Ebbage v Manthey & Ors

[1] HELMAN J: There are two applications before me in this proceeding. The first was filed on 21 September 2000. In it the first defendant applies for an order that the claim and the statement of claim be struck out on the ground that the plaintiff lacked the necessary locus standi to bring the claim when he began it. That order was sought on other grounds in the first defendant's application, and orders were also sought that the claim be dismissed or stayed permanently or pending further order on yet another ground, but the ground of lack of standing was the only one pursued at the hearing of the applications. The other application is the plaintiff's application, filed by leave at the hearing, that a company called Resolution Services Ltd be added as a second plaintiff in the proceeding, or in the alternative that that company be substituted for the present plaintiff as plaintiff in the proceeding. Other, ancillary orders were also sought. The plaintiff's application was made with the concurrence and support of Resolution Services Ltd.

[2] The plaintiff's claim is as executor of the will of his brother who died on 2 December 1998. The plaintiff alleges in his statement of claim that by a deed dated 12 May 1999 between a company incorporated in Queensland, the second defendant a company incorporated in the Republic of Vanuatu, another company incorporated in Vanuatu, and Advanced Engine Technology Inc. a company incorporated in the United States of America, the last-mentioned company agreed to pay to the second defendant $US1,500,000 for a certain consideration. The deed, the plaintiff alleges, was executed by the first defendant on behalf of the second defendant. The plaintiff further alleges that by a letter dated 12 May 1999 the first defendant directed the American company to pay the $US1,500,000, which was due and owing to the second defendant under the terms of the deed, to a bank account under the control of the first defendant. The plaintiff alleges that the second defendant did not authorize the first defendant to give the direction, which was acted upon by the American company. The second defendant has not received the money.

[3] The second defendant having neglected or refused to begin proceedings for the recovery of the money despite having been called on to do so by the plaintiff, he began his proceeding for the recovery of the money from the first defendant on behalf of the second defendant. The plaintiff asserts that he was entitled to do so, relying on the third defendant's holding half of the issued shares in the second defendant on trust for him, and, before him, the deceased. The evidence shows, however, that the third defendant's shareholding in the second defendant was transferred to Resolution Services Ltd on 21 November 2000 pursuant to an order of Coventry J. made in the Supreme Court at Port Vila on 20 November 2000, and the register of members was altered accordingly: see the affidavits of Dr Garry Hamilton and Mr John Ebbage filed by leave at the hearing, and exhibit 1. The plaintiff claims to retain the beneficial ownership of that shareholding.

[4] The plaintiff's claim is, then, derivative. For it to succeed reliance upon an exception to the rule in Foss v. Harbottle [1843] EngR 478; (1843) 2 Hare 461; 67 E.R. 189 would be necessary. But in Australia it is now well settled that an equitable interest in shares does not confer standing to bring a legal proceeding based on an exception to the rule in Foss v. Harbottle: Maas & Anor v. McIntosh & Ors [1928] NSWStRp 48; (1928) 28 S.R.(N.S.W.) 441 at p. 446; Hooker Investments Pty Ltd v. Email Ltd (1986) 10 A.C.L.R. 443, at p. 445; Fulloon v. Radley [1992] 2 Qd. R. 290; Ruralcorp Consulting Pty Ltd v. Pynery Pty Ltd (1996) 21 A.C.S.R. 161 at p.165; and Ford's Principles of Corporations Law (Butterworths, 2000), 11.300, p. 11,231.

[5] It is true that the decision of Parker V.-C. in Great Western Railway Company v. Rushout [1852] EngR 297; (1852) 5 DeG. & Sm. 290; 64 E.R. 1121 - in which the company, the affairs of which were the object of the dispute, was constituted by statute - is authority for the proposition that a beneficial owner of shares whose name does not appear in the company's register of members has standing to bring a derivative proceeding. But that proposition has not been accepted in Australia, and, for the reasons given by Georges J.A., with whom the other members of the Court of Appeal of the Cayman Islands (Zacca P. and Kerr J.A.) agreed, in Svanstrom v. Jonasson (1997) 23 A.C.S.R. 475, should not be regarded as applicable to all companies. Summarizing his conclusion, George J.A. said that `since Great Western Rly v. Rushout . . . casts doubt on the principle that companies are in no way obligated to recognise any trusts existing in relation to their shares, it should be treated as a decision on its own facts, strongly influenced by the consideration that the company was a statutory company' (p. 483). Kerr J.A. observed: `it seems on the face of it an illogical synthesis to argue that the beneficial owner of shares, who is not within the defined category of shareholder, may bring this special and exceptional derivative action on behalf of himself and other members of the company - a category to which he clearly does not belong . .'(p.486)

[6] The rule in Foss v. Harbottle and its exceptions have generally been considered part of the powers and procedures of modern courts of equity: Scarel Pty Ltd v. City Loan & Credit Corporation Pty Ltd (1988) 17 F.C.R. 344, at p. 349; and Karam v. ANZ Banking Group Ltd [2000] NSWSC 596; (2000) 34 A.C.S.R. 545, at p. 554. It follows that the rule as to the lack of standing of a beneficial owner of shares to institute a derivative proceeding is procedural. Matters of procedure are governed by the lex fori, so that the rule as to the lack of standing of one whose name does not appear on a company's register of members to bring a derivative proceeding, as it is understood in this jurisdiction, governs this case.

[7] There is evidence from which it could be concluded that the law of Vanuatu could be different from that of this jurisdiction on the question of standing, in that the proposition acted upon by Parker V.-C. is part of the law of Vanuatu. The reasoning leading to that conclusion is somewhat tenuous, and proceeds from a statement in an affidavit of Mr Rowan Downing, Solicitor-General of the Republic of Vanuatu, that the Supreme Court of the Republic `will always apply English common law authority in preference to authority from other common law jurisdictions': paragraph 4 of an affidavit sworn on 29 September 2000. But in another affidavit, sworn on 20 September 2000, in which Mr Downing referred specifically to the question of the plaintiff's locus standi he expressed the opinion that `the learning in the case of Falloon & Anor v. Radley & Ors [1992] 2 Qd. R. 240 would be applied in the Supreme Court of Vanuatu as it is directly on point': paragraph 14. The conclusion I have referred to, then, relies upon a general proposition in preference to one dealing with the particular question under consideration. But in any event the evidence as to the law of Vanuatu is irrelevant since the lex fori is the governing law on this subject.

[8] On behalf of the plaintiff, Mr Timothy North S.C. submitted that the Foreign Corporations Application of Laws Act 1989 (Cwth) applied to the question of standing on this application, so that since the second defendant was incorporated in Vanuatu that question must be determined in accordance with the law of that country. The relevant provision is s. 7:

7(1) The section applies in relation to the determination of a question arising under Australian law (including a question arising in a proceeding in an Australian court) where it is necessary to determine the question by reference to a system of law other than Australian law.

(2) Any question relating to whether a body or person has been validly incorporated in a place outside Australia is to be determined by reference to the law applied by the people in that place.

(a) the status of a foreign corporation (including its identity as a legal entity and its legal capacity and powers); or

(c) the shareholders of a foreign corporation having a share capital; or

(e) the rights and liabilities of the members or officers of a foreign corporation, or the shareholders of a foreign corporation having a share capital, in relation to the corporation; or

(f) the existence, nature or extent of any other interest

(g) the internal management and proceedings of a foreign corporation; or

(h) the validity of a foreign corporation's dealings

is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated.

(4) A matter mentioned in subsection (2) or (3) is not to be taken, by implication, to limit any other matter mentioned in those subsections.

The argument for the plaintiff cannot be sustained in my view, first because the question of standing is not, as subsection (1) requires, one it is necessary to determine by reference to a system of law other than Australian law; it is a question of procedure governed by the lex fori which is Australian law. Secondly, paragraphs (e), (f), and (g) of subsection (3), to which Mr North referred in particular, would not assist the plaintiff's case on this point, even if he were to overcome the obstacle subsection (1) presents, because the issue of the standing of one with a beneficial interest in shares to make a claim of the kind made in this proceeding is not a question relating to the rights and liabilities of members, officers, or shareholders of a foreign corporation, nor is it a question of the existence, nature, and extent of any other interest in a foreign corporation, or a question of the internal management and proceedings of a foreign corporation. The plaintiff is not a member, officer, or a shareholder of the second defendant, the extent of his interest in it is not in question, and his standing in this proceeding is not a question relating to the internal management and proceedings of the second defendant.

[9] I should mention that it was not in dispute at the hearing of the applications that ss. 236 (bringing, or intervening in, proceedings on behalf of a company) and 237 (applying for, and granting leave to bring, or to intervene, in proceedings) of the Corporations Law have no relevance to the issues before me.

[10] My conclusion is then that in the present form of the proceeding the plaintiff had no standing to bring it, and so the first defendant is entitled to relief against the plaintiff. It seems clear that the plaintiff's case is demonstrably futile, because there is no suggestion that the plaintiff is to become a shareholder whose name will appear in the register of members. The plaintiff's claim in the proceeding should therefore be struck out, and not merely stayed until further order.

[11] This case can be distinguished from that before the Court of Appeal in Noble v. State of Victoria [1999] QCA 110; [2000] 2 Qd. R. 154, in which it was held that it was not completely clear that an action begun in 1996 by plaintiffs each of whom claimed as the descendant and `inheritor' of the estate of a person who had died intestate - one in 1926, and the other in 1935 - was in law demonstrably futile, notwithstanding that neither plaintiff had obtained a grant of letters of administration. In the then present form of the action the plaintiffs themselves did not appear entitled to sue, but it was held that the action should not have been struck out, but rather stayed until further order to enable the plaintiffs to see if they were able to attend to the deficiencies in their case: see the reasons of McPherson J.A., with whom McMurdo P. agreed, at pp. 165-168.

[12] The action in Noble v. State of Victoria was in form and substance a common law action for a debt, as McPherson J.A. said (p. 160), and the usual rule at common law was, as McMurdo P. said (p. 155), that `a writ issued in respect of the estate of a deceased person who died intestate before the grant of letters of administration is a nullity: The Minister of State for the Interior v. R.T. Co Pty Ltd [(1962) [1962] HCA 29; 107 C.L.R. 1, 7]'. So too must the plaintiff's proceeding in this case be regarded as a nullity. If that is so, can the application to add a second plaintiff be entertained?

[13] A wide power conferred by s. 81 of the Supreme Court Act 1991, which came into force on 1 July 1999, may be relied on in support of the application. That section, so far as it is relevant, provides:

81.(1) This section applies to an amendment of a claim, anything written on a claim, pleadings, an application or another document in a proceeding.

(2) The court may order an amendment to be made, or grant leave to a party to make an amendment, even though -

(a) the amendment will include or substitute a cause of action or add a new party; or

(b) the cause of action included or substituted arose after the proceeding was started;

There is a general discretion under that section not restricted by the Uniform Civil Procedure Rules 1999: see Draney v. Barry & Ors [1999] Q.C.A. 491 at para. 2 per McMurdo P., and at paras. 22 and 23 per Pincus J.A. But can the discretionary power provided for in s. 81 be availed of where the claim is a nullity? It seems that it can be. In Thomas v. National Australia Bank Limited [1999] QCA 525; [2000] 2 Qd. R. 448 it was argued that that action was a nullity and had been properly dismissed by the primary judge. It was held by the Court of Appeal that the action had not been a nullity, so that the following passage in the reasons of the learned President is an obiter dictum, but it is of course weighty persuasive authority. Her Honour said:

The respondents claim an amendment cannot cure the situation here which is a nullity not a mere irregularity, but such distinctions have become blurred in the civil jurisdiction in recent years. As this appeal is by way of re-hearing, s. 81 of the Supreme Court of Queensland Act 1991 and U.C.P.R. r. 375(1) permit amendment even though the cause of action arose after the proceedings started. The statutory force of s. 81 would seem to overcome the nullity argument. This is a clear case where such leave should be given nunc pro tunc and were it necessary I would grant such leave. (p. 452)

An example of the more rigid approach to such matters may be found in Francis v. National Mutual Life Association of Australasia Limited [1999] 2 Qd. R. 355 decided on 26 June 1998, i.e., over a year before s. 81 came into force.

[14] In this case the objection that the plaintiff lacks locus standi is valid and will prevent a hearing of the proceeding as presently constituted on the merits. That obstruction can be removed by the substitution of Resolution Services Ltd as the plaintiff in the proceeding, and it appears to me that the interests of justice require that course unless a further valid objection is taken.

[15] On behalf of the first defendant it was submitted that consideration of the application should be deferred because although his advisers had had some notice of the application that Resolution Services Ltd be joined in the proceeding the notice was not adequate, and because the first defendant proposes to institute proceedings to overturn the effect of Coventry J.'s order. Those are not sufficient reasons in the circumstances to defer consideration of the application, in my view. But if the first defendant should succeed in having Resolution Services Ltd removed from the second defendant's register of members he may then apply for such relief as he may be entitled to in this proceeding. I shall therefore order that Resolution Services Ltd be substituted for the present plaintiff as the plaintiff in the proceeding.

[16] I shall invite further submissions on costs.