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[2001] WASC 297
Supreme Court of WA
2001-11-14
Original judgment source is linked above.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION : HEEDES -v- TELSTRA CORPORATION LTD [2001] WASC 297
Practice and procedure - Duty of care as between party contracting with company and shareholder - Reflective loss - Right of shareholder to claim independent of claim by company
Gould v Vaggelas [1984] HCA 68; (1985) 157 CLR 215
Nestegg Holdings Pty Ltd v Smith [2001] WASC 227
1 MASTER SANDERSON: This is the defendant's application to strike out the plaintiff's substituted statement of claim. On 23 August 2001 I dealt with an earlier strike out application brought by the defendant. That application was successful and although the defendant sought an order that the action be dismissed I was satisfied the plaintiff should be afforded the opportunity to replead. The defendant says that the substituted statement of claim contains all the faults and failings of the earlier pleading, perhaps even more so. The defendant again seeks an order not only that the substituted statement of claim be struck out but that the action be struck out and judgment be entered for the defendant.
2 The plaintiff's claim can be summarised in this way. He was at all material times the sole shareholder and managing director of a company known as Toolwise Pty Ltd. That company is now in liquidation. It is pleaded that in or about August 1999 Toolwise Pty Ltd entered into a contract whereby the defendant was to install telephone lines at the business premises of Toolwise Pty Ltd in Henderson. The contract is said to be partly oral and partly in writing. It is said that, as a consequence of the transaction between the defendant and Toolwise Pty Ltd, a duty of care arose as between the plaintiff and the defendant. Because this issue is central to the present dispute between the parties, I will quote the relevant parts of the substituted statement of claim in full:
"4. The Defendant owed a duty of care to the Plaintiff to:
(a) exercise all reasonable care in carrying out its obligations under the Contract; and
(b) exercise all reasonable care in advising the Plaintiff or Toolwise Pty Ltd as to the availability of telephone services and when the telephone connection was likely to be in place.
PARTICULARS OF FACTS GIVING RISE TO A DUTY OF CARE OWED BY THE DEFENDANT TO THE PLAINTIFF
5. A duty of care was owed by the Defendant to the Plaintiff personally because:
(a) Prior to incorporation of Toolwise Pty Ltd on 26th February 1999 the Plaintiff was the sole proprietor of an unincorporated business known as 'Toolwise'.
(b) Prior to the incorporation of Toolwise Pty Ltd the Defendant dealt directly with the Plaintiff and directed all accounts to the Plaintiff personally under the heading 'Arthur Heedes T/A Toolwise'.
(c) Upon incorporation of Toolwise Pty Ltd the Plaintiff transferred the business to Toolwise Pty Ltd and the Plaintiff obtained ownership of 100% of the shares in the company Toolwise Pty Ltd.
(d) After incorporation of Toolwise Pty Ltd the Defendant continued to deal with the Plaintiff personally and as the alter ego of Toolwise Pty Ltd and as the person who was responsible for (and entitled to the benefits of) the activities of Toolwise Pty Ltd and for the payment of the relevant accounts incurred by Toolwise Pty Ltd, including the accounts for the said telephone services.
(e) After the incorporation of Toolwise Pty Ltd, the Defendant, at its option and interchangeably rendered (and still continues to render) accounts for the services of Toolwise Pty Ltd and the Plaintiff in his personal capacity for the same services carried out by the Defendant for Toolwise Pty Ltd.
(f) There was a contractual relationship, as outlined in paragraphs 1, 2 and 3 hereof between the Defendant and Toolwise Pty Ltd for the installation of the subject telephone lines; and the Defendant owed a duty of care to Toolwise Pty Ltd for the proper performance of that contract.
(g) By reason of the course of dealing between the Plaintiff and the Defendant as pleaded in paragraphs 5(a)-(e) herein after the incorporation of Toolwise Pty Ltd it was, or ought to have been, known to the Defendant that losses caused to Toolwise Pty Ltd by a breach of the Defendants contract with or duty of care to that company would inevitably cause a loss to the Plaintiff who was the sole shareholder and alter ego of Toolwise Pty Ltd.
(h) Further, by reason of the said course of dealing between the Plaintiff and the Defendant both before and after the incorporation of Toolwise Pty Ltd it was, or ought to have been, known to the Defendant that the proximity of the relationship between the Plaintiff and Toolwise Pty Ltd was such that a loss caused to Toolwise Pty Ltd by a breach of contract or a breach of the duty of care by the Defendant would inevitably result in a personal loss to the Plaintiff."
3 It is the first part of the defendant's submissions that, on the facts as pleaded, no duty of care arises as between the plaintiff and the defendant. It is said, further, that no repleading can cure the defect because the plaintiff has not and cannot establish any duty of care and hence has no cause of action. Before dealing with this issue, I should complete the outline of the facts and state briefly the second limb of the defendant's argument.
4 It is alleged by the plaintiff that the defendant did not install the telephone lines by the agreed date, so that potential customers could not contact Toolwise Pty Ltd. Further, when contact was made by potential customers, they were given incorrect directory assistance information. It is said that this was a breach of the defendant's duty of care to the plaintiff - not Toolwise Pty Ltd, but the plaintiff - and as a consequence the plaintiff has suffered loss and damage. The particulars of the loss and damage, which are to be found in par 8, are said to be as follows:
"8. As a direct result of the Defendant's breach of its duty of care to the Plaintiff, the Plaintiff has suffered loss and damage.
(a) The Defendant's actions caused or alternatively significantly contributed to the failure of the business of Toolwise Pty Ltd, the value of which business was approximately $697,000 plus stock prior to the Defendant's breach pleaded above.
(b) As a direct result of the damage to the business of Toolwise Pty Ltd, the value of the Plaintiff's shareholding in Toolwise Pty Ltd has been expunged and destroyed.
(c) As a direct result of the failure of the business of Toolwise Pty Ltd, the Plaintiff is now subject to personal claims brought against him by his personal creditors or creditors of Toolwise Pty Ltd, in his capacity as indemnifier and guarantor of Toolwise Pty Ltd.
(d) The claims against the Plaintiff, as guarantor and known to the Plaintiff are as follows, with interest still accruing: [further particularised in an amount of $964,629]"
5 As the second limb of its application, the defendant says that the losses claimed by the plaintiff are in fact losses which were sustained by Toolwise Pty Ltd. These losses being "reflective" losses cannot be claimed by the plaintiff. If any claim is to be made, it must be made by Toolwise Pty Ltd. The defendant says, as the plaintiff has not and cannot plead any loss other than reflective loss, he has no cause of action. This, again, leads to the conclusion that the action ought be struck out.
6 Dealing, first, with the issue of whether or not a duty of care arises, I think it is readily apparent that the form of the pleading is defective. In no way can it be said that, consequent upon pars 1, 2 and 3 of the statement of claim, a duty of care as between the plaintiff and the defendant arose. But that conclusion deals with form rather than substance. What does emerge from the pleading are these material facts. First, prior to February 1999 the plaintiff was the sole proprietor of an unincorporated business known as "Toolwise". Second, from time to time the defendant had rendered accounts styled "Arthur Heedes T/A Toolwise". Thirdly, based upon these first and second points, the defendant knew that Toolwise Pty Ltd was a small family company. Fourthly, if losses were sustained by Toolwise Pty Ltd the effects would be passed on to the plaintiff. Whether the plaintiff would go so far as to say that the defendant knew, or must have known, that losses would be passed on because the plaintiff had given personal guarantees in relation to the Toolwise Pty Ltd business is unclear. I think all that can be said (taken from par 5(h) of the substituted statement of claim) is that the plaintiff would say that the defendant was, or should have been, aware that if loss was caused to Toolwise Pty Ltd then a range of losses would be caused to the plaintiff. The question, then, is whether or not those material facts can give rise to a duty of care.
7 Clearly, this is not a situation where it is immediately obvious that there is a duty of care between the plaintiff and the defendant. Often, the existence of a duty of care is obvious - for instance, when a person is using a motor vehicle on a public highway or the duty owed by a store owner to a customer. The question for this case is to decide whether, given the facts found in the statement of claim, a duty of care arises. Some guidance as to the proper approach to this question is to be found in the judgment of Hayne J in Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 176 ALR 411 at 436 - 437. His Honour said:
"In almost every case in which a plaintiff suffers damage it is forseeable that, if reasonable care is not taken, harm may follow. The conclusion that harm was forseeable is well-nigh inevitable. As Dixon CJ said in argument in Chapman v Hearse, 'I cannot understand why any event which does happen is not forseeable by a person of sufficient imagination and intelligence'. Foresight of harm is not sufficient to show that a duty of care exists ... .
The present case is one in which resort to more concrete reasons, rules and principles helps to resolve the problems it presents. The rules and principles to which reference must be made concern the liability of occupiers to entrants upon their premises and the obligations of a person to control the conduct of another.
Noting that the appellant and the first respondent could, respectively, be described as the occupier of land and an entrant upon that land does not wholly resolve the duty of care issue. There can be no dispute that an occupier of land owes some duty of care to those who enter it. But detecting that the parties stood in a relationship where one owed some duty of care to the other by no means exhausts the first in the traditional trilogy of issues in an action for damages for negligence: duty, breach and damage. The relevant question in the present case is not whether an occupier owes some duty of care to an entrant. The question is what is the extent of the duty which the occupier owes.
Because the extent of a duty falls for decision in relation to 'concrete facts arising from real life activities' it will not always be useful to begin by examining the extent of a defendant's duty of care separately from the facts which give rise to a claim. That may be possible, and useful, in a simple case (like motorist and injured road user) where the duty of care and its content are well-established. In other cases, however, it may lead to an insufficiently precise formulation of the duty which obscures the issues that require consideration. That lack of precision may lie in formulating the duty too narrowly: for example, by asking did the defendant owe a duty of care to fence the part of the cliffs in its reserve from which the plaintiff fell? It may also, as in this case, lie in formulating the duty too broadly: for example, by asking did the defendant owe any duty of care to the plaintiff?"
8 So the question then is whether, on the facts of this case, the defendant owed any duty of care to the plaintiff. In my view, it did not. There was a contract between the defendant and Toolwise Pty Ltd. Pursuant to that contract, each of the parties had certain rights and obligations. Further, for the purposes of this application, it may be assumed that the defendant knew of the relationship between the plaintiff and Toolwise Pty Ltd, as set out in the statement of claim. But in my view, none of that gives rise to a duty of care. Moreover, the fact that if the defendant breached its contract with Toolwise Pty Ltd the plaintiff might suffer loss and such loss was foreseeable, does not of itself mean there was a duty of care as between the plaintiff and the defendant.
9 I am satisfied that, on the facts pleaded in the substituted statement of claim, no duty of care arises as between the plaintiff and the defendant. On that basis alone, the plaintiff must fail. However, the question of whether or not the plaintiff, even if he were able to establish the existence of a duty of care and breach of that duty of care, suffered any loss and damage giving rise to a cause of action was a matter fully argued during the course of the application. In deference to the quality of the argument put by both counsel, and lest I be wrong on the issue of the existence of a duty of care, it is an issue I should resolve.
10 The defendant's position can be summarised in this way. All of the loss and damage claimed by the plaintiff in par 8 of the statement of claim is loss and damage which could be claimed by Toolwise Pty Ltd if it were to take action against the defendant. Such loss cannot then be claimed by the plaintiff.
11 The defendant relied upon the decision of the House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65; [2001] 2 WLR 72. As this case is central to the arguments put by both counsel, it is necessary to say something of the facts to put the decision in context. (What follows is taken from the headnote in the report of the decision to be found at [2000] UKHL 65; [2001] All ER 481):
"The claimant, J, carried on a property development business through a company which, for all practical purposes, was his corporate embodiment. In 1988, J, acting on behalf of the company, instructed the defendant firm of solicitors, which from time to time acted for him personally, to serve a notice exercising the company's option to purchase certain land. The solictors duly served the notice, but not in a manner which was incapable of challenge by the vendor. After the vendor disputed the validity of the notice, the company instructed the solicitors to issue proceedings against him for specific performance. Although the court eventually granted such an order, it was not until April 1992 that the land was conveyed to the company. By that time, the company had suffered substantial loss because of the cost of the proceedings, the company's inability to recover damages or costs from the vendor (who had no assets), the collapse of the property market and high interest charges. In 1991 the company brought proceedings for professional negligence against the solicitors, and the latter were informed that J intended to bring a personal claim against them. In fact, in part because of his limited financial resources, J had brought no such claim by December 1992 when the company's proceedings against the solicitors were settled on payment of the substantial part of the sum claimed. In the settlement agreement, J gave an undertaking he would limit to a specified sum the amount of any claim made by him personally against the solicitors by reason of losses suffered through loss of income, dividends or capital in respect of his position as a shareholder of the company. It was expressly stated that that undertaking did not limit any other of J's rights against the solicitors. In 1993, after obtaining full legal aid, J brought an action against the solicitors for breach of duty, alleging that he had retained the solicitors to act for him personally as well as for the company in the exercise of the option, that they had been negligent in the manner in which they had exercised the option and that they had also been negligent in advice given to him personally on the likely outcome and duration of the proceedings against the vendor. J sought to recover, inter alia, the cost of personal borrowings to fund his own outgoings and those of his various businesses, the diminution in value of his pension and majority shareholding in the company, the loss of a portion of his shareholding in the company which had been transferred to a lender as security for a loan, an additional tax liability, general damages for mental distress and anxiety and aggravated damages. Over the next four and a half years the parties pleaded and re-pleaded their respective cases. In December 1997, shortly after the trial date had been set, the solicitors intimated for the first time that they intended to apply to strike out the action as an abuse of the process of the court, contending that the action could and should have been brought at the same time as the company's action. On the hearing of that application, the judge held that the solicitors were stopped by convention from contending that the action was an abuse. He also held, on determination of preliminary issues, that the solicitors had owed J a duty of care and that the heads of damages claimed were not irrecoverable. On the solicitors' appeal, the Court of Appeal agreed with the judge's decision on duty of care and, with one exception, with his decision on the pleaded heads of damages. However, it reversed the judge's finding on estoppel by convention and concluded that the proceedings were an abuse of process, holding that J could have brought his action at the same time as the company's proceedings and that he should therefore have done so. Accordingly, the court struck out the proceedings, and J appealed to the House of Lords. The solicitors cross-appealed from the court's ruling on the heads of damages, contending, in respect of some of them, that the alleged damage had been suffered by the company, not by J."
12 It is important, first, to note that the court at first instance had found that the solicitors owed Mr Johnson a duty of care. That issue was not really a matter which was before the House of Lords. By far the greater part of their Lordships' judgments are taken up with the question of what losses it was open to Johnson to claim. During the course of his judgment, Lord Bingham of Cornhill, after an examination of the relevant authorities, set out the following three propositions (at 94 - 95). First, 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 value of the shareholder's shareholding, where that merely reflects the loss suffered by a 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. In support of this proposition his Honour referred to, in particular, the decision of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204. This was a decision of the Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) who said at 222 - 223:
"But what he (a shareholder) 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 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 the 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 absolute unencumbered property. ... A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing [sterling]100,000. The company has an issued share capital of 100 shares, of which 99 are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching [sterling]100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some [sterling]100,000 damages in addition to the [sterling]100,000 damages recoverable by the company."
13 His Lordship put the second proposition in this way. 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 the value of the shareholding. Lee v Sheard [1956] 1 QB 192 provides a good illustration of this principle. The negligence of a car driver resulted in an injury to the plaintiff who was one of two directors and shareholders of a limited company and did outside work of buying and selling linen goods for it. As a consequence of the accident the plaintiff was unable for a time to do his work for the company, its profits were lower than they would otherwise have been and he received [sterling]1,500 less from it than he would otherwise have done. In an action for damages for negligence against the car driver, the Court of Appeal upheld an award of [sterling]1,500 of damages from the defendant. The company would not have been entitled to recover their loss as damages in the action and, hence, the plaintiff could do so. In Australia the principle is illustrated by the decision of the New South Wales Court of Appeal in Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538. That was a case which had to do with the fiduciary duties owed by a director to a shareholder of the company. It was central in that case that the company had no right of action. There was no question of the losses sustained by the shareholder being reflective.
14 His Lordship put the third and final proposition in this way. 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. This proposition can be illustrated by reference to the decision in Johnson v Gore Wood itself. Mr Johnson claimed that he was obliged to borrow at punitive rates of interest to fund his personal outgoings and those of his businesses. The court held that such damages would be recoverable by Mr Johnson, although they cautioned that the claim would call for close examination, among other things, to ensure that it was not disclosed as a claim for loss of dividend. The same reasoning applied to bank charges and interest and mortgage charges and interest. Clearly, none of these matters were losses sustained by the company but were personal to Mr Johnson.
15 The plaintiff, for his part, relies squarely on the decision of the New Zealand Court of Appeal in Christensen v Scott [1996] 1 NZLR 273. The facts in this case, taken from the headnote, were as follows:
"The plaintiffs, the Christensens, were potato farmers. They formed a company, Christensen Potato Co Ltd (the company), of which they were the directors, each having an equal shareholding. The company approached the first defendants, Peat Marwick, to organise a lease by the company of a block of land for growing potatoes. There were three mortgages on the land including one to Registered Securities Ltd (RSL). Peat Marwick arranged for the second defendants McCaw Lewis Chapman to prepare the lease and to attend to other incidental legal matters. The company executed an instrument by way of security in favour of Broadbank Corporation Ltd and the company's obligations were guaranteed by the plaintiffs. The lessors defaulted on the mortgage to RSL which entered into possession of the land and the crop and executed its power of sale. RSL claimed it had no knowledge of the lease. The first and second defendants had not obtained the written consent of RSL as mortgagee to the lease nor lodged a caveat against the land to protect the company's interest. Access to the crop was denied to the company and the plaintiffs who were unable to harvest it. The plaintiffs sued RSL and obtained an interlocutory injunction restraining RSL from disposing of the proceeds of the crop. RSL went into liquidation and no damages were recovered. The Christensens claimed against the first and second defendants but that claim was struck out by a Master and an application to review was dismissed by a High Court Judge in August 1991. But in the meantime the company had been placed in receivership. It was wound up on 21 July 1992, the Official Assignee being appointed the liquidator. The present proceedings were commenced in October 1992 and the defendants moved to strike it out April 1993. In December that claim was settled by the company, the receiver, the Official Assignee as liquidator, and the defendants in respect of all claims which the company might have against the defendants arising out of the original proceedings - the defendants entering into the settlement with a denial of liability. The Christensens opposed the settlement claiming that the amounts being paid were totally inadequate. In the present proceedings the Christensens argued that the claim was brought in respect of the duties owed by their professional advisers to them personally and not to the company. An application to strike these proceedings came on again in the High Court where the Judge accepted that it was arguable that the defendants owed the Christensens a duty of care and assumed that the defendants were in breach of that duty. He held that the damages representing the diminution in the value of the Christensens' shares could not be recovered and that any loss resulting from the negligence of the defendants would be a loss suffered by the company and not by the Christensens.
He held that there was no causal connection between the loss and the defendants' breach of duty and that it was too remote, that the claim for general damages could accordingly not be sustained and that, as the company had claimed the same losses in its earlier proceedings and settled the claim which settlement had been implemented, it would be unjust and oppressive to the defendants to allow the claim to proceed. He therefore struck it out. Mr and Mrs Christensen appealed."
16 The appeal was allowed, Thomas J delivering the judgment of the court. Remarkably enough, his Honour did not feel it necessary to discuss the decision of the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (supra), in any detail. His Honour noted that the decision had been the subject of adverse academic comment and then continued (at 280):
"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 the exception to the rule in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461. 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 those 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 a breach of duty owed to the company but from a breach of duty owed to individuals. The individuals [sic] 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 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 realise their shares at the value they enjoyed prior to the alleged 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."
17 The position adopted by the plaintiff then can be put this way. Whatever duty may have been owed by the defendant to Toolwise Pty Ltd, either in tort or in contract, the defendant owed to the plaintiff a separate and distinct duty. Once that duty is breached then the plaintiff is entitled to recover the loss suffered, even if that loss is the diminution in the value of his shareholding in the company. As I understand the plaintiff's argument, it is conceded that if a duty was owed by the defendant to Toolwise Pty Ltd and no independent duty was owed to the plaintiff, then the plaintiff could not sue simply for the diminution in value of his shares as a mere incidence of the breach by the defendant of the duty it owed to the company in which he was a shareholder. It is in the situation where there is a separate and independent duty owed to a person in the plaintiff's position that a right of action arises.
18 The decision in Christensen v Scott (supra), is not without its supporters. In Johnson v Gore Wood & Co (supra), Lord Hutton said (at 113):
"My Lords, I consider, with respect, that part of the reasoning in Prudential Assurance is open to criticism. In my opinion the view of the Court of Appeal of New Zealand that the loss suffered by a shareholder through the diminution in the value of his shareholding is a personal loss is a more realistic assessment than the view of the Court of Appeal in Prudential Assurance that the shareholder's loss is merely a reflection of the loss suffered by the company and that the shareholder suffers no personal loss."
19 However, having acknowledged the rationale for the decision in Christensen, his Lordship went on (at 114):
" ... 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 the 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 the 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 emphasise that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company."
20 Remarkably enough, there is no authority directly on this point in Australia. Accepting that there is a conflict between the English decisions of Prudential Assurance and Johnson v Gore Wood & Co, on the one hand, and Christensen v Scott on the other, and I do not think it is to be doubted that there is such a conflict, it is a question of following one line of reasoning or the other. Counsel for the plaintiff submitted that, as it was at least arguable that the Christensen v Scott decision would be followed in Australia, the claim ought not be struck out. I appreciate the strength of that reasoning. However, in my view there is no doubt that the English line of authority ought be followed. I find the reasoning compelling, largely for the reasons given by Lord Hutton in the passage I have quoted above. On that basis then, I am satisfied that a claim which seeks to recover reflective loss cannot be sustained.
21 Properly considered, all of the loss claimed in sub-pars (a) through to (d) of par 8 are reflective loss. There can be no doubt about pars 8(a) and (b). Each is a different way of saying that the value of the plaintiff's shareholding in Toolwise Pty Ltd has been wiped out. The position is slightly different with respect to pars 8(c) and (d). These are personal liabilities incurred by the plaintiff. But they have been incurred as a consequence of his guaranteeing debts of Toolwise Pty Ltd. If Toolwise Pty Ltd recovered from the defendant in an action for breach of contract or otherwise, then the damages would allow Toolwise Pty Ltd to meet its creditors and the plaintiff would not have been called upon under the provisions of various guarantees. Looked at in that way, the losses claimed are reflective and the claim cannot be sustained.
22 It is possible to postulate a circumstance where recovery might be possible in the circumstances of this case. Leaving to one side the question of the existence of any duty as between the plaintiff and the defendant and assuming such a duty exists, if the plaintiff had borrowed from a financial institution to pay out the debts of Toolwise Pty Ltd for which he was liable under various guarantees, it might well be open to him to claim interest he paid on the borrowings. Of course there would be a question of remoteness, but it is at least conceivable that interest costs would be recoverable. This is a loss that the plaintiff would incur separate and distinct from any loss incurred by the company. The recovery of such losses is consistent with the decision in Johnson v Gore Wood & Co, above.
23 I am satisfied, in the circumstances of this case, that the statement of claim ought be struck out and judgment ought be entered for the defendant against the plaintiff. The decision is based primarily upon there being no duty of care as between the plaintiff and the defendant. Further, I am not satisfied that any of the losses pleaded are recoverable and, accordingly, as the plaintiff has suffered no recoverable loss, he has no right of action in tort.
24 I will hear the parties as to the precise form of orders and as to costs.
# Heedes
Telstra Corporation Ltd \[2001\] WASC 297
(1985) 157 CLR 215
(2000) 176 ALR 411
(1999) 46 NSWLR 538