[2003] HCA 57
Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285
Judgment (8 paragraphs)
[1]
Mr B Phillips (First to Fifth Plaintiffs)
Mr C Harris SC (First Defendant)
Mr M Bonnell, Solicitor (Second to Fifth Defendants)
Mr A McInerney SC (Sixth Defendant)
[2]
Solicitors:
Results Legal (Plaintiffs)
Colin Biggers & Paisley (First Defendant)
Henry William (Second to Fifth Defendants)
Garland Hawthorn Brahe Solicitors (Sixth Defendant)
File Number(s): 2018/27127
[3]
EX TEMPORE Judgment
HER HONOUR: This is an application by the plaintiffs to further amend their originating process and statement of claim in an oppression suit commenced in 2018. These proceedings are listed for final hearing on 3 December 2020, together with other proceedings commenced by the plaintiffs in 2020.
[4]
Parties
The plaintiffs are the children of Maurice Davis and the grandchildren of Joseph Davis. They are beneficiaries of the Joseph Babington Davis Settlement, a trust created in 1934. They have a 62% interest in the trust. The plaintiffs became beneficiaries in 2014 and, prior to that, fell within a class of potential beneficiaries described in the trust deed as:
[T]he children if any of the said Norman Charles Davis Maurice Pascoe Davis Robina Louise Miller and [Veronica Lees] as shall be living at the time of the death of the survivor of the said Mabel Beatrice Davis and [Veronica Lees] …
Some of the proposed amendments are opposed by the defendants.
The first defendant is Canberra Babington Pty Ltd, a company incorporated in 1934. The plaintiffs each own one ordinary share in Canberra Babington, but only acquired that share in 2018.
The second to fourth defendants are the children of Veronica Babington Lees (nee Davis). The fifth defendant is a related corporate entity to Veronica Lees' family. These defendants are also shareholders in Canberra Babington. The second to fourth defendants have also been directors of Canberra Babington in recent times, that is, since 2008.
The sixth defendant, Perpetual Trustee Company Limited, is the current trustee of the Joseph Babington Davis Settlement. Perpetual is also a defendant in the 2020 proceedings together with predecessor trustees and the trustees' insurer. The defendants in the 2020 proceedings are said to have acted in breach of trust in failing to seek any relief in respect of the rights issues to which I will shortly come. The plaintiffs claim some $13 million from the defendants in the 2020 proceedings.
[5]
Proposed amendments
The relevant allegation in respect of the contentious proposed amendments is that, by four rights issues made in 1962, 1980, 1994 and 1997, the trust's shareholding in Canberra Babington was diluted from 55% to 14%, and the second to fifth defendants' shareholding was increased from 45% (held at the time by their mother Veronica Lees) to 86%.
Perpetual was not the trustee at the time of the rights issues but became the trustee in about 2015. The trustee at the time of the rights issues has been deregistered.
It is said that Veronica Lees (who died in 2014) was aware before the rights issues that, if there was a rights issue, then the Joseph Babington Davis Settlement did not have funds to take up any shares it might otherwise be entitled to. In 1962, the directors of Canberra Babington, then being Veronica Lees and Mabel Davis (who died in 1967), resolved to offer shares by way of rights issue nonetheless, which had the result that Veronica Lees increased her shareholding. In 1980, 1994 and 1997, the directors of Canberra Babington, then being Veronica Lees and Stuart Henderson (who died in 2008), resolved to offer further shares by way of a rights issue, which further increased the shareholdings of the second to fifth defendants in Canberra Babington.
It is said that the shares should have been issued at a price which reflected the asset backing of the company rather than par value. If this had been done, then less shares would have needed to be issued to raise the required capital such that the ultimate dilution of the trust's shareholding would have been far less, reduced to 51% only. It is said that the directors of the company at the relevant time were aware that the shares were being issued at a substantial discount, being a discount of as much as 99%. It is also said that the company could have raised the necessary funds by calling on loans to Veronica Lees and her family instead. The particulars to these allegations include reference to contemporaneous documents dating from 1961 to 1997.
Thus is it said that the dominant purpose of the directors was:
1. for the first rights issue, to confer effective control on Veronica Lees' family; and
2. for the other rights issues, to "appropriate value" from the trust's shares to Veronica Lees' family,
and this was, in each case, an "improper purpose": paragraphs 134(eA) to 134(eH) of the proposed Further Amended Statement of Claim.
[6]
Submissions
The plaintiffs say that the source of the general equitable power referred to in paragraph 143A is of the type recognised in Whitehouse v Carlton Hotel Pty Limited (1987) 162 CLR 285; [1987] HCA 11 and in Howard Smith Limited v Ampol Petroleum Limited (1974) 3 ALR 448; [1974] 1 NSWLR 68 to declare invalid a share issue the dominant purpose of which was an improper purpose. It was submitted that paragraphs in substantially similar form had been refused leave by Black J on 6 July 2020 due to problems with the form of the amendments, which problems had now been addressed.
The first defendant submitted that proposed paragraph 143A does not plead a cause of action nor identify the basis upon which the plaintiffs claim to be entitled to 'general equitable relief', including identifying the legal or equitable rights owed to them at the time of the rights issues said to have been breached and the facts relied upon as constituting the breach. In reply, the plaintiffs submitted that this does not matter as the declaratory relief is not premised upon the breach of any duty, although I rather understood from proposed paragraph 136 of the statement of claim that it was. Further, the plaintiffs submitted that they have standing to seek declaratory relief as they are current shareholders and would benefit from the declaratory relief sought. Whether the plaintiffs suffered loss at the time of the rights issue was said to be irrelevant as the plaintiffs do not seek compensation or damages based on a breach of duty, but a declaration that the rights issues were invalid because they were carried out for an improper purpose.
The second to fifth defendants opposed the amendments on the basis that they may tend to cause embarrassment, in that they are ambiguous and imprecise in their identification of material factual allegations so as to deprive the defendants of proper notice of the real substance of the claims: Nanevski Developments Pty Ltd v Slaveski [2020] NSWSC 617 at [219]. Alternatively, as presently framed, the proposed amendments do not appear to disclose a reasonable cause of action. Whilst the pleadings invoke the general equitable jurisdiction of the Court, the pleading does not plead material facts that make out a cause of action as against the second to fifth defendants; a power is not a cause of action. Nor is it sufficient to invoke the "general equitable jurisdiction" of the Court as a substitute for pleading a recognised cause of action: Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; [2003] HCA 57 per Kirby J at [86] and [87]. It was submitted that there was a disconnect between the amendments proposed to paragraphs 134 and 136 and the relief sought in paragraph 143A. As Mr Bonnell submitted,
"[O]ne simply can't go to court with a grievance and shout equity and ask for relief, the equity that is given has to be granted under a cause of action".
[7]
Consideration
The relevant principles in respect of leave to amend pleadings were explained by Black J when this matter was before him on 6 July 2020 for leave to file an earlier iteration of the proposed pleading. His Honour noted that two principles must be borne in mind: the circumstances in which the amendment should be allowed; and the requirements for an adequate pleading. Then, as now, it is the second matter which is causing particular difficulty. As to the second matter, Black J noted:
… the role of pleadings is to define the issues that would be raised at the hearing and to provide the basis on which evidence may be ruled admissible or inadmissible at the hearing on the ground of relevance, adopting the High Court's observation as to the role of pleadings in Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658 at 664. This requires that the Second to Fifth Defendants be given notice of the facts and matters on which the Plaintiffs rely to set aside, in this case, the impugned rights issues so that they have the opportunity to meet the case brought against them: Banque Commerciale SA, (en liquidation) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 at 296. The importance of this matter is in turn noted by Bongiorno J in Gunns Ltd v Marr [2005] VSC 251 at [57], where his Honour noted that a pleading must set out the facts asserted with sufficient particularity to enable the matter to be determined fairly to all parties and that "vague allegations on very significant matters may conceal claims which are merely speculative". That observation was subsequently approved by Garling J in Young v Homes [2013] NSWSC 580 at [82] and in Iacullo v Iacullo [2013] NSWSC 1517. In McGuirk v University of NSW [2009] NSWSC 1424 at [21]ff, Johnson J in turn referred to the fundamental importance of clarity in identifying the facts and matters in issue in determining the real issues in proceedings, and emphasised that that promoted the objects of s 56 of the Civil Procedure Act.
As to proposed paragraph 143A(a) and corresponding prayer 1B in the originating process, the declaration that the share issues were invalid is probably bad at law as share allotments are voidable, not void: Manthey Redmond (Aust) Pty Ltd (In Liq) v Manthey (2017) 121 ACSR 389; [2017] QSC 145 at [31] per Jackson J, citing Whitehouse v Carlton Hotel at 294-5 and 315 (CLR). But that problem can likely be remedied by a small revision to the proposed pleading.
[8]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 22 September 2020
Paragraph 136 of the statement of claim is proposed to be amended as follows:
Veronica Lees and Mabel Davis (in respect of the First Rights Issue), and Veronica Lees and Stuart Henderson (in respect of the Second Rights Issue, Third Rights Issue and Fourth Rights Issue) each:
(a) knew the matters referred to in paragraph 134 above by reason of the matters pleaded therein;
(b) by reason of that knowledge, as a director of the Company, owed a duty to the members of the Company as a whole, and the trustee of the Trust as a shareholder in particular, to ensure that any shares offered from 1961 by way of rights issue, were offered at fair value and not par value and that the dominant purpose of any rights issue was a proper purpose;
(c) breached the said duty by causing the Company to offer or undertake the Rights Issues.
The conduct is said to be oppressive and relief is sought under section 233 of the Corporations Act 2001 (Cth). In addition, it is proposed to add paragraph 143A as follows:
If relief is not available or is not granted under section 233 as set out above, then the plaintiffs seek the following relief as against the first to sixth defendants, pursuant to the general equitable jurisdiction of the Court:
(a) a declaration that the shares issued pursuant to each of the Rights Issues were not validly issued as the dominant purpose of each of the Rights Issues was an improper purpose (being the purposes pleaded at paragraphs 134(eA), 134(eC), 134(eE) and 134(eG) respectively; and
(b) that the share register of the Company be rectified to reflect the number of shares that each member would hold had each of the Rights Issues not taken place.
A corresponding prayer 1B is proposed to be added to the Second Further Amended Originating Process in like terms to paragraph 143A of the statement of claim.
It was said by the second to fifth defendants that the proposed amendments did not explain how the conduct of past directors gave rise to a cause of action by the plaintiffs against the second to fifth defendants, or what the elements of that cause of action may be. None of the impugned conduct was said to have been conduct of the second to fifth defendants, and the proposed pleading did not explain how they were said to be liable for conduct of Mabel Davis, Stuart Henderson and Veronica Lees in the years between 1962 and 1980. If the duty was said to be owed to the shareholders, then the proper plaintiff would be the trustee. The pleading does not explain how it is that the plaintiffs claim to have standing for the asserted breach of duty. Nor does the proposed pleading explain the basis upon which Canberra Babington is liable to be sued in respect of a breach of duties owed to it by past directors. The amendments may not be consistent with the rule in Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189. That does appear to be a problem.
The final problem identified by the second to fifth defendants is that the pleading does not make plain why it is said that that any impugned conduct by past directors should have the consequence that the shares now held by the second to fifth defendants should be declared invalid or otherwise affected. Whitehouse v Carlton Hotel Pty Ltd was said not to assist. The precise basis on which the plaintiffs sought an order rectifying the register of the company was also said to be unclear as an applicant for such an order "must show a personal equity that the court will protect; prima facie, such an equity is shown if a person's name is wrongly omitted from the register": In the matter of Motasea Pty Ltd (2014) 97 ACSR 589; [2014] NSWSC 69 at [47]; Re Mogul Stud Pty Ltd [2012] NSWSC 1639 at [7]. The plaintiffs did not appear to rely upon any such grounds. Any claim a company may have for relief in relation to the exercise by a director of a power to issue shares on the basis that it was carried out in breach of fiduciary duty to the company is not a personal equity of a shareholder: Whitehouse v Carlton Hotel. The plaintiffs seem to claim that Veronica Lees breached her director's duties by carrying out the rights issues but it is not clear from the proposed amendments whether they assert a personal equity and, if so, what it is and what material facts are said to support it.
To this, the plaintiffs submitted that the second to fifth defendants' objection misconceived the proposed additional relief as the making of a declaration was not a cause of action against a party and thus the failure to explain the nature of the claim against the second to fifth defendants, or how they were said to be liable, was not a defect in the proposed pleading. The amendments did not attempt to explain how the second to fifth defendants were liable to the plaintiffs because the plaintiffs did not allege that the second to fifth defendants had any such liability. Further, the plaintiffs as current shareholders had a personal equity; any shareholder has an interest in confirming the validity or otherwise of any purported shares issued by the company, whether before or after that person became a shareholder. The plaintiffs submitted that while the defendants were necessary parties because, as shareholders, they would be affected by the making of the declarations; that was not to say that relief was sought from them.
Perpetual submitted that the proposed pleadings were problematic from a case management perspective in that the plaintiffs did not allude to these proposed amendments when the matter was before me on 13 July 2020 and fixed for hearing later this year. From a legal perspective, Perpetual noted that whether a director's purpose in issuing shares was improper critically depends on the states of mind of the directors, all of whom have died; nor has their legal personal representatives been joined. As the plaintiffs did not become shareholders until 2018, then they can either seek relief by way of a derivative action or, alternatively, assert a personal equity. Either way, the basis on which the claim for relief is sought needs to be expressly pleaded and identified, which has not occurred.
Further the new proposed claim is said to be futile because equity will apply the six year limitation period to a claim in tort and contract by analogy in this case. Perpetual submitted that laches is only available as a defence to an equitable, not legal, claim: Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 at 340 (Deane J). Laches is confined to equitable claims which are subject to no statutory bar either expressly or by analogy: Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462 at [414]. In purely equitable proceedings, where there is a corresponding remedy at law in respect of the same matter and that remedy is the subject of a statutory bar, equity will apply the bar by analogy: Lewis Securities Ltd (In Liq) v Carter [2018] NSWCA 118; (2018) 355 ALR 703 at [212]; Gerace v Auzhair Supplies Pty Ltd (in liq) (2014) 87 NSWLR 435; [2014] NSWCA 181 at [70]; Sze Tu v Lowe at [365]. An allegation of breach of fiduciary duty, based on facts that would also have allowed a common law action for fraud to be brought, attracts the same statute of limitation period as the common law action for fraud: Lewis v Carter at [214]; Belan v Casey (2003) 57 NSWLR 670; [2003] NSWSC 159 at [149].
Here, Perpetual noted that the first rights issue dated back to 1962. The law of limitations in New South Wales was stated in the Law Reform Commission's First Report on the Limitation of Actions (No 3, 31 October 1967) at page 7, paragraph 6:
The general law of the limitation of actions in force in New South Wales today is in general the same as it was in England when Queen Victoria came to the throne in 1837. The law rests, in the main, on Imperial Acts passed before the first settlement of this country, together with some later English legislation adopted, or copied, by New South Wales legislation passed over 100 years ago. For the limitation rules of most common application, it is necessary to go back to a statute passed in 1623 and it may possibly be necessary to go back to a statute of 1588.
Thus, in respect of the first rights issue, the six year period in respect of claims in tort and contract under the Limitation Act, 1623 (21 Jac 1 c 16), sections 2 and 3, was the main provision in force before assent was given to the Limitation Act 1969 (NSW) and would be applied by analogy to defeat the claim made for breach of fiduciary duty. In respect of the rights issues in 1980, 1994 and 1997, section 14 of the Limitation Act 1969 (NSW) would be applied by analogy to defeat the claim made for breach of fiduciary duty in respect of these rights issues.
To this, the plaintiffs submitted that this was not a derivative action and the plaintiffs' standing to seek declaratory relief arose because they were current shareholders. Whilst the Court will less readily make findings of improper purpose in the absence of the directors, there was nothing to preclude the Court from doing so. Further, the fact that a defendant may have a valid defence to a new claim, such as it is time barred, was not a reason to refuse leave to rely upon the claim. It was submitted that whether an application for declaratory relief was analogous to a contractual or tortious claim was not self-evidently correct but a matter for trial and not a reason to refuse leave. It was submitted that there was no authority that determined what limitation period, if any, applied by analogy to a request for declaratory relief of the type sought and, in the absence of clear authority, it was reasonably arguable that there was no limitation period by analogy and therefore leave to amend should be granted.
The bigger problem is understanding what the pleaded facts in respect of the rights issue have to do with the parties to these proceedings. Some obvious questions arise from the proposed amendments, which might be thought "a riddle, wrapped in a mystery, inside an enigma" (Winston Churchill, 'The Russian Enigma', BBC Broadcast, 1 October 1939). First, is the relevant duty said to be owed by the directors (Veronica Lees, Mabel Davis and Stuart Henderson) to the company or to the shareholders, noting that generally a director owes duties to the company rather than to shareholders (Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538; (1999) 32 ACSR 294 at [40]; Sharp v Blank [2015] EWHC 3220 (Ch) at [9]) and the existence of fiduciary duties owed by a director to a company generally prevents the recognition of concurrent and identical duties owed to a shareholder covering the same subject matter: Brunninghausen v Glavanics; Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31; (2003) 21 ACLC 1671 at [17]; Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2003] QSC 402; [2004] 2 Qd R 207; (2004) 22 ACLC 724; Jones v Jones [2009] VSC 292. I take it from proposed paragraph 136 that the duty is said to be owed to the shareholders.
Second, where the shareholders of the company at the time of the rights issues comprised both natural persons and a trustee, how is it said that the directors owed a duty to one shareholder "in particular", being the trustee. What are the material facts from which this heightened duty is said to arise? What is the content of this heightened duty?
Third, and more importantly, how is it said that any breach of the heightened duty to a trustee shareholder infringed the rights of potential beneficiaries of the trust such as to entitle the potential beneficiaries, on becoming beneficiaries, to seek declaratory relief and consequential orders that the share register of the company be rectified to reflect the shares that the trust would hold if the rights issues had not occurred? Fourth, nor is it explained how the plaintiffs have standing to seek declaratory relief and an order to rectify the share register given that they were not shareholders at the time of any of the rights issues. That is not to say that the plaintiffs may not be entitled to the declaratory relief sought, but simply to say that it is not presently clear why.
That is, the proposed amendments still seem to me to suffer from the defects referred to by Black J on 6 July 2020. There, his Honour did not object per se to the inclusion of Prayer 1B as:
I would not, in an application of this kind, reach any determination as to whether that proposition is arguable or not arguable, as a matter of general law, because it seems to me that that proposition is factually intensive, and it is at least arguable that the general law equitable jurisdiction, which recognised a personal right of a shareholder to support a challenge to an improper share issue, prior to the introduction of the statutory derivative action may support a claim of this kind.
However, the difficulty identified by Black J was "the pleading does not identify either the material facts that are said to support the claim, or the logical steps in that claim, so as to allow the defendants to know the case they have to meet". That problem seems to me to continue to exist with the current proposed amendments. Whilst the plaintiffs have provided some of the missing detail referred to by Black J, including who the directors were at any particular point in time and which directors were said to have had the improper purpose, the core problem identified by his Honour remains. The pleading does no more than assert that the relief is said to arise in the general equitable jurisdiction of the Court but without identifying material facts said to give rise to that relief. This problem is particularly acute where there is no obvious connection between the facts as presently pleaded which, even if they be assumed to be true, do not clearly connect the parties to these proceedings to the proposed relief sought. The missing piece of the puzzle remains how any breach of duty by the directors to the shareholders at the time of the rights issues gives rise to the relief sought by the plaintiffs vis a vis the defendants in these proceedings. The defendants are entitled to know what the suggested basis for the relief is, as it would follow from the grant of such relief sought that their interests will be materially affected.
For these reasons, I make the following orders:
1. Dismiss the interlocutory process filed on 2 September 2020.
2. Order the plaintiffs to pay the defendants' costs of the interlocutory process.