Western Australia v Bond Corporation Holdings Ltd (No 2)

Re: STATE OF WESTERN AUSTRALIA
And: BOND CORPORATION HOLDINGS LTD; WARDLEY AUSTRALIA LIMITED; LAWRENCE ROBERT
CONNELL; WARDLEY AUSTRALIA SECURITIES LIMITED; ROTHWELLS LIMITED (In
Liquidation) and JAMES PHILLIP YONGE
Nos. WA G115, 116 and 118 of 1990
FED No. 545
Practice and Procedure - Corporations - Bankruptcy
(1992) 10 ACLC 1349
(1992) 37 FCR 150
(1992) 114 ALR 275

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Practice and Procedure - trade practices - misleading or deceptive conduct - company in liquidation - leave to cross-claim - rule against double proof - whether cross-claimant creditor under scheme of arrangement - application for leave to proceed against State Crown - Crown Suits Act 1947 (WA) - whether "just" to grant leave - motions for stay and confidentiality orders - contemporaneous criminal proceedings - relevant factors.

Corporations - winding up - leave to proceed - rule against double proofs - rationale - extent of rule.

Bankruptcy - rule against double proofs - rationale - extent of rule.

Trade Practices Act 1974 ss.52, 82, 87

Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 s.7

Companies (Western Australia) Code s.360(1)(k)

Crown Suits Act 1947 (WA) s.6(3)(a)

Day and Dent Constructions Pty Ltd v. North Australian Property Pty Ltd (1982) 150 CLR 85

In Re Oriental Commercial Bank; Ex parte European Bank (1871) Ch App 99

Banco de Portugal v. Waddell (1880) App Cas 161

Re Sass; Ex parte National Provincial Bank of England (1896) 2 QB 12

Re Moss Ex parte Hallett (1905) 2 KB 307

Re Melton; Milk v. Towers (1917) 1 Ch 37

Re Fenton Ex parte Fenton Textile Association Ltd (1930) 1 Ch 85

Deering v. Bank of Ireland (1886) 12 App Case 20

Re Hoey (1919) 88 LJKB 273

The Liverpool (No. 2) (1963) P 64

Barclays Bank Ltd v. T.O.S.G. Trust Fund Ltd (1984) WLR 49

Houldsworth v. City of Glasgow Bank and Liquidators (1880) 5 App Cas 317

Re Dividend Fund Incorporated (In Liquidation) (1974) VR 451

Re Addlestone Linoleum Company (1887) 37 Ch D 191

McMahon v. Gould (1982) 7 ACLR 202

Camerons Unit Services Pty Ltd v. Kevin R. Whelpton Associates (Australia) Pty Ltd (1984) 4 FCR 428

Uni-Lab Communication Ltd v. Wright (unrep Sup Ct WA 27/1/89)

Deputy Federal Commissioner of Taxation v. Alvaro (1990) 90 ATC 4744

HEARING

PERTH

#DATE 30:7:1992

Counsel for the State of Western Australia: Mr R. Cock

Solicitors for the State of Western Australia: Crown Law Department

Counsel for Bond Corporation Holdings Ltd: Mr A. McCarthy

Solicitors for Bond Corporation Holdings Ltd: Parker and Parker

Counsel for Wardley Australia Limited Mr J. Chaney on 3 July 1992;
and Wardley Australia Securities Ms A. Kennedy on 7 July 1992
Limited:

Solicitors for Wardley Australia Limited Northmore Hale Davy and Leake
and Wardley Australia Securities Limited:

Counsel for Mr L.R. Connell: Mr W. Martin

Solicitors for Mr L.R. Connell: Jackson McDonald

Counsel for Rothwells Limited Mr C. Zelestis QC on 3 (In Liquidation): July 1992 and Mr G. Murphy on

7 and 8 July 1992

Solicitors for Rothwells Limited Blake Dawson Waldron
(In Liquidation):

Counsel for Mr J.P. Yonge: Mr M. Bennett and Mr G. Dean

Solicitors for Mr J.P. Yonge: Bennett and Co.

Counsel for KMG Hungerfords: Mr P. Clifford

Solicitors for KMG Hungerfords: Freehill Hollingdale and Page

Mr P.K. Lucas appeared on his own behalf.

Mr D.G. Hurley appeared on his own behalf.

Counsel for Mr P.R. Gallagher: Mr D. Goodman on 3 July 1992,

Mr I. Freeman on 7 July 1992

Solicitors for Mr P.R. Gallagher: Phillips Fox

ORDER

THE COURT ORDERS THAT:

A. On the first respondent's motion filed 5 May 1992:

1. The first respondent have leave to cross-claim against Rothwells

Limited (In Liquidation) by way of cross-claim in this action notwithstanding the order of the Supreme Court of Queensland to wind up Rothwells Limited dated 22 September 1989.

2. Any judgment obtained by the first respondent against Rothwells

Limited (In Liquidation) in these proceedings shall not be enforced without the leave of the Court.

3. The costs of the motion be in the cause.

B. On the second and fourth respondents' motion filed 4 May 1992:
1. The second and fourth respondents have leave to cross-claim

against Rothwells Limited (In Liquidation) by way of cross-claim in this action notwithstanding the order of the Supreme Court of Queensland to wind up Rothwells Limited dated 22 September 1989.

2. Any judgment obtained by the second and fourth respondents

against Rothwells Limited (In Liquidation) in these proceedings shall not be enforced without the leave of the Court.

3. The costs of the motion be in the cause.

C. On the sixth respondent's motion filed 4 May 1992:
1. The sixth respondent have leave to cross-claim against Rothwells

Limited (In Liquidation) by way of cross-claim in this action notwithstanding the order of the Supreme Court of Queensland to wind up Rothwells Limited dated 22 September 1989.

2. Any judgment obtained by the sixth respondent against Rothwells

Limited (In Liquidation) in these proceedings shall not be enforced without the leave of the Court.

3. The costs of the motion be in the cause.

D. On the second and fourth respondents' motion filed 15 May 1992:
1. The second and fourth respondents have leave to cross-claim

against the applicant in terms of the proposed cross-claim filed herein.

2. The applicant pay the second and fourth respondents' costs of

the motion unless within seven (7) days it files submissions seeking a different order.

E. On the third respondent's motion filed 10 June 1992 seeking a

stay and confidentiality orders:

1. The motion is dismissed.

2. The parties be at liberty to file short written submissions

within seven (7) days on the question of costs.

F. On the motion of KMG Hungerfords filed 9 June 1992 seeking a

stay and confidentiality orders:

1. The motion is dismissed.

2. The parties be at liberty to file short written submissions

within seven (7) days on the question of costs.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This litigation between the State of Western Australia and parties said to have been involved in the attempted financial rescue of the merchant bank, Rothwells Limited, in October 1987 has reached the point at which defences and cross-claims have been filed and some particulars requested. In May and June 1992 motions were filed by certain of the parties seeking leave to proceed by way of cross-claim against Rothwells which is in liquidation and out of time against the State of Western Australia pursuant to the Crown Suits Act 1947 (WA). Motions were also filed by Lawrence Robert Connell and by KMG Hungerfords, which is the subject of cross-claims, seeking stay orders and alternatively confidentiality orders pending the hearing and determination of criminal proceedings against Connell and one of KMG Hungerfords' partners, Louis Carter, who is said to have been involved in the audit of the Rothwells 1987 accounts. A stay order is also sought by Peter Lucas, a former director of Rothwells who faces criminal charges with Messrs. Connell and Carter. Argument on the motions was heard on 3, 7, 8 and 9 July 1992 and judgment reserved until today.

The Claim and Cross-Claims

By its amended statement of claim filed on 25 February 1992, the State of Western Australia claims damages for misleading or deceptive conduct against Bond Corporation Holdings Ltd ("Bond"), Wardley Australia Limited, Wardley Australia Securities Limited (together referred to as "Wardleys") and Rothwells Limited (In Liquidation) ("Rothwells"). It also claims damages against Lawrence Robert Connell and James Phillip Yonge for their alleged involvement in the misleading or deceptive conduct of the corporate respondents. Connell was at the relevant time a director of Rothwells and Yonge a director of the two Wardley companies. A claim is also made against Wardleys and Yonge for damages for negligent mis-representation and against Connell for damages for deceit. What follows is a short summary of the principal allegations and does not involve any finding of fact.
The claims arise out of the participation by the State in an arrangement made in October 1987 to provide financial support to the merchant bank, Rothwells. The arrangement became known as the "Rothwells Rescue". The National Australia Bank, as part of the rescue, advanced to Rothwells a sum of $150 million supported by a Deed of Indemnity allegedly entered into by the State on 26 October 1987. By that Deed the State is said to have undertaken to hold the Bank indemnified against any net loss which might arise from the grant by it of financial accommodation of up to $150 million to Rothwells. Various misrepresentations and non-disclosures by the respondents are said to have induced the State to enter into the Deed. Rothwells drew down the facility to the full extent of $150 million and repaid that sum to the Bank on 17 October 1988. On 3 November 1988 a petition for the winding up of Rothwells was presented in the Supreme Court of Queensland and provisional liquidators appointed. On 22 September 1989 an order was made in that Court for the winding up of Rothwells.
Following their appointment the provisional liquidators contended that the repayment of $150 million to the National Australia Bank constituted a preference and demanded repayment of that sum from the Bank. On 17 March 1989 it is said that the Bank asked the State to indemnify it in respect of the provisional liquidators' demand. In so doing it is said that the Bank alleged that the State would eventually be obliged to do so in accordance with the terms of the indemnity. The State denied liability, arguing that the repayment to the National Australia Bank had discharged its liability. The State now says that there was a significant risk that the provisional liquidators would have succeeded if they had sued the Bank and that in that event there was a risk that the Bank could successfully have sued the State under the indemnity. The disputes between the State and the Bank and between the provisional liquidators and the Bank are said to have been settled by a Deed of Settlement between the State and the provisional liquidators of Rothwells dated 3 May 1989 and another Deed of Settlement of the same date between the State and the National Australia Bank. These deeds required the payment of $33 million by the State to the provisional liquidators on 30 May 1989 and a payment of $10.5 million by the National Australia Bank to the State on 8 December 1989. The State alleges that the loss it thereby suffered was the result of the conduct of the various respondents to which reference has already been made. The loss claimed is the sum of $22.5 million and interest on the sum of $33 million between 10 May 1989 and 8 December 1989.
Defences were filed by all respondents by the first week in May 1992. A cross-claim was made by Bond against Wardleys, Connell, Rothwells and Yonge. The cross-claim against Rothwells is subject to the requirement for leave before it can proceed further. Cross-claims were filed by Wardleys against Bond, Connell, KMG Hungerfords, the former auditors of Rothwells, and Peter Kenneth Lucas, Peter Robert Gallagher, John Michael Hilton and David George Hurley who are all former directors of Rothwells. Connell has cross-claimed against Bond, Wardleys, Yonge and KMG Hungerfords. Yonge has cross-claimed against Bond, Lucas, Gallagher, Hilton and Hurley. Bond has filed defences to the Connell, Wardleys and Yonge cross-claiMs
On 3 July 1992 I made orders on a motion filed by Bond that it have leave to join KMG Hungerfords as a cross respondent and have leave to amend its defence and cross-claim with leave to make further amendments to more fully plead the claim against KMG. The order so far as it relates to the cross-claim against Rothwells is subject to the grant of leave to proceed against that company. Bond filed a motion on 5 May 1992 seeking such leave. Wardleys sought similar orders by a motion filed 4 May 1992, as did Yonge by a motion filed on the same day. All these motions were opposed.
The Proposed Cross-Claims against Rothwells
Bond, on 4 May 1992, filed its defence and cross-claim and has named Rothwells as a cross-respondent. Bond alleges that in so far as it made any of the misleading statements pleaded in paras. 18(a) to (e) and 30(a), (b) and (d) of the amended statement of claim, it merely passed on information passed on to it by the cross-respondents and/or obtained from the Rothwells' 1987 accounts. It says it relied upon the truth and accuracy of the information given to it by the cross-respondents and that their conduct in passing that information on to it was misleading or deceptive in contravention of s.52 of the Trade Practices Act 1974. To the extent that it is found liable to the State in the principal action, the company says it will have suffered loss and damage on account of that conduct. By an additional and alternative claim, Bond says that if it is found liable to the State and one or other of the cross-respondents is also found liable to the State, then it is entitled to contribution from those cross-respondents. On that basis it claims indemnity or contribution from each of the other parties who are named as cross-respondents and alternatively damages and interest in the same amount as is claimed by the State.
The proposed Wardleys cross-claim characterises the State's claim against Wardleys and Rothwells for damages under s.82 of the Trade Practices Act and against Wardleys for negligent mis-representation as claims in tort. If the State should make out its causes of action against Rothwells and Wardleys then, it is said, they would be tortfeasors within the meaning of s.7 of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947. On this basis it is said Wardleys would be entitled to contribution or indemnity from Rothwells. The proposed cross-claim goes on to refer to the Rothwells' Annual Report for 1987 and the accounts contained in it. Various aspects of the accounts are pleaded to which concern shareholder funds, total deposits, receivables, bad and doubtful debt provisions, pre-tax operating profits, profits available for appropriation and the absence of any indebtedness to Rothwells by Connell or entities in which he had financial interests. These elements are collectively designated the "Rothwells Representation". The representation is said to have been made in order to induce persons to purchase shares in Rothwells, provide financial assistance for its benefit, have financial dealings with it or give advice about Rothwells to investors or other persons proposing to deal with it. In the circumstances, Rothwells is said to have been under a duty of care in the making of the Rothwells' representation to Wardleys.
Wardley Australia Securities says that on the faith of the representations it entered into an underwriting agreement under which Rothwells was to offer its shareholders the right to purchase shares in Rothwells with a total value of $150 million. If any of the issued shares were not subscribed for by Rothwells' shareholders by 14 January 1988, then Wardley Australia Securities would subscribe and pay for or alternatively procure subscription and payment for those issued shares on that date. It is also said to have been a term of the underwriting agreement that sub-underwriting agreements would be entered into between Wardley Australia Securities and third parties which together would discharge Wardley Australia Securities' liability to subscribe and pay for all but about $2,500,000 in value of the issued shares. If any sub-underwriter defaulted Wardley Australia Securities would be liable to subscribe and pay for or alternatively to procure subscription and payment for that defaulting sub-underwriter's issued shares. Rothwells was to pay to Wardley Australia Securities a fee of $4.5 million in consideration of it entering into the underwriting agreement. Wardley Australia Securities says it performed its obligations under the agreement and entered into various sub-underwriting agreements on or about 25 October 1987. On 14 January 1988 it subscribed for 2,649,334 of the issued shares for a total price of $2,492,654.50, which it paid to Rothwells on or about that date. It says that one of the sub-underwriters defaulted, as a result of which Wardley Australia Securities paid for that sub-underwriter's portion of issued shares for a price of $2,143,680. Further, it is said, that in reliance on and induced by the Rothwells Representation, Wardley Australia advanced to Rothwells a sum of $7.5 million to be repaid in or about June 1989. The Rothwells Representation is said to have been false in various respects and known to Rothwells to have been false. Rothwells is also said to have breached its duty of care to Wardleys. Wardley Australia Securities says that although it traded some of the issued shares it had subscribed for, it suffered loss and damage of $4,180,247. Wardley Australia says as a result of the loan agreement it has suffered loss of $7,571,064.90. This aspect of the claim has, however, now been abandoned as the loan amount has been admitted to proof in the winding up.
It also complains that Rothwells failed to pay to it a sum of $1.5 million due in respect of fees on the underwriting agreement. But this claim too has now been admitted to proof. Both companies claim damages by way of compound interest on the share trading losses. Wardleys say that if they made representations and engaged in misleading or deceptive and negligent conduct , then the representations were made and the conduct occurred by reason of their reliance on the Rothwells Representation. On this basis they say they would be entitled to be indemnified by Rothwells.
Yonge's proposed cross-claim begins with the plea that the State's claim against Rothwells under s.82 of the Trade Practices Act is a claim in tort. The claims against Yonge for damages under s.82 and for negligent misrepresentation are also thus characterised. If the State's claim is made out against Rothwells and Yonge then, he says, they would be tortfeasors within the meaning of s.7 of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947. On that basis Yonge, like Wardleys, says he would be entitled to contribution from Rothwells.
Like Wardleys, Yonge also pleads the Rothwells Representation by reference to the 1987 annual report and accounts and asserts the existence of a duty of care owed to him by Rothwells. He also alleges that the Rothwells Representation was made fraudulently and in breach of Rothwells' duty of care to him. If, contrary to his denials, he is found to have made the representations and engaged in misleading or deceptive conduct or negligent mis-statement as alleged by the State, then all those representations were made and the conduct occurred by reason of his reliance upon the Rothwells Representation. On this basis Yonge says he would be entitled to be indemnified by Rothwells.
Evidence in Relation to the Cross-Claims against Rothwells
Before turning to the matters raised by Rothwells against the grant of leave, it is necessary to refer to evidence relied upon by the company's liquidators. This was set out in an affidavit of Paul Kenneth Bailey from the accounting firm, Ferrier Hodgson and Co., who has been assisting the former provisional liquidators, now joint liquidators of Rothwells, Messrs. Tuckey and Ferrier during the period 3 November 1988 to 22 September 1989 when they were the provisional liquidators and since the winding up order was made. His affidavit was neither objected to nor disputed.

Bailey referred to the Deed of Indemnity between the State and the National Australia Bank, the draw down by Rothwells on 27 October 1987 of $150 million on the National Australia Bank facility and the repayment of that sum on 17 October 1988. On 3 May 1989, Rothwells and its provisional liquidators entered into a Deed with the State which recited, inter alia, that the company intended to propound a scheme of arrangement under which the claims of creditors arising before 3 November 1988 would be admissible to proof in the event that it was wound up. Depositors with such claims would receive 100 cents in the dollar to the extent that the amounts owed to them did not exceed $1 million as at 3 November 1988. Other ordinary unsecured creditors would receive such dividends as were capable of being paid on the claims at 3 November 1988. The claims of all creditors which arose before 3 November and which were admissible to proof under the scheme would be barred. The recital referred to the repayment of the $150 million to the NAB. Recital J went on:

"For the purpose of facilitating the Scheme and conditionally upon its approval and without any admissions on the part of any of the Company, the Provisional Liquidators or the State, the State has agreed, as the creditor's indemnifier, to pay to the Provisional Liquidators the sum of $33,000,000 (which amount together with any interest accrued under clause 3 of this Deed is called the "Fund") on the terms and conditions herein contained."

By the Deed the State agreed to pay to the provisional liquidators $33 million after the conclusion of a meeting of creditors convened by leave of the Court to consider the proposed scheme. The State would support the scheme and procure the support of the National Australia Bank for it. Upon the Deed becoming unconditional the liquidator would distribute $10,490,000 by way of payment of interim dividend to the State Government Insurance Commission of Western Australia and the Rural and Industries Bank of Western Australia pro rata according to the value of their respected admitted proofs of debt in the liquidation of the company.

The Deed was expressed to be conditional upon approval of the Supreme Court of Queensland for the scheme, the making of a winding up order for the company and the approval of the Supreme Court of Queensland for the compromise contained in the Deed with the State.
The Deed of settlement between the National Australia Bank and the State of Western Australia made on 3 May 1989 recited, among other things, the advance of $150 million to Rothwells by the Bank, the repayment of that amount, the contentions of the provisional liquidators that it constituted a voidable preference and the existence of a dispute between the State and the Bank in relation to the indemnity. By the Deed the State undertook to indemnify the Bank in respect of any liability on its part to repay to the liquidator any part of the $150 million or interest on it and all legal and other costs properly incurred by the Bank up to 21 April 1989 in relation to the payment or litigation connected with it. The State agreed to use all reasonable endeavours to procure a duly executed release of the Bank from the liquidator in a form annexed to the agreement. Upon such a release being obtained the Bank would, upon receipt of the release, pay to the State a sum calculated in accordance with cls.4, 5 and 6 of the Deed. Relevantly cl.5 provided that where the State paid to the liquidator some consideration for the release any amount without an entitlement in the State to prove in the winding up and the agreed net amount was not less than $33 million, then the Bank's contribution would be $10.5 million. The Deed embodied mutual releases by the State and the Bank of each others liabilities (cls.11 and 12).
In an explanatory memorandum sent to creditors of Rothwells explaining the proposed scheme of arrangement and supporting documents, it was said at p 20:L

"The State of Western Australia as the indemnifier of National Australia Bank has agreed to compromise the claim which the Provisional Liquidators allege may be made against the Bank by the State paying $33,000,000 to the Provisional Liquidators in full and final satisfaction of those claims and without any entitlement on its part or on the part of the Bank (so far as the preference recovery is concerned) to participate in the Scheme. As the Bank will not prove under the Scheme (with respect to the alleged preference payment) that settlement represents an effective recovery of $90 million to $100 million given the estimated dividend under the Scheme. The settlement reduced the dividend under the Scheme by approximately 6 cents in the one dollar. A condition of the agreement with the State is that State Government Insurance Commission of Western Australia and the R and I Bank receive an immediate interim payment of the dividends due to them as Creditors of $10,490,000 being the estimated incremental dividend receivable by those government instrumentalities as a result of the recovery of that $33,000,000. The National Australia Bank remains an unsecured creditor for its overdraft to the Company of approximately $3.9 million."

According to Mr Bailey's evidence the conditional compromise of the alleged National Australia Bank preference claim was on the basis that:

(a) A preference claim by the liquidator against the National Australia Bank would not be straightforward and should be discounted to reflect uncertainties of recovery.

(b) A reasonable notional discount might be 33% leaving a debt of $100 million rather than $150 million and the recovery of $100 million as a preference.

(c) The then maximum possible dividend expected to be available to creditors and depositors assuming that preferential treatment of depositors and small creditors as contemplated in the scheme was in the order of 67 cents so that if a preference on a notional debt of $100 million were recovered, it would pay a dividend on the debt of $67 million.

(d) Rather than have the Bank repay $100 million and prove for that amount and receive $67 million as a dividend, the liquidators of Rothwells would be paid the difference being $33 million immediately.

(e) The State would pay $33 million to the liquidators in full and final settlement of the National Australia Bank preference claim and without any entitlement on the part of the State or the National Australia Bank (so far as the preference recovery was concerned) to participate in the proposed scheme. National Australia Bank would not prove under the proposed scheme with respect to the alleged preference payment.

The Supreme Court of Queensland gave leave on 4 May to the provisional liquidators to convene meetings of creditors to consider the scheme of arrangements. Meetings held between 25 May and 29 May 1989 approved, subject to minor amendments, the proposed scheme set out in the Explanatory Memorandum. On 30 May 1989 the State paid the sum of $33 million to the provisional liquidators in accordance with cl.1 of the Deed of settlement. The Supreme Court of Queensland subsequently approved the proposed scheme of arrangement. The core provision of the scheme of arrangement is in Part C entitled "THE SCHEME". The relevant clauses of that part are as follows:
"C. THE SCHEME

1. The claims of Creditors and Depositors including interest thereon shall be valued as at the Fixed Date.

2. The Liquidator shall be entitled to admit claims of Creditors and Depositors to proof in the liquidation of the Company and to make payments to Creditors and Depositors under this Scheme notwithstanding that such claims otherwise would not be admissible to proof in the liquidation of the Company.

3. Subject to the payment of the claims of Preferential Creditors and the Small Trade Creditors the Liquidator shall distribute the funds available for the payment of the claims of the Creditors and Depositors in the following order or priority:-

(a) firstly, in payment to the Participating Depositors of such amount not exceeding 100c in the one dollar pro rata according to the amount of the debts due and owing to them by the Company at the Fixed Date; and

(b) secondly, in payment to the Participating Creditors pro rata according to the amount of the debts due and owing by the Company to them and/or the amount of their claims against the Company valued as at the Fixed Date.

.

.

.

5. The Participating Creditors and the Participating Depositors shall accept their entitlements under this Scheme in full satisfaction and complete discharge of all debts or claims which they have or claim to have against the Company as at the Fixed Date together with such interest as may have accrued or which may after the Fixed Date accrue on those debts or claims and each of them will, if called upon so to do, execute and deliver to the Company such forms of release of any such debt or claim as the Liquidator requires.

6. This Scheme may be pleaded by the Company against any Creditor or Depositor in bar of any debt or claim arising by reason of any act matter or thing occurring prior to the Fixed Date and whether or not that debt or claim is or is not admitted or established in the liquidation of the Company pursuant to the provisions of the Code as modified by this Scheme BUT nothing in this Scheme shall preclude any Creditor or Depositor from seeking leave to commence or proceed with any action or civil proceeding against the Company or other civil proceeding in respect of such act matter or thing or from commencing or proceeding with an action or civil proceeding for which such leave has been granted for the purpose of establishing any debt or claim against the Company in the liquidation."

In Part A of the Scheme of Arrangement various definitions were set out including a definition of the term "Creditors" as follows:

"Creditors means any person who has or claims to have

any claim against the Company arising out of or having its origin in any matter occurring prior to the Fixed Date or arising out of any transaction, act or omission of the Company or of any person before the Fixed Date whether the claim be present or future, certain or contingent (and, in the case of contingent claims, irrespective of the nature or the contingency and which shall include claims contingent upon the crystallisation of a liability to make a payment to the Liquidator under s.451 of the Code) or whether liquidated or sounding only in damages and whether in contract or in tort or otherwise howsoever arising other than:-

(a) a secured creditor to the extent of its security and including therein any creditor who is the lessor of any personalty;

(b) Preferential Creditors;

(c) Depositors;

(d) Small Trade Creditors; and

(e) any person having a claim in respect of which the Company is entitled to indemnity under a policy of insurance to the extent of the amount recoverable under such policy in respect of such claim. BUT including those persons shown to be depositors in the Company's Register of Depositors as at the Fixed Date in respect of so much of their claim or claims for both principal and interest against the Company as at the Fixed Date as exceeds or in aggregate exceed the sum of $1,000,000.00."

On 12 October 1989 the liquidators called for proofs of debt and on 31 October received a proof of debt from the State in the amount of $130,993.15 described as "fees relating to State Government indemnity for $150 million to NAB". By a Deed between the State and the liquidators dated 27 October 1989 they acknowledged that they were obliged to make the payments required by cl.5 of the Deed of 3 May 1989 between the company, themselves as its joint provisional liquidators and the State satisfied a condition precedent contained in that Deed. On 6 December 1989 the liquidators entered into a deed with the National Australia Bank which, in consideration of the payment by the State of the sum of $33 million, released the Bank from all further claims or demands against it by the liquidators. The Bank acknowledged and agreed with the liquidators that it was not entitled to prove in the liquidation of the company in respect of the payment of $33 million by the State. That deed was approved by the Supreme Court of Queensland on 4 December 1989.
In January 1991, the liquidators agreed to leave being granted to the State to bring its application against Rothwells on terms that the State would not enforce or seek leave to enforce any judgment obtained against Rothwells in respect of its claim for $22.5 million until all other creditors of the company had been paid in full. This agreement is embodied in a deed dated 29 January 1991. The liquidators offered similar terms to Bond, Wardleys and Yonge, but these offers were rejected.
It is Mr Bailey's evidence that in the negotiations to compromise claims by and against Rothwells, the best estimate of the likely dividend payable to creditors entitled to prove in the winding up was an important element. The amount of $10.49 million was paid by the liquidators to or at the discretion of the Rural and Industries Bank of Western Australia and the State Government Insurance Commission on 31 October 1989. That sum was calculated on the basis of the best information then available as to the likely dividend payable in the winding up. At the time of the negotiations the State had been sent the provisional liquidators' report to creditors which showed a total sum of unsecured creditors claims as $407.9 million. The State, it is said, was also aware that the estimated net unsecured claim of the Commission was for $70 million and that of the R. and I. Bank was for $12 million. The $10.49 million represents the additional dividend payable to the R. and I. Bank and the SGIC as a result of the payment of the sum of $33 million by the State without any deduction for the costs and expenses of liquidation. Had the claim of the State for damages in the sum of $22.5 million and the cross-claims been foreshadowed prior to 3 May 1989, the likely dividend to the R. and I. Bank and SGIC would have taken that claim into account and the dividend would have been assessed at less than $10.49 million. The provisional liquidators would not have agreed to the compromise deed on its current terms and in particular to the immediate payment out of $10.49 million to the two State instrumentalities. Furthermore, had the State's claim for damages and the cross-claims been foreshadowed before 19 July 1989, the provisional liquidators say they would not have asked the Court to approve the proposed scheme of arrangement, nor would the liquidators have approved the conditional compromise of the National Australia Bank's preference claim, nor taken the other steps which they took to enable the scheme of arrangement to become unconditional.
A compromise deed between Rothwells, the R. and I Bank and the provisional liquidators made on 17 July 1989 was facilitated by the estimate of the likely dividend to unsecured creditors. Had the provisional liquidators been aware that the State proposed to make a claim for damages, they would necessarily have had to take that into account in calculating a likely final dividend. In many other cases it is said the provisional liquidators were able to compromise disputed claims of creditors and others on terms that they would be admitted to proof in an agreed sum and be paid dividends in the normal course. In all such cases the claimants have been given an assessment of the likely dividend which did not take into account any claim by the State or any cross-claim by the respondents. These claims, had the liquidators known of them, must necessarily have reduced the estimate of the likely dividend. The liquidators, according to Mr Bailey, believe it is likely that a number of those claims would not have been compromised on the terms agreed at the time had the liquidators been aware of the claim by the State and the cross-claimants. The provisional liquidators have also compromised a claim against Connell by a deed dated 17 January 1989 and a supplemental deed of 6 July 1989. At the time they had no notice of any potential claim by the State.
Small creditors and small depositors have been paid in full. There is no prospect of remaining creditors receiving 100 cents in the dollar. Without taking into account the costs of the pending proceedings, the likely dividend to creditors is presently in the order of 50 cents in the dollar. If the cross-claimants become entitled to prove in respect of the $22.5 million claimed by the State, the likely dividend will be reduced to about 46 cents in the dollar.
If leave is granted to the proposed cross-claimants it will, according to Mr Bailey, be necessary for the liquidators to make provisions for the claims in the event that dividend equalisation payments are required. As an interim dividend of 5 cents in the dollar has already been paid to admitted remaining unsecured creditors, a provision of 5 cents in the dollar in relation to the State claim and the Wardleys' claims will have to be made. The money set aside for those provisions would be unavailable for future dividends to unsecured creditors until the proposed cross-claims are resolved and further provisional dividends will have to be made. Further it is said that the claims by Wardleys for $7,756,064.90 and $1.5 million were the subject of proofs of debt in the scheme of arrangement. Following receipt by the liquidators of those proofs of debt, it was agreed to admit the claim for $7,567,418 and reject that for $1.5 million on the basis that Wardleys would not object to or appeal against a rejection of the $1.5 million claim.
According to Mr Bailey a large amount of additional resources and costs will have to be devoted to the defence of the cross-claims if leave is granted other than on terms that the cross-claimants are not entitled to prove in the liquidation of Rothwells until all other dividends are paid in full.
Rothwells' Contentions in Relation to the Cross-Claims
Rothwells contend that:

(a) The State's claim against all the respondents is for a loss which is not provable in the Rothwells' liquidation because proof of such a loss would offend the rule against double proof. As formulated in the submission, the rule is that dividends will not be paid in respect of different claims which relate to what is in substance the same debt. The existence and extent of the State's loss is dependent upon and referable only to Rothwells' liability by way of dividend to the National Australia Bank on the National Australia Bank's proof for the "returned preference".

(b) The cross-claimants are seeking to pass on to Rothwells by way of contribution or indemnity their liability to the State for a loss which the State cannot recover from Rothwells.

(c) Since the State's loss is of a kind which cannot be proved in the Rothwells' liquidation, the cross-claimants equally cannot prove in the liquidation for a judgment against Rothwells based directly or indirectly on its liability for the State's loss.

(d) Leave to proceed should be refused as the proposed cross-claim is futile.

Rothwells says there is no prejudice to the cross-claimants if leave to cross-claim is refused. It is said to be a corollary of the rule against double proof that where a creditor proves and recovers in a liquidation, neither that creditor nor its surety can recover in respect of what is in substance the same debt or loss against a third party whose alleged liability to the creditor or surety would give rise to a claim against the company for which the third party cannot prove because of the rule and the creditor's proof. The distinct point is made that all tortious liability in a corporation is vicarious and that the cross-claimants have individual tortfeasors whom they can sue.
Rothwells further submits that the State is not a creditor in respect of this claim within the meaning of cls.A1 and C1 of the Scheme of Arrangement. The Scheme requires a claim to exist before 3 November 1988 even if only in a contingent form. The relevant damage which grounds the tortious claims of negligence and deceit arose on the pleadings in May 1989 upon the settlement of the National Australia Bank preference claim. The same is said to be true of the trade practices claim. Thus it is contended the State is not a creditor and if it is not then neither are the cross-claimants who seek indemnity or contribution in respect of its claims against them.
Rothwells challenged both the Wardleys and Yonge cross-claims so far as they rely upon the proposition that a contravention of s.52 of the Trade Practices Act is a tort for the purposes of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947. Other complaints are made that the fraud plea is inadequate to show the prima facie case necessary for leave to proceed against the company to be granted. The plea that Wardleys and Yonge were induced to certain acts by the Rothwells Representation is also attacked as inadequate to make out a prima facie case. Wardleys' claim for damages for losses on share trading of $4,180,247 is said not to be recoverable as a member of a company is not entitled to prove for damages occasioned by misrepresentation inducing it to buy company shares unless the contract with the company is rescinded. This cannot be done once a winding up has been commenced.
The Bond cross-claim is also said to be deficient in failing to plead what information was passed to it by Rothwells and who engaged in the contraventions it alleges. It is also said to be defective to the extent that it relies for the contribution claim upon s.87 of the Trade Practices Act.
The Double Proof Rule
It is a well established rule of bankruptcy law that there cannot be two claims in respect of the same debt - Day and Dent Constructions Pty Ltd v. North Australian Property Pty Ltd (1982) 150 CLR 85 at 100 (Mason J.). The rule applies equally to the winding up of companies - In Re Oriental Commercial Bank; Ex parte European Bank (1871) ChApp 99 at 103. In the latter case a company had accepted bills of exchange upon an undertaking by another company which indorsed them to provide the funds to meet them upon maturity. The indorsing company was wound up and was unable to honour its undertaking. The acceptor tried to prove in the winding up for the amount it had had to pay by reason of the breach of the indorser's undertaking. The ultimate holder of the bills also proved in the winding up. The claim of the acceptor was held to be a double proof in respect of the same debt for which a dividend had already been paid to the holder. Mellish L.J. said at 103:

"...the principle itself - that an insolvent estate whether wound up in Chancery or in Bankruptcy, ought not to pay two dividends in respect of the same debt - appears to me to be a sound principle. If it were not so, a creditor could always manage, by getting his debtor to enter into several distinct contracts with different people for the same debt to obtain higher dividends than the other creditors, and perhaps get his debt paid in full. I apprehend this is what the law does not allow; the true principle is that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts." (James L.J. agreed)

The principle received implicit recognition in successive bankruptcy statutes in England and Australia which excluded from its application cases in which a debtor was, at the date of sequestration, liable in respect of distinct contracts as a member of two or more distinct firMs That exclusion was limited to negotiable instruments in s.152 of the Bankruptcy Act 1861 (UK). It was generalised to liabilities of the bankrupt "in respect of distinct contracts as member of two or more distinct firms or as a sole contractor" by s.37 of the Bankruptcy Act 1869 (UK). This was reproduced as r.18 of Schedule 2 to the Bankruptcy Act 1883 (UK), r.19 of Schedule 2 to the Bankruptcy Act 1914 (UK), r.21 of Schedule 2 of the Bankruptcy Act 1924 (Cwth) and is now found in s.95 of the Bankruptcy Act 1966 (Cwth). These provisions were not seen as creating any new right to prove, but rather as removing a difficulty which might have arisen in some cases because of the rule against double proofs - Banco de Portugal v. Waddell (1880) App Cas 161 at 167.
A number of double proof cases have involved variations upon the theme of a surety seeking to prove in the estate of a debtor where the principal creditor has made a claim - Re Sass; Ex parte National Provincial Bank of England (1896) 2 QB 12; Re Moss Ex parte Hallett (1905) 2 KB 307; Re Melton; Milk v. Towers (1917) 1 Ch 37; Re Fenton Ex parte Fenton Textile Association Ltd (1930) 1 Ch 85. But the rule is not limited to that situation. It has, for example, been applied where the mortgagee of an insurance policy, on which the bankrupt mortgagor had covenanted to pay premiums, had lodged a proof for the amount of the debt less the value of the security. The mortgagee could not then also prove on the covenant to pay the premiums - Deering v. Bank of Ireland (1886) 12 App Cas 20 at 24. In Re Hoey (1919) 88 LJKB 273, a bankrupt mortgaged certain property and conveyed to his wife and another the equity of redemption in the property with a covenant to discharge the mortgage debt. The mortgagees having been admitted to rank for dividend against the estate, it was held that if the wife were also allowed to prove in the bankruptcy it would be a case of double proof in respect of the same liability. And although the application of the rule is frequently reported in relation to personal or corporate insolvency it reflects a more general principle that claims against a limited fund required to be distributed rateably, cannot be made in respect of what is in substance the same liability. The Court of Appeal in The Liverpool (No.2) (1963) p 64 at 84 could see no reason why the principle would not apply in a limitation action in admiralty arising out of a ship collision:

"The principle must, as it seems to us, as a matter of justice, apply wherever there are rival claimants against an insufficient fund, as it does in bankruptcy, winding up and creditors' administration actions."

The court also noted that the reported cases appear to arise out of contract and that it was difficult to think of a case other than that then before them in which it might apply to tort. Nevertheless the Court stated the principle widely enough to encompass tortious claims in saying, at 85, that "the fund must not be saddled with two proofs where the two creditors are both seeking to enforce the same debt". In my opinion there is nothing in the authorities and no reason in logic why that principle should not apply to prevent multiple claims against limited funds required by law to be distributed rateably where such claims are made in respect of what is in substance the same liability whether its source be contractual, tortious, statutory or otherwise. In the end it is no more than an expression of the limits placed by law on the way in which the fund is to be distributed.

The question whether two claims arise out of the same liability is a matter of substance not of form. It may said that the claim of a principal creditor in respect of its debt and the claim of a surety in respect of the debtor's failure to indemnify it are distinct. But in substance they relate to the same debt. Swinfen Eady L.J. said in Re Melton; Milk v. Towers (1917) 1 Ch 37 at 47:

"It may well be that technically there are two claims against the debtor in respect of the transaction and two separate liabilities of the debtor arising out of the transaction. One of these is the debtor's liability to the bank for the money that he owed. The other, which is a separate liability arising out of the contract of guarantee, is the debtor's liability to indemnify the sureties in respect of their liability to the principal creditor. Technically they are two separate liabilities, but in substance they are the same; and in respect of that liability there could not be a double proof against the estate. The creditor could not prove for the amount of the debt and the surety bring in a proof for part of the same amount as regards his liability for that part of that amount."

Scrutton L.J. at 60 said that in determining whether two proofs are in respect of the same debt regard must be had, "not to technicalities but to the substance". That reasoning applies notwithstanding that the surety's claim is in effect a claim for damages for the breach by the debtor of its obligation to the surety - Re Fenton: Ex parte Fenton Textile Association Ltd (1930) 1 Ch 85 at 114 (Lawrence L.J.). The application of the rule in that case prevented a surety from setting off its claim under the debtor's indemnity against various sums due by the surety to the debtor. Consistently with the principle a surety who has paid out the creditor before that creditor has lodged a proof would be able to prove in the bankruptcy. If the principal creditor were paid after the latter had lodged a proof, the dividends in respect of such proof would be recoverable by the surety - Re Fenton at 118 (Romer L.J.). See also Re Sass; Ex parte National Provincial Bank of England (1896) 2 QB 12 at 15.

The rule was discussed and applied by the Court of Appeal in Barclays Bank Ltd v. T.O.S.G. Trust Fund Ltd (1984) WLR 49. The case concerned the collapse of a holiday tour operator. TOSG Trust Fund Ltd was a company limited by guarantee set up by various tour operators to receive and dispense money payable under bonds provided by its members in the event of a member being unable to fulfil its obligations to its customers. TOSG called up the bonds from the collapsed tour operator's banks and settled the claims of various customers. It required such customers to assign their claims to an agency called The Air Travel Reserve Fund Agency which had been established to manage and administer a statutory fund to compensate persons who lost holidays as the result of tour operator collapses. The banks proved in the liquidation of the operator under counter indemnities obtained from it when the bonds were executed. The Agency sought to prove in respect of the claims assigned to it by the operator's customers. The Court of Appeal held that on the facts the relevant part of the banks' claims under the counter indemnities and the claims of the assigning customers related to what was in substance the same debt and that the liquidators could not entertain both. The Banks' proofs were favoured by application of the analogy of suretyship principles and broader considerations of equity.
The test of the relationship between two claimed liabilities necessary to bring them within the double proof rule, was said to be a broad one transcending a close jurisprudential analysis of the persons by and to whom the duties are owed. Oliver L.J. said at 58:

"It is simply whether the two competing claims are, in substance, claims for payment of the same debt twice over."

His Lordship accepted the broad general proposition that:

"... the rule against double proofs in respect of two liabilities of an insolvent debtor is going to apply wherever the existence of one liability is dependent upon and referable only to the liability to the other and where to allow both liabilities to rank independently for dividend would produce injustice to the other unsecured creditors."

The rule, however, had nothing to say upon the question of which of two proving creditors has the better right to claim a dividend in respect of a debt. And on that basis the position had to be examined at the point at which the dividend is actually about to be paid and the question asked then whether two payments were being sought for the liability which, if the company were solvent, could be discharged as regards both claimants by one payment. Slade L.J. acknowledged that the question whether two proofs are made in respect of what is in substance the same debt is not always an easy one to resolve. He said at 80:

"Difficulty may well arise in determining whether, in any given case, two proofs are in respect of what is in substance the same debt. Though various broad tests have been canvassed by both Bar and Bench in argument in this case, I have, for my own part, found none of them wholly satisfactory. The question can, I think, only be determined by reference to the particular facts of the case before the Court, bearing in mind that it is the substance of the relevant liability, rather than the form, on which attention must be concentrated."

It is against that background of authority and the necessity to focus upon the substance rather than the form of any rival claims that the difficult question of the application of the rule as an answer to the proposed cross-claims must be considered.

The Proposed Cross-Claims in the Light of the Double Proof Rule

For the purpose of considering the application of the double proof rule to the proposed cross-claim the Court is invited to look through the forms of the settlement between the State, the National Australia Bank and the provisional liquidators of Rothwells to notional transactions of proof and dividend return underlying them. That process of inquiry is of an analytical kind which investigates the substantial relationship between the now resolved liability of Rothwells to the National Australia Bank and the cross-claims for which leave is now sought.
The affidavit evidence from Mr Bailey supports the contention that the sum of $33 million paid by the State to Rothwells was paid upon the following basis:

1. Rothwells should be treated as having a recoverable preference claim for $100 million against the Bank.

2. The Bank should be treated as entitled to a dividend of $67 million.

3. On the two preceding assumptions, Rothwells would have retained $33 million out of its recovery from the Bank.

4. Rothwells' claim against the Bank would be satisfied if the State were to pay it $33 million.

On this basis, the outcome of the settlement is arguably the same as that which would have occurred had the National Australia Bank been repaid only $50 million of its $150 million advance and proved for the balance of $100 million. Had it recovered a dividend of $67 million on that proof it could have looked to the State for the balance. Had there been a contractual relationship between the State and Rothwells supporting a claim for breach of a counter indemnity in favour of the State, the State would not have been entitled to lodge its proof for the amount of the shortfall which it had had to find. In its application, the State relies upon the Trade Practices Act 1974 and the torts of negligence and deceit to make good its claim to recover its loss from Rothwells. The liability thus asserted is distinct in law from the debt which was the subject of the settlement. Nevertheless what is sought is on the face of it recovery of the State's shortfall in relation to that debt. The authorities and the principle which underly the rule against double proof support the view that the substantial relationship between the liabilities asserted and the amounts thereby claimed in the rival proofs is of greater importance than the legal grounds upon which they are sought. In my opinion this case is one in which the State's claim against Rothwells, absent the conditions agreed between it and the liquidators, could well fall within the rule against double proofs. There would be much to recommend the argument that as a consequence the relief sought by the various respondents in their proposed claims for contribution and indemnity against Rothwells in respect of the State's claims against them is in the same category. They are, of course, different parties but the potential liability in respect of which they bring their cross-claims can be said in light of the putative basis for the settlement, to arise out of the debt in respect of which the National Australia Bank has, in substance, taken its dividend and in respect of which the State has, in substance, made up the agreed shortfall to the Bank.
Notwithstanding the attraction of the argument advanced for Rothwells in respect of the rule against double proofs however, I would not refuse leave to cross-claim for that reason. There is, I think, much force in the submission made for Wardleys that the settlement between the State, the National Australia Bank and the provisional liquidators of Rothwells involved a number of assumptions which may turn out to have little relationship to the position had the National Australia Bank preference been returned and its debt admitted to proof. The State, under the settlement, was to procure the National Australia Bank not to oppose the scheme of arrangement. It was to receive a return to its instrumentalities of $10.94 million. The true nature of the settlement will necessarily be closely examined at trial for it is central to the State's claim for loss. I accept the submission therefore that the application for leave ought not to be declined on the basis of a conclusion as to the nature of the settlement between the State, the National Australia Bank and Rothwells.
Further, I make no finding on the contention, offered by counsel for Rothwells, that it is a corollary of the rule against double proof that where a creditor proves and recovers in a liquidation neither that creditor nor its surety can recover in respect of what is in substance the same debt or loss against a third party whose alleged liability to the creditor or surety would give rise to a claim against the company for which the third party cannot prove because of the rule and the creditor's proof. That contention was raised in the course of argument, but was not fully argued by those whose interests are directly affected.
The Status of the Cross-Claimants as Creditors

The question whether the proposed cross-claimants would be creditors for the purposes of the scheme of arrangement depends upon the definition of "Creditor" in Part A of the Scheme document. That definition is wide, extending to any person who has a claim against the company "arising out of or having its origin in any matter occurring prior to the Fixed Date or arising out of any transaction, act or omission of the Company or of any person before the Fixed Date whether the claim be present or future, certain or contingent...". It does not, on the face of it, require a complete cause of action to have arisen prior to the date referred to. While the question of construction may have to be reviewed at trial in the context of a wider factual matrix it is not at all clear to me that the State or the proposed cross-claimants would fall outside the definition. There is at least a prima facie case in the sense of a strongly arguable case that they fall within it. I would not refuse leave to cross-claim on this basis.
Wardley Australia Securities' Cross-Claim for Share Trading Losses
Leave to Wardley Australia Securities to cross-claim against Rothwells for share trading losses attributable to the Rothwells Representation is also opposed. Rothwells contends that a shareholder is not entitled to prove for damages incurred by misrepresentation inducing the purchase of shares unless the contract with the company is rescinded, something which cannot be done after the winding up has commenced. Reference was made in argument to Houldsworth v. City of Glasgow Bank and Liquidators (1880) 5 App Cas 317. There, a stockholder in a joint stock company claimed damages from its liquidator in respect of the sum he had paid for the stock, money already paid in calls and the estimated amount of future calls. The claim was based on fraudulent misrepresentations made by the directors and other officials of the company. It was held by the House of Lords that even though the fraud might have entitled the stockholder to rescind when the Bank was a going concern, rescission was now impossible and there was therefore no ground for an action against the liquidator. The difficulties attaching to the position of the plaintiff in such a case were enunciated by Lord Selborne at 329:

"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: it is to throw upon them the Pursuer's share of the corporate debts and liabilities. Many of those shareholders... may have come and probably did come into the company after the Pursuer had acquired his shares. 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 the 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."

In Re Dividend Fund Incorporated (In Liquidation) (1974) VR 451, Anderson J. said at 454:

"The reasoning in Houldsworth's case makes it plain that for a shareholder to have a right to claim damages against the company would involve his being obliged as a member of the company to satisfy, or join with other shareholders in satisfying, his own claim. In the case of an unlimited company, a circumstance common both to Houldsworth's case and to this case, something akin to perpetual motion would be involved for the merry carousel would go on till the end of time, the aggrieved shareholder being eventually obliged to pay call after call to meet his own claim in damages."

Houldsworth's case was applied in the context of a limited liability company in Re Addlestone Linoleum Company (1887) 37 ChD 191. Preference shareholders in a limited company who had taken their shares at a discount were placed on the list of contributories in the winding up of the company and calls for the unpaid portions of the share price were made on them and paid. Some of the shareholders applied for leave to prove in the winding up "in damages for breach of contract or otherwise in respect of the issue of the preference shares". It was held on appeal that if the contract between the company and the shareholders was to be treated as a contract to issue fully paid up shares, the shareholders might have rescinded the contract to take them but after an order to wind up there could be no rescission and they had no remedy. Cotton L.J. doubted whether there was any contract to issue the shareholders with fully paid shares. He said, however, at 204:

"But if the contract was to issue fully paid-up shares, I am of opinion that the decision in Houldsworth v. City of Glasgow Bank precludes us from allowing this proof."

Lindley L.J. at 205-206 said that:

"The principle on which the House of Lords decided Houldsworth v. City of Glasgow Bank was that a shareholder contracts to contribute a certain amount to be applied in payment of the debts and liabilities of the company, and that it is inconsistent with his position as a shareholder, while he remains as such, to claim back any of that money - he must not directly or indirectly receive back any part of it, and this appears to me to govern the present case."

Counsel for Rothwells also relied upon s.360(1)(k) of the Companies (Western Australia) Code which provides:

"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, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves."

It is to be noted that this section is similar in terms to s.38(7) of the Companies Act 1862 which was also relied upon in the judgment at first instance in Re Addlestone Linoleum Company. Kay J. had taken the view that the preference shareholders in that case were making their claims for damages in their character as members of the company. It seemed to him that the money so claimed was not only claimed in that character but that the claim was just as unreasonable as if it were a claim of dividends or profits and that accordingly it came within the words "or otherwise" in the sub-section. Lopes L.J. expressly agreed with that construction.

Counsel for Wardley Australia Securities says that the rationale of the Houldsworth and Re Dividend Fund Incorporated cases has no application in the context of a company of limited liability with fully paid up shares. Furthermore, he contended the issue has not yet been dealt with in the context of claims under the Trade Practices Act. There is no good reason in principle, it was submitted, why the causes of action available under that Act, in particular in respect of misleading or deceptive conduct, ought not to be available to a member of the corporation following liquidation. The cross claim may well, in this regard, for the reasons advanced by counsel for Rothwells, face serious difficulties. In my opinion, however, apart from the question of the quantum of the alleged loss, the factual compass is likely to overlap significantly with other aspects of the cross-claim and the principal action. It is undesirable, I think, to refuse leave on a basis which could be seen as deciding an important question of law without the benefit of detailed factual findings and full debate as to the application of the Houldsworth principle, s.360(1)(k) of the former Companies Code and the Trade Practices Act 1974.
Conclusions on the Cross-Claims
Various other objections were raised to the cross-claims which related to the sufficiency of the pleadings, but in my opinion they can be dealt with in the usual way by provision of particulars or amendment where necessary. The question of the application of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 is at least open and, I think, sufficiently arguable to answer the requirement of a prima facie case. I would therefore not refuse leave on the basis of the challenge to that proposition which I recently dealt with in the context of an application for leave to serve a cross-claim in these proceedings out of the jurisdiction - see State of Western Australia v. Bond Corporation Holdings and Others (unrep. Fed. Ct. 19 June 1992; French J.).
Motion for Leave to Proceed against the State of Western Australia
By a motion filed 15 May 1992, Wardleys seek leave to proceed with a cross-claim against the State of Western Australia pursuant to s.6(3)(a) of the Crown Suits Act 1947 (WA). That section provides, in the relevant parts:

"6(1) Subject to the provisions of subsections (2) and

(3) of this section, no right of action lies against the Crown unless-

(a) the party proposing to take action gives to the Crown Solicitor, as soon as practicable or within three months (whichever of such periods is the longer), after the cause of action accrues, notice in writing giving reasonable information of the circumstances upon which the proposed action will be based and the name and address of the party and his solicitor or agent; and

(b) the action is commenced before the expiration of one year from the date on which the cause of action accrued, and for the purposes of this section where the act, neglect, or default on which the proposed action is based is a continuing one, no cause of action in respect of the act, neglect or default accrues until the act, neglect or default has ceased but the notice required by paragraph (a) of this subsection may be given and an action may thereafter be brought while the act, neglect or default continues. .

.

.

(3)(a) Notwithstanding the foregoing provisions of this section application may be made to the Court having jurisdiction to hear the action when the application is granted for leave to bring an action at any time before the expiration of six years from the date on which the cause of action accrued, whether or not notice as required by subsection (1) of this section has been given to the Crown.

(b) Where the Court considers that the failure to give the notice or the delay in bringing the action as the case may be, was occasioned by mistake or by any other reasonable cause or that the Crown is not materially prejudiced in its defence or otherwise by the failure or delay, it may if it is just to do so, grant leave accordingly subject to such conditions as it thinks it is just to impose."

The pleading to support the proposed cross-claim by Wardleys against the State is that presently relied upon in the defence and set-off which was filed on 4 May 1992 together with the proposed cross-claim. By the cross-claim Wardleys repeat paras.44 to 61 of the defence which supports its set-off. In substance they allege that on 24 and 25 October 1987 and between 25 October 1987 and 14 January 1988 the State knew or ought to have known a number of matters relating to the rescue and the basis upon which Wardleys became involved in it. It was therefore under a duty to disclose to Wardleys any unusual facts or circumstances affecting the position of Rothwells and any fact or circumstance which Wardleys as underwriter or lender would expect not to exist. The State is said to have made false implied representations to Wardleys to the effect that:

(a) no unusual or unexpected facts or circumstances affecting the position of Rothwells existed or were known to the State;

(b) the State had disclosed to Wardleys all facts or circumstances known to it concerning Rothwells' position that Wardleys, as underwriter and lender would expect not to exist.

Wardleys say that acting on the faith of the representations, Wardley Australia Securities entered into the underwriting agreement referred to earlier in relation to the cross-claim against Rothwells, made the payments in respect thereof and sustained a share trading loss of $4,180,247. They also say that on the faith of the representations Wardleys Australia made the loan agreement with Rothwells under which it advanced $7.5 million to that company. Wardleys claim that the State was negligent and that they have suffered loss thereby.

Wardleys submit that the Crown will not be materially prejudiced if they are given leave to proceed against it and that leave should be given under s.6(3)(a) of the Crown Suits Act 1947 (WA). The State does not contend that it would suffer any material prejudice but says that in terms of s.6(3)(b) it would not be "just" to grant leave. The basis of that contention is that the cross-claim does not disclose a cause of action and it would not be just to grant leave to bring a claim which must inevitably be struck out. Silence, it says, cannot ordinarily amount to actionable misrepresentation and the present case does not fall into any of the accepted modifications or exceptions to the rule. There was no fiduciary relationship between the parties nor was their relationship akin to that of lender and guarantor. Further, it is said, facts to ground Wardleys' expectation that the State would disclose unusual facts to them are not pleaded. Nor are the facts upon which the State's alleged knowledge of that expectation is based. No facts going to the reasonableness of Wardleys' expectation have been pleaded. And there is no evidence going to the genuineness of the Wardleys' claim. The delay in bringing the claim is not explained and the minimum facts necessary to support it are not the subject of any evidence. The indications are, it is said, that the cross-claim is not brought in good faith and is of a speculative character.
I am not satisfied upon a perusal of the proposed pleading that there is any basis for stigmatising it as speculative or brought other than in good faith. The delay is no doubt understandable given the complexity of the proceedings, a complexity which is well reflected in the lengthy period over which the State's own pleading has evolved into its present form. Nor am I satisfied that the pleading is, on the face of it, so obviously and fatally flawed that it is appropriate to refuse leave to proceed for that reason. Amendment and particularisation may be necessary in due course, but that can be dealt with in the ordinary way. I propose to grant leave to Wardleys to proceed by way of cross-claim against the State of Western Australia.
Motions to Stay the Proceedings and For Confidentiality Orders
By a motion filed on 10 June 1992 and amended at the hearing, Connell moved for orders that the claim and cross-claims by and against him be stayed pending the prosecution of criminal charges against him in the Supreme Court of Western Australia. Alternatively, he seeks a stay pending the determination of his application in the Supreme Court for a permanent stay of the criminal proceedings. In addition, a variety of confidentiality orders is sought in relation to further interlocutory proceedings, pleadings, particulars, evidence and submissions filed.
By a motion filed on 9 June 1992, the firm, KMG Hungerfords, seeks an order that all cross-claims against it be stayed pending the completion of the prosecution of criminal charges against one of its partners, Louis James Carter, in the Supreme Court of Western Australia arising out of his audits of Rothwells for the years 1983 to 1988 inclusive. Carter is charged on the same indictment with Connell and Lucas. KMG asks, in the alternative, for an order staying the cross-claims against the firm pending completion and determination of applications in the Supreme Court for a stay and alternatively a separate trial in the criminal proceedings for Carter. Alternatively, an order is sought excusing it from its obligation to file a defence until completion of the prosecution in the Supreme Court. Various confidentiality orders are sought in the event that a stay of these proceedings is not ordered.
Mr Lucas, who represents himself, is also facing criminal charges in the Supreme Court with Connell and Carter, and asks that the cross-claims against him be stayed until those proceedings are heard and determined.
The motions were supported by an immense amount of paper intended to demonstrate the range and complexity of the criminal proceedings and to expose in exquisitely tortuous detail, the overlap of issues between those proceedings and the present application. In my respectful opinion, there was too much of it. A considerable portion of the material could more economically and usefully have been the subject of summary or description in affidavits.
Despite the amount of paper and submissions devoted to these motions, their determination is not an esoteric exercise. It starts with the guidelines relevant to the exercise of the power to stay proceedings, enunciated by Wootten J. in McMahon v. Gould (1982) 7 ACLR 202, which were approved by Wilcox J. in Camerons Unit Services Pty Ltd v. Kevin R. Whelpton Associates (Australia) Pty Ltd (1984) 4 FCR 428, by Kennedy J. in Uni-lab Communication Ltd v. Wright (unrep. Sup. Ct. WA 27/1/89) and by O'Loughlin J. in Deputy Federal Commissioner of Taxation v. Alvaro (1990) 90 ATC 4744:

1. Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the Court.

2. It is a grave matter to interfere with this entitlement by a stay of proceedings, which requires justification on proper grounds.

3. The burden is on the defendant in a civil action to show that it is just and convenient that the plaintiff's ordinary rights should be interfered with.

4. Neither an accused nor the Crown is entitled as of right to have a civil proceeding stayed because of a pending or possible criminal proceeding.

5. The Court's task is one of "the balancing of justice between the parties", taking account of all relevant factors.

6. Each case must be judged on its own merits, and it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors.

7. One factor to take into account where there are pending or possible criminal proceedings is what is sometimes referred to as the accused's "right of silence", and the reasons why that right, under the law as it stands, is a right of a defendant in a criminal proceeding.

8. However the so called "right of silence" does not extend to give such a defendant as a matter of right the same protection in contemporaneous civil proceedings. The plaintiff in a civil action is not debarred from pursuing action in accordance with normal rules merely because to do so would or might, result in the defendant, if he wished to defend the action, having to disclose, in resisting an application for summary judgment in the pleading of his defence, or by way of discovery or otherwise, what his defence is likely to be in the criminal proceedings.

9. The Court should consider whether there is a real and not merely notional danger of injustice in the criminal proceedings.

10. In this respect factors which may be relevant include:

(i) the possibility of publicity that might reach and influence jurors in the civil proceedings;

(ii) the proximity of the criminal hearing;

(iii) the possibility of miscarriage of justice e.g. by disclosure of a defence enabling the fabrication of evidence by prosecution witnesses, or interference with defence witnesses;

(iv) the burden on the defendant of preparing for both sets of proceedings concurrently;

(v) whether the defendant has already disclosed his defence to the allegations;

(vi) the conduct of the defendant including his own prior invocation of civil process when it suited him.

11. The effect on the plaintiff must also be considered and weighed against the effect on the defendant in which regard it may be relevant to consider the nature of the defendant's obligation to the plaintiff; and

12. In an appropriate case the proceedings may be allowed to proceed to a certain stage e.g. setting down for trial and then stay it.

I accept the preceding as a comprehensive, although not necessarily exhaustive, statement of the considerations that may be relevant when the power of the Court to stay its own proceedings where they may affect parties in a contemporaneous criminal prosecution is invoked. Consistently with that statement the Court will ordinarily allow proceedings in which its jurisdiction has been properly invoked to progress to trial and determination unless the legitimate interests of the parties and the administration of justice require otherwise. The judgment to be made is essential normative and requires a balancing of factors of the kind referred to in the judgment of Wootten J.
In the present case, the evidence is that Connell, Carter and Lucas are all charged on the one indictment with a number of counts relating to the affairs of Rothwells. The first of these is a joint charge of conspiracy which alleges that all three conspired together with one Thomas Forrest Hugall and various other persons, to defraud the public by deceitfully concealing and falsely portraying the true financial position of Rothwells so as to induce persons to do or continue to do business with or refrain from taking action in relation to that company. Connell, Lucas and Carter are each charged individually with concurring in the publication of the 1985 annual report of Rothwells which was allegedly, to the knowledge of each, false in a material particular in that it stated that the operating profit for the year ended 31 July 1985 was $3,081,278 and failed to disclose the extent of borrowings during that financial year from Rothwells by Connell and companies in which he had a substantial interest. This, it was said, in each case, was done with intent to deceive members or creditors of Rothwells. Similar charges are laid against each of Connell, Carter and Lucas in respect of the 1986 and 1987 annual reports.
Connell and Lucas, by an additional charge against the two of them, are said to have concurred in publishing consolidated financial statements of Rothwells for the half year ended 31 January 1988 which were to their knowledge false in a material particular in that it falsely stated that the consolidated operating profit for Rothwells and its subsidiaries for the half year ended 321 January 1988 was a loss of only $20,126,000 and failed to disclose the extent of borrowings during that half year from Rothwells by Connell and companies in which he had a substantial interest. This, it was said, was done with intent thereby to deceive members or creditors of Rothwells. By a separate count, Carter is alleged to have concurred in the publication of the consolidated financial statements when they were, to his knowledge, false as alleged in the joint count against Connell and Lucas and failed to disclose the extent of borrowings by Connell and companies in which he had a substantial interest.
Connell is a respondent to the State's claim in this case. The causes of action raised against him are involvement in misleading or deceptive conduct by Bond, Wardleys and Rothwells and deceit. The allegations of deceit on his part are set out in para.60 of the statement of claim and go, inter alia, to the represented accuracy of the Rothwells' 1987 accounts, the non-existence of substantial loans by Rothwells to companies, firms or partnerships in which Connell had financial interests and the financial soundness of Rothwells as at October 1987. Wardleys' cross-claim against Connell refers expressly to the 1987 annual report and pleads, as a representation contained in that report, the statement that the pre-tax operating profit was $28,690,048. The true position is said to have been that Rothwells had a pre-tax operating loss for the year of approximately $107,979,000. Also pleaded are statements contained in the annual report and said to have been signed by Connell that the profit and loss accounts were drawn up to give a true and fair view of the state of affairs of the company as at 31 July 1987. Wardleys raise causes of action in deceit and negligent mis-representation by Connell and claim indemnity and contribution from him in relation to their liability to the State and damages for the share trading loss of $4,180,247 referred to earlier and the loan of $7,500,000. Yonge's cross-claim against Connell is limited to indemnity or contribution in relation to any liability he has to the State, but also raises pleas of deceit and negligent mis-statement in relation to the 1987 annual report of Rothwells. Bond's cross-claim against Connell alleges misleading or deceptive conduct on his part, although it is not clear how this is raised directly as distinct from by way of some accessorial liability.
Connell has cross-claimed in turn against KMG Hungerfords in respect of an unqualified auditor's report published by Carter on their behalf on 27 August 1987 stating that the annual accounts for 1987 gave a true and fair view of the state of affairs of Rothwells as at 31 July 1987 and of the profit for the year ended 31 July 1987. Connell claims contribution from KMG Hungerfords and damages for deceit and negligent mis-statement. He also cross-claims against Bond, Wardleys and Yonge for indemnity or contribution against them as joint tortfeasors under the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947. Wardleys' cross-claim against KMG Hungerfords relates to the 1987 annual report and accounts and Carter's alleged role in auditing the accounts. So too does Yonge's cross-claim against KMG Hungerfords.
Wardleys' cross-claim against Lucas also concerns the 1987 annual report and his alleged signing of a statement in it that the profit and loss accounts were drawn up to give a true and fair picture of the state of affairs of the company as at 31 July 1987. They claim against Lucas indemnity or contribution and damages for deceit and negligent mis-representation. Yonge's cross-claim against Lucas is for indemnity and contribution only, but is similarly based.
Having regard to the contents of the indictment and the claims and cross-claims set out above, I am satisfied that there will be a significant overlap of issues between the proceedings in this Court and the criminal proceedings so far as they relate to the preparation and signing of the Rothwells annual report and accounts of 1987.
Argument on various preliminary questions in the criminal proceedings, including the question of a stay or separate trial for Carter was due to commence before Seaman J. in the Supreme Court on 13 July 1992. It is apparently envisaged that Connell's application for a permanent stay will be heard on 21 September 1992. These and other pre-trial applications have been estimated to take about 3 months. If no stay is granted, then the trial proper is scheduled to begin in February 1993 and will evidently run for some months. Its precise length may depend upon rulings made in relation to argument before Seaman J. in the latter part of this year. Without descending to detail, I am satisfied that each of the accused in the criminal proceedings will need to devote substantial time and resources to the preparation of his defence. The charges will involve consideration of a large range of transactions and events. The overt acts relied upon by the Crown to support its conspiracy which were filed in the Supreme Court, took up some 340 typed A4 pages. In addition, the Court was told that the Crown will rely upon another 55 pages of particulars of overt acts supplied at the preliminary hearing stage pursuant to an order of His Worship Mr Boys SM. A Case Statement occupying some hundreds of pages has also been supplied to the Supreme Court and the parties by direction of the trial judge. It is possible that up to 300 witnesses may be called to give evidence at the criminal trial. These are likely to include Messrs. Yonge, Hilton, Gallagher, Lucas and Hurley, all of whom are involved in these proceedings.
On the present progress of this case through its interlocutory stages, I do not anticipate a trial of the action before the second half of 1993. There would, in any event, be considerable practical difficulties in the conduct of these proceedings contemporaneously with the criminal proceedings. There are common witnesses likely to be called in each case and those who are parties simply cannot be in two places at once. These are practical considerations quite apart from the questions of prejudice that might arise. There is, I apprehend, at present no real possibility that the trial of these proceedings would, if not stayed, coincide with the criminal trial. The consideration of the stay applications must therefore focus largely upon the continuing interlocutory processes involved in getting this proceeding to trial. I accept, by reference to evidence exhibited to the affidavit of Mr Carter's solicitor, Mr Willox, and as a matter of judicial notice, that each of Messrs. Connell, Carter and Lucas, have been the subject of adverse publicity arising out of the Rothwells rescue and that it is undesirable that these proceedings should be the occasion of any further avoidable adverse publicity while the criminal proceedings are pending. But at the interlocutory stages I think the risk of such publicity is low. Press and media coverage of the case to date suggests, not surprisingly, that public interest in the fine grindings of its interlocutory progress is not great. Any risk of adverse publicity attached to particular interlocutory steps can, in my opinion, be dealt with as and when it arises by appropriate confidentiality orders.
Also of relevance is the extent to which statements on the record by the parties in these proceedings by way of pleadings or particulars or otherwise, might compromise their right to silence in relation to the criminal charges. It was suggested in argument that much of what the parties had to say had already been said on the record in the course of the inquiry conducted by a special inspector appointed under the Companies (Western Australia) Code and in the course of the Royal Commission. I do not feel able to make any useful judgment on that matter and do not consider the attempt would be a fruitful exercise. For, in any event, I am not persuaded that it has been demonstrated that as a general proposition the filing of pleadings or answers to requests for particulars would necessarily seriously compromise the right to silence in the criminal proceedings. The risk of such compromise can be dealt with pro tem by the use of confidentiality orders on a case by case basis. I anticipate, for example, that defences to the cross-claims may be filed on the basis that initially they are to be disclosed only to counsel for the parties until the question whether a continuing confidentiality order is necessary can be resolved.
The question of the diversion of resources involved in the preparation of the criminal case to this case is one of concern as it affects each of Messrs. Connell, Carter and Lucas. It may be said that KMG Hungerfords is a firm of which Carter is only one partner and could be expected to have the resources to cope with the conduct of these proceedings more readily than Connell or Lucas. Even so, it is obviously Carter who is the principal person involved in the claim against KMG Hungerfords. On the other hand, to the extent that work required for the preparation of the criminal trial will overlap with issues in these proceedings, those connected with the criminal proceedings who are also involved in representing the parties in this case may be expected to have sufficient familiarity with the issues to enable appropriate defences to be drawn without undue interference with the preparation of the criminal case. The question of providing particulars, I think, can raise greater difficulties given the level of detail to which may be required. I would not be inclined at this stage to order the provision of extensive particulars but that again, is a matter which can be dealt with on a case by case basis in the light of specific requests.
In the event, I am not satisfied that Messrs. Connell and Lucas or KMG Hungerfords have made a case for a stay of these proceedings so far as they relate to them. I also take into account the risk that any such stay could prejudice the already slow progress of these proceedings generally. The preferable course is to keep the interlocutory process going and to accommodate, so far as is reasonable and practical, the special interests of Messrs. Connell, Carter and Lucas. I am of the view that Connell, KMG Hungerfords and Lucas should be required to plead to the cross-claims against them, but that such pleadings may be protected by confidentiality orders limiting access to them to counsel for a time sufficient to enable consideration of whether such orders should be extended until after the hearing and determination of the criminal proceedings. The provision of particulars subject to judgments about the resources burden imposed by them can be made subject to the same constraints. I would not at this stage entertain orders for general discovery against any of these parties. Limited discovery may be sought but its scope, the time for compliance with any orders made, and the desirability of any confidentiality order in respect of it will have to be considered against the circumstances at the time that any such order is sought. I do not anticipate that leave would be granted to interrogate these parties until after the completion of the criminal proceedings. In the event I propose to dismiss the motions for stays and general confidentiality orders. Programming of particular interlocutory steps and the question of specific confidentiality orders will be dealt with on a case by case basis.

[1992] FCA 545

30 JULY 1992