James v Andrews [2001] NSWSC 1149 | Case summary

Judgment 1 His Honour: The plaintiffs are the liquidator and a company in liquidation. The defendants are persons who were, in the case of the first two defendants, directors of the second plaintiff and, in the case of the third defendant, the holding company of the second plaintiff. 2 The originating process was filed on 2 August 2000, making a claim, inter alia, for compensation under s 588M of the Corporations Law. In due course, a statement of claim was filed and the current version of the statement of claim indicates that the second defendant, (the only defendant who is involved in the current proceedings) was a director of the second plaintiff at the relevant period; that the company incurred debts while insolvent; and that the second defendant failed to prevent the company from incurring that debt and so contravened s 588G of the Corporations Law. That then had the effect that under s 588M of that Law that person was liable to an action to have recovered an amount equal to the loss suffered by creditors. 3 The statement of claim could be more comprehensively framed. For instance, in para 7 it merely alleges that the second defendant, as director, failed to prevent the company from incurring the debts referred to earlier on in the statement of claim, without alleging, as is probably necessary to allege, that the person concerned was either aware of the appropriate factors, or a reasonable person in their shoes would have been so aware. 4 Furthermore, there was little particularisation of the debts involved, though it is clear from para 4(d) that some of those debts were tax liabilities, and that in para 4(e) some were ordinary trade creditors, and the company was trading in New South Wales. 5 It would have been better to have pleaded or particularised precisely that some of the debts involved were debts in New South Wales, and that point troubled me for a while, but, I think, in view of paras 4(d) and 4(e), there is a sufficient indication that there was a failure to pay debts incurred in New South Wales. 6 The background facts are that, at all material times, the second defendant was a citizen and resident of New Zealand. Indeed, a New Zealand address is given for him in all the documents in these proceedings. It would seem that the third defendant is a New Zealand corporation. It was the holding company of the second plaintiff, and the first and second defendants became directors because of their connection with the third defendant. 7 The plaintiffs and the second defendant both filed notices of motion. The plaintiffs, by motion filed 25 January 2001, sought leave to proceed against the second defendant, pursuant to the Supreme Court Rules. The second defendant, by motion filed 13 October 2000, sought orders setting aside the originating process or the service of the originating process, or a declaration that this Court had no jurisdiction over the second defendant in respect of the subject matter of the proceedings. 8 The two notices of motion came on before Acting Master Berecry, who heard them on 16 August 2001, and delivered judgment on 23 August 2001. His orders were that on the plaintiffs' notice of motion leave be granted to proceed, and he ordered that the second defendant's notice of motion be dismissed. 9 The second defendant filed a notice of appeal on 19 September 2001, and the plaintiffs have filed a notice of contention today. The appeal was put into the short notice list and, in due course, was called up and came on before me this morning. I am indebted to Mr Blake of counsel, for the appellant, for the very thorough presentation of the appellant's case, and also to Mr Durston of counsel, for the liquidator, for his submissions, which were not as detailed because of the nature of things. 10 Mr Blake made two principal points; (a) the plaintiffs had not shown that the cause of action arose in New South Wales, and thus no leave to proceed should have been given; and (b) it was not competent for the NSW Parliament to legislate so as to make liable a person who was never a resident of New South Wales for the debts of a company which happened to be registered or wound up in New South Wales. 11 Mr Blake raised various other matters, but for reasons that I will indicate, it is not necessary to deal with these fully, though I will mention them before I close this judgment. 12 I have already indicated the nature of the legislation. I do not consider that it is necessary to look at it in greater detail. I should, however, note that it is almost certainly the form of the legislation in 1994 that should govern, rather than the form of the legislation immediately before the coming into force of the Corporations Act 2001. 13 The matter is of little moment, as the basic parts of both sections remain the same, but between 1994 and 2001 there were various alterations made in the section and it may be that it was the 1994 version of the section, as kept in force by transitional provisions of the Corporations Law, that was the applicable rule at the time when the action was commenced. 14 The question that one must address when considering whether there was a contravention of s 588G(2) is, assuming that the actions set out in the statement of claim assert a failing to prevent a company from incurring a debt, where did that failure take place in the case of a director, who we will assume for present purposes, never left New Zealand. 15 It seems to me that before addressing that question one must look to see what the words "failing to prevent" comprehend. The word "failure" is a word which can have various shades of meaning. 16 Jordan CJ dealt with the question in Ingram v Ingram (1938) 38 SR (NSW) 407, 410, which was summarised by Mahoney JA in CBS Productions Pty Ltd v O'Neill [1985] 1 NSWLR 601, 616, as in many cases requiring, in circumstances such as the present, what Mahoney JA described as "volitional delinquency", that is, one must look to see some delinquency occurring in the will of the propositus, where there has been an omission to comply with an obligation. 17 Then one must look at the word "prevent". One finds in the legal dictionaries all sorts of shades of meaning for the word, but it must never be forgotten that it is derived from the word "prevenio", which means "I go before" or "proceed" and the basic concept in the word is that someone intervenes to control a state of affairs, usually these days by stopping it. So the general flavour of s 588G(2) is that someone has an obligation to deal with the company's affairs in such a way to stop it incurring a debt, and that that person is guilty of volitional delinquency in and about that obligation. 18 The question then is where does that volitional delinquency take place, where the propositus is at all stages physically in New Zealand? 19 I was referred to what the High Court said in Agar v Hyde (2000) 74 ALJR 1219. In many respects that was a completely different case to the present because people who were injured in rugby matches in New South Wales brought tort actions against the International Rugby Football Board, who were scattered throughout the world. However, in the course of the consideration of those matters, the members of the High Court gave useful guidance as to how this sort of problem that we are here considering should be approached. 20 At page 1229 [50] of the joint judgment, the High Court told us to focus attention upon the nature of the claim which is made in the proceedings, and then ask whether that cause of action arose in the State. It was recognised that, depending on the sort of action, the Court may need to look beyond the statement of claim to see the basal facts in order to determine whether the proceedings had sufficiently good prospects to succeed as an action which was properly before a court in New South Wales. 21 The Court did say, as Mr Blake says it did, that one focuses on the cause of action as it is pleaded, and the alleged tort, and this is to be distinguished from the consequences of the tort or quasi-tort, which may have a far more direct nexus with New South Wales than the former. 22 The question must be whether this volitional delinquency occurred in New South Wales. In my view, the probabilities are that it did. I should say that it may well be that when the full facts come out at the trial, the judge hearing the matter may decide on the whole of the evidence that that was not so, in which case he or she may well find a verdict for the second defendant, but looking at what is alleged in the pleadings, the background facts, the facts accepted by the Master, which are not challenged here, and considering whether the case has sufficient prospects of success as to warrant it going to trial, in my view, there is sufficient there, even bearing in mind, as Mr Blake submitted, that the onus of proof on this matter is on the plaintiffs; see Agar v Hyde at 1238 [105]. 23 In this day and age, it is not usually a requirement that a person be physically present when a tort or crime is committed; see eg Re Al Fawwaz [2001] 4 All ER 149. One can have a tort or crime committed in cases where there is absolutely no activity at all on the part of the defendant, such as the situation discussed in the Victorian Full Court in Foster v Aloni [1951] VLR 481, where the defendant was asleep and so did not switch his lights off at 9 pm as the regulations required. It would have been no different if, instead of being asleep, the defendant had been in Queensland or New Zealand or otherwise. The matter still would have been occurred in Victoria against the Victorian regulations. 24 Where a New South Wales statute creates an obligation on a company director, then that obligation attaches to the company director wherever that company director may physically be. He is bound to discharge obligations and the mere fact that he is outside the jurisdiction is no answer. It is always difficult to deal with omissions, but when one casts the omission in terms of some sort of positive delinquency, as I have done, one looks to see the duty, looks to see what did not happen, and then asks where did it not happen, which is, of course, an Alice in Wonderland type question, but it has to be addressed and that then focuses on what possibly can happen to fulfil the obligation. 25 Mr Blake says that really the second defendant was not in a position to do anything. He was not a shareholder, he was only one of two directors. For most of the period he was not the managing director. He could have called a meeting, but he probably would have been voted out of office anyhow. However, this is really to take too narrow a view of the possible acts that the second defendant could have done. 26 Again, what might be done may only become exposed at the trial, but certainly some of the acts that the second defendant could have taken were acts that could only have been done in New South Wales, or perhaps in Australia, in view of the extended jurisdiction given in the unique cross-vesting scheme in the Corporations Law, that is, applying to the New South Wales Court for provisional liquidation, as well as making attempts to take commercial steps in New South Wales in order to bring any co-director or shareholder, who was not complying with the law, to book. 27 Failure to do acts, which could have been done in New South Wales, seems to me to make the delinquency occur in New South Wales. It may well be that some of the failure occurred in New Zealand, and some in New South Wales, but it would seem to me that that is sufficient to give this Court jurisdiction. Accordingly, in my view, the learned Acting Master was correct in giving leave to proceed. 28 I then pass to the second defendant's notice of motion. The New South Wales Parliament is more or less a plenary legislature, though its powers are restricted, because of s 5 of the Constitution Act of 1902, to be exercised for the peace, welfare and good government of New South Wales. This means, in accordance with the authorities, that the New South Wales Parliament has no power to legislate for something that has no nexus or no sufficient nexus with New South Wales, and if it attempts to do so then its Act will be, at least pro tanto, invalid. 29 There have been a host of authorities, mainly from the early part to the middle of the twentieth century, in which this Court, the High Court and the Privy Council examined what sort of nexus is required to support New South Wales legislative power. 30 One of the leading statements is by Dixon J in Broken Hill South Ltd v Commissioner of Taxation (NSW) (1937) 56 CLR 337 at 375, where he said: "The power to make laws for the peace, order and good government of a State does not enable the State Parliament to impose by reference to some act, matter or thing occurring outside the State a liability upon a person unconnected with the State whether by domicil, residence or otherwise. But it is within the competence of the State legislature to make any fact, circumstance, occurrence or thing in or connected with the territory the occasion of the imposition upon any person concerned therein of a liability to taxation or of any other liability. It is also within the competence of the legislature to base the imposition of liability on no more than the relation of the person to the territory. The relation may consist in presence within the territory, residence, domicil, carrying on business there, or even remoter connections. If a connection exists, it is for the legislature to decide how far it should go in the exercise of its powers." 31 The death duty cases have made it clear that, generally speaking, if the underlying property in an estate is protected by the laws and police force in New South Wales then there is a sufficient nexus that will support the law. In The Myer Emporium Ltd v Commissioner of Stamp Duties (1967) 68 SR (NSW) 220, the New South Wales Court of Appeal had to consider the validity of a New South Wales law making dutiable a transfer of a share in a corporation incorporated in New South Wales, even if the parties to the transfer, and even the register on which the shares were registered, were outside New South Wales. 32 The court decided that the law was valid. Walsh JA said at 241: "In my opinion, the incorporation of the company in New South Wales does constitute a sufficient connection, in relation to a charge imposed upon the transfer of a share in that company. The whole value of the shares and its very existence rest upon and are capable of being affected by the laws of this State. It does not answer this to say that, when the share is on a foreign register, it must be regarded, for purposes for which it is necessary to give to the share a local habitation, as being situated in that place, or that the holder of it may be able under the laws and in the courts of that place to enforce rights in relation to it. The important thing is that the existence of the share depends upon the laws of New South Wales. ... In my opinion, it would be within competence if the New South Wales Parliament decided ... to enact that shares in companies incorporated under its laws were to be held only by local residents and not by "foreigners" and that no transfer to a foreigner should be valid. A fortiori, it can enact that transfers, including transfers to foreigners, are to be subject to such conditions as it may stipulate, including the payment of some charge. If the foreigner chooses to invest in shares in a New South Wales company he must submit to the conditions attaching to his exercise of that choice." 33 It will not be in every case, however, that the mere fact that there is a corporation incorporated in New South Wales involved in a transaction that a law will be valid. For instance, in Commissioner of Stamp Duties (NSW) v Millar (1932) 48 CLR 618, a death duty case, the nexus was insufficient to tax a shareholder dying domicil outside New South Wales. 34 Mr Blake mainly relied on two cases dealing with the attempts to collect road tax from people who were living outside the relevant State, whose only connection was that they were directors of a company, which company had at some earlier time driven trucks in the State without paying the appropriate road charges. These are Welker v Hewett (1969) 120 CLR 503 and Cox v Tomat (1972) 126 CLR 105. 35 Kitto J, who gave a leading judgment in Welker, seems to decide the case, as appears at page 511, on the basis that on the true construction of the Act in question the words "any director" did not extend to a director who was not in New South Wales at the relevant time. He said, however, at p 512 that whilst that was enough to entitle the appellant to succeed, he should deal with the other arguments that had been raised. He dealt with death duty cases such as Johnson v Commissioner of Stamp Duties (NSW) [1956] AC 331, and then said at 513: "But upon what connexion between the State and a director who is and always has been out of the State does s 10A base its attempt to impose a civil and criminal liability upon the director? Certainly not upon his having been a director at the time when the company incurred its liability for charges under the Act by reason of the travelling of the vehicle on the public streets of New South Wales ... . The intention is not that the travelling of the vehicle shall give rise to a primary liability in the company and a secondary liability in the directors in office at that time; it is that the failure of the company to pay the charge is to be treated as a failure for which each director who is in office while the failure continues may be made individually responsible by the means which s 10A provides." 36 His Honour thought that that was insufficient nexus. However, the page also seems to indicate that it would have been a sufficient nexus to have made the directors of the company, who were directors when the truck travelled into New South Wales, liable if the nexus was the travelling of the truck on the roads of New South Wales. The reasons are quite obviously, that the New South Wales people paid for the roads over which the truck was travelling. 37 However, in Cox v Tomat, the majority of the High Court seem to adopt the general words of Kitto J in the Welker case more broadly than his Honour had actually addressed them and, I think, Mr Blake is right that by so doing, it has converted the words of Kitto J from mere obiter dicta to a statement of principle, which, read in conjunction with the Broken Hill South Ltd case, bind this Court. 38 However, it does not seem to me that in the corporations' sphere, those cases provide a sufficient analogy to stop one following the approach that was taken in the Myer case and in almost every case involving corporations, other than Millar, to which I have referred, and some dicta of Hodgson J (as his Honour then was) in National Companies & Securities Commission v Brierley Investments Ltd (1988) 14 NSWLR 273, 297. 39 I looked at some of these cases in the context of preferences in Horn v York Paper Company Ltd (1990) 3 ACSR 417. I pointed out in that case that, since at least 1843, the general method of approaching these sort of cases is that even if a company is incorporated in one jurisdiction, then the laws which relate to that company will be enforced over boundaries; see eg White v Briggs Thurburn Acraman & Co (1843) 5 Dunlop (Court of Sessions) 1148. The discussion of the various cases in McPherson's Law of Company Liquidation, 4th ed (LBC, Sydney, 1999) at pp 710-711, suggest that there is still some doubt about some of the matters, but generally speaking the view taken in Horn v York Paper Company Ltd has been considered to be generally correct. 40 There have been exceptions, such as the decision of the Full Supreme Court of South Australia in Danae Investment Trust PLC v Macintosh Nominees Pty Ltd (1993) 11 ACSR 523; (1993) 61 SASR 341, but that was a decision on the interpretation of the statute, rather than the power to make it. 41 I do not think there is much need to look at further authority, though I would note Dempster v National Companies and Securities Commission (1993) 9 WAR 215, which again supports the general line of the authorities to which I have referred. 42 The English and Australian law of corporations is that a corporation is created by the Crown. In early days they were created by charter. In later days by private Acts of Parliament. Until in the mid-nineteenth century the Company Clauses Consolidation Act enabled companies to be created by registration without the intervention of the Crown on each occasion. However, the company owes its existence and the rights of all persons who are shareholders, directors or have any interest in the company principally from the statute or from the incorporation. All this is the gracious act of the New South Wales Crown. Whenever there is that largesse, on analogy with some of the cases I have referred to, such as the passage in the Broken Hill South case, it is open for the New South Wales Parliament to put conditions and charges and obligations on the persons who have taken advantage of its largesse. 43 Certainly, as Mr Durston suggests, that is what has happened in the instant case, where the Parliament has enacted that, as part of the package of rights and obligations, there is an obligation on those people who are directors of New South Wales companies to observe the requirements of s 588G. That obligation, on its true construction (and this is not contested in this appeal) extends to any director, wherever that director may be. 44 It seems to me that it is plainly within the powers of the New South Wales Parliament. Accordingly, in principle the second defendant's notice of motion should be dismissed. 45 This really puts an end to the appeal, and what should happen now is that after there has been sufficient time to consider the implications of this judgment a defence should be put on and the case should go on for trial. It is probably appropriate to fix a time for mentioning it before the Registrar. 46 However, Mr Blake did spend a considerable amount of research in putting the proposition that this matter is still a matter to be dealt with under the Corporations Law and not, as the great majority of the cases since 15 July 2001, under the Corporations Act. However, he says that the principal reason for this is that if the New South Wales Act was invalid before 15 July 2001, then there would be nothing on which the Corporations Act could operate, so as to convert a pre-commencement right into a substituted right. 47 That argument may well be correct. However, as the basis of it is flawed, in my judgment, for the reasons that I have given, in that the New South Wales Act is valid, there is no need to consider the point further. 48 Accordingly, the orders are that the appeal is dismissed with costs. The time for filing a notice of motion for leave to appeal against this decision is extended to 15 February 2002. If no such notice of motion is filed then the matter can be mentioned in the Corporations List before the Registrar on 18 February 2002. The exhibits may be returned on the usual basis.

James v Andrews

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Judgment (9 paragraphs)

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