Harris v Milfull

Introduction 1 This is an application for leave to appeal from orders made by Kiefel J on 30 April 2002, giving effect to reasons delivered on 1 March 2002. On an application for leave to amend the statement of claim, her Honour refused to allow certain amendments but allowed others. Those amendments are reflected in a draft which is exhibit PGB 1 to the affidavit of Paul George Anthony Betros filed on 26 April 2002. The present appeal is brought by the second and fifth respondents in the proceedings before Kiefel J. The second respondents are partners in the fifth respondent firm. They are sued for actions allegedly taken by them as receivers of Terranora Leisuretime Resort Management Ltd ("Management"). The fifth respondent is allegedly also liable for those actions. The second and fifth respondents seek to set aside her Honour's order granting leave to file the amended statement of claim as against them.

Leave to appeal 2 We were referred in argument to the decision of the Full Court in Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397, which case is said to establish that the relevant considerations governing the grant of leave to appeal are: (a) whether in all the circumstances of the case the decision is attended by sufficient doubt to warrant its being reconsidered by the Full Court; and (b) whether substantial injustice would result if leave were refused, supposing the decision to be wrong. 3 However in Decor, the Court merely identified these matters as the "major considerations". The nature of the discretion varies, having regard to the decision under appeal and the grounds of appeal. In particular, at 399-400, the Full Court said: "In our opinion, the principles … to which we have referred provide general guidance which a Court should normally accept. However, there will continue to be cases raising special considerations and the court should not regard its hands as tied in any case beyond this; that by s 24(1A) the legislature has evinced a policy against the bringing of interlocutory appeals except where the court, acting judicially, finds reason to grant leave. When the court comes to exercise its discretion on a particular application, an important distinction to be observed is that between the common interlocutory decision on a point of practice - concerning which the High Court has given … a strong warning that 'a tight reign' should be kept on appeals - and an interlocutory decision determining a substantive right - where leave will more readily be granted." 4 The decision under appeal did not finally determine any rights in the sense used in Decor. Her Honour merely held that the applicant should not be summarily excluded from pursuing his claim.

bACKGROUND CIRCUMSTANCES 5 These proceedings concern the collapse of a time-share resort investment scheme. The essential components of the scheme were: · A resort was constructed at Terranora Lakes by Terranora Timeshare Developments Pty Ltd ("Developments"). · The land was owned by Terranora Lakes Country Club Ltd ("Club"). · The resort was leased by Club to, and managed by Management. The lease was for forty years but would come to an end if Management were wound up. · The articles of association of Management provided that its board was not competent to deal with the lease other than pursuant to a special resolution of RP shareholders who are identified below. · Club held 54 per cent of the shares in Developments and 74 per cent of the shares in Management. · Redeemable Preference Shares ("RP shares") were issued by Management pursuant to prospectuses. They conferred certain rights of accommodation on a "time-share" basis, which rights could be "sub-let" or exchanged for accommodation at other resorts participating in the scheme. RP shares were issued at a premium, the quantum of such premium depending upon the time-share rights to be acquired. 6 Management guaranteed the repayment of funds advanced to Developments and accordingly gave a bill of sale, equitable mortgage and floating charge over its assets. On 25 July 1988, it granted a mortgage over its interest in the lease. This was done without a special resolution of RP shareholders. Club also guaranteed Developments' debt. The scheme apparently fell into financial difficulties and, in July 1991, Club sought advice from the fifth respondent. In its advice, the fifth respondent identified three options said to be available to Club. They were: · to wind-up Management, terminate the lease and take over the resort, free from time-share rights; · to re-finance and take over management of the scheme; and · to sell the resort in a way which preserved the rights of existing RP shareholders. 7 At about this time, an offer was received for the resort in the amount of $3.5 million, together with a 25 per cent interest in a new project. This offer was rejected on the basis that it was insufficient to pay out debts. The applicants allege that the fifth respondent recommended that Club adopt the first of the three options. It is alleged that the value of the resort business was then $3.5 million. In August 1992, Club paid out approximately $4.5 million of the amount owed by Developments to the bank and claimed to be subrogated to the bank's rights under the securities granted by Management. On 24 August 1992, Club appointed the second respondents as receivers of Management. It is alleged that the second respondents advised RP shareholders that the amount required to pay out the secured debt was in excess of $5 million and sought their views as to whether they could raise that amount in order to protect their rights. The RP shareholders concluded that they could not do so. It is alleged that the true amount of the debt was only $566,368.59 and that such amount could have been raised. Management was wound up on 16 March 1994 on the application of Club. The lease was accordingly terminated. 8 In 1995, the applicant commenced proceedings in this Court. On 16 July 1999, Kiefel J struck out a claim in negligence against the fifth respondent but granted the applicants liberty to apply to replead that cause of action in the future. In July 1999, the action was effectively stayed pending proceedings in the Supreme Court brought by the liquidators of Management. On 4 October 2001, as a result of events in the Supreme Court, the action in this Court was re-activated. The applicant, representing various RP shareholders, seeks damages from Club, the directors of Management, the second respondents and the fifth respondent. The claims against the directors arise primarily out of various prospectuses for the issue of RP shares.

Causes of action against THE second and fifth respondents 9 As against the second respondents, damages are claimed for negligence and pursuant to s 82 of the Trade Practices Act 1974 (Cth) (the "Trade Practices Act"). Broadly speaking, the conduct said to give rise to these claims is the advice allegedly given as to the amount secured upon Management's securities. It is said that the receivers advised the RP shareholders that the amount secured was in excess of $5 million, when in fact it was $566,368.59. This alleged error is said to have resulted from the inclusion in the amount of the debt of an amount owed by Club to third parties, which amount was not secured upon Management's assets. It is said that this conduct constituted misleading and deceptive conduct contrary to the Trade Practices Act and was also negligent. How the second respondents might be liable for misleading and deceptive conduct pursuant to the Trade Practices Act is not precisely spelled out in the pleading. However that point was not ventilated before us, and it is not necessary to consider it. The applicant also pleads that the second respondents declined an offer to purchase the assets of Management for $3.5 million upon the basis that it was insufficient to pay out Club's debts. However nothing seems to turn upon this allegation. It is alleged that the fifth respondent is liable for the conduct of the second respondents who are members thereof. Again, it is unclear how the fifth respondent might be liable pursuant to the Trade Practices Act. It is also unclear why the second respondents and the fifth respondent have been sued separately. Neither question matters for present purposes. We infer from [15] of her Honour's reasons that the second and fifth respondents did not dispute the pleading of these causes of action against them, subject only to the question of damages which is the subject of this appeal. They assert that the damages claimed by the applicant were incurred by Management or reflected damages so incurred and that the applicant may not advance such a claim. Kiefel J considered that the claimed loss was arguably separate from any loss incurred by Management and so concluded that the claims against the second and fifth respondents should proceed to trial. 10 The second and fifth respondents have since sought particulars of such damages. In par 25 of the applicant's response, he referred to sub-paragraph 8(b) thereof which is as follows: "as to the value of the rights alleged to be encompassed by the Timeshare Rights, the loss of which is alleged to have been suffered, and the basis for the calculation thereof, the Applicant says: (i) as at 25 November 1998, the average cost to (RP shareholders) to obtain accommodation in another resort comparable to the Resort for one week was $816.00; (ii) as at 25 November 1998, the average annual maintenance levy for other time-share resorts comparable to the Resort was $357.00; (iii) as at 25 November 1998, the value of the total loss of Timeshare Rights which had been sustained by all holders of (RP shares) from the date that Management went into liquidation, being 16 March 1994, to such date was $4,032,023.00 (excluding interest) in accordance with the calculation contained in Schedule B to an Expert Report prepared by Vincent's Chartered Accountants dated 25 November 1998, a copy of which has been supplied to the Second and Fifth respondents; (iv) The value of the total loss of Timeshare Rights which has been sustained by all holders of (RP shares) for the period of time from 25 November 1998 to 30 June 2027 is $11,429,826.00 (excluding interest), being the present value of the total cost that each of the holders of (RP shares) will be expected to expend in obtaining annual holidays in another resort comparable to the Resort for one week each year during this period, less a deduction for the sum which the (RP shareholders) would have been required to have raised in order to satisfy the proper claims of Management's creditors. Full particulars of this calculation are contained in the above report prepared by Vincents Chartered Accountants dated 25 November 1998." 11 Although these particulars were not available at the time of the hearing before Kiefel J, it seems that her Honour must have proceeded on a similar basis.

Grounds of appeal 12 The grounds of appeal are: "3. The learned Judge erred in holding that the loss of the Timeshare Rights (as defined) was arguably other than reflective of the loss sustained by (Management). 4. The learned Judge erred in holding that the rights lost by the (Applicant) may arguably be valued separately from the redeemable preference shares to which those rights attached or separately from the assets of the company. 5. The learned Judge erred in holding that it was arguable that whilst it was necessary that the redeemable preference shares be held, the time share rights may be seen to arise by virtue of a contract with Management or a licence granted by it. 6. The learned Judge misexercised her discretion in failing to award the (second and fifth respondents) the whole of their costs of and incidental to the (Applicant's) Notice of Motion filed on 4 February 2002."

DAMAGES 13 The second and fifth respondents submit that the damages which are claimed are either those of, or reflective of damage suffered by Management. As we have said, the liquidators of Management have sued the second respondents in the Supreme Court. The status of the pleading in that action is unclear. However at AB 188 et seq, there is a proposed draft statement of claim which appears to be the most recent manifestation of Management's claim in those proceedings. It is part of an exhibit to an affidavit filed on behalf of the second and fifth respondents. We infer that they invite us to decide this appeal on the basis that the document accurately reflects Management's claim. It is alleged that the second respondents, in breach of their duty as receivers, conspired with Club to have Management wound up and otherwise acted in breach of statutory and/or fiduciary duties. It is said that as a result, Management incurred loss, including: · loss of the lease; · loss of the income from management of the resort; · winding up expenses; and · loss of plant and equipment. 14 Paragraph 45.4 may be of some relevance. It is alleged that: "The Club has been able to sell its freehold land unencumbered by the Lease for $3,200,000.00 whereas the interest in remainder of the land expectant on the reversion of the Lease prior to 16 March 1994 had little or no discernable value as the Lease had a term of 40 years. The lease reserved a token rental of $1 per annum and could not be terminated for default in any respect. The improvements to be constructed on the leased land would have been due for replacement by the date of the expiration of the Lease. Any person entitled to the interest in remainder had no right to any benefit other than $40 payable over 40 years with respect to the leased land until the expiration of the Lease. The Club had a claim to contribution from Management which it would not otherwise have had. To the extent that the Plaintiff relies upon documentation, such documentation is the Lease and its terms."

Some relevant authorities 15 In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204 a shareholder brought a derivative action, alleging conspiracy by directors to defraud a company. He also claimed personally, relying upon the same facts. At 222-223 the Court of Appeal said: "In our judgment the personal claim is misconceived. It is of course correct, as the Judge found … that (the directors) in advising the shareholders to support the resolution approving the agreement, owed the shareholders a duty to give such advice in good faith and not fraudulently. It is also correct that if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company … . Counsel for the plaintiffs sought to answer this objection by agreeing that there cannot be double recovery from the defendants, but suggesting that the personal action will lie if the company's remedy is for some reason not pursued. But how can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself? What happens if the robbery takes place in year 1, the shareholder sues in year 2, and the company makes up its mind in year 3 to pursue its remedy? Is the shareholder's action stayed, if still on foot? Supposing judgment has already been recovered by the shareholder and satisfied, what then?" 16 Prudential establishes that even if the shareholder has a personal cause of action apart from that of the company, he or she cannot recover for a diminution in share value which reflects a loss suffered by the company as a result of the same conduct. 17 In Australia the leading authority is the decision of the High Court in Gould v Vaggelas (1983-1985) 157 CLR 215. In that case a husband and wife (the "Goulds") were induced by misrepresentation to purchase a tourist resort on terms which included the transfer to the vendors of valuable property and a mortgage-back to them to secure the balance of the purchase price. A company (the "company") was formed and the purchase completed, using it as the purchasing vehicle. The Goulds were the only shareholders. They funded the purchase, their advances being treated as loans in the books of the company. They also guaranteed its obligations to the vendors ("Vaggelas"). The company defaulted in repaying the purchase price. Vaggelas exercised his power of sale under the mortgage, also suing the husband and wife as guarantors. They counter-claimed for damages for deceit. The company was wound up. The liquidators had no funds with which to proceed against Vaggelas. The Goulds did so, claiming loss of funds advanced, including those advanced to, or on behalf of the company. Relying on Prudential, Gibbs CJ said at 219-220: "Any loss suffered by (the company) as a consequence of the fraud can be recovered only by the company itself. Even if the company had not commenced an action within the limitation period, its failure to enforce its own rights would not have enhanced the rights of the Goulds … . However, although the Goulds cannot recover damages merely because (the company) has suffered damage, and cannot recover damages which are merely a reflection of a loss suffered by the company, they may recover damages for the loss which they personally have suffered and which is separate and distinct from the loss suffered by the company." 18 At 245-6 Wilson J, after referring to Prudential, said: "The facts of Prudential Assurance do not present any analogy with the present case. The Goulds do not sue as shareholders of (the company). They sue in their personal capacity as individuals who were induced by Mr Vaggelas' fraudulent misrepresentations to part with their own property. They have suffered personal loss by making their own property available to enable (the company) to complete the purchase unless it be that the value of that advance to the company was offset by the value of the debt owed to them by the company. They also suffered personal loss if it be held that the fraudulent misrepresentations induced them to give the personal guarantees and securities which have deprived them of their property." 19 At 253, Brennan J (as his Honour then was) said: "The Goulds cannot sue in their own names for the company's loss …; they can recover only the loss suffered by them in acting upon the fraudulent misrepresentations which Mr Vaggelas made. They did not act upon those representations by becoming the purchasers of the resort but by forming the company, by providing it with funds to complete the contract to purchase the resort and by guaranteeing the company's borrowings needed to improve the resort and provide working capital. No doubt it was a matter of indifference to the Vaggelas interests whether the Goulds chose to buy the resort personally or by forming a company to be the purchaser, but the terms of the contract show that the formation of the company to complete the purchase and conduct the resort was contemplated by the parties. The representations were calculated to induce the Goulds either themselves to buy or to form a company to do so and, in the latter case, to provide to or procure for the company the funds it would need to complete the purchase of the resort and to conduct the resort. It is the loss, if any, suffered by the Goulds in acting in this way which is recoverable in this action. The Goulds' loss is the loss suffered by a creditor of the company which, apart from its cause of action in deceit, is worthless. If a defendant, D, by fraudulent misrepresentations made to a plaintiff, P, induces P to lend money to a worthless company, C, whereby the money lent is lost, D is liable for damages in deceit to P. That is clear enough where C is under D's control and there is no difference in principle when C is not under D's control." 20 At 256-258, Brennan J summarized the views as to measure of damages expressed by members of the Full Court of the Supreme Court of Queensland in the decision under appeal, namely that the company had a cause of action, the value of which would have been translated to the Goulds had it prosecuted its cause of action. His Honour then continued (at 257-8): "In my respectful opinion, these approaches fail to take account of the distinct causes of action vested in the company and the Goulds respectively … . Once it is recognized that the Goulds' cause of action is distinct from the company's there can be no question of the Goulds' appropriating the company's cause of action or of measuring the Goulds' damages by what the company could have recovered at some earlier time. In assessing the Goulds' loss, the value of the company's cause of action is relevant to the value of the company debt so far as it might show what the company was likely to pay the Goulds; but the value of the company debt is a matter of fact, not to be ascertained by reference to the measure of damages which might have been recovered by the company if it had sued. The relevant question in determining the Goulds' damages was whether the company would more probably than not be able to pay some or all of what it owed the Goulds. In fact, the company has never been likely to pay the Goulds anything." 21 It seems that the shares in the company were never worth anything. At the point of incorporation the company had no assets and thereafter, the value of such assets as it had was exceeded by value by its debts. In any event, with the benefit of hindsight it was clear that the Goulds would derive no financial benefit from that source. Brennan J considered that the Goulds' status as shareholders did not affect their entitlement to recover amounts lost. Any claim which they may have had against the company was relevant only to the extent that it went in reduction of the loss which they had otherwise suffered. 22 Dawson J dissented. At 268-270 his Honour said: "It is essential to bear in mind that what the Goulds initially did was to subscribe for two shares in the capital of Gould Holdings and to lend, in effect, a sum of money to that company. They did not purchase the tourist resort in reliance upon Vaggelas's fraudulent misrepresentations; the purchase was by the company. Nor did the Goulds continue to run the tourist resort for some time after the purchase was made; it was the company which did that. There is no reason why the calculation of the Goulds' loss should not be made at the time at which the expenditure which was said to result in loss to them was made. … At the time Gould Holdings purchased the tourist resort it suffered a loss as a direct result of the fraudulent misrepresentations which induced the purchase. The business was worth less than it was represented to be and at that time, upon the findings of the trial judge, the company had a cause of action in deceit against the Vaggelases and the vendor companies. … What is important is that the company suffered loss at the time of purchase as a direct result of the inducement fraudulently offered by Vaggelas. It was tricked into buying the tourist resort by statements representing it to be something which it was not and its worth was less than it was represented to be. With this may be contrasted the position of the Goulds. They were not tricked into subscribing for shares in the company by any representations that the shares were, or would be, something which they were not. … Moreover, at the time they acquired the shares and made the loan, the Goulds suffered no loss. They received exactly what they had bargained for. Even if their position is assessed at the time of the purchase of the tourist resort by the company and by reference to that event, the Goulds suffered no loss by reason of what they did. The company suffered a loss at that time but that loss gave rise to a good cause of action which, if pursued to judgment, must, it appears from the evidence, have allowed recovery by enabling the amount of the judgment to be set off against the amount of purchase price which remained to be paid. The Goulds, as the sole shareholders in Gould Holdings, were entitled to the benefit of the company's assets, which must be taken to have included the cause of action in deceit. Upon this basis, their investment in the company caused them no loss. See (Prudential) … . It is true that the investment turned out to be less profitable than the Goulds anticipated but that was because of the events which ensured; it was not a direct consequence of the fraudulent misrepresentations made by Vaggelas, however much it may have followed as an indirect consequence. The expenses which the Goulds incurred after their initial investment were for the purpose of keeping the company trading. They were not tricked into giving guarantees or mortgaging property by the deceit of Vaggelas nor could their losses in this regard be said to be the direct consequence of the fraudulent misrepresentation of the tourist resort. … It was the company, not the Goulds, which continued to carry on business, thereby necessitating further financial contribution by the Goulds. If the company suffered direct consequential loss from Vaggelas's deceit in addition to paying more for the business than it was worth, then any action to recover that loss must be by the company. It cannot be recovered indirectly by the Goulds in an action to recover their investment. The majority in the Full Court, in rejecting the conclusions of the trial judge, recognized the distinction between the position of Gould Holdings and that of the Goulds themselves but sought to overcome the problem by 'identifying the respondents with the company and depriving the company of the right to further relief'. On any view such an approach cannot be sustained. The result would be to afford to the Goulds a derivative action for which there is no legal basis and which would, in any event, be defeated by the rule in Foss v Harbottle … . Moreover, even if it could be done, it would be quite wrong to bar any claim for deceit which Gould Holdings might have. That company has substantial creditors who ought not be deprived of the benefit of such a claim. …" 23 The New Zealand Court of Appeal considered a similar question in Christensen v Scott [1996] 1 NZLR 273. The plaintiffs were shareholders in a company (the "company") which grew potatoes. They caused it to take a lease of land for that purpose. The land was mortgaged, but those advising both the company and the plaintiffs (the "advisers") did not ensure that the mortgagee's consent to the lease was obtained. The plaintiffs guaranteed an advance to the company. The lessors defaulted under the mortgage, and the mortgagee went into possession, denying the company access to its potato crop. The mortgagee then went into liquidation, and the company went into receivership. The company claimed damages from various parties, including the advisers. The plaintiffs commenced their own action against the advisers and sought to prosecute it. Those proceedings were struck out. On appeal Thomas J, with whom the other members of the Court agreed, referred to Prudential and continued at 280: "We do not need to enter upon a close examination of (Prudential). It has attracted not insignificant and, at times, critical comment. …. It may be accepted that the Court of Appeal was correct, however, in concluding that a member has no right to sue directly in respect of a breach of duty owed to the company or in respect of a tort committed against the company. Such claims can only be brought by the company itself or by a member in a derivative action under an exception to the rule in Foss v Harbottle … . But this is not necessarily to exclude a claim brought by a party, who may also be a member, to whom a separate duty is owed and who suffers a personal loss as a result of a breach of that duty. Where such a party, irrespective that he or she is a member, has personal rights and these rights are invaded, the rule in Foss v Harbottle is irrelevant. Nor would the claim necessarily have the calamitous consequences predicted by counsel in respect of the concept of corporate personality and limited liability. The loss arises not from the breach of the duty owed to the company but from a breach of duty owed to the individuals. The individual is simply suing to vindicate his own right or redress a wrong done to him or her giving rise to a personal loss. We consider, therefore, that it is certainly arguable that, where there is an independent duty owed to the plaintiff and a breach of that duty occurs, the resulting loss may be recovered by the plaintiff. The fact that the loss may also be suffered by the company does not mean that it is not also a personal loss to the individual. Indeed, the diminution in the value of Mr and Mrs Christensen's shares in the company is by definition a personal loss and not a corporate loss. The loss suffered by the company is the loss of the lease and the profit which would have been obtained from harvesting the potato crop. That loss is reflected in the diminution in the value of Mr and Mrs Christensen's shares. They can no longer realize their shares at the value they enjoyed prior to the allege default of their accountants and solicitors. … In circumstances of this kind the possibility that the company and the member may seek to hold the same party liable for the same loss may pose a difficulty. Double recovery, of course, cannot be permitted. The problem does not arise in this case, however, as the company has chosen to settle its claim." 24 The House of Lords has recently considered the same question in Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1. The plaintiff carried on business through a number of companies. One of his businesses involved property development which he carried on through a company called Westway Homes Ltd ("WWH"), of which company he was managing director and holder of all but two of the issued shares. The plaintiff instructed the defendant, a firm of solicitors, to act for WWH in connection with the proposed acquisition of land for redevelopment. The plaintiff had previously retained that firm to advise him personally with regard to the same transaction. WWH held an option to purchase the land and instructed the defendant firm to serve a notice exercising that option. They did so, but the validity of such exercise was challenged. WWH successfully obtained an order for specific performance. However there was significant delay in the conveyance of the land to WWH, and it suffered substantial loss as a result. WWH sued the defendant. A duty of care was admitted, but breach was denied. After further delay and a lengthy trial, the claim was compromised, the defendant paying a substantial amount to WWH. In subsequent proceedings the plaintiff claimed personal loss. He had participated in the conduct by WWH of the earlier proceedings and in the settlement negotiations. 25 The heads of damage claimed by the plaintiff appear from the judgment of Lord Bingham of Cornhill at pp 36-37. They included: (1) Sums lost as a result of the plaintiff's investment in certain companies, acting on the advice of the solicitors; (2) Costs of borrowing loan capital and interest at punitive rates to fund personal outgoings and those of his businesses; (3) Diminution in value of pension arrangements and majority shareholding in WWH; (4) Loss of 12.5% of the plaintiff's shareholding in WWH, which shares were transferred to a lender as security and could not be redeemed because of lack of funds; and (5) Additional tax liability. 26 Lord Bingham said at 35-36: "As the Court of Appeal pointed out in (Prudential): "A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested." Here, it was argued, Mr Johnson was seeking to recover damages which had been suffered by WWH. Mr Johnson's response was equally simple. It was accepted, for purposes of the application to strike out the damages claim, that (the defendant) owed a duty to him personally and was in breach of that duty. Therefore, subject to showing that the damage complained of was caused by (the defendant's) breach of duty and was not too remote, which depended on the facts established at trial and could not be determined on the pleadings, he was entitled in principle to recover any damage which he had himself suffered as a personal loss separate and distinct from any loss suffered by the company. … These authorities support the following propositions: (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss …. (2) Where a company suffers loss, but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in value of the shareholding. … (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it, but neither may recover loss caused to the other by breach of the duty owed to that other. … These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential …) the loss claimed is "merely a reflection of the loss suffered by the company". In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant."

27 Lord Bingham then proceeded to consider the heads of damage referred to above. His Lordship held that the claim for sums invested in the companies and lost was "unobjectionable in principle". This sounds very much like the position adopted by the majority in Gould v Vaggelas, as does his Lordship's consideration of the second head of damages, borrowings and interest. This claim was also permitted to proceed but said to "call for close examination". Diminution in the value of Mr Johnson's pension scheme as a result of lost contributions by WWH and in the value of his majority shareholding in that company were disallowed as being reflective of the company's loss. However a claim for the lost enhancement of the value of the pension reflecting such contributions had they been made, was allowed. An alternative claim, based on the supposition that the company would not have made the pension payments and that the value of the company's other assets would therefore have been increased, was disallowed as being reflective of the company's loss. The claim for the value of shares transferred by way of security and not redeemed was allowed, as was the claim for additional tax liability.

28 Lord Cooke of Thorndon was a member of the court which decided Christensen v Scott (supra). In Johnson v Gore Wood,his Lordship held, consistent with that earlier decision, that where there were separate causes of action, there was no bar to prosecution of a claim by a shareholder, provided that there was no double recovery.

"I consider it to be clear that where a shareholder is personally owed a duty of care by a defendant and a breach of that duty causes him loss, he is not debarred from recovering damages because the defendant owed a separate and similar duty of care to the company, provided that the loss suffered by the shareholder is separate and distinct from the loss suffered by the company. … But a more difficult question arises where the shareholder claims a loss which is not separate and distinct from the loss suffered by the company but his loss flows from loss suffered by the company." 30 His Lordship referred to Prudential, Christensen v Scott and a number of other cases in which the latter decision was followed, acknowledged that the decisions were difficult to reconcile and expressed a preference for the approach taken in Christensen v Scott. At 55, Lord Hutton continued: "In Christensen v Scott … the Court considered that the problem of double recovery did not arise in that case as the defendants had settled the company's claim with the knowledge that the plaintiff's claim was outstanding. But the court recognized that double recovery cannot be permitted and that the interests of the creditors of a company must be protected. In my opinion the resolution of the conflict between Prudential Assurance and Christensen v Scott narrows down to the issue whether, as held in the former case, the shareholder is debarred from bringing to trial an action claiming loss where such loss is merely reflective of loss suffered by the company, or whether the shareholder is entitled to proceed to trial on such a claim, it being a matter for the trial judge, if the plaintiff establishes his claim, to ensure that there is no double recovery and that creditors and other shareholders of the company do not suffer loss, … . My Lords, whilst in a case such as Christensen v Scott there may be merit in permitting an individual shareholder to sue, the decision in Prudential Assurance has stood in England for almost 20 years and, whilst the decision has sometimes been distinguished on inadequate grounds, it has been regarded as establishing a clear principle which the Court of Appeal has followed in other cases. I further consider that the principle has the advantage that, rather than leaving the protection of creditors and other shareholders of the company to be given by the trial judge in the complexities of a trial to determine the validity of the claim made by the plaintiff against the defendant, where conflicts of interest may arise between directors and some shareholders, or between the liquidator and some shareholders, the principle ensures at the outset of proceedings that where the loss suffered by the plaintiff is sustained because of loss to the coffers of the company, there will be no double recovery at the expense of the defendant nor loss to creditors of the company and other shareholders. Therefore whilst I think that this House should uphold the Prudential Assurance principle I also consider that it is important to emphasize that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company." 31 Lord Millett, with whose reasons Lord Goff of Chieveley agreed, observed at 61-62: "A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: … . Correspondingly, of course, a company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact. This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none, … . Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant's actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder. The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, although they have not always been faithfully observed." 32 Lord Millett then referred to Prudential and to a number of other cases including Christensen v Scott. Referring to a key passage in the latter decision, his Lordship observed at 66-67: "I cannot accept this reasoning as representing the position in English law. It is of course correct that the diminution in the value of the plaintiff's shares was by definition a personal loss and not the company's loss, but that is not the point. The point is that it merely reflected the diminution of the company's assets. The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder's loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders. … The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations. … … Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends … and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company's funds and which the company would not have sustained itself. The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it." 33 Curiously, notwithstanding the apparent differences in reasoning, all members of the House came to the same conclusion as to the ultimate result, as best we can ascertain. Nonetheless there appears to be a clear distinction between the approach taken by Lord Cooke on the one hand and Lord Millett on the other, although it is difficult to discern the exact boundary between them. There is some support in Johnson v Gore Wood for the position adopted in Christensen v Scott, but also some criticism of it. Although the question was not raised in quite so clear a way in Gould v Vaggelas, the same difference of opinion is suggested in the respective judgments of Brennan J and Dawson J. The problem appears to lie in identifying the circumstances in which the shareholder's loss is reflective of the company's loss. Lord Bingham suggested, as the relevant test (at 36): "… the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, whether (to use the language of Prudential …) the loss claimed is 'merely a reflection of the loss suffered by the company'." 34 It is difficult to reconcile this test with the approach taken by Brennan J in Gould v Vaggelas where his Honour was willing to permit recovery by the Goulds of moneys advanced to, or on behalf of the company, which moneys were not recoverable because of its impecuniosity. However Lord Bingham's willingness to allow the first two heads of damage appears to be consistent with the outcome in Gould v Vaggelas. The test seems to be inconsistent with the decision in Christensen v Scott. It is perhaps of some significance that Christensen v Scott and Johnson v Gore Wood were both decisions on the pleadings in advance of trial. It is also significant to note the different factual situations in these cases. In Prudential, the shareholder had a separate cause of action, but the measure of damages was the reduction in value of shares brought about by damage to the company caused by the same act. In Gould v Vaggelas the claim was to recover moneys advanced to, or on behalf of the company and not recoverable because of impecuniosity as a result of the same tort. It was not a claim for reduction in share value. In Christensen v Scott the claim was for diminution in value of the Christensens' shareholdings. In Johnson v Gore Wood the claims were similar to those in Gould v Vaggelas save for those concerning diminution in value of the plaintiff's pension and of his shareholding in WWH, which claims were disallowed, although the claim for loss of expected enhancement in the value of the pension was allowed to stand.

The present application 35 Despite Lord Cooke's suggestion to the contrary in Johnson v Gore Wood (at 45), Prudential and Christensen v Scott are difficult to reconcile. However Gould v Vaggelas, Christensen v Scott and Johnson v Gore Wood appear to be broadly consistent, at least in outcome. The unsettled state of the law in this area and the need to examine closely the factual bases of the claims as identified by Lord Bingham pose difficulties for the second and fifth respondents. 36 Whatever the rule, it is concerned with the situation in which the relevant company has a cause of action arising out of the same facts as those founding the shareholder's claim. It is not clear that Management's claim arises from the same facts as does the applicant's or even that the company necessarily has such a claim. The cases to which we have referred all concerned situations in which, if the shareholder had a claim, so did the company. As best we can ascertain, Management's claim concerns the conduct of the second respondents, leading to its liquidation. It is alleged that they conspired with Club to bring about that result and/or acted in breach of statutory and/or fiduciary duty in: · failing to attempt to levy RP shareholders as provided by article 17(a); · allowing Management to be wound up when that outcome could have been avoided by such a levy; and · failing to hold a meeting of RP shareholders to raise funds or to secure their approval to the sale of Management's interest in the lease. 37 On the other hand, the applicant's present claim arises out of conduct which concerned only the RP shareholders, namely providing allegedly incorrect information as to the level of Management's indebtedness. No doubt the factual substrata of the two cases are closely associated, but it is by no means clear that success for the applicant in the present proceedings would necessarily mean that Management would be successful in its proceedings. 38 It is also by no means clear that the damages likely to be recovered in these proceedings merely reflect those likely to have flowed from the conduct impugned in Management's action. The measure of damages for loss of the lease would be its lost value to Management, probably taking into account the timeshare rights of the RP shareholders. That would be a valuation exercise, perhaps a complex one. In the present proceedings the applicant's measure of damages would presumably be the lost value of his timeshare rights. This approach raises a further problem. If, as the applicant seems to suggest, the timeshare rights are more than mere incidents of ownership of RP shares, a liquidator may be able to disclaim them. That issue has not been canvassed. It may depend upon the proper construction of the articles of association. 39 Finally, the second and fifth respondents' argument depends upon the assumption that RP shares and ordinary shares should be treated similarly for present purposes. It also assumes that loss of a licence created under a lease which has been forfeited should be treated in the same way as diminution in the value of shares. Both assumptions are fairly arguable, but they may involve quite complex considerations.

Outcome 40 The issue is a difficult one and obviously needs to be resolved. However we consider that the development of the law will take place in a more orderly way if decisions are based upon actual findings of fact rather than upon mere allegations. It is said for the second and fifth respondents that such a course will expose them to the costs of a trial. That is one of the reasons for permitting applications of the kind made in this case. However it does not follow that such an application will always be successful. It will often be a matter of judgment. The cases make it clear that a court must be very careful in shutting out an applicant at a preliminary stage. The deficiencies in the claim must be clear. That is not the present situation. There may be other ways in which the second and fifth respondents can protect themselves. We also observe that it may be desirable for Management's claims to be decided in the same proceedings as the applicant's. Those are matters for the parties. 41 We are of the view that her Honour was correct to refuse to strike out the claims as against the second and fifth respondents. We see no point in granting leave to appeal.

Orders 42 The application will be dismissed with costs. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of The Court.

Associate: Dated: 23 December 2002 Counsel for the First and Second Appellants: Mr D F Jackson QC Mr D A Kelly

Solicitor for the First and Second Appellants: Allens Arthur Robinson

Counsel for the Respondent: Mr J S Douglas QC Mr C D Coulsen

Solicitor for the Respondent: Russell and Company

Date of Hearing: 27 August 2002

Date of Judgment: 23 December 2002