Clutha v Millar [2002] NSWSC 362 | Case summary

4834/00 CLUTHA LTD (IN LIQ) V FREDERICK WILLIAM MILLAR & ORS JUDGMENT 1 HIS HONOUR: This judgment relates to a notice of motion in proceeding No 4834 of 2000, by which the first to seventh defendants ("the applicants") seek an order that the proceeding be dismissed against them. According to their contention, the pleaded cause of action is statute barred. 2 There are two proceedings in this Court relating to the insolvency of Clutha Ltd (in liquidation) ("Clutha") and the alleged liability of its directors, namely No 4834 of 2000 ("the 2000 Proceeding") and No 1428 of 2001 ("the 2001 Proceeding"). 3 Clutha was a substantial mining company, which traded up to 14 February 1995 under the management of its board of directors. According to the statements of claim in both proceedings, on 28 November 1994 Clutha issued a substantial quantity of shares to Nichimen Corporation, for which Nichimen Corporation paid $7.2 million. As part of the transaction Mr Yoshikawa became a director of Clutha on 30 November 1994, and Mr Yamamoto was appointed as alternate director for Mr Yoshikawa. Mr Yoshikawa is alleged to be a director, agent and employee of Nichimen Corporation, and Mr Yamamoto is alleged to be a director, agent and employee of Nichimen Australia (a wholly-owned subsidiary of Nichimen Corporation). 4 On 14 February 1995 a voluntary administrator was appointed to Clutha, and on 23 June 1995 Clutha entered into a deed of company arrangement. After some extensions of the life of the deed, and in accordance with its provisions, a liquidator was appointed to Clutha on 23 December 1996. The liquidator is now Mr Timothy Cuming. The 2000 proceeding 5 Clutha sues: · seven individuals (the applicants) who were directors of the company during the period from 30 September 1994 to 14 February 1995; · Mr Yoshikawa and Mr Yamamoto (the eighth and ninth defendants); and · Nichimen Corporation and Nichimen Australia Ltd (the tenth and eleventh defendants). 6 The proceeding began by a statement of claim filed on 30 November 2000. The statement of claim pleaded that Clutha incurred debts during the period from 30 September 1994 to 14 February 1995, which remain outstanding; and that it was insolvent on 30 September 1994 and at all times thereafter. 7 The cause of action against the applicants is in negligence. The statement of claim contends that they owed a duty of care to Clutha in the exercise of their powers and the discharge of their duties as directors of the company, and that between 30 September 1994 and 14 February 1995 ("the September/February period") they were in breach of their duty of care to Clutha and were negligent. Clutha says that in the September/February period it incurred unsecured debts which remain outstanding, and at the times when those debts were incurred there were reasonable grounds for suspecting that the company was insolvent. It alleges that the applicants knew or should have known that was so, and that they failed to prevent Clutha from incurring the debts. It alleges that by reason of their breach of duty, it suffered loss and damage. It says that the loss and damage is measured either by the amounts of the debts incurred during the September/February period for which it remains liable, or by its trading losses in respect of that period. 8 The same cause of action is asserted against Mr Yoshikawa and Mr Yamamoto, except that in their cases the period within which the breach of duty is alleged to have occurred is the period from 30 November 1994 to 14 February 1995 ("the November/February period"). The pleading against Nichimen Corporation and Nichimen Australia is that they are vicariously liable at common law and under s 7 of the Law Reform (Vicarious Liability) Act 1983 (NSW) for the breaches of duty by Mr Yoshikawa and Mr Yamamoto respectively. The 2001 proceeding 9 In the 2001 proceeding Mr Cuming and Clutha sue the same 11 defendants, pleading in rather more detail broadly the same facts, but this time seeking relief under provisions of the Corporations Act rather than the general law of negligence. The statement of claim invokes against the first to ninth defendants ss 588G and 588M (the insolvent trading provisions), and s 232 (4) (the statutory duty of care and diligence, now found in a rather different context in s 180). 10 The proceeding began by a statement of claim filed on 3 August 2001. This time the period selected for recovery against all defendants is the November/February period. The statement of claim alleges that Clutha was insolvent during the whole of that period. 11 The pleading against the Nichimen companies is that they are liable as persons involved in the contraventions by the eighth and ninth defendants of s 588G and s 232 (4), by reason of s 79 and/or s 1317DB (as the provision was at the relevant time). The plaintiffs seek orders for recovery from each of the Nichimen companies of the amount of their losses, as debts due under s 588M (2) and s1317HD (as it then was). 12 Additionally there is a pleading against all defendants based upon s 598 of the Corporations Act (the misfeasance provision). 13 It will be seen that the two proceedings require essentially the same factual inquiry. Not surprisingly, one of the applications that have been filed, but not yet determined, is an application for either consolidation or an order that the proceedings be heard together. The limitation claim 14 The applicants claim that the 2000 proceeding is not maintainable against them because it was brought after the expiration of the limitation period of six years running from the date on which the alleged cause of action in negligence first accrued: Limitation Act 1969 (NSW), ss 14 (1) (b) and 63 (1). They say that the cause of action against them first accrued on 30 September 1994, and was extinguished on 30 September 2000. The statement of claim was not filed until 30 November 2000. They seek an order dismissing the proceeding against them under Part 13 rule 5 or Part 15 rule 26 of the Supreme Court Rules, or in the inherent jurisdiction of the Court. 15 In Hillebrand v Council of the City of Penrith [2000] NSWSC 1058, paragraph [27], I expressed the view that if the cause of action relied upon by the plaintiff in a proceeding is clearly statute barred, the Court may conclude that the plaintiff's claim for relief discloses no reasonable cause of action, and may therefore enter summary judgment against the plaintiff or strike out the whole or the relevant part of the plaintiff's pleading. Although both Part 13 rule 5 and Part 15 rule 26 may be invoked in some circumstances, Part 15 rule 26 is limited to cases where there is a defect in pleadings, and does not include cases where after examination of the evidence the Court comes to the conclusion that the plaintiff's case is hopeless: Hillebrand, at paragraph [29]. The notice of motion in the present case relies on the pleaded statement of claim, and the only fact that the applicants need is that the proceeding was commenced more than six years after 30 September 1994. Because that fact is needed, strictly the relief may be better granted, if the applicants are entitled to it, under Part 13 rule 5 than under Part 15 rule 26, but in any case there is no doubt that the Court has jurisdiction under the Supreme Court Rules to grant the relief that the applicants seek. 16 Nor is there any doubt that in order to succeed, the applicants must establish not only that, on balance, the 2000 proceeding is statute barred against them, but that the contrary contention is unarguable to the standard referred to in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; Air Services Australia v Zarb (Court of Appeal of New South Wales, 26 August 1998, unreported); Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 124. 17 There is some doubt, however, as to whether an interlocutory application for dismissal of the proceeding against the applicants is an appropriate way of testing the limitation argument. In Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, one of the questions was whether a claim under sections 52 and 82 of the Trade Practices Act 1974 (Cth) for damages for loss suffered as a result of misleading and deceptive conduct was barred by the three-year limitation period set by s 82 (2). In October 1987 plaintiff granted an indemnity to a bank, after misleading representations had been made to it by the defendant. In May 1989 the plaintiff made a payment pursuant to the indemnity. It commenced proceedings against the defendant and others in October 1990, and in January 1991 it sought to amend its statement of claim. The defendant claimed that the amendment was out of time, since the loss alleged by the plaintiff first accrued when it granted the indemnity in October 1987. The judge at first instance accepted the defendant's argument and struck out the amendment. The High Court held that the plaintiff suffered no loss at the time when it granted the indemnity, but only when it was obliged to make a payment under the indemnity, and accordingly time did not begin to run under s 82 (2) until May 1989. 18 Mason CJ, Dawson, Gaudron and McHugh JJ concluded the joint judgment by saying (at 533): "We should, however, state in the plainest of terms that we regard it as undesirable that limitation questions of the kind under consideration should be decided in interlocutory proceedings in advance of the hearing of the action, except in the clearest of cases. Generally speaking, in such proceedings, insufficient is known of the damage sustained by the plaintiff and of the circumstances in which it was sustained, to justify a confident answer to the question." 19 The limitation point in Wardley's case required the Court to enter further into the facts than in the present case. Before reaching a conclusion as to whether the claim was statute barred, the Court in Wardley had to construe the instrument of indemnity in the circumstances in which it was made, to determine whether it generated an executory and contingent liability or an immediate liability (see 175 CLR at 524, 534). It then had to make a finding as to when the loss in fact occurred. In the present case, the applicants rely on the way the loss is pleaded in the statement of claim, and the only fact to be established is the date of commencement of the proceeding. It seems to me that if the cause of action as pleaded is plainly statute barred, the interests of justice require that the Court should make a determination to that effect immediately. If the applicants' argument is correct, this is one of the clear cases for which Mason CJ, Dawson, Gaudron and McHugh JJ allowed an exception. 20 Obviously the critical issue is to determine when the cause of action, as pleaded, first accrued. The statement of claim relies only on a cause of action in negligence causing economic loss. Negligence is not actionable per se, and the cause of action only accrues when damage is suffered. Therefore, the question is when, according to the pleading, did Clutha's damage arise. In my opinion, the answer lies in a close analysis of Hawkins v Clayton (1987) 164 CLR 539. 21 In that case, the defendant solicitors submitted that the executor's cause of action, asserting that they had negligently failed to discharge their duty of taking reasonable steps to find him and inform him of the will, was statute barred. The testator died in January 1975, the executor was informed about the will in March 1981, and he commenced proceedings in November 1982. Damage commenced to be suffered, in the sense that the assets of the estate began to be wasted, from 1975 onwards. In the Court of Appeal of New South Wales ((1986) 5 NSWLR 109), the majority upheld the limitation argument. Kirby P held that the cause of action first accrued when damage first occurred, even though the executor was unaware of the facts constituting the cause of action at that time. Glass JA held that the cause of action first accrued as soon as the wrongful act of the defendants caused some damage beyond what could be regarded as negligible. 22 In the High Court each of the three judges forming the majority (Brennan, Deane and Gaudron JJ) addressed the limitation point. Each of them concluded that the action was not statute barred, but for different reasons. 23 Brennan J said (at 561) that most causes of action for negligence first accrue when the plaintiff first suffers damage caused by the defendant' s breach of duty. He called this "the ordinary rule". However, he distinguished the case before him from the ordinary case. In the ordinary case, the last element of the cause of action to occur is the damage. In the case before him, the last element needed to complete the cause of action was the nominated executor's assumption of that office. The cause of action did not accrue until there was someone who could institute it, namely the executor upon his assumption of office. Since the nominated executor did not assume office until October 1982, the cause of action was not statute barred. 24 Brennan J's reasoning is relevant to the present case only to the extent that he laid down and described "the ordinary rule". There is no analogy between the present case and the special circumstances of executorship that led him to depart from the ordinary rule. 25 Deane J observed that in the ordinary case the cause of action first accrues when damage caused by breach of duty is sustained (at 587). He rejected the submission that this proposition should be qualified, in the case of a claim in negligence for damages for economic loss, so that in such a case time would not commence to run until the plaintiff discovered, or would on reasonable inquiry have discovered, that the damage had been sustained (at 587). He referred to cases about latent defects in buildings, where loss is not sustained until the defect becomes manifest, even though it has existed since the construction of the building. He distinguished those cases from cases where the damage is directly sustained when it is inflicted or first suffered, and said that in cases of the latter kind the cause of action accrues at that time (at 588). 26 The application of these principles would have led to the conclusion that the cause of action in Hawkins v Clayton was statute barred. However, Deane J found that the facts of that case fell within an exception arising out of the proper construction of the statute itself. He said that the reference in s 14 (1) of the Limitation Act of New South Wales to the cause of action first accruing "should be construed as excluding any period during which the wrongful act itself effectively precluded the institution of proceedings" (at 590). Just as the legislature could not have intended to prevent an action for damages for false imprisonment to be brought if the false imprisonment itself prevented the plaintiff from taking proceedings for six years, so on the facts before him it could not have been intended that the executor would be prevented from suing the solicitor where the solicitor's breach of duty prevented the executor from finding out about the will until the limitation period had expired. 27 Subsequently, some doubts have been expressed about this reasoning. It was not followed by the other judges in Hawkins v Clayton, nor in Wardley's case. It was doubted by Giles JA in Scarcella v Lettice [2000] NSWCA 289, paragraph 43, and by Powell JA and Heydon JA in Cassis v Kalfus [2001] NSWCA 460, at paragraphs 7-8 and 9 respectively. It is unnecessary for me to reach any conclusion about the validity of Deane J's reasoning, because the present case is not in the exceptional category identified by Deane J. Here the pleaded wrongful conduct is the directors' failure to exercise reasonable care and diligence by failing to prevent Clutha incurring debts during a period when they knew or ought to have known that the company was insolvent. It is arguable that Clutha was prevented from bringing proceedings against its directors so long as they remained in control of the management of the company (although the obstacle to proceedings may not have been complete, since it was presumably open to creditors or contributories during the September/February period to place Clutha in liquidation so that the liquidator could take proceedings). But the directors' control came to an end in 1995 when an administrator was appointed. Further, there is no basis for contending that the alleged negligent conduct, as opposed to the directors' controlling position, effectively precluded the institution of any proceedings for any period. 28 Consequently, Deane J's reasoning would imply, like the reasoning of Brennan J, that the present case falls within the general rule that the cause of action first accrues when damage caused by the breach of duty is sustained. However, the plaintiff seeks to rely on the following dicta in Deane J's judgment (at 589): "Finally, it is arguable that, in the circumstances of the present case, the duty of care owed by the firm was a continuing one, that the breach of that duty continued up until the firm finally took some positive steps to locate Mr Hawkins and inform him of the existence and contents of the will and that damages (which would include the loss of a right of action by the operation of the Limitation Act) continued to accrue in varying forms right up until the time when the Stamp Duties Office imposed a fine for late lodgement of the death duty return and when Mr Hawkins incurred any additional legal costs involved in seeking probate of a copy will as distinct from the original document. In these circumstances, there is something to be said for the view that a distinct cause of action accrued each time new damage was incurred by reason of the continuing breach of duty." 29 Here, as in Hawkins v Clayton, the pleaded duty of care is a continuing one, extending throughout the September/February period. Clutha says that it relies on a distinct cause of action accruing each time the company incurred a new debt, because the incurring of each new debt was new damage. I disagree, for two reasons. 30 First, upon its proper construction the statement of claim does not plead a separate cause of action for every debt incurred during the September/February period. It pleads a continuing duty of care, breached when the applicants failed to prevent Clutha from incurring debts during the September/February period, leading to loss and damage measured either by the amount of the debts incurred during the period or by Clutha's trading losses during the period. That language is not apt to plead a separate breach of duty upon the incurring of each debt. It is true that paragraph 15 of the statement of claim asserts that Clutha was insolvent "at 30 September 1994 and at all times thereafter and was insolvent at the time when each of the said debts was incurred", but that pleading goes to Clutha's insolvency rather than to the duty or breach or loss. 31 Moreover, a case propounding a separate cause of action when each debt was incurred would be inconsistent with the claim that the applicants' wrongful conduct caused Clutha to suffer trading losses. The statement of claim does not purport to link the incurring of particular debts with any particular trading losses. Rather, the claim for recovery of trading losses seems to be based upon a comparison between Clutha's position at the beginning and at the end of the September/February period, consistent only with the allegation of a single continuous breach of duty. 32 Secondly, in my opinion it is not open to Clutha to plead a separate cause of action for the incurring of each debt, given the nature of the case in negligence. The point was considered by Glass JA in the Court of Appeal in Hawkins v Clayton (1986) 5 NSWLR 109 at 124. He said: "… [N]o fresh cause of action accrued to the beneficiary when he suffered further loss of income during the six-year period of limitation. Assuming a continuing duty of care, a fresh cause of action will only arise if a fresh breach causes loss going beyond the loss resulting from the barred cause of action. … The evidence here fails to establish a fresh breach inflicting superadded loss for the following reasons. The assumed breach of duty occurring before the limitation period of six years was the failure to take care to locate the beneficiary. Since the evidence showed a continuing omission to take steps which would have led to the discovery of his whereabouts, there is some difficulty in postulating a succession of breaches of duty arising from the continuing inaction. Do they occur at yearly, monthly, daily or hourly intervals? Nevertheless, if it be assumed in favour of the argument that there was a continuing breach of a continuing duty there is an insurmountable obstacle with respect to proving aggregation of the damage otherwise suffered. The loss of income flowing from the putative breach of duty within the six-year period after November 1976 was no different from the loss of income which would have been recoverable in an action for the earlier breach of duty had it not been statute barred." 33 Glass JA's conclusion with respect to the limitation point was overruled by the majority in the High Court, but the only doubt cast on these cogent remarks was in the tentative observations by Deane J which I have extracted. In my opinion, it is still open to me to follow and apply Glass JA's remarks and I shall do so. 34 It would be absurd to hold, in a case where the defendant's breach of duty extends over a period of time and causes loss constituted by failure to avoid transactions that occur repeatedly during that period, that a new cause of action arises with each such transaction. Since Clutha was a substantial trading company during the September/February period, I infer that it incurred many thousands of separate debts during that period. Hence, the plaintiff's proposition would entail that many thousands of causes of action arose during that time. The only purpose of distinguishing each such cause of action from every other would be to allow some of them to be brought within the limitation period. There would be no other rational basis for drawing any distinction. Properly understood, the complaint is that a continuing duty was breached by failure to act during the whole of the specified period, leading to a single loss. 35 In my opinion, Deane J's dicta do not support the plaintiff's contention. Deane J thought it arguable that a new cause of action accrued when damage in varying forms was suffered, including the late lodgement fine and the legal costs of seeking probate of a copy will. Those two categories of damage can be seen as "new damage" when compared with the damage suffered through deterioration of the deceased's house and failure to obtain rental income from it. On this reasoning, Mr Hawkins could assert (at least) four separate causes of action, namely causes of action for negligence causing deterioration of the value of the house, negligence depriving the estate of rental income, negligence causing the imposition of the late lodgement fine, and negligence causing the incurring of legal costs for seeking probate of a copy will. The latter two, relating to "new damage", would not be statute barred. In the present case, however, only one category of damage is relied upon. The damage is said to be either the debts incurred during the September/February period, or in the alternative, Clutha's trading losses in that period. Only one kind of loss is asserted by reason of the breach of duty, and there is no "new damage" arising through the plaintiff sustaining a loss of a different kind. Therefore, even if (contrary to the view expressed by Glass JA) it is unnecessary to show a fresh breach before a new cause of action accrues, there can be only one cause of action in the present case because the loss allegedly flowing from the putative breach of duty outside the limitation period is no different in kind from the loss allegedly flowing within the limitation period. 36 My conclusion is that analysis of the judgments of Brennan and Deane JJ supports the applicants' submission. Here, since the pleaded damage first accrued when debts or trading losses were incurred early in the September/February period, Clutha's cause of action in negligence accrued more than six years before the commencement of the proceeding. The notion that a cause of action for breach of a continuing duty of care accrues as soon as damage is first sustained, provided the damage is more than negligible, is supported by the judgments of Deane J and Toohey J in Wardley, 175 CLR at 540 and at 554-555 respectively. The same conclusion is borne out by the judgments of Kirby P and Glass JA in the Court of Appeal in Hawkins v Clayton ((1986) 5 NSWLR at 116-118 and at 124, 126 respectively). Those judgments, and Scarcella v Lettice [2000] NSWCA 289 (paragraph 15, per Handley JA), also make it clear that time commences to run under the Limitation Act once damage has accrued, even if the plaintiff is not aware of it. The assertion in the statement of claim, that the breach of duty by failure to prevent debts being incurred extended throughout the September/February period, implies the assertion that non-negligible damage was suffered early in that period, and therefore more than six years before the commencement of the proceeding. 37 Gaudron J emphasised that in cases of negligence causing economic loss, where the loss may manifest itself in various forms (such as reduction of value or increased liability), it is necessary to identify precisely the interest that has been infringed (at 601). In the case before her, the assets had deteriorated and had been subject to waste before they came under the control of Mr Hawkins, but that was not the loss sustained by him, as the property was not then vested in him. The loss suffered by Mr Hawkins was a loss in the value of the assets referrable to them not having been properly managed in the period prior to coming under his control, and that loss was suffered by him only when the assets came under his actual control (at 602). That occurred, at the earliest, when he was informed of the existence of the will in March 1981. That reasoning has no direct application to the present case. 38 Gaudron J observed (at 601) that "if the interest infringed is an interest in recouping moneys advanced it may be appropriate to fix the time of accrual of the cause of action when recoupment becomes impossible rather than the time when the antecedent right to recoup should have come into existence, for the actual loss is sustained only when recoupment becomes impossible." 39 Relying on this dictum, Clutha submits that in the present case, its loss was sustained when recoupment, that is payment of its debts, became impossible. That did not occur until the company went into voluntary administration in February 1995, within the six-year limitation period. 40 There are two answers to that submission. The first is that the submission is inconsistent with Clutha's statement of claim. The relevant parts of the statement of claim are as follows: "14. Between 30 September 1994 and 14 February 1995 Clutha incurred unsecured debts ("the debts") which to date remain outstanding. … 24. By reason of the first to seventh defendants' breach of duty of care and/or negligence Clutha suffered loss and damage. Particulars 24.1 The Matters pleaded in paragraph 14 being debts for which the plaintiff remains liable. 24.2 In the alternative, Clutha's trading losses between 30 September 1994 and 14 February 1995." There is no suggestion that the loss arose only when payment became impossible. 41 Suppose, contrary to my construction of the statement of claim, that the pleaded loss had been a loss arising when payment of the debts incurred through breach of duty became impossible. A case pleaded in that way would not be supported by Gaudron J's dictum, in my view. Gaudron J's dictum does not directly apply, because she was dealing with the position of a creditor failing to recover money owed to it, rather than the position of a debtor becoming unable to make payment. The question is whether her observation should be extended from a case where the plaintiff is the creditor to a case where the plaintiff is the debtor. 42 In my opinion, that extension should not be made. One can understand that when a creditor becomes entitled to be paid, no loss is suffered as long as the debt is payable and its value as an asset is equivalent to the amount to be paid. Once payment has become impossible, the asset has no value and the creditor has incurred a loss at least at that stage, if not earlier. However, where a debtor is made, by breach of some duty, to incur a debt, the debtor's loss may be immediate. The question will depend upon facts such as whether the debtor has received something of value in return for incurring the debt, whether failure to pay causes some disadvantage to arise (the example given in submissions was failure to pay a telephone account, leading to disconnection) and whether the liability to pay the debt can be called up immediately. The incurring of the debtor's loss will not often depend on it becoming impossible for the debtor to pay the debt. One would have thought that removal of the possibility of payment would in many cases extinguish rather than create the debtor's loss. Where the debtor is a corporation, and the incurring of the debt leads to external administration, the event of external administration may well produce loss for the creditors and contributories, but not for the company itself. 43 It may appear that Wardley's case supports the extension of Gaudron J's dictum to a case of loss by a debtor. Wardley was a case where the plaintiff gave an indemnity and was called upon to meet it, and in that sense it was a case where the plaintiff was a debtor. Mason CJ, Dawson, Gaudron and McHugh JJ referred with approval (at 527 and 533) to the reasoning of Gaudron J in Hawkins v Clayton, expressly approving the dictum quoted above. However, their decision was based on the narrower ground that as a matter of construction, the liability incurred by the plaintiff was a contingent rather than an immediate liability (at 524, 534). Gaudron J's dictum was only said to "accord" with their conclusion. The ground for the decision in Wardley is not applicable in the present case, for there is no suggestion that Clutha's liability to meet the debts incurred during the September/February period was in any way contingent. 44 In my opinion, Hawkins v Clayton requires me to conclude that Clutha's pleaded case in negligence against the applicants is statute barred. There is no suggestion that any exception to the statutory bar is applicable. 45 Clutha has foreshadowed that if I reach this conclusion, it shall apply to amend the statement of claim to confine the pleading to the November/February period. It also wishes to amend the statement of claim in other respects. That application, and the application by the Nichimen companies to strike out parts of the statement of claim in the 2001 proceeding, are still to be heard. The matter is due to return to the Court on 4 June 2002. I shall not make an order on the present application, or deal with costs, at this stage. **********

Clutha v Millar

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