Does Pt 2F.1A apply to a company in liquidation?
95 In view of my conclusion that the primary judge was correct in finding that the requirements of s 237(2)(b) and (c) were not satisfied, the appellant's application for leave should be dismissed. Those findings are sufficient to dispose of the appeal. However, the question of whether Pt 2F.1A applies to a company in liquidation has been fully argued by counsel in this case and there are conflicting authorities. The issue is one of general importance and should be resolved by this court.
96 I have already referred to the fact that the primary judge in the present case considered this issue to be settled in favour of the proposition that Pt 2F.1A applied to companies in liquidation. The purpose of Pt 2F.1A was to abolish the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 and its exceptions pursuant to which the ability to bring a derivative action was confined to the shareholders of a company as being the only persons who could represent the interests of the company as a whole. Thus, s 236(3) provides:
"The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished."
97 The effect of the foregoing is that s 236(1) significantly extends the categories of persons who may apply for leave to institute proceedings on behalf of a company where those who control the company refuse to do so.
98 Euphoric accepted that there were a series of first instance decisions in which it has been held that Pt 2F.1A applied to companies in liquidation. Those decisions are Roach v Winnote Pty Ltd (in liq) [2001] NSWSC 822; Brightwell v R F V Holdings Pty Ltd [2003] NSWSC 7; [2003] 44 ASCR 186; Charlton v Baber [2003] NSWSC 745; (2003) 47 ACSR 31; Mahanna v Sovereign Capital Ltd [2004] FCA 1040; Kamper v Applied Soil Technology Pty Ltd [2004] NSWSC 891; (2004) 211 ALR 337; (2004) 50 ACSR 738; Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 1007; (2004) 51 ACSR 299; Scuteri v Lofthouse & Another (2006) VSC 317; (2006) 202 FLR 106.
99 However, there are a number of decisions that originally or more lately have taken a contrary view and have either upheld or suggested in obiter that Pt 2F.1A does not apply to a company in liquidation: B L & G Y International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705; (2001) 164 FLR 268; HPM Pty Ltd v Fear [2002] WASCA 249; (2002) 171 FLR 12; Promaco Conventions Pty Ltd v Dedline Printing Pty Ltd [2007] FCA 586; (2007) 159 FCR 486.
100 In Hypec Electronics, the first case to address this issue, Einstein J considered the legislative intention behind Pt 2F.1A. After setting out paras 6.11, 6.14-6.17, 6.23-6.24, 6.31-6.32 and 6.36-6.37 of the Explanatory Memorandum he observed (at 294)(omitting citations):
"69. It seems clear that the legislature had no intention of removing the well-established inherent power of the court to permit proceedings to be taken in the company's name where a company was in liquidation [See Aliprandi v Griffith Vinters Pty Ltd (in liq) ; Wenham v General Credits Ltd …]. An application in this regard might be made to the Court to give a direction to the liquidator to take such proceedings. Another approach to the same end, would be for the court simply to order that a particular creditor or contributory be authorised to use the company's name in taking the proceedings.
70 The matter that the legislature sought to address appears to have been the difficulties which had arisen when under the common law, a party sought to proceed on the basis of an exception to the rule in Foss v Harbottle . The intention behind the enactment of sections of 236 and 237 appears to have been to avoid confusion in that regard and to codify that form of entitlement and right of action. The Explanatory Memorandum gave no attention whatsoever to questions involving the jurisdiction of the court to permit actions to be taken in the name of a company in liquidation. As has already been seen, this jurisdiction is grounded upon the same principle on which a person could always have filed a bill in the old court of Chancery against his or her trustee to be allowed to use his or her name to recover the trust property."
101 Although his Honour expressed the view that it was unnecessary for him to finally decide whether s 237 was inapplicable to a company in liquidation as it was open to him to decide the matter under the court's inherent jurisdiction which was conceded by all parties, he was inclined to the view that s 237 was so inapplicable for the following reasons (at 295 [73]):
"There are clear indications within section 237 to the effect that the section does not extend to and does not contemplate, circumstances in which the subject company on behalf of which an application for leave to bring proceedings or to intervene in proceedings is made, is a company in liquidation. The rebuttable presumption the subject of section 237 (3) contemplates the directors participating in a decision by the company not to bring the proceedings or not to defend the proceedings or not to discontinue, settle or compromise the proceedings. Where a company is in liquidation the directors cannot participate in such a decision. Where a company is in liquidation the scheme of the Corporations Act is that it is the liquidator who is the appropriate party to determine whether proceedings should be brought on behalf of a company or whether any particular step should be taken on behalf of the company in relation to any proceedings. Absent some exceptional leave of the court, while a company is being wound up in insolvency or by the court, a person cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company except as a liquidator appointed for the purposes of the winding up; or as an administrator appointed for the purposes of an administration of the company beginning after the winding up order was made; or with the liquidator's written approval; or with the approval of the court [section 471A(1)]. Hence, as far as directors are concerned, they are unable to exercise their powers except where they obtain either the approval of the liquidator or the approval of the court. The manner in which the subsection refers to a decision "by the company" also does not suggest that there was an intention to refer to a decision by a liquidator on behalf of a company in liquidation." (Emphasis in original)
102 Einstein J resiled from this view in Kamper (at 338 [11]) where he suggested that the proper approach was that expressed by Barrett J in Charlton, in which his Honour said (at 39-40) (omitting citations):
"25 In BL & GY International Co Ltd v Hypec Electronics Pty Ltd , Einstein J expressed the view that Part 2F.1A does not apply to a company in liquidation. His Honour was influenced by the fact that s.237(3)(c) appears to assume that a company's directors will play a part in deciding whether it will itself engage in the particular litigation. Once creditors voluntary winding up commences, the directors will ordinarily have no power to make such decisions for the company: see s.499(4). Einstein J eventually did not need to decide this point. In Roach v Winnote Pty Ltd , Santow J, who was apparently not referred to Einstein J's earlier decision, inclined to the view that Part 2F.1A continues to apply despite the intervention of winding up, describing s.237(3) and its reference to directors' decision making as merely adjectival to the earlier substantive provisions of s.237.
26 The question has recently been addressed by Austin J in Brightwell v RFB Holdings Pty Ltd (above). With 'some hesitation', his Honour expressed a preference for the view of Santow J:
'Sections 236(3) and 237 literally apply to proceedings brought on behalf of a "company". That word is defined in s 9 in a manner that extends to a company in liquidation. I respectfully agree with Santow J that s 237 (3) is adjectival. The matters to be taken into account by the Court in exercising its discretion to grant leave are set out in s 237(2). Section 237(3) operates in aid of subsection (2)(c) by creating a rebuttable presumption in specified circumstances. Those circumstances apply to a case where the directors of the company have made a decision of a kind that could not be made by them if the company were in liquidation. But the fact that the rebuttable presumption arising out of s 237 (3) cannot arise in a case where at all relevant times the company is in liquidation should not be taken to imply that where a liquidator is in control the Court cannot exercise its discretion under subsection (2). Each of the criteria specified in subsection (2) is perfectly comprehensible in the case of the company in liquidation.
If Part 2F.1A were held to be inapplicable to a company in liquidation because of the wording of s 237 (3) (c), it would be equally inapplicable if a receiver and manager had been appointed to the company. As Santow J observed in the Roach case (at para [4]), it would be an incongruous result if the statutory derivative action were not available where a receiver has displaced the board, as regards its external relations which would embrace litigation.'
27 My views coincide with those of Santow J and Austin J and I respectfully adopt the approach that commended itself to them. Section 237(3), which refers to decision making by directors, does no more than cause a rebuttable presumption to arise as to one of the matters to be examined by the court under s.237(2). If the facts as found (including as to directors' decision making) cause the case to fit within s.237(3), the presumption arises. If they do not - because directors did not participate in a relevant decision, or for any other reason - the presumption does not arise. In either event, there is no reason why the substantive provisions of ss.237(1) and 237(2) cannot operate perfectly well according to their terms."
103 In Roach, Santow J (as he then was) noted that Pt 2F.1A substituted a statutory derivative action for the general law exceptions to the rule in Foss v Harbottle. He then observed (omitting citations):
"3 There is no express reference in ss236 to 242 of the Corporations Act delineating the statutory derivative action whereby it is stated, one way or the other, whether these remedial provisions apply to a company in liquidation. It is true that s237(3) provides for a rebuttable presumption that granting leave is not "in the best interests of the company" in the circumstances there set out. Those circumstances include (subparagraph (c)) that, 'all of the directors who participated' in the relevant decision acted in good faith for a proper purpose and otherwise satisfied the requirements there laid down. There is no alternative reference to the liquidator in that context and clearly the directors in those circumstances would have no such determining authority in a liquidation situation. It may be that the assumption was made that a liquidator, as an officer of the court, would make any such decision in such a way as to conform to those requirements, in any event, though here the interests of creditors substitute for those of shareholders; Walker v Wimborne .
4 I consider s237(3) is really adjectival to the earlier substantive provisions, so that its omission of any reference to liquidators could not be decisive in determining whether the derivative action could apply in a liquidation. Indeed, one could contemplate a receiver also being in an equivalent position, having effectively displaced the Board. It would be an incongruous result if the statutory derivative action were not then available because the receiver has displaced the Board, as regards its external relations which would embrace litigation.
5 The only other statutory reference that may bear on the matter appears to be s239 of the Corporations Act . However, that simply deals with members of a company ratifying or approving conduct and saves that situation from falling outside the scope for a derivative action.
6 One possibly significant line of enquiry would be directed at the position prior to the CLERP statutory derivative action. That is, to ascertain whether the previous general law exceptions to the rule in Foss v Harbottle then operated in a liquidation context. In Aliprandi Pty Ltd v Griffith Vintners Pty Ltd , McLelland J applied the general law exception to the rule in Foss v Harbottle to a company in liquidation permitting the relevant proceedings. It would indeed be incongruous, were the statutory derivative action to have a narrower ambit than the general law exceptions. That is, given its remedial character as a procedural reform, and its retroactive application to causes of action arising prior to its date of commencement (13 March 2000), which have not been earlier resolved.
…
10 The general common law could operate if the statutory derivative action did not apply and did not seek to cover the whole field including liquidation. However, I do not need to decide that question since, on balance, I am satisfied that the statutory derivative action would still be available in the context of a liquidation. This is so, even if it be the case that there is here overlap with the inherent power of the liquidator to decide whether the company should begin or continue proceedings assisted as needed by s477(6) and s511 of the Corporations Act . …"
104 In HPM Pty Ltd Steytler J, with whose reasons Malcolm CJ and Murray J agreed, observed (at 16 [18]) that there was a real question as to whether ss 236 and 237 of the Act had any application to a company in liquidation. Having set out the relevant sections, his Honour then said (at 17 [19]) (omitting citations):
"There is, in these provisions, no reference to a company in liquidation and the reference, in s 237(3), to the 'company' and the 'directors' appears to be inconsistent with the notion that those provisions are applicable to a company in liquidation. Moreover, there is, at common law, no exception to the rule in Foss v Harbottle which would have entitled a shareholder to bring proceedings in the name of a company in liquidation in circumstances in which the liquidator did not wish to pursue those proceedings. Once a company is in liquidation, the court is given ultimate control over the winding up, including the carriage of any claims on the part of the company. The situation appears to me to be no different under the Corporations Law , which expressly provides, by s 477(6), that the exercise by the liquidator of the powers conferred upon him or her (including authority to institute proceedings) is subject to the control of the court and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers. Also, by s 511, the liquidator, or a contributory or creditor, may apply to the court to determine any question arising in the winding up of a company… ."
105 Siopis J recently considered this issue in some detail in the Federal Court of Australia in Promaco Conventions. Promaco Conventions Pty Ltd and Dedline Printing Pty Ltd agreed to create a new company, The Printing Place, through which they would carry on business in partnership. The principals of Promaco (Mr and Mrs Pearce) and of Dedline (Mr and Mrs Ripley) became directors of The Printing Place whose members were Mr and Mrs Ripley and three nominees of Promaco. The Printing Place failed and liquidators were appointed. Promaco was its only creditor.
106 The three nominee shareholders of Promaco applied for leave to bring proceedings in the name of The Printing Place against Dedline and Mrs Ripley alleging that the former had used company property without authority and failed to account for profits and that the latter had breached her directorial duties to The Printing Place. His Honour reasoned that Pt 2F.1A did not apply when the relevant company was in liquidation. He preferred Einstein J's decision in Hypec Electronics to that of Santow J in Roach.
107 After referring to the reasoning of Einstein J in Hypec Electronics, that of Santow J in Roach and noting that the decision in Roach had been followed on a number of occasions by judges at first instance such as Austin J in Brightwell, Barrett J in Carpenter and Whelan J in Scuteri, Siopis J noted the difference of approach between Einstein J and Santow J in these terms (at 492 [20]) (omitting citations):
20 Einstein J relied upon the subsection as indicative of Parliament's intention that s 236 and s 237 were to apply only to a company as a going concern - because s 237(3)(c) could not have any application where a company was in liquidation. Santow J, on the other hand, observed that the subsection was "adjectival", in that, it provided only for a rebuttable presumption, and it was possible to construe that subsection as indicative of Parliament's intention that the presumption would apply when the company in question was a going concern, but not when the company in question was in liquidation. Therefore, said Santow J, the subsection was not inconsistent with a Parliamentary intention to alter the existing law, so that Pt 2F.1A would apply, both when the company was a going concern and when it was in liquidation.
108 His Honour then noted that those differences in approach called for an examination of Parliament's intention in enacting Pt 2F.1A and considered that, in seeking to discern that intention, it was open to the court to have regard to the mischief the legislation was intended to remedy by reference to the Explanatory Memorandum. His Honour then recorded at 493 [25] the following observations of Gummow J in Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344 at 351-352 in relation to the law as it stood before the introduction of the statutory derivative action:
"The point is that when the company went into liquidation, the question of the subsequent carriage of claims of a company was brought within the scope and control of the winding up and of the Court having charge of that winding up. In such a case, it is, in my view, not appropriate to speak of the rule in Foss v Harbottle or exceptions to the rule in Foss v Harbottle which have the effect of taking the carriage of such claims outside the winding up. It has been said on more than one occasion that winding up is a process which affects rights in rem, and there is obviously much sense in the policy of the legislation in confining those questions to the one forum designated by the legislation to deal with the whole of the subject matter."
109 Siopis J then cited (at 494 [26]) the following passage from the judgment of the Full Court of the Federal Court in Christianos v Aloridge Pty Ltd (1995) 59 FCR 273 at 281-282:
"Although a member who is dissatisfied with a liquidator's reluctance to sue cannot rely upon the exceptions to the rule in Foss v Harbottle , it is clear that other remedies may be available, for instance, the member may use the statutory procedure to ask the court to order the liquidator to bring the proceedings (see HAJ Ford & RP Austin, Principles of Corporations Law (7th ed, 1995), p 452, referring to s 477(6) and 511 of the Law; see also s 1321, providing for appeals from acts, decisions or admissions of liquidators and provisional liquidators). There are other possible remedies, for example, removal of the liquidator or, as was done in Garden Mews-St Leonards Pty Ltd v Butler Pollnow Pty Ltd (1984) 9 ACLR 91 the appointment of a receiver of the company's right of action (see generally, Scarel at 351-352)."
110 His Honour then made note of the Corporate Law Economic Reform Program Proposal Paper No. 3 entitled "Directors Duties and Corporate Governance" (the CLERP Paper) which was referred to in the Explanatory Memorandum and observed at 494 (omitting citations):
"28 The focus of the CLERP Paper was on inadequacies of the exceptions to the rule in Foss v Harbottle (1843) 67 ER 189 as affording an aggrieved shareholder a practical and effective means of enforcing rights as between the shareholders and directors. The paper criticised the existing law, particularly the so-called 'fifth exception to the rule', on the grounds that it was uncertain. Another obstacle identified was the lack of access by a minority shareholder to the company's funds to bring an action in the company's name. Also, it was said that the power of the majority to ratify breaches of duty could frustrate a minority shareholder who wanted to enforce the rights in the company's name, against a defaulting director who enjoyed the support of the majority. The paper said that these obstacles meant that few actions, relying on the exceptions to the rule in Foss v Harbottle , were ever effectively brought against defaulting directors. In this respect, the CLERP Paper contrasted the unsatisfactory operation of the existing law when the company was a going concern, with the position when a company went into liquidation. The CLERP Paper at 32 stated:
A statutory derivative action would not impose a new form of liability on directors but would provide a more effective avenue of enforcement than has previously been available. In the past, relatively few breaches of directors duties have been able to be litigated, other than in the insolvency context , especially when there has been no involvement by the ASC. (Emphasis added.)
29 There is no reference in the CLERP Paper to any of the cases referred to in [23] to [26] above [namely, Scarel and Christianos ]. There is no criticism of the existing law as reflected in those cases. To the contrary, as mentioned above, the position when a company is in liquidation, is contrasted favourably with the position when it is a going concern. There is no recommendation that the existing law as reflected in those cases be amended. In particular, there is no consideration in the CLERP Paper of whether the distinction recognised in those cases between the legal position of an aggrieved member, when the company was a going concern, and when it was in liquidation, should be abolished, merged or otherwise disturbed, and there is no recommendation to that effect.
30 The Explanatory Memorandum to the Bill also made no reference to the existing law in relation to the power of a member or contributory to bring an action in the name of the company, when the company was in liquidation. In describing the "current position" which the legislation was intended to remedy, the Explanatory Memorandum confines its description only to the exceptions to the rule in Foss v Harbottle - in other words, only to the law as it applied to an aggrieved shareholder in a company which was a going concern, desirous of bringing a claim in the name of the company."
111 After referring (at 495 [30]-[31]) to paras 6.14, 6.15 and 6.23 of the Explanatory Memorandum, his Honour continued (omitting citations):
"32 There is no suggestion in the Explanatory Memorandum that the existing law in relation to the power of a member or a contributory to bring an action in the name of a company which is in liquidation, would be, or should be, amended, supplemented, or in any way affected by legislative change proposed to be effected by the Bill. In particular, there is no suggestion that the proposed statutory amendment would, or should, abolish or affect the distinction recognised in the cases between the legal position of a member or contributory, when the company was a going concern, and when it was in liquidation.
33 Further, the Bill provided for the inclusion of "officers" and "former officers" in the class of persons who would be eligible to apply to Court to bring an action in the name of a company. Such a change would have represented an expansion to the category of persons who had standing to complain about the exercise of the powers of a liquidator under s 477(6) and s 511 of the former Corporations Law , which was confined to "contributories" and "creditors". Likewise, only contributories and creditors had standing to invoke the inherent power in the course of winding up, to bring proceedings in the name of the company ( Cape Bretton Company v Fenn ; Cadima Express Pty Limited v Deputy Commissioner of Taxation . However, there is no discussion in the CLERP Paper, nor in the Explanatory Memorandum, of any rationale for reforming the law by expanding the class of eligible complainants to include a director or former director of the company.
34 In my view, the mischief which Parliament intended to address was confined only to that manifest in the existing law relating to the right of an aggrieved shareholder in a company, which was a going concern, to bring an action in the name of the company. Therefore, I agree with the observations made by Einstein J at 294 in BL & GY International ….
35 It follows that, in my view, the abolition of the general law right, referred to in s 236(3) of the Act, was intended to be confined to the abolition of the right founded on the exceptions to the rule in Foss v Harbottle - being the general law which applied when the company in question was a going concern. It was not intended that the scope of the replacement statutory provisions would extend beyond the scope of the provisions of the general law which the statute abolished.
36 Another basis relied upon by Santow J in Roach for concluding s 236 and s 237 applied even when the company in question was in liquidation, was that the definition of "company" in the Act was wide enough to include a company in liquidation. Section 6(1) says that the definitions in Pt 1.2 of the Act 'have effect for the purposes of the Act, except so far as the contrary intention appears in this Act'. Accordingly, the definition of 'company' does not preclude a finding that the relief in Pt 2F.1A was intended only to apply when the company in question was a going concern.
37 The distinction in the position of a person seeking to bring a claim in the name of a company, where the company is a going concern, and where it is in liquidation, and the rationale for the distinction, is authoritatively stated by Lord Blanesburgh in Ferguson and by Gummow J in Scarel …. For the reasons set out above, in my view, Parliament did not intend, in enacting Pt 2F.1A, to undermine or affect that distinction. It follows, that the better view, in my opinion, is that Pt 2F.1A of the Act has no application when a company is in liquidation."
112 However, his Honour then concluded that he was unable to refuse leave solely on this basis. This was because the decision of the High Court in the case of Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 required, in the words of Siopis J at [38]:
"a single judge interpreting a statute applied nationally, to give effect to the decisions of other single judges construing that statute, unless the single judge is of the view that the previous decisions of those single judges are "plainly wrong". This test requires a high degree of assurance on the part of the single judge departing from the existing view. As I have said, I am of the opinion, that the better view is that Pt 2F.1A has no application where a company is in liquidation, but in light of the considerable number of other single judges who have come to a different view, I do not have the high degree of assurance necessary for me to characterise the contrary view a "plainly wrong".
113 In Ford's Principles of Corporation Law, Butterworths (Looseleaf Edition) at para 11.270, the learned authors state that Pt 2F.1A does not address the effect of liquidation. They refer to the common law principle that once a company goes into liquidation it is the liquidator who decides whether the company should commence or continue proceedings, the directors and members ordinarily losing their respective powers to have the company conduct litigation other than proceedings to have the winding up order stayed. Scarel is referred to before the authors note that prior to the commencement of Pt 2F.1A, a member who was dissatisfied with the liquidator's reluctance to sue or continue proceedings could use the statutory procedure to ask the court to order the liquidator to commence proceedings: see ss 477(6), 511.
114 The learned authors then refer to the court's inherent power in the course of a winding up to permit proceedings to be taken in the name of the company at the instigation of a member or creditor and note that this inherent power has survived the commencement of Pt 2F.1A, as confirmed in Brightwell, Hypec Electronics and Carpenter. However, whether Pt 2F.1A is available when a company is in liquidation was a different question. Whilst noting there were initially conflicting views, the authors conclude:
"[I]t is now clear that Pt 2F.1A is available when a company is in liquidation."