Allen v Atalay and Ors (1993) ACSR 753

Baltic Shipping Co v Dillon (1992-3) 176 CLR 345

David Securities Pt Ltd v Commonwealth Bank of Australia Ltd [1992] HCA 48; (1992) 175 CLR 353

Dempster and Ors v Biala Pty Ltd and TS Holdings Pty Ltd and Ors (1989) I WAR 266

Emlen Pty Ltd and Anor v St Barbara Mines Ltd and Ors (1997) ACSR 303

Foran v Wright [1989] HCA 51; (1989) 168 CLR 385

Hospitals Contribution Fund of Australia v Hunt (1983) 44 ALR 365

Kwei Tek Chao v British Traders Ltd [1954] 2 QC 459

This is an application by the plaintiffs to strike out paras 16-20 of the counterclaim and the prayers for relief which go with those paragraphs. The application is on the basis that the plea discloses no reasonable cause of action or because it may prejudice, embarrass or delay a fair trial of the action. The cause of action pleaded in paras 16-20 is a statutory one under s1324 of the Corporations Law and the application turns on the proper interpretation of that section.

Certain named defendants in para 16 of the counterclaim plead that they are creditors of a company RRS. The paragraph further pleads that three named plaintiffs were directors of RRS and breached their fiduciary duties to that company in this way. RRS was in the process of selling the Tammin Abattoir to Meatco Pty Ltd (Meatco) and were offered a management agreement with Meatco to continue to operate the abattoir. Instead of securing the benefit of this management agreement for RRS the named plaintiff directors purchased a shelf company, Benetti Enterprises Pty Ltd (Benetti), and entered into the management agreement in the name of Benetti. They thus diverted the opportunity to enter into the management agreement from RRS to their own company Benetti. The prayers for relief sought against one of the directors, Coral Russell, are as follows:

"16A The RRS Creditors claim against Coral Russell:

(1) an injunction under section 1324(1), alternatively 1324(2) of the Corporations Law requiring Coral Russell to cause Benetti to account to RRS for all benefits received by Benetti under the Tammin Management Agreement;

(2) an order under section 1324(10) of the Corporations Law that Coral Russell pay damages to RRS in an amount equal to the difference between the amount recovered, if any, by RRS pursuant to the injunctions claimed in 16A(1) above and 18(2) below, and the full value of the benefits received by Benetti under the Tammin Management Agreement;

(3) interest at 8% on the benefits received pursuant to section 32 of the Supreme Court Act; and

Similar prayers are sought against the other directors. The other pleas in para 17 and subsequently are similar to the plea in 16 I have described.

Section 1324 of the Corporations Law provides in part as follows:

1324(1) [Court may grant injunction restraining] Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(c) aiding, abetting counselling or procuring a person to contravene this law;

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Law;

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Law; or

the Court may, on the application of the Commission, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

1324(2) [Court may grant injunction requiring act to be done] Where a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Law to do, the Court may, on the application of:

(b) any person whose interests have been, are or would be affected by the refusal or failure to do that act or thing;

grant an injunction, on such terms as the Court thinks appropriate, requiring the first-mentioned person to do that act or thing.

1324(10) [Damages] Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person."

The plaintiffs' first argument is that prayer 16A(1) is not really a prayer for an injunction. It is, in truth, a claim for an account. I agree with that submission. The relief claimed in that prayer should not properly be called an injunction.

The plaintiffs' second objection to the pleas contained in paras 16-20 is that the relief of damages under s1324(10) is only available if there is a properly-based plea for an injunction under s1324(1) or (2). The argument based on the whole section and especially on subs(10) is that it is only where the pleaded facts would enable the court to grant an injunction, either restraining the plaintiffs in this case from engaging in particular conduct or requiring them to do a particular thing, that the court may in substitution for the grant of "the" injunction - meaning that injunction - order the plaintiffs to pay damages instead. For that proposition the plaintiffs' counsel relies on the plain meaning of the words of the section and also on the decision of Perry J of the South Australian Supreme Court in Executor Trustee Australia & Anor v Deloitte Haskins Sells and Ors [1996] SASC 5874; (1996) 22 ACSR 270. In that case the judge was considering an application to strike out a plea under s574(8) of the Companies (SA) Code which was the forerunner to s1324 of the Corporations Law. Perry J observed, and I think rightly, that there is no significant difference between the Code section and the Law section on this. Section 574(8) of the Code is in identical terms to s1324(10) of the Law

In the case before Perry J there was no application for an injunction under s574. The only relief sought was damages under s574(8).

"Subsections 574(1) and (2) both deal expressly with injunctions. Subsection (3) deals with interim injunctions, and subs (4) confers a power to rescind or vary an injunction granted under the section. Subsections (5) and (6) amplify the power to grant an injunction by making it clear that it may be granted whether or not similar conduct of the kind sought to be restrained has been engaged in before the application is brought, and whether or not it appears likely that the person concerned intends to engage in conduct of that kind in the future. Subsection (7) extinguishes the common law power to require, as a condition of granting an interim injunction, an undertaking as to damages in circumstances where the Commission makes the application.

Pausing there, from the observations which I have so far made, it is clear that all of the subsections of s574 down to subs (8) have to do with applications for an injunction, the circumstances in which such an application may be granted, and the terms of an order granting an injunction. While subs (7) refers to damages, it does so only in the context of an undertaking to pay damages if any should be occasioned by the grant of the injunction.

On the other hand, the reference in subs (8) to damages must be taken to relate to damages shown to have resulted from the conduct sought to be restrained.

Against that background there are strong arguments that the words "in addition to or in substitution for the grant of the injunction" in subs (8) identify a situation where an injunction is sought, but the court exercises the discretion to make an order for payment of damages at the same time as granting the injunction or in lieu of doing so. Given the statutory context, it is difficult to accept the argument advanced by Deloittes that the power to award damages under subs (8) exists independently of any application for an injunction, or is such a power did in some abstract sense exist, that it could be invoked absent an application for an injunction.

True it is that the words 'where the Court has power under this section to grant an injunction' could possibly identify a situation where the power, in the sense of jurisdiction, exists to grant an injunction, but there has not necessarily been an attempt to invoke it. In my opinion, however, that would be a strained interpretation of the section, and would not sit comfortably with the words 'in addition to or in substitution for the grant of the injunction'."

Perry J in Executor Trustee goes on to distinguish a different view of the section taken by Cohen J sitting in the Supreme Court of New South Wales Equity Division in Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1995) 13 ACLC 66. Cohen J in that case was also interpreting s574 of the Code but, as I have stated above, his decision can apply equally well to s1324 of the Law. It was submitted in that case by the defendant that s574(8) does not give a general power to claim damages but that it can only be used in the same way as the provisions of Lord Cairns' Act, now contained in s68 of the Supreme Court Act of New South Wales which reads:

(a) to grant an injunction against the breach of any covenant, contract or agreement, or against the commission or continuance of any wrongful act; or

(b) to order the specific performance of any covenant, contract or agreement, the Court may award damages to the party injured either in addition to or in substitution for the injunction or specific performance."

In effect it is said that an injunction must be sought and, it is only where in particular circumstances it is refused, that damages may be awarded. For the ASC it was submitted that the power to award damages is independent of any claim for an injunction. At p70 Cohen J said:

"When one looks at the wording of s 68 and that of s 574 (8), there is not a great deal of textual difference, certainly not of any significance. Nevertheless, the circumstances of the creation of the two sections are quite different. Section 68 is a clear successor, through the lineage of s 32 of the Equity Act 1880 and s 9 of the Equity Act 1901, to s 2 of Lord Cairns' Act which was passed in 1858. That Act was intended to overcome the lack of power, or uncertainty as to power, of the Court of Chancery to award damages where injunctions or specific performance were sought. It has continued as a particular aspect of rights in equity. On the other hand s 574, notwithstanding the similar wording in subs (8), was intended to widen the scope of persons who could seek relief from contraventions of the Companies Code. Those breaches have little to do with the situation which existed in the middle of the 19th century where the Chancery Court had no jurisdiction to grant damages even similar to, let alone identical with, the power given to the Queen's Bench Lord Cairns' Act gave that power, which has been interpreted as having a somewhat limited scope, In my opinion the Code stands alone, unaffected by the principles which have been applied to the powers to grant damages under Lord Cairns' Act and its successors."

The learned authors of Australian Corporations and Securities Law Reporter (CCH Volume 3 para 313-000) discuss these two conflicting cases and conclude:

"Clearly, there is so settled authority on this point. The above two judgments, both decisions of a single Supreme Court judge sitting alone, appear unreconcilable. It is arguable that Justice Cohen's reasoning on this point is obiter (see Executor Trustee (supra) at p1,794) and so is perhaps less authoritative. Nevertheless, it is an analysis that must be considered, given the paucity of authority on this point. Practically, it may be safest to assume that damages are unavailable under s1324(10) unless an injunction is applied for. This, however, may mean that an injunction application has to be lodged where the real remedy sought is damages. The applicant must then rely on the Court's discretion to award damages under s1324(10)."

Faced with this conflict of authority I am not convinced that a pleading which seeks damages under subs(10) that fails to seek an injunction under subs(1) or (2) is so bad that it ought to be struck out. Until this matter is decided by an appellate court the plea is not so "manifestly groundless" or so "obviously untenable" that it cannot possibly succeed and I propose to let the pleading in paras 16-20 stand.

Also when I look at s1324 myself I ask why should it not be given a wide interpretation? Consider, for example, a director who has engaged in conduct which contravened the Law (subs(1)), and the applicant is a person whose interests have been affected by that conduct (subs(1)). Let me suppose further that the conduct is a "one-off" thing - e.g. the sale of a company asset and the director pocketed the money; clearly the director gained a benefit for himself and not for the company. If the misconduct is complete it is too late to apply for an injunction to restrain him from engaging in that conduct under subs(1). If he has sold the asset, there is no point in seeking a mandatory injunction under the last few words of subs(1) or under subs(2) ordering him to transfer the asset back to the company. Why, I ask, must the applicant plead a case for an injunction when he does not want one, before he can "in substitution for", obtain damages? Although the section is headed "INJUNCTIONS", and the granting of injunctions under it may well be its principal use, it is perfectly arguable in my view that the aim of the section is to provide remedies of injunction and/or damages to those whose interests have been affected by directors who have contravened the Law in the circumstances prescribed in the section.

I also propose to let the prayers for relief stand as I consider it is arguable that damages can be obtained under the section without even seeking an injunction. If, however, in the current uncertainty of the law, the defendants propose to follow the advice of the authors of the Australian Corporations and Securities Law Reporter they could amend prayer 16A(1) to ask for an injunction e.g. restraining Benetti from enjoying the benefits of the Tammin Abattoir management agreement or transferring the benefits of that agreement to RSS. That is a matter for the defendants and their advisers to consider. I would give them leave to amend.

There is a minor matter which I will decide in favour of the plaintiffs. The defendants in their counterclaim seek relief, inter alia, against Reginald Dennis Russell and Benetti whom they have referred to as the eighth and ninth defendants to the counterclaim. Russell and Benetti are not plaintiffs in the action and cannot be joined in this way. Section 24(3) of the Supreme Court Act deals with counterclaims and the power of the Court to grant relief to a defendant in an action. Subsection(3)(a) applies where the relief is claimed against the plaintiff. Subsection3(b) applies where the relief claimed by the defendant is claimed against any other person. In summary, under that subsection the Court has the power to grant relief to a defendant against such a person who has "been duly served with notice in writing of such claim pursuant to any rule of Court or any order of the Court, as might properly have been granted against such person if he had been made a defendant to a cause duly instituted by the same defendant for the like purpose. The section goes on to say that every person served with any such notice shall henceforth be deemed a party to the cause or matter with the same rights in respect to his defence against such claim as if he had been duly sued in the ordinary way by such defendant. Under that section I could strike out the counterclaim against the eighth and ninth defendants to the counterclaim and require the defendants to apply to join Mr Russell and Benetti as parties under O18 r6, or I could fashion some other order in this particular case which might regularise the situation. I will hear the parties further on this matter.