Appellant, was diminished? .....

In truth the Appellant is trying to reconcile two inconsistent positions, namely,

that of shareholder and that of creditor of
the whole body of shareholders including

himself.

And he goes on to say you cannot do so. And in

Lord Blackburn's judgment the particular passage is at page 337, the second half of the paragraph on that page to just over to the top of page 338.

Now, Your Honours, Mr Justice Tadgell, as the

Court has probably seen from his judgment, thought

that there was difficulty with much of the reasoning, although he thought there was a

principle that could be found. If I could ask the Court to look at the book of extracts of textbooks

and articles that was referred to this morning and

to go to tab 9, an extract from Professor Ford's

book, "Principles of Corporations Law", 6th

edition; in paragraph 1137, commencing on page 297,

Professor Ford looks at common law damages for fraudulent misrepresentation, and at page 298 in

the last paragraph on that page says that:

In relation to dealings in company

securities, the action of deceit is subject to

a serious limitation. It cannot be used

against the company whose securities are in

question at the suit of a person who remains a

member and does not rescind or who cannot

rescind. The person misled would have to sue

the promoter or directors who made or

authorized the statement. The limitation

stems from an old decision of the House of

Lords in Houldsworth v City of Glasgow Bank.

Webb(2) 63 18/5/93

The reason for the limitation is obscure. It cannot be that to allow a member to recover

damages would be unfair as against other

shareholders since it would be no more unfair
than allowing a member to rescind and withdraw
his or her contribution. It cannot be that
the limitation is needed to maintain capital

for the protection of creditors since the

company involved in Houldsworth's case was an

unlimited company and an unlimited company can

return capital without court approval.

In Houldsworth's case Lord Cairns said

that the contract between the shareholder and
the company and between him and his fellow

members, which he was not rescinding,

impliedly restricted use of the company's
property to the achievement of the company's

objects which did not include the payment of

damages to a member who had been induced by
fraud to become a member.

The House of Lords later held that the property of a registered trade union should

bear damages awarded to a person who remained

a member for breach of the contract of

association when he was wrongfully expelled:

Bonsor v Musicians' Union. That decision, which was followed in relation to an

incorporated co-operative society in Cole v

Gem Taxis Co-operative Ltd, is not easily

reconciled with Houldsworth's case.

Houldsworth's case has been followed in

Victoria in relation to an unlimited company:

Re Dividend Fund Inc. As Anderson J noted in

that case, there is a special difficulty in an

unlimited company in allowing a claim for damages against the company for deceit in inducing the plaintiff to become a member, the

plaintiff's liability to pay calls would enter

into the calculation of his or her damages.

Something akin to perpetual motion would be

involved, the aggrieved shareholder being

eventually obliged to pay call after call to

meet his own claim in damages. It may be that

Houldsworth's case can be confined in

Australia to unlimited companies.

And that in fact is what Mr Justice Vincent did in

his judgment in this particular matter. In the

same bundle of materials -

McHUGH J:  An unlimited company can return its capital - it

could, could it not, under -?

MR HAYES:  Yes, that is true.

Webb(2) 64 18/5/93

McHUGH J:  It might make the case for applying this rule to

limited companies the more stronger.

MR HAYES: Certainly Mr Justice Tadgell did not see any

difference in the case below and we do not put that

point to the forefront of our arguments. Some of the reasonings it explains, that certainly is so, but not necessarily all the reasoning that might be

applicable.

In England they have an Act called the

Misrepresentation Act which is on our chronology appended to the outline, and various texts have

expressed the opinion that the Misrepresentation

Act is not subject to any limitation from

Houldsworth's case and the Act itself appears in

volume 2 of the legislation volume, tab 20. It is,

if the Court has it, the Misrepresentation Act

1967:

Where a person has entered into a

contract after a misrepresentation -

in those circumstances -

if otherwise he would be entitled to rescind

the contract without alleging

fraud, ..... entitled.

And then, Damages to Misrepresentation:

(1) Where a person has entered into a

contract after a misrepresentation has been

made to him by another party thereto and as a

result thereof he has suffered loss, then, if the person making the misrepresentation would

be liable to damages in respect thereof had

the misrepresentation been made fraudulently,

that person shall be so liable notwithstanding

that the misrepresentation was not made

fraudulently, unless he proves that he had

reasonable grounds. (2) Where a person has entered into a

contract after a misrepresentation has been

made to him otherwise than fraudulently, and he

would be entitled, by reason of the

misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings

arising out of the contract, that the contract

ought to be or has been rescinded the court or

arbitrator may declare the contract subsisting

and award damages in lieu of rescission, if of

opinion that it would be equitable to do so,
having regard to the nature of the

misrepresentation and the loss -

Webb(2) 65 18/5/93

and damages may be awarded according to

subsection (3). It is a very short Act, it goes

over three pages only.

As I say, various English texts, without the matter having, as far as we know, been considered

by a court, have expressed the opinion that the

Misrepresentation Act is not limited by the

principle in Houldsworth's case.

MASON CJ: But it is not of very much importance really,

Mr Hayes, is it?

MR HAYES:	No, perhaps my learned junior could just find the reference I was looking for, Your Honour, to cite
it only.

The position in England is that an Act has

been passed - also in my learned friend's volume of
materials - the Corporations Law, I think. It is

the 1989 Companies Act, tab 5, volume 1 of the

materials. It is behind tab 5. The relevant

section is three pages in to that particular

section, under the heading Companies Act 1989.

section 131 inserts a new section:

"right to damages, &c not affected.

IIIA. A person is not debarred from obtaining

damages or other compensation from a company

by reason only of his holding or having held

shares in the company or any right to apply or

subscribe for shares or to be included in the

company's register in respect of shares.".

MASON CJ:  What do we get out of that?

MR HAYES: That in England they have inserted a section

designed, as the parliamentary debates show, to

make clear that any residual application of

Houldsworth's case no longer bar any claims for

damages, and they do so by inserting a provision in

the Act, nowhere near section 360, or the English

equivalent, but in an altogether other area of the

Act. That, Your Honour, tells us only that the

English Parliament sees no public purpose in any

such rule operating as a bar on claims. No more

than that, but it does show that, we would say.

Mr Justice Tadgell uses it the other way, in

part, in his judgment, to say, "Well, the fact that they have seen fit to legislate to abolish the rule in England, rather recognizes that it existed" and,

when you look at Lord Fraser's speech, in the House

of Lords, what he says is, "Well look, if there is

anything is left of Houldsworth after various

developments, including the Misrepresentation Act,

Webb(2) 66 18/5/93

this Act is to make it clear that there is no

restriction on a claim for damages".

They are the two ways in which it is put,

Your Honour: partly to meet what

Mr Justice Tadgell, and partly as a guide to

whether there is any public policy reason for the

existence of the rule. The extract from

Lord Fraser's speech is with the bundle of

materials the Court got this morning, and is

referred to in our supplementary list. I simply

indicate to the Court rather than taking you

separately to it.

Your Honour, Houldsworth was followed by

Mr Justice Anderson in Re Dividend, a case referred

to by Mr Justice Tadgell in his reasons.

Re Dividend Fund Incorporated, and that is case

No 6 on our list. If I could briefly take the

Court to that decision. The Court sees the general

nature of the case from the headnote of the report.

At page 453 at line 35, His Honour says:

It was submitted ..... that Houldsworth's case and the other cases to similar effect

related to circumstances in which the

aggrieved shareholder had an alternative

remedy of rescission of which he had chosen

not to avail himself, and on that account

could not be heard to say he was entitled to

damages when the company went into

liquidation. Mr Jordan submitted that in a

case such as the present where the shareholder

had no right of rescission, and accordingly in

the past had not failed or neglected to

exercise the means of redress ..... the

shareholder still had available to him the

remedy of damages.

His Honour goes on to say that he does "not think

it is correct", and at the bottom of that page

says:	There can be no rescission after winding up
has commenced and so, at least from that time
(or earlier if he has elected to affirm the contract) the only remedy ever available to
him has gone.

And mentions Houldsworth's case, and the reasoning

at the bottom of 454, second paragraph from the

bottom of the page:

I consider that the decision in

Houldsworth's case is directly in point ..... In

essence the two cases are the same the only

difference being that the tort in respect of

Webb(2) 18/5/93

which damages were being claimed in

Houldsworth's case was fraud, whereas in the present case Montgomery's claim is for damages

for breach of contract. I think the

distinction is immaterial. Each is a claim for

damages by a shareholder against the company,

and everything said in Houldsworth's case is,

in my opinion, equally applicable to any claim

for damages, however arising, which a

shareholder qua shareholder may seek to

enforce against the company, a fortiori when

it is an unlimited company in liquidation.

We would respectfully .submit that His Honour

has not given consideration to a number of the
factors that make Houldsworth an inapplicable
principle that we are endeavouring to advocate

here, and it is a case which does not stand in the

way of the propositions that we seek to persuade

this Court of.

There are literally hundreds of American cases

which I do not propose to read to the Court but
which are summarized in both of our lists of

authorities. I would refer the Court to an extract

from American Jurisprudence and an extract from
Corpus Juris which are on our lists of authorities.

The first is American Jurisprudence and it is on

the supplementary list on the third page,

unnumbered.

The thrust of it, as with the Corpus Juris, which is also on that same reference, is to say that the preponderance of authority in America is

to allow damages for deceit. There are a great

many cases in a great many jurisdictions within

America going in a whole lot of different ways with

different rationales. The explanation for why

Houldsworth might be thought to be wrong I have

already given the Court.

In so far as it might be said by my learned

friend there are a lot of cases in America that go
his way, we point to a large number of cases that
go the other way and to respected digests in the

United States that suggest the preponderance of

authority is the other way. I can say to the Court that the cases cited, particularly in Corpus Juris,

we have read and they support the proposition that

is there listed.

I can also say I have seen other cases going

the other way. So America has got a number of

decisions going in different ways with different
reasoning as to the modern application of the

principle in Houldsworth's case but, if it is of

any value, it is to show that, especially as time

Webb(2) 68 18/5/93

has gone on in America, the principle has been less

and less applied and is not regarded as good law,

we would say.

So if the Court pleases, we would say that

there is no good reason in principle why

Houldsworth should be accepted as the law of

Australia if it is any more applicable having

regard to the changes that have come about in

statutory and common law principles. In any event,

it is, we say, no bar to claims under the Trade

Practices Act or under the Securities Industries
Act and like legislation.

Mr Justice Tadgell, in his reasons, dealt shortly and decisively with the Trade Practices Act

argument, saying that he could not comprehend that

it could have been intended that the Trade

Practices Act would seek to override such a

fundamental principle as was to be derived from

section 360. I think that would be a fair short

summary of His Honour's reasoning.

But this Court has looked at the

Trade Practices Act a lot, and I will not trouble

the Court with references, but Wardley's case, for

example, and other like cases, where the Court has

considered the different principles applicable
under the Trade Practices Act, in many ways,
including the assessment of damages, to the

principles applicable in common law claims, for

example, as to remoteness and foreseeability and

the like, and the sorts of equitable principles

that seem to underlie the relief giving provisions

in section 87 of the Trade Practices Act. In our

respectful submission, there is every reason to

construe the Trade Practices Act, as with the

Securities Industry like provisions, as giving a

remedy not fettered by liquidation, and that comes

down to a matter of the apparent purpose of the

Trade Practices Act and what you read into any

absence of limitation appearing in the

Trade Practices Act or in the Securities Industries

Act, dealing with claims for damages when the

company has gone into liquidation.

So, even if all our arguments about

section 360 and Houldsworth and Oakes v Turquand

are wrong, we could live with all of those and
submit that the Trade Practices Act, the Securities

Industries Act, provide their own code of remedies,

unfettered, and Parliament has shown an intention

to provide remedies in the circumstances that those

sections deal with.

McHUGH J: But if section 87 does not apply, it must be by

implication, as a matter of construction of the

Webb(2) 69 18/5/93

section, sections 56 and 52, which would mean that

even if a State abolished the rule of Houldsworth,

you could not pursue your Trade Practices remedy

because, by implication, it was not intended to

apply to that.

MR HAYES: Yes, Your Honour; a most unlikely possibility, we

would say. So that argument stands by its own and

discretely, and the equitable principles that have

been largely embodied, albeit with a statutory

overlay in the Trade Practices Act, taken from equity, about the rights of rescission and the other relief that equity granted, we would say, are

likewise unlikely to be affected by these

principles. Equity often operates to prevent an

unjust reliance on a statutory right. Some of

those estoppel cases are cases where there was a

statute that stood in the way, but estoppel could

be used to prevent what would be an unjust reliance

where people proceed on a different factual basis.

But here we get into a potential huge ocean of

principle which we obviously cannot ask the Court

to canvass, but if there was a fiduciary

relationship here, and we would invite the Court to

say that is a distinct - if it is relevant to say -

possibility, because you have got a person comes in

off the street to their Pyramid branch; they

probably have had a lot of dealings with that
branch, there is a lot of concentration in
particular community areas; they say to the person

at the counter, "I have got my life savings, my

retirement moneys.	I want to put it somewhere
safe, I want to put it into deposit."	And they

say, "Well have you thought about shares, the

interest rate is higher?"	And the person says,
"Oh, but is it safe?"	"Yes, it is as safe as
houses; it is just like a deposit."	"Well, can I

get my money back?" "Yes, you can get my money

back." The society is advising a person who is

trusting them about the alternative investments available. There may well be a fiduciary	relationship, and an incident of that fiduciary
relationship is that the societies were obliged to
tell the investors what the society knew of the
runs on their funds.

McHUGH J: Is there any case which has held that a company,

as opposed to the directors or the promoters, have

a fiduciary duty towards those taking up shares?

MR HAYES:	The cases - I cannot cite one at the moment, Your Honour, but the cases that I have looked at in
relation to fiduciary duties that I am going to
refer the Court to are broad principles. I have
not got a fact situation very close to this one to
give.  I will double check that through all my

Webb(2) 70 18/5/93

notes tonight, but we would respectfully submit

there is no reason, in principle, why that would

not be so. In the Daly v The Sydney Stock Exchange

case that the Court recently dealt with, that was

not shares but that was a stockbroker who was
giving investment advice and people made loans to

it as a range of options for investment that they

advised about. I think that might have been a

partnership there, probably.

Certainly, yes, there are bank cases,

Your Honour, that we have got here, a New Zealand

case, a bank case where there was an argument of

breach of fiduciary duty in relation to the

investment in a gold bullion company, for example.

MASON CJ:	But that is a very different case.
MR HAYES:	I do say that, Your Honour.  I cannot think of a

case where there were shares being bought where the

fiduciary relationship was held to exist, but I

submit that there is no reason why the principles

would be any different. A share should be no

different to a loan or any other investment where

the person - - -

McHUGH J: Well, I appreciate that, but it is a question as

to whether a company as opposed to the directors or

ordinarily the promoters are - - -

MR HAYES:  Yes, I see. the company has owed the fiduciary duty; I cannot I can give Your Honour cases where

at the moment cite a case where that was in respect

of the purchase of shares, but I will check that,

Your Honour, overnight.

MASON CJ:  Why are we going to look at the fiduciary cases

anyhow, Mr Hayes? I have not followed that.

MR HAYES:  We submit, Your Honour, that a claim for equitable compensation or an account of profits

that would arise from a breach of fiduciary duty

would not be prevented by the application of

Houldsworth or section -

MASON CJ:	I follow that, but why will looking at the fiduciary cases help us to resolve that question?
MR HAYES:	It will not, and I was only really referring to

fiduciary to indicate that there might well be a
fiduciary relationship, but I am not making a

fanciful point about it. I do not seek to ask the Court to rule, on what you know, whether there was

a fiduciary relationship, only to show that it is

not a fanciful notion that a fiduciary relationship

may well have existed here.

Webb(2) 71 18/5/93

McHUGH J:  I thought it was common ground that the case was

going to be conducted on the basis that there may

be - - -

MASON CJ: Yes, a fiduciary relationship.

MR HAYES: Well, I am told that is so and I am beating the

wind unnecessarily on that and I will stop doing

so.

What then follows, Your Honours, is that

assuming that there was a fiduciary relationship
and assuming against us that Houldsworth,

section 360, are an otherwise bar to fraudulent misrepresentation or the other claims that have

been mentioned, would they provide a bar to

equitable compensation? And we are aware of no

case which has sought to apply or resolve whether

Houldsworth, section 360, would provide a bar in

those circumstances.	So it is a matter of
principle.	We know that there are many statements

of undoubted correctness to say that equity can
grant relief notwithstanding an inability to

rescind; that equity has a range of remedies

available to provide compensation to a person who

is the victim of, say, a breach of fiduciary duty;

and the question is whether, as a matter of

principle - and that is the only way we put it

here - is there any reason why equitable

compensation would be necessarily barred by an

application of Houldsworth or section 360, if they
otherwise applied.

And on the principles that one sees often

repeated in the cases and the texts of equitable
compensation, account of profits and the like, we

respectfully submit that there is no good reason

why equity could not provide relief. Equity may
well grant rescission for a purely equitable

remedy. Equity may say, "Well, if rescission is

not possible, we will provide relief by way of an

account of profits, or some other form of equitable
compensation". There are many cases collected

together in our list - and they are only

illustrations of the general application of

equity - which we would say give rise to that

possible claim. We cannot put it any higher than

that because we are dealing in a general sense with

the matter, but that is the way we put that,

Your Honours.

The cases, and I simply just draw the Court's

attention to them because they add nothing, I

think, to what I have broadly said, we have

collected together in our list. We have given the

Court reference to Nocton v Lord Ashburton, and to

Robinson v Abbott and McKenzie v McDonald, cases 44

Webb(2) 72 18/5/93

and 45 in our list of authorities, and to a number of more recent cases dealing with equitable relief for breach of fiduciary duty, Liggett v Kensington,

which is a New Zealand case - - -

MASON CJ: That is the bank case you referred to earlier,

the gold bullion case.

MR HAYES:  Yes; different facts I agree but statements of

principle in there that we submit are of
assistance; Daly v Sydney Stock Exchange, that we

mentioned to the Court, that is case No 82 on the list, and there is a general section of cases, 82

to 89 in our section on equity. But there is no

case that we can find that gets near to addressing
the issue of whether bars to common law relief of
the kind in question here would be a bar to

equitable relief of the kind that might be

available here, and it comes down to a submission

on principle. We submit, there is no reason in

principle why there is an absolute bar. It will

depend very much on the facts of the matter and, as

the judgment stands at the moment, it would operate

- the Full Court's judgment - as a bar of any such

claim, and we seek to overcome that.

McHUGH J:  What do you say that Houldsworth can be supported

on? On the basis that to abolish it would be

inconsistent with the contract created between the

shareholders which has an implied term that, on

winding up, the assets will be distributed in

accordance with a regime laid down in section 360?

MR HAYES: Well, Your Honour, in Salomon v Salomon, the idea

of the shareholders as partners with each other was

put to rest - - -

McHUGH J: Well, that may be so but, nevertheless, take your

Victorian Code at the relevant time under

section 78, as in earlier Acts, the articles

constituted a contract between the members.

MR HAYES:	Yes.
McHUGH J:	So there is certainly a contract inter se, is

there not, between the shareholders?

MR HAYES:  Yes, and then one has to imply a term and follow

all the well-known tests for whether a term is to

be implied. We would submit that there would be

great difficulties in meeting those criteria. That

is what we would say in answer to that,

Your Honour.

McHUGH J: You see, that is real difference. It is the

interposition of the other shareholders, is it not?

It is the big difference between a

Webb(2) 73 18/5/93

misrepresentation in this situation and in other

cases: ordinary cases of sale of land or any other

commodity?

MR HAYES: Well, as to other shareholders, Your Honour, when

you have got a limited liability company with no

prospect of a surplus, which is here, the other

shareholders do not suffer by having - they are not

going to get anything back.

McHUGH J: Well, I appreciate that, but you have got to look

at the matter as a matter of principle.

MR HAYES:	As a matter of principle, yes, but the fact that in many cases that would work an injustice might be
a reason why you would not imply the term. If you
are looking ahead and you have got no surplus, no
possibility of the shareholders gaining, a person
looking for damages who is coincidentally, we would
say, a shareholder but who has got a claim for
damages, is being said to be prevented from
pursuing that claim for damages because of an implied term in a contract with other shareholders.
We would say that you would not imply a term in
those circumstances. It would not go without saying and so on.

In fact, it could create great injustice to

deny what we would say is a quite separate claim

for damages.	We emphasis that, that it is
coincidental that you are a shareholder.	What you

are primarily is a person who has been been

defrauded with a claim for damages. That is what

we say, Your Honour.

McHUGH J:  I know, but if you have got two contracts, that

is what you have got to consider - - -

MR HAYES: Yes, Your Honour -

McHUGH J:  You have got a contract with the company and then

there is this contract containing certain terms

with your fellow shareholders and I - - -

MR HAYES:  Yes, well you would have to meet the criteria for

an implied term. You would have to treat the claim

for damages that the shareholder is making as

really an incident of his shareholding or

inseparable from rather than it being - the fact

that he has got to claim for damages being the

predominate thing that just happens to arise out of

being a shareholder. You would have to say that

that principle could apply in circumstances where

no one is going to suffer because there is no

surplus, they have all paid up, there is limited

liability, there is no call to make and yet why

would you imply a term to stop a person pursuing a

Webb(2) 18/5/93

claim for damages as to what was there in those

circumstances.

So whilst, Your Honour, it is right to say you

have got to look at it as a principle and not on

perhaps an extreme situation that has happened

here, if the application of the principle can lead

to absurd results it is a good reason why you would

be reluctant to imply the term, we would say.

Would the Court just pardon me to look at this

liferaft that I have been given to my right and I

will see what it says.

McHUGH J: That seems to suggest that you are drowning.

MR HAYES:	It is pointed out to me that in the decision of the House of Lords in Western Bank of Scotland v
Addie, which is one of the cases on our list, in
the judgment of the Lord Chancellor,
Lord Chelmsford, he says that:

although, according to the strict rules of the

common law, a man cannot be Plaintiff and

Defendant at the same time, yet in a

Court of Equity ..... it could not, in my
opinion, be a valid objection to a suit to set

aside a contract for fraud, that the

complainant was a member of the company, by

the fraud of whose agents, technically imputed

to the company, he was drawn into the
contract.

Another objection which was urged against

the right of the Pursuer to be relieved from
his contract was, that it would prejudice the
interests of other innocent shareholders who
had acquired shares after the Pursuer became

possessed of those in question. In answer to

this argument I would only observe that these

subsequent shareholders either bought their

shares under circumstances which compel them

to hold them, or they also were induced to
join the company by false representations. If

they are bound to continue to be shareholders,

I do not see upon what principle they can

contend, that their purchase of shares

prevents the contract of the Pursuer being

impeached for fraud; and if they, like the

Pursuer, have been deceived into the purchase of their shares, and abstain from taking

proceedings to exonerate themselves from

liability, there is no reason why their

forbearance should hinder the Pursuer from

taking steps to rid himself of a contract into

which he has been drawn by a similar fraud.

Webb(2) 75 18/5/93

Now, if that was accepted by Your Honour, that

would be another good reason, perhaps a better one

than the ones I put forward, as to why there would

not be such an implied term.

I have got down, the Court will be pleased to

note, to the end of the outline dealing with the
claim for damages and now, subject to.any question
from the Court, would like to move to the first of
the questions, that is assuming we can maintain a

claim for damages, can we maintain a proof of debt.

MASON CJ:  Mr Hayes, is it for you to raise this matter

first? It was not dealt with by Mr Justice Tadgell

in his judgment, was it?

MR HAYES:	Not as to the substantive matter, no.
MASON CJ:	You are attacking the judgment of the court

below. It seems to me it would be convenient at this stage, perhaps, if you confine your attack to

what is in the judgment against you, leaving

Mr Finkelstein to rely on section 82(2) of the

Bankruptcy Act, and then you can deal with that

argument in reply.

MR HAYES:  I am content to take that course, if that is

convenient to the Court. I should mention, on the

question of liability, that I have not dealt as

such with Re Addlestone. Re Addlestone is case

No 5 on the list. That was the case that applied

Houldsworth to a limited liability situation where

great reliance was placed upon section 38 as a

source, particularly the equivalent of

section 360(l)(k).	I only draw the Court's
attention to the fact.	I have taken the Court

through the reasoning as to why we submit it is not

so, and do not wish to take the Court any further

on that matter. If the Court pleases.

MASON CJ: Yes, thank you, Mr Hayes. Yes, Mr Finkelstein.

MR FINKELSTEIN:  May it please the Court. In order to

properly understand both Oakes v Turquand and

Houldsworth, it is necessary to accept that there

is a fundamental and basic proposition of company

law, the maintenance of capital. The principle is

that creditors dealing with a company should know

that the share capital, provided by shareholders,

is fully paid in and will remain in the company,

and be subordinated on liquidation to the claims of

creditors. In other words, creditors get paid

before shareholders. That is the basic principle

of company law since limited liability was first

introduced into company law in 1855.

Webb(2) 76 MR FINKELSTEIN, QC 18/5/93

The principle for which we contend, is

expressed in two early cases on company law.

Trevor v Whitworth, (1887) 13 AC 409, in the speech

of Lord Watson, at page 423, when dealing with the

object of the then new company laws, His Lordship

said, in the last full paragraph:

One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of

their capital as set forth in the memorandum,

is to protect the interests of the outside

public who may become their creditors.	In my
opinion the effect of these statutory

restrictions is to prohibit every transaction

between a company and a shareholder, by means

of which the money already paid to the company
in respect of his shares is returned to him,

unless the Court has sanctioned the

transaction. Paid-up capital may be

diminished or lost in the course of the
company's trading; that is a result which no

legislation can prevent; but persons who deal

with, and give credit to a limited company,

naturally rely upon the fact that the company

is trading with a certain amount of capital

already paid, as well as upon the

responsibility of its members for the capital

remaining at call; and they are entitled to

assume that no part of the capital which has

been paid into the coffers of the company has
been subsequently paid out, except in the

legitimate course of its business.

McHUGH J: That rule does not apply any more, does it?

MR FINKELSTEIN: It has statutory exceptions but, apart from

the instances where the Parliament itself has

abrogated the rigours of the rule - and when the

Parliament has done that it is always done so with

protection, for example, court approval and the

like, that is, that there is some means of

supervision of conduct which would otherwise be prohibited - the principle still holds good for limited liability corporations, in our respectful

submission.

McHUGH J: But in no sense is it a return of capital simply

because the shareholders have got a right for

damages against the company.

MR FINKELSTEIN: Not by itself, no, but - and I will come to

develop this - our point will be that, on a

liquidation, once a liquidation has intervened, the

principle of Oakes is a shareholder cannot rescind
his fraudulently procured contract because, to do

so, would give him back his capital, paid or,

Webb(2) 77 MR FINKELSTEIN, QC 18/5/93

alternatively, avoid his obligation to make further

payments on unpaid calls on his shares.

McHUGH J:  But is it not an irrational distinction? If he

starts his action the day before the winding-up is

deemed to commence, he can do it. If he waits to

the day after, he cannot.

MR FINKELSTEIN: That is right. That is the principle, and

it is not irrational for the reason that on

liquidation the company statute then tells you what

the parties' rights and liabilities are. Those

rights and liabilities are, from liquidation, the

creditors take precedence over members. That has
been so since limited liability was introduced and,

as it turns out, in our respectful submission, is

the price of limited liability.

McHUGH J: But the action is not as a member; that is what

I - - -

MR FINKELSTEIN: If the action is not as a member, then our

point may only be a partially good point but if in

substance the action is seeking a return of

capital, then it is, in our respectful submission,

a claim in character as a member because if you -

assume that you allow rescission. Rescission would

entitle the contract to go and moneys paid to be

recoverable in equity as a debt. What the member

would get back is the amount of capital that he has

subscribed.

If you leave it as an action in damages, the

damages would be measured by the amount of money

the shareholder has subscribed subject to claims

for consequential relief. But in substance it is a

claim for the return of capital. You can call it,

in an action for deceit, an action for damages, but

prima facie, if it is a common law cause of action,

it is measured by the amount of capital subscribed

and if it is treated as an equitable debt, it is	represented by the amount put in, ie the capital	subscribed.
If that is a correct analysis of what the claim is, then it is properly described as a claim
in character of member because it is seeking to get
capital back. That is what the Court of Appeal said in Addlestone, and we say correctly so.

McHUGH J: If the company defames the shareholder and he

sues

MR FINKELSTEIN: Different considerations may arise.

McHUGH J: It is hardly a return of capital.

Webb(2) 78 MR FINKELSTEIN, QC 18/5/93

MR FINKELSTEIN: In those circumstances it would not be a

return of capital, but what we are here dealing with is capital subscribed. We are not dealing
with other claims which would put a person who is a

claimant, who would only incidentally also be a

member, but his membership has nothing to do with

the nature of the claim.

McHUGH J:	What about the managing director who, if he wanted to sue for breach of contract of his
employment, was also a shareholder?
MR FINKELSTEIN:	The nature of the claim does not spring

from his membership. The fact that in those

circumstances he is or was a member is either

irrelevant or so incidental as not to be relevant.

McHUGH J:  Even if the articles provide that he shall hold

the position, as articles frequently do, or used to

do.

MR FINKELSTEIN:  And often still do. The nature of the

claim has no relationship to his status as a member

and therefore cannot ever be characterized as

either a direct or indirect means of getting back

capital subscribed. In the case of a claim for

unpaid wages, there is no reason as a matter of

policy to prevent such a claim because in those

circumstances the claimant stands wholly equal to,

or equivalent to, other unsecured creditors of the

company, and again his membership is irrelevant in

that regard.

DEANE J:  Mr Finkelstein, while you are being interrupted,

could I take you to page 8 of the Liquidator's

Summary of Facts and Chronology.

MR FINKELSTEIN:  I have page 8.

DEANE J: The second category there, in terms and without

more, could lead to a situation where the allotment

was void.

MR FINKELSTEIN: Yes.

DEANE J:  What do we do about that?

MR FINKELSTEIN: Well, we do not address it; I accept, as a

matter of principle, that if circumstances exist

where a person - if there was no consensus that a

person was to become a member, then it may be that

he never became a member -

DEANE J: Subject to ratification.

MR FINKELSTEIN:  - subject to the question of

ratification and subsequent conduct.

Webb(2) 79

DEANE J: So, we need to confine any answers on the basis

that we are dealing with allotments which - - -

MR FINKELSTEIN: Are voidable, not void.

DEANE J: - - - were at worst, voidable?

MR FINKELSTEIN: Yes, and I think that it is fair to say

that all of the courts below have approached the

question on the voidable contracts and have not

addressed at all the issue whether there was a

class of persons who are not properly to be treated

as members, because there was never a contract or

there were other circumstances which deprived the

Building Society of ever saying they were members.

DEANE J: Well, one can think of many examples of

theoretical circumstances where the allotment would

be void and there would be a liquidated debt for

the amount of the allotment; that is the

subscription moneys.

MR FINKELSTEIN: Yes, there may well be. Yes, and category

two may at least highlight that such a class

exists.

DEANE J: That answers my question.

MR FINKELSTEIN:  The only other case I wanted to refer to at

the commencement on the question of what we
describe as a fundamental policy of company law

applied to limited liability companies, is

Ooregum Gold Mining Company of India v Roper,

(1892) AC 125, in the speeches of Lord Halsbury at

page 133 and Lord Macnaghten at 145. In a short

sentence at 133, Lord Halsbury says, at the bottom

of the page, last four lines:

The capital is fixed and certain, and every creditor of the company is entitled to look to that capital as his security.

And to a like effect is what Lord Macnaghten says

in his speech at 145, middle paragraph:

To sum the matter up, I cannot, I think,

do better than adopt the language Mr Buckley

has used in speaking of the Limited Liability

Acts.

And there is a quote:

"The dominant and cardinal principle of these

Acts," he says, "is that the investor shall

purchase immunity from liability beyond a

certain limit, on the terms that there shall

be and remain a liability up to that limit."

Webb(2) 80

Whether this liability is one of "the

conditions of the memorandum," within the

meaning of that expression in the Act of 1862,

as Lord Selborne seems to have thought, or a
condition attached by the Act to a company

limited by shares and of the essence of such a

company, though it may not be found contained

within the four corners of the memorandum, is
a matter of little or no importance.

The consequences of that principle that the rights of members are to be subordinated to the rights of

creditors, has resulted in the formulation of a

number of rules by the Court, some of which apply,

we would submit, to building societies.

The relevant rules, which are all under the

umbrella of maintenance of capital, subordinating
the rights of members to those of creditors, first,
the total consideration for a share must not be
less than par value; except when permitted by
statute and then only in special circumstances,

shares cannot be issued at a discount; dividends

must be paid out of profits and not capital; absent

shareholder sanction a company cannot reduce its

capital or return it to shareholders before a

winding up.

It follows from that principle, as a

sub-principle, that a company cannot purchase its

own shares, cannot be a member of its holding

company, and cannot provide financial assistance

for the purchase of its own shares. And as a last

subset of the principle, a shareholder cannot agree

to satisfy his liability for future calls by the

supply of goods and services must pay.

Now, it is true that some of the rules that I

have identified have been modified by statute but,

regardless of the modification, the policy of the

maintenance of capital is evident from the

provisions of the Companies Acts since 1862 and

perhaps goes back to the introduction of limited

liability for the first time in 1855. As I said

earlier, in our respectful submission, the

principle is this; that the maintenance of

capital, that is the subordination of the rights of

members to those of creditors, is the price of

limited liability.

Section 38 of the 1862 Act gives statutory

effect to that principle. It provides - it is in

vol 1, tab 1 of the folder of statutes - that:

every present and past Member of such Company

shall be liable to contribute to the Assets of

the Company to an Amount sufficient for

Webb(2) 81 MR FINKELSTEIN, QC 18/5/93

Payment of the Debts and Liabilities of the

Company, and the Costs, Charges, and Expenses

of the Winding-up, and for the Payment of such

Sums as may be required for the Adjustment of

the Rights of the Contributories amongst

themselves, with -

a number of qualifications. In the case of a

limited liability company, the qualification is

found in subsection (4). It is:

limited by Shares, no Contribution shall be

required from any Member exceeding the Amount,

if any, unpaid on the Shares in respect of

which he is liable as a present or past

Member.

At the same time then in the same section, subsection (7), it says that:

No Sum due to any Member of a Company, in his

Character of a Member, by way of Dividends,

Profits, or otherwise, shall be deemed to be a

Debt of the Company, payable to such Member in

a Case of Competition between himself and any

other Creditor not being a Member of the

Company.

That is not to deny the debt, or it is not to deny

the claim, it is just to subordinate the claim when

it is due to a member in his character as member.

McHUGH J:  Mr Finkelstein, in practice these days are there

many shares issued otherwise than is fully paid?	I
know it was the case once but it seems to have
dropped. It still is - - -

MR FINKELSTEIN: Yes, and often by publicly listed companies

on rights issues. They come partly paid - I paid a

call not too long ago, I just remember the name of

the company.	I would not say it was very common
but it is certainly not uncommon to have partly

paid shares - - -

MASON CJ: These are shares in which the price is payable by

instalments?

MR FINKELSTEIN:	By instalments, yes.
MASON CJ:	By way of calls made from time to time.

MR FINKELSTEIN: Yes. It is not very common in small

limited liability companies - - -

MASON CJ: But it was very common with trustee companies and

banks at one stage, was it not?

Webb(2) 82 MR FINKELSTEIN, QC 18/5/93

Mr FINKELSTEIN: Yes, yes. I think there are still lots of

publicly listed companies as opposed to public

companies that issue special classes of shares.	I
would not say that the dominant capital of any
publicly listed companies is anything other than
fully paid but there is a lot of publicly listed
companies that issue classes of shares which are
partly paid and calls are made from time to time and banks are still in that category.

McHUGH J: Yes, I was trying to think of some companies, but

I could not think of any of the publicly listed

companies that were in that category.	Anyway it
does not matter.

MR FINKELSTEIN:  I think I paid a call in bank share but I

will check that. One of the features of the

principle which we say is important in this case is

in relation to partly paid shares. When a call is

made on partly paid shares the obligation to pay

the call is to be satisfied by payment in full

without set off and the reason for that is clear in

our submission. If it was not payable in full

without set off, that is to say, where money was

owed by the company to the shareholder which he

sought to set off, he would receive payment in

effect by bringing about the set off when the

payment is - when his obligation is to contribute

capital to the company.

Now, this arises and has arisen, not

uncommonly, in calls made on shareholders after a

liquidation. Of course if there is any unpaid

capital then it is part of the asset of the company

and the Liquidator gets it in for the purposes of

pari passu distribution amongst creditors.

The rule is, and it is a clear rule, that in

those circumstances a shareholder must pay in full

without set off. Because if he does not do that he

deprives the body of creditors of portion of his

capital and gets repaid portion of his capital, in

fact ranking ahead of creditors, because he would

be paid in full or potentially ahead of creditors
because he would be paid in full in circumstances

where, if there was a deficiency, creditors would

rank pari passu for what is left.

So, it has been held in a number of cases, the lead case is Re Overend Gurney and Co, (1866),

1 Ch App 528, that no right of set off exists.

Lord Chelmsford, then the Lord Chancellor1 dealt

with the matter especially at 535.	The last
paragraph on 535 His Lordship says:

The two remaining questions may be

considered together. It appears to me to be

Webb(2) 83 MR FINKELSTEIN, QC 18/5/93

quite clear that the amount of the call not

paid cannot be set-off against the debt -

call due and debt due by the company to the

member -

The Act creates a scheme for the payment of

the debts of a company in lieu of the old

course of issuing execution against individual

members -

the old clause being applicable pre joint stock

companies -

It removes the rights and liabilities of

parties out of the sphere of the ordinary

relation of debtor and creditor to which the

law of set-off applies. Taking the Act as a

whole, the call is to come into the assets of

the company, to be applied with the other

assets in payment of debts. To allow a

set-off against the call would be contrary to

the whole scope of the Act. In support of

this view it will be sufficient to refer again

to the 133rd section as to the ~atisfaction of
the liabilities of the company pari passu.

And the argument against the allowance of a

set-off, addressed to the Court on behalf of

the official liquidators, is extremely

strong - that if a debt due from the company

to one of its members should happen to be

exactly equal to the call made upon him, he

would in this way be paid twenty shillings in

the pound upon his debt, while the other

creditors might, perhaps, receive a small

dividend, or even nothing at all.

The principle of that case and other related cases

is as expressed by Lord Selborne in Paraguassu

Steam Tramroad Company - the Court need not trouble

itself by getting the case, it is (1872) 8

Ch App 254 in a sentence at 259. His Lordship

said:

equities which might be good as between the

shareholder and the company cannot, after a

winding-up be set up against the creditors of

the company.

Not only is that an established principle in this

area, but it is clear enough from the authorities

that it is not possible to contract out of that

position. That is the principle that a member

cannot set off a debt due to him against the call

payable when the call is made by a liquidator,

cannot be contracted out of, as was sought to be

done in the Paraguassu Company itself, in that case

Webb(2) 84 MR FINKELSTEIN, QC 18/5/93

itself, and it was also made clear in a later

New Zealand decision, Re Harding & Co v Hamilton

(1929) NZLR 338, a decision of the Court of Appeal.

Now, in our respectful submission, it is the

principle of the protection of capital of a company

for the benefit of its creditors that led to the

rule enunciated in Oakes that it is too late after

a liquidation of a company for a shareholder to

rescind his contract for shares and thereby avoid

any liability that he may have, for example, for

unpaid calls as a shareholder, and at the same time

not be permitted to get back moneys subscribed by

reason of the rescission of his contract.

The Court knows now that Oakes v Turquand

confirmed that after liquidation, rescission of a

contract for subscription procured by fraud could

not be repudiated or rescinded. The principle, as

was made clear by the Lord Chancellor,

Lord Chelmsford, was derived from the effect of the

statute itself. That is the 1862 Act. He says

that at page 349 of his speech in the second-last

paragraph. By looking at the legislation itself

and in particular section 38 but not.limited to

section 38, the answer to the question that was

under consideration, whether rescission was

possible after liquidation, being no, was dictated

by the effect of the Act as a whole, in particular

the sections set out on page 349. Then after

referring to the sections His Lordship says:

The result of these provisions of the Act

is, that a contributory is a person who has

agreed to become a member of the company, and

whose name is upon the register.

At 353, after expressing his conclusions and

dealing with earlier authorities, he says in the

first full paragraph:

In the conclusion at which I have arrived

in this case I rely altogether upon the words of the Act. I do not take into consideration the principle which has governed many

decisions, as to which of two innocent persons

is to suffer -

So that His Lordship is looking at it not in terms

of, at least in a literal sense, competing

priorities to a fund, but speaking about the effect

of the new Companies Act. The effect of the new

Companies Act is that with the creation of limited

liability, the company tells the world what its

share capital is, it tells the world what its

paid-up share capital is. It tells the world that

by maintaining the appropriate registers which are

Webb(2) 85 MR FINKELSTEIN, QC 18/5/93

available for public inspection, and by that as a

matter of law holds out to the world what the state

of its capital is.

The members who subscribe that capital, which

is then held out to the world as being the capital
of the company, cannot, so Oakes v Turquand says,

get rid of that holding out. That is the relevance

of what His Lordship says at 348 when he quotes

from Henderson's case. The principle is really set

out in the adoption of the passage from Henderson's

case at the top of page 348:

It would be monstrous to say, he having become

a partner and a shareholder, and having held

himself out to the word as such, and having so

remained until the concern stopped payment,

could be repudiating the shares on the ground

that he had been defrauded, make himself no

longer a shareholder, and thus get rid of his

liability to the creditors of the bank, who

had given credit to it on the faith that he

was a shareholder.

McHUGH J: That reasoning does not apply to a building

society, does it?

MR FINKELSTEIN: Yes, it does, and I will take the Court to

the provisions which make it clear that, for no
relevant purpose, so far as permanent shareholders

are concerned, that is to say the non-withdrawable

shareholders here, the principle is identical

because the relevant legislation is, in all

material respects, the same.

McHUGH J: Well, did the creditors get a right to look at

the accounts in that?

MR FINKELSTEIN: Yes, and I will take the Court to that.

Unless the Court wants me to do that now, I will

get to comparing the provisions of the Building

Societies Act with the relevant provisions of the

Companies Acts to show why the point, if it is good

for companies, it is just as good for building

societies.

The result in Oakes is susceptible of two

explanations. Oakes gives one explanation, and

Tennent v City of Glasgow Bank seems to give

another explanation and, for our purposes, it may

not matter which is the correct explanation.

As I have tried to indicate to the Court,

Lord Chelmsford in Oakes said that the inability to

rescind is dictated by the Act itself. That is the

scheme of limited liability legislation. The

Earl Cairns, in Tennent, (1879) 4 App Cas 615, in

Webb(2) 86 MR FINKELSTEIN, QC 18/5/93

the passage to which my learned friend took the

Court, in the passage at 621, Earl Cairns said that

the reason for the rule is that:

Innocent third parties have ..... acquired

rights which would be defeated by its

rescission.

Now, there seems to be a disconformity between the two decisions about the rationale for the rule.

Oakes v Turquand itself seems to say that the

statute, the way that the statute itself operates,

that is the Companies Act, prevents rescission, and

the reason for that is that you defeat the purposes
of the Act on the one hand, or it might be that

Oakes v Turquand could be explained on holding out by the members of their membership to the word at large, which estoppes them from turning around

after liquidation to say that the capital that they

subscribed is, not available for distribution

amongst creditors.

Or, as the Earl Cairns says, the rescission

which, if allowed, would affect innocent third

parties should not be allowed for that reason. If

one ever has to get to looking at the American

cases, it is that sort of justification which plays

more in the mind of the American judges than does

the other explanations.

But it is important, in any event, to note

that Oakes v Turquand has been accepted. Leaving
aside Houldsworth and criticisms of Houldsworth,

Oakes v Turquand has never been queried as good

law. That is to say, there has been no dissent

from the principle in any common law country that

we are aware. It was accepted by implication by

the High Court in Elder's Trustee and Executor Co.

Ltd v Commonwealth Homes and Investment Co. (1941)

65 CLR 603, and by the Supreme Court of Canada in

Re North-Western Trust Co. (1926) 3 DLR 612. I want to say something very briefly about the

position in the United States because, whilst there

are dozens and dozens of cases on the point, it is

important to know where the point of difference

lies between the US decisions and the English and

Australian decisions on this question.

In most State jurisdictions in the United

States, there is no requirement for there to be a public register of shareholders or of capital.

That is not true of all jurisdictions. There has

been, for many years, federal legislation in the

United States for banks, and under the federal

legislation for banks there is a public register of

shareholders maintained by the banks. There does

Webb(2) 87 MR FINKELSTEIN, QC 18/5/93

not seem to be any equivalent in the States of the registration provisions of the old Companies Acts.

The American cases, when they look at Oakes v

Turquand - forget about Houldsworth for the minute,

but just when they look to Oakes v Turquand - do one of a number of things: some cases follow it

completely; Hinkley v Sac Oil & Pipeline Co,

107 NW 629 and Meholin v Carison, 107 PR 755,

follow Oakes v Turquand. The case of Upton v

Eaglehart, (1874) 28 Fed Cas 835 - it is the case

my learned friend referred to - draws attention to

the fact that in the United States there is, under

State jurisdictions, no public register.

The point of difference in the bulk of the

American cases that do not follow Oakes to the

letter - and lots of them do not - is the view by

the American courts that the fact of liquidation by

itself does not justify the rule "no rescission",

what is important is that somebody will be

adversely affected by the rescission, if it is to

be allowed. So what the bulk of the American cases

hold is that if, after subscription procured by

fraud, creditors come into existence, it is that

fact which bars the rescission, not the liquidation

itself.

That is to say, what the American cases do is

to look at, if I might say so without being

disrespectful to what the English cases have done,

the justice of the position to see whether or not,

as a result of a rescission, anybody would be

adversely affected. If there are no new creditors, nobody would be adversely affected, therefore there

is no reason in principle to disallow rescission;

but if there are new creditors, then there is every reason in principle to disallow rescission and they disallow it.

But, as I said earlier, there is federal

legislation dealing with banks which require banks
to maintain a public register.	The dozens and

dozens of cases that you can find in the American

reports on Oakes v Turquand, to a very large

extent, deal with the State position under State

laws. There are two decisions in the United States

Supreme Court - old - but two decisions of the
Supreme Court which deal with the question of banks

which have a public register, and they adopt the

principle of Oakes; they say that liquidation bars

rescission.

Now, I should say one other thing about the

United States cases, because there is an issue that

arises, if you look at them, and we have not been

able to find the answer. The bulk of the cases -

Webb(2) 88 MR FINKELSTEIN, QC 18/5/93

and really there are dozens - predate the 1930s,

and there does not seem to be any modern statements

of either the principle or the problem.

McHUGH J:	What about the textbooks?
MR FINKELSTEIN:	I have got a 1985 textbook, with a 1991

supplement, and it does not help. It turns out

that it really is the most useful discussion of the

cases in the United States. I have provided the

Court - I hope the Court has got it, I should have

said so at the beginning - with a blue folder. I

should have said that there are outlines in it and

I did not.

MASON CJ: Yes, we have it.

MR FINKELSTEIN:  The Court has that. There is in that

folder, what we understand to be, and we say no

more than it is our belief, an extract from - our

understanding is relation to the nature of the text

- one of the leading company texts in the United

States, Fletcher Cyclopedia of the Law of Private

Corporations, and we have got an extract from

volume 12A - I think it is about a 20 volume work -

and unfortunately, I think, there are only three of

the 20-odd volumes available in this country that

we have been able to discover, Macquarie - anyhow,

that is as up-to-date a text as we have been able

to find, and it discusses generally the question of

rescission - - -

MASON CJ:  Mr Finkelstein, I think we will adjourn at this

stage and - - -

MR FINKELSTEIN:  - and I will continue the lecture

tomorrow.

MASON CJ:  You can give us a lecture tomorrow. But you

might give us the lecture in Courtroom No 1, I

think.	We will adjourn to Courtroom No 1 and we
will resume at 10.15 am.

AT 4.16 PM THE MATTER WAS ADJOURNED

UNTIL WEDNESDAY, 19 MAY 1993

Webb(2) 89 18/5/93