The plaintiff's claim is presently described in an amended statement of claim filed on 22 December 2022. By a notice of motion filed on 15 August 2023, the plaintiff wishes to further amend the claim by adding Mr James Howson as a second plaintiff.
The motion is supported by an affidavit of Mr John McDermott sworn on 15 August 2023. He is the plaintiff's solicitor.
Mr Howson consents to the joinder. The four defendants, who are jointly represented, do not.
The plaintiff is a company. Mr Howson is its sole director, secretary, and shareholder. At a prima facie level, the plaintiff's interests are indistinguishable from those of Mr Howson. Mr Howson, however, says that he has, in addition to the plaintiff's rights, separate and personal interests in the proceedings. Relying upon r 6.19 of the Uniform Civil Procedure Rules 2005 (NSW), the plaintiff submits that:
1. separate proceedings by the plaintiff and Mr Howson would give rise to common questions of law or fact; and
2. all rights of relief claimed in the proposed pleading arise out of the same transactions.
Rule 6.19 specifically allows for the joinder of another party "after the originating process is filed."
The amended statement of claim asserts that the parties, plus Mr Howson on the plaintiff's behalf, entered into agreements relating to the formation, in simple terms, of an agricultural business called Goodlife. The agreements were said to have been formalised in a deed executed by the parties, and Mr Howson, on 17 February 2021.
Pursuant to the agreements, the business was to be established, the Goodlife Trust was to be created to own the property upon which the business would operate and there would be an operating company (the Goodlife Group) to run the Goodlife Business. Mr Howson and the first and second defendants were to have equal units or shares in the business, the trust, and the group, respectively.
The amended statement of claim says that it was a term of the deed that the property upon which the business was to operate would be purchased by the defendants for the sum of $2.7m (cl 2.2(b)). However, says the plaintiff, instead of providing this sum from their own funds the defendants borrowed the money from the trust (about $1.3m) and from the Commonwealth Bank (about $1.5m).
The plaintiff asserts that borrowing the money, as described above, was in breach of the parties' agreement, and had the consequence of diminishing the funds held by the trust, and in turn, diminished the value of the units held in the trust by the plaintiff. Further, and again consequentially, the plaintiff's shares in the Goodlife Group lost a part of their value.
The defendants pointed out that there was an inconsistency within the deed concerning the source of the funds to purchase the property. Clause 2.3(h) suggests that the defendants did pay the purchase price from their own resources. The defendants did however agree that the issue of the payment for the property was central to the dispute between the parties.
According to the plaintiff, the failure to utilise the defendants' own funds amounted to, at least on the part of the first defendant, a breach of his fiduciary duties as a trustee and even to a "dishonest and fraudulent design." The other defendants are alleged to have "knowingly assisted and participated" in the first defendant's inappropriate conduct.
Finally, the plaintiff asserts that, as a result of the conduct of the defendants, they are liable to account to the plaintiff and also to pay the plaintiff "an amount in equitable compensation for the reduction in value of its interest" in the trust.
The proposed pleading (a further amended statement of claim) asserts that if the current plaintiff is unable to recover the diminished value of the trust units or the shareholdings in the group then Mr Howson should be entitled to that recovery.
In addition, Mr Howson seeks specific performance of the defendants' obligations under the deed and also damages arising from misrepresentations made by the defendants.
Finally, it is asserted that Mr Howson, having signed a deed of guarantee for the loan from the Commonwealth Bank, has become liable to pay any amount arising from the bank loan. Accordingly, he says "the defendants ought to be held liable to indemnify and hold harmless Mr Howson in respect of any such liability."
As noted above, the plaintiff and Mr Howson say that the conditions for a joinder as set out in r 6.19, have been met and leave should be granted. The amendments to the pleadings reflect the basis for the relief sought by Mr Howson.
In response to the allegations in the amended statement of claim, the defendants deny any wrongdoing, stating that it was always envisaged that the property was to be purchased using loan funds.
As to the motion for joinder, the defendants say it is "irregular" for the plaintiff to join another plaintiff and that "in any event the claims that Mr Howson seeks to bring are not sustainable." Therefore, the motion should be dismissed with costs.
More specifically, the defendants submitted, in summary:
1. a shareholder cannot make a claim for a reduction in the value of a share; that right is reserved to the company;
2. the claim for specific performance must fail for a number of reasons, but in particular because the property has already been purchased and the agreement relied upon by Mr Howson was concluded after the purchase of the property;
3. damages in lieu of specific performance cannot be claimed by Mr Howson because he has no right to specific performance; and
4. there is no loss attributable to Mr Howson signing the guarantee for the loan because no claim arising from the guarantee has ever been made upon Mr Howson. Further it would be inappropriate to seek declaratory relief concerning a matter which had not yet occurred, in particular because the features which might attend the occurrence were unknown.
The issue regarding the guarantee has an added element derived from a letter (via email) from the Commonwealth Bank dated 30 January 2024 (Exhibit 1). In this letter a representative of the bank says the bank has approved a release of Mr Howson as a guarantor of the facility held with the bank. It is subject to the signing of a discharge authority which has yet to occur.
If the authority is signed, the guarantee issue may dissolve. However, that has not yet occurred so that the issue remains relevant.
The defendants also submitted that any asserted right of Mr Howson to join the proceedings could be seen as a device to avoid a future application for security for costs against the plaintiff resulting in the stultification of the plaintiff's claim. The defendants said that this was not a proper basis to join Mr Howson because the application had not been made and its result was unknown.
The plaintiff replied to the defendants' points, stating that each of its claims was at least arguable, even if only productive of nominal damages, and that the legal arguments should be reserved to the full hearing.
As to the inability to sue for a reflective loss, the plaintiff conceded the current state of the law probably did not favour Mr Howson's capacity to recover the decline in the value of his shares, but it suggested that Mr Howson retained a claim for breach of contract arising from his personal involvement in the enterprise. Notably, Mr Howson is a personal signatory to the deed in addition to the plaintiff. It also did not matter, the plaintiff submitted, if the result was no more than the recovery of nominal damages on Mr Howson's part. I was referred to this passage from State of New South Wales v Stevens (2012) 82 NSWLR 106; [2012] NSWCA 415 at [18]:
"The principles concerning the award of nominal damages in the case of a breach of contract were conveniently set out by the West Australian Court of Appeal (McLure P, Newnes and Murphy JJA) in Motium Pty Ltd v Arrow Electronics Australia Pty Ltd as follows:
'6 Nominal damages were described by Lord Halsbury in The Mediana [1900] AC 113 in the following oft-cited passage:
'Nominal damages' is a technical phrase which means that you have negatived anything like real damage, but that you are affirming by your nominal damages that there is an infraction of a legal right which, though it gives you no right to any real damages at all, yet it gives you a right to the verdict or judgment because your legal right has been infringed. But the term 'nominal damages' does not mean small damages (116).
See, too, Baume v Commonwealth [1906] HCA 92; (1906) 4 CLR 97, 116 - 117 (Griffiths CJ).
7 It is clear that a breach of contract by one party always gives the other party a right to recover damages for the breach: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 [58]. If the breach is not proved to have caused any loss, the party that has breached the contract is liable to pay nominal damages: see Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286, 301; Huppert v Stock Options of Australia Pty Ltd [1965] HCA 30; (1965) 112 CLR 414, 424, 431; Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232 [93], [149].' (Emphasis added)"
As a party to the deed, submitted the plaintiff, Mr Howson was entitled to have his rights vindicated, if only by the award of nominal damages.
In addition, the plaintiff submitted that an exception to the reflective loss principle might still be available in Australian law. This exception was described in the Court of Appeal of England and Wales in Giles v Rhind [2002] EWCA Civ 1428, for example at p 628, where Waller LJ quoting Bingham LJ in Johnson v Gore Wood & Co [1999] Lloyds Rep PN 91, CA said:
"These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation."
The fact that the Supreme Court of England and Wales did not sanction the exception in Marex Financial Ltd v Sevilleja [2021] AC 39 did not necessarily mean it was not applicable in Australia.
Next, submitted the plaintiff, if Mr Howson did not have a remedy for reflective damages, then that would enhance his right to specific performance, a remedy which arises when damages are inadequate. Just because the defendants had already borrowed money was not decisive. The borrowings could be viewed as bridging finance, leaving open the possibility of specific performance through the defendants advancing the final funding from their own resources.
In relation to the guarantee the plaintiff submitted that although Mr Howson had not yet been called upon to honour the guarantee that did not prevent the making of the declaration to the effect that any such call was impermissible. The fact that the orders depended on events still to occur was no bar to the granting of the orders. As stated by Barrett AJA in EB 9 & 10 Pty Ltd v The Owners Strata Plan 934 (2018) 98 NSWLR 889; [2018] NSWCA 288 at [34]:
"It is no obstacle to the grant of declaratory relief that the concrete situation of controversy relates to future actions. Relief in the nature of a quia timet declaration is available to establish what, according to existing rights and obligations, the parties' positions will be if some defined event happens, at least where it is reasonably foreseeable that the event may happen."
Finally, in response, the plaintiff submitted that there was a real possibility that security for costs would be sought against it. There had already been one successful application, and another had been envisaged. If the result of the application was to stultify the plaintiff's claim, the litigation should still proceed on the part of Mr Howson, in particular to the extent that his claims were independent of the company and personal to him.
It is not contentious that there are common questions of law and fact or that the relief claimed by Mr Howson arises from the same transactions as the relief claimed by the plaintiff. It is contentious that falling within r 6.19 creates a right to a joinder of a party. I do not think this dispute is particularly relevant because there is no doubt that there is a discretion in relation to the granting of leave to amend the pleadings. A joinder without a consequent amendment would be of little purpose.
In addition, I think the commonality of facts and issues as between the plaintiff against the defendants and Mr Howson against the defendants is such that little or no prejudice will be suffered by the defendants as a result of the joinder, nor will the ultimate hearing occupy much greater time than would otherwise be the case.
Some of the plaintiff's arguments, in particular that arising from Mr Howson's claim for the reduction in value of his shareholding, are possibly bold and perhaps have little prospect of success. Nevertheless, to the extent that the claims are arguable, the argument should take place within the substantive hearing. At this stage I think there is a sufficient basis to allow the arguments to be developed.
Accordingly, I will make the orders sought by the plaintiff. The orders are:
1. James Graeme Howson be joined to the proceeding as a second plaintiff;
2. The plaintiff is granted leave to file and serve a further amended statement of claim in the form attached at "Annexure A" to the Affidavit of John McDermott sworn on 15 August 2023;
3. Subject to Order (4), the costs of the motion are to be costs in the cause; and
4. The plaintiffs (specifically including Mr Howson) are to pay the defendants' costs occasioned by the filing of the further amended statement of claim.
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Decision last updated: 31 January 2024