Johnston v McGrath & Ors

CATCHWORDS : TRADE PRACTICES - Consumer Protection - Whether misleading and deceptive conduct of HIH Insurance by misrepresentation overtaken by subsequent press statements to the contrary - Whether plaintiff's failure to heed press statements a novus actus interveniens - CORPORATIONS - Winding up - Appeal from liquidators' rejection of proof of debt - Whether claim for damages under Trade Practices Act 1974 (Cth), s 82 for inducement to enter on-market purchase of worthless HIH shares a debt due in a person's capacity as a member and postponed to all other creditors under Corporations Act 2001 (Cth), s 563A - EVIDENCE - Client Legal Privilege - Whether privilege in statement provided to solicitor for purpose of drafting an affidavit to which no reference made in the affidavit is impliedly waived by the reading of the affidavit

Trade Practices Act 1974 (Cth) Corporations Law Corporations Act 2001 (Cth) Corporations Regulations 2001 (Cth) LEGISLATION CITED : The Building Societies Act 1986 (Vic) Companies (Victoria) Code Companies Act 1862 Insolvency Act 1986 (UK) Evidence Act 1995

Henville v Walker (2001) 206 CLR 459 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Munchies Management Pty Ltd v Belperio (1988) 58 FCR 27 Pavich v Bobra Nominees Pty Ltd (1988) 10 ATPR 46-039 Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522 Tanning Research Laboratories Inc v O'Brien (1989-1990) 169 CLR 332 Sons of Gwalia Ltd v Margaretic [2005] FCA 1305 Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 1 Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 Soden v British & Commonwealth Holdings Plc [1998] AC 298 CASES CITED : Re Pyramid Building Society (in liq) (1991) 6 ACSR 405 at 407 Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 Trevor v Whitworth (1887) 12 App Cas 409 Ooregum Gold Mining Co of India v Roper [1892] AC 125 Oakes v Turquand (1867) LR 2 HL 325 Tennent v City of Glasgow Bank (1879) 4 App Cas 615 Re Addlestone Linoleum Co (1887) 37 Ch D 191 Crosbie v Naidoo (2005) 216 ALR 105 Peek v Gurney (1873) LR 6 HL 377 Cadence Asset Management Pty Ltd v Concepts Sports Ltd [2005] FCA 1280 Attorney-General (NT) v Maurice (1986) 161 CLR 475 Amalgamated Services Pty Ltd v Marsden [2000] NSWCA 63

Brian Alexander Johnston - Plaintiff PARTIES : Anthony Gregory McGrath & Alexander Robert Mackay Macintosh (In their capacities as liquidators of HIH Insurance Ltd ) (In Liq) )- 1st Defendants HIH Insurance Ltd (In Liq) - 2nd Defendant

Mr D Grieve QC with Mr M Gracie - Plaintiff COUNSEL : Mr A Sullivan QC with Mr J Kirk - Defendants

Dennis & Co Solicitors SOLICITORS : Blake Dawson Waldron Lawyers

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

6644/04 BRIAN ALEXANDER JOHNSTON v ANTHONY GREGORY McGRATH & ORS JUDGMENT 1 Brian Alexander Johnston bought 40,000 shares in HIH Insurance Ltd at 25.5 cents on 2 January 2001. He claimed he was induced into buying the shares by statements in a media release and financial report and the press coverage of those items. He lodged a proof of debt in the liquidation of HIH that was rejected by its liquidators, Anthony Gregory McGrath and Alexander Robert Mackay Macintosh. From that decision Mr Johnston appeals to the court. 2 The liquidators admit that some of the statements in the media release and financial report were misleading and deceptive, or likely to mislead or deceive. For the purposes of these proceedings only, they also conceded that the shares in HIH were worthless on and from the appointment of provisional liquidators on 15 March 2001. 3 The central issues are whether the misleading or deceptive conduct that fell within the Trade Practices Act 1974, s 52(1) caused Mr Johnston to suffer the loss in value of the shares so as to enliven s 82. And, if it did, whether the claim is postponed to the claims of other creditors. There is also a question whether a claim for client legal privilege should be sustained with respect to a document produced to the court. 4 An alternative claim by Mr Johnston that HIH was in breach of the Corporations Law, s 995(2) was not prosecuted. That provision is limited to engaging in conduct that is misleading or deceptive, or likely to mislead or deceive, in connection with any dealing in securities. The representations in the media release and the financial report are unlikely to have been made by HIH in connection with a dealing in its securities.

The representations 5 HIH issued a media release on 13 September 2000. Mr Johnston alleged that some of the statements it contained were misleading and deceptive, or likely to mislead or deceive. The liquidators admitted that the following fell into that category: "HIH Insurance - financially strong and positioned for the future Statement from the Chairman and Chief Executive." "Today's announcement marks the culmination of a lengthy process aimed at insuring that HIH is a financially strong and strategically well-positioned company, especially in view of substantial changes proposed for the Australian insurance regulatory framework." "The market has clearly had difficulty in attaching an appropriate value to this key retail market franchise. This transaction values a segment that represents less than half of our current business base at a valuation that represents around 70 cents per HIH ordinary share. Following the transaction, each HIH ordinary share will have an undiluted net tangible asset backing of $1.03 and $1.12 on a fully diluted basis. HIH solvency improves to more than 50 per cent." "As promised, no capital raising but a solvency strong company." "HIH 1999/2000 preliminary final result · $42.1 million operating profit after tax before abnormals ($18.4 million after tax, abnormals and outside equity interest)." "The operating profit after tax before abnormals for the 12 months ended 30 June 2000 was $42.2 million and represented an unsatisfactory outcome given that the second half only marginally added to the first half equivalent result." "With the Allianz transaction, HIH has group premium solvency in excess of 50 per cent and an undiluted net tangible asset backing per share of more than $1.00." "This solution also leaves intact a financially strong, profitable and independent HIH." 6 Mr Johnston did not read the media release. He read press coverage with respect to it. 7 On 16 October 2000, HIH published a concise annual report for the year ended 30 June 2000. Again, Mr Johnstone alleged that some of its statements were misleading and deceptive, or likely to mislead or deceive. The liquidators admitted the following as such: "In addition, HIH's strategic application of whole of account reinsurance protection is assisting to reduce earnings volatility going forward." "Operating profit after income tax for the year ended 30 June 2000 was $18.4 million compared with a loss of $39.8 million the previous year." "Whole of account reinsurance, entered into with AAA and AA Reinsurers consistent with industry practice, significantly protected the Group's underwriting portfolio. These contracts are long-term and are aimed at reducing the volatility of the profit and loss account." "The whole of account reinsurance protection has led to a substantial increase in non-current reinsurance recoveries at 30 June 2000." "GROUP RESULTS Consolidated profit for the entity for the year ended 30 June 2000 was $18.4 million after extraordinary items, income tax expenses and outside equity interests." "REVIEW OF OPERATIONS Premium revenue earned was $2 862.5 million for the year to 30 June 2000 compared to $3 136.8 million for the eighteen months to 30 June 1999. Operating profit after income tax for the year was $18.4 million as compared to the operating loss after tax amount of $21.2 million for the eighteen month period to 30 June 1999."

The liquidators conceded that the balance sheet set out in the financial report was misleading and deceptive, or likely to mislead or deceive. It showed net assets and total shareholders' equity at $939.1 million. The statement in the report that basic earnings per share were ($0.006) and diluted earnings per share were $0.019 were also conceded to be misleading and deceptive, or likely to mislead or deceive. 8 Mr Johnston said he flicked through a few of the columns in the report at his gymnasium in five or ten minutes.

The newspaper reports 9 Mr Johnston swore an affidavit. In it he said that during the whole of 2000 he read in the newspapers from time to time that HIH had been making profits, was financially strong, the shares in HIH were worth $1 each, that HIH had approximately $1 billion worth of net assets, that the forecasts by HIH for its future was good, that HIH was making a financial recovery, that HIH was in good shape, that it did not require any further capital and that HIH was a solvency strong company. He pleaded that selected statements from newspapers were misleading and deceptive, or likely to mislead or deceive and he was induced to buy the shares. He maintained that he read newspaper articles about HIH in full. 10 From a search of News Store and Newstext, the solicitors for the liquidators assembled all newspaper articles that mentioned HIH in the period 13 September 2000 to 2 January 2001. The articles were put to Mr Johnston in cross examination. 11 The day after the media release, press reports were consistently scathing of the performance of HIH. The Sydney Morning Herald reported that the shares slumped more than 17% the previous day after the company was forced to cede control of its Australian retail general insurance operations to Germany's Allianz in an effort to restore its ailing balance sheet and meet tougher prudential regulations. The Australian Financial Review reported that HIH shares slumped nearly 20% the day before after it announced another disastrous result and a deal to sell its personal lines operations to Allianz. The Australian reported that Ray Williams had dealt HIH into play after unveiling a 2000 result less than half expectations and the sale of 51 per cent of its retail insurance business to Allianz. It also stated that the shares plunged 17 cents the previous day to a new low of 82 cents. 12 On 15 September 2000, The Australian Financial Review reported that HIH shares slumped another 30% the day before after scathing analysts' reports had valued the company as low as 50 cents a share. 13 Mr Johnston was challenged to point to anything in the press coverage of the media release that painted an encouraging picture. Mr Johnston had extracted portions of the articles in his statement of claim as items upon which he relied. As a whole, however, the newspaper articles painted a dismal picture. On 13 September 2000, the shares fell from 99 cents to 82 cents, and they fell to 58 cents the next day: a 40% fall in two days, consequent upon the media release. 14 In the period that followed the financial report of 16 October 2000, the press coverage continued to paint a decline in HIH's fortunes. On 16 October 2000, The Australian Financial Review reported that share market analysts remained sceptical about the outlook for HIH despite board changes and the resignation of Mr Williams. The shares had risen to 52 cents when Mr Williams announced his intention to resign, but the next day they dropped 7 cents to close at 45 cents. On 21 October 2000, the paper reported that Mr Rodney Adler had sold virtually all his remaining stake in HIH. The shares dropped to 42.5 cents. On 23 October 2000 the paper reported that Harvey Norman chairman, Mr Gerry Harvey criticised executives of poorly performing companies referring to Mr Williams and the recent performance of HIH. The next day the paper reported that the shares had dropped to 39 cents following Mr Harvey's criticism. 15 On 28 October 2000, The Sydney Morning Herald reported that HIH shares hit new lows despite signs that the troubled insurer was moving to restructure its Asian operations. The shares hit a low of 30.5 cents before closing at 33 cents. That paper stated that the company's decline was accelerating since September's sale of its Australian personal lines operations to Allianz. 16 On 31 October 2000, The Daily Telegraph reported that the shares had scraped a new low at 31.5 cents as Mr Adler called on the company to articulate and pursue a new strategy. The Australian of that day gave the same report. 17 On 31 October 2000, The Australian Financial Review reported that the shares touched a record low of 29.5 cents as speculation intensified about plans to off-load its Californian workers' compensation business. On 4 November 2000, the paper reported that HIH shares rose to 43 cents after the Standard & Poor's reduction of HIH's credit rating from A minus to BBB plus. Share market analysts explained that the downgrading had already been factored into the company's share price weeks before. On 8 November 2000, the paper reported that the shares had fallen to 37 cents and the company was looking for a new chief executive after the resignation of Mr Williams. 18 On 18 November 2000, The Sydney Morning Herald reported that HIH had moved to shore up its vulnerable market position through an agency agreement with the largest privately held insurance company in the world, Gerling and the shares rose to 40.5 cents. 19 On 21 November 2000, The Australian reported that the group's decision to run their corporate risk business, mostly professional indemnity and public and product liability insurance, through a managing agency owned by Gerling would clip potential earnings further. The shares fell to 39.5 cents. 20 On 22 November 2000, The Australian reported that HIH had already sold 51% of its potentially most profitable business to Allianz and if the corporate work also went into a joint venture over which it had no control: "then the game is up. There will be nothing left". The shares dropped to 38 cents. 21 On 8 December 2000, The Australian reported that the shares had closed the previous day at 30.8 cents. On 14 December 2000, the paper reported on simmering tensions in the boardroom of HIH said to break into the open at the annual general meeting the next day. The shares had closed the day before at 29.5 cents. 22 By 15 December 2000, the shares were down to 29 cents. In an article in The Australian Financial Review it was predicted that HIH would commence its annual general meeting that day with the announcement that it had picked internal candidate Randolph Wein as its new chief executive. The shares dropped to 26 cents. 23 On 19 December 2000, The Australian reported on the annual general meeting and the most pressing crisis facing Mr Wein, the inevitable conversion in June 2001 of most if not all of the 35 million $5 converting notes issued by the company in 1998. The report concluded: "In yet another smirking admission the shareholders, Cohen disclosed that these notes will convert to no fewer than 800 million shares, nearly trebling the stock on issue to 1.27 billion. The impact that this conversion will have on HIH's net asset backing, its earnings per share and the share price is too horrible to contemplate. It the stock is trading at 26 c today, what will it be in mid-to-late-June after the conversion? 10c? 5c? " 24 In an article in The Australian Financial Review of 27 December 2000 entitled "Winners and losers - Financial Services", HIH was picked out as the worst performer of the year. The article contained the following: "No heralds harking over at HIH There's definitely no tension when the envelope for loser of the year is opened. Unfortunately for shareholders, HIH Insurance had the lot an ill-fated takeover (FAI Insurance), a blowout in losses, a nose-diving share price and board ructions. Much of the board, including founder and CEO Ray Williams, departed as more than $600 million in shareholder value evaporated this year alone. The situation is so bad that HIH is threatening legal action against one of its own board directors, former FAI chief Rodney Adler, who is almost worthy of a separate award. 'I believe it could be a billion-dollar company again,' he declared in June after topping up his holding in HIH. Five months later, he bailed out of the stock as his losses mounted." 25 On 28 December 2000, The Australian Financial Review reported that HIH shares, which had closed on 31 December 1999 at $1.53, closed on 21 December 2000 at 22 cents, a drop of 85.6%. The paper reported that Mr Adler sold 550,000 shares at 26 cents on the day the shares plunged to a low of 20.5 cents. The Australian noted that this represented all Mr Adler's remaining shares. 26 Mr Johnston maintained that while the newspaper articles contained negative connotations, he saw positive signs in the restructuring of the company, the introduction of new people, the company returning to its core business and Mr Harvey's interest in the company. 27 But the restructuring in this case amounted to a selling off of the potentially profitable portions of the HIH business. It was not a case of getting back to its original core business. 51% had been sold to Allianz and the corporate work was to go to the Gerling agency. As the press indicated, the new blood in the form of Mr Wein was faced with the problem of the conversion of the notes in June 2001.

Was Mr Johnston induced by the representations? 28 I do not accept that the newspaper coverage of the media release played any part in Mr Johnston's decision to buy the shares. While snippets from the press coverage contained statements which, if read in isolation, were positive, the articles taken as a whole were damning of the performance of HIH. 29 Nor do I accept that the statements in the financial report played a part in Mr Johnston's purchase of the shares. He flicked through that report in December 2000 shortly before he made the purchase. The financial position the subject of the report was then six months old and the current position of the company was the source of constant printed media criticism. Any influence that the media release or the financial statement might have had was overtaken by Mr Johnston's full reading of contemporaneous press reports. And those reports contained no encouragement whatsoever. They counteracted the misleading and deceptive statements in the press release and the financial report. 30 In May 2000, Mr Johnston purchased 534 AMP shares for $8,072.15. He sold them for $10,718.71 on the same day as he purchased the HIH shares. 31 In my view, it is more probable than not that Mr Johnston was motivated to purchase HIH shares at 25.5 cents because of the success of his single other investment in AMP. 32 Mr Johnston has failed to satisfy me that the false statements in the media release and financial report in September and October 2000 were a materially contributing cause of his purchase of the HIH shares.

The legal principles 33 In Henville v Walker (2001) 206 CLR 459 it was said that the purpose of the Trade Practices Act 1974, (Cth) was not restricted to the protection of the careful or the astute and that negligence on the part of a victim was no bar to an action under s 82 unless the conduct of the victim was such as to destroy the causal connection between the contravention and the loss or damage. 34 In that case, an architect obtained advice from a real estate agent about the purchase of property for the purpose of construction of home units. The agent stated that there was a demand for quality units in the town and three units on the site would fetch between $250,000.00 and $280,000.00 each. At the time, there was no demand for units in that price range. The architect prepared a feasibility study that substantially underestimated the costs of the project. A reasonable profit on the project was predicted from the selling price projections and the cost estimates. If one or other of the projections was known to be inaccurate, the project would not have been profitable and would not have proceeded. It was held that the agent's contravention of the Trade Practices Act 1974 (Cth), s 52(1) was one of two concurrent causes of the architect's loss and was enough to enable damages to be recovered under s 82. 35 But this is not a case of contributing factors, one of which was reliance upon the misleading and deceptive conduct. This is a case in which, in my judgment, that conduct played no part in the loss sustained by Mr Johnston when the shares became valueless. Without causation, a misleading and deceptive representation does not give rise to an entitlement to damages under s 82 of the Trade Practices Act 1974 (Cth). It requires a person to have suffered loss or damage by conduct of another person in contravention of, in this case, s 52 which provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The use of the word "by" in s 82 requires the conduct in breach of the Act to be a cause of the loss or damage (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514. 36 In Henville, the agent's misrepresentation remained a cause of the damage sustained by the architect. The position is different if the causal connection between the contravention of the Act and the loss or damage is destroyed. That may occur, as here, by subsequent events. Or it may occur because the conduct of the victim is such as to destroy the causal connection, as Gleeson CJ observed at [13]. 37 In Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 at 286-287 a Full Court of the Federal Court referred to Pavich v Bobra Nominees Pty Ltd (1988) 10 ATPR 46-039 in which French J, having said that the primacy of the causation principle in the Trade Practices Act 1974 (Cth), s 82 would seem to exclude reliance upon such concepts as mitigation or contributory negligence, said that there may come a point where the applicant's own conduct is so dominant in the causal chain as to constitute a novus actus interveniens. 38 If, contrary to my view, any of the misrepresentations by HIH remained causative, I am of view that Mr Johnston's conduct in ignoring the repeated warnings in the printed media that he assiduously read, was so dominant as to cut the causal chain to the misrepresentations. 39 In Henville at [96] McHugh J warned against mechanical application of common law conceptions of causation to the issues posed by the Trade Practices Act 1974 (Cth), s 82. 40 In this case, however, a common sense approach to causation requires the conclusion that the misrepresentations by HIH were overtaken by subsequent events, namely, printed media reports that contradicted the representations. 41 Reference was made to Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 and to its description in Ford Motor Co of Australia Ltd v Arrowcrest Group Pty Ltd (2003) 134 FCR 522 at [115] as authority for the proposition that an applicant need not establish that it relied upon a respondent's conduct, but can establish liability by proof that others did, as a result of which the applicant suffered loss. But that is not situation in the instant circumstances. Mr Johnston alleges that he relied upon HIH's conduct. 42 The task of the court upon a challenge to a liquidator's rejection of a proof of debt is to determine whether the proof of debt is a true liability of the company enforceable against it (Tanning Research Laboratories Inc v O'Brien (1989-1990) 169 CLR 332 at 340-341). 43 In my judgment, Mr Johnston has failed to establish an entitlement to damages under the Trade Practices Act 1974 (Cth), s 82, his proof of debt is not a true liability of HIH enforceable against it and his appeal under the Corporations Act 2001 (Cth), s 1321 must be dismissed.

Debt postponement 44 In view of the above, it is unnecessary for me to consider the question whether, if HIH owed Mr Johnston a debt, it was postponed to the claims of all other creditors. But in deference to the arguments addressed to me by counsel, I indicate my views on that subject. 45 Section 563A of the Corporations Act 2001 (Cth) provides for the deferment of certain debts owed to a member of a company. It is in the following terms: "Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been set aside." 46 The law on this subject topic is, to say the least, confused. 47 The word "debt" in the above section is not defined. As Emmett J points out in Sons of Gwalia Ltd v Margaretic [2005] FCA 1305 at [17], the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth) use the terms "claim" and "debt" indiscriminately to refer to the same thing. 48 In Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 the High Court treated a shareholder's claim against its company for damages for misleading or deceptive conduct in deceit or under the Trade Practices Act 1974 (Cth), s 82 as falling within a forerunner of s 563A of the Corporations Act 2001 (Cth). 49 The first point that can be made, therefore, is that the word "debt" in s 563A of the Corporations Act 2001 (Cth) is sufficiently broad to encompass a member's claim to unliquidated damages against a company. 50 That is a logical conclusion because Pt 5.6 of the Corporations Act 2001 (Cth) deals with winding up generally, and Division 6 of that Part, in which s 563A is to be found, is concerned with proof and ranking of claims. It is, therefore, appropriate to construe the word "debt" in terms of the definition in Division 6 of the debts and claims that are provable in a winding up. The definition is in s 553(1) as all debts payable by, and all claims against, the company, present or future, certain or contingent, ascertained or sounding only in damages. 51 A similar approach was taken by the Appeal Division of the Supreme Court of Victoria in Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 at 32-33 in determining who were the creditors of a company bound by a deed of company arrangement in terms of s 444D(1) of the Corporations Act 2001 (Cth). 52 There is also an issue about the word "otherwise" in the Corporations Act 2001 (Cth), s 563A. It was submitted that it should be given a restrictive meaning in accordance with the ejusdem generis rule and, accordingly, it would exclude an unliquidated claim for damages against the company. 53 There are several problems with that submission. First, it is inconsistent with the approach taken by the High Court in Webb Distributors. There the holders of non-withdrawable shares in a building society that was being wound up claimed they had been induced to acquire their shares by representations that the shares were redeemable, and those representations constituted misleading and deceptive conduct for the purposes of the Trade Practices Act 1974 (Cth), s 52. The Building Societies Act 1986 (Vic) provided that the provisions of the Companies (Victoria) Code, including a forerunner of s 563A, applied with necessary modifications to the winding up of a building society. The High Court held that the provision excluded their claims. 54 Secondly, the argument was rejected by the House of Lords in Soden v British & Commonwealth Holdings Plc [1998] AC 298. In that case B & C purchased the entire share capital of Atlantic Computers Plc. The shares proved to be worthless and B & C and Atlantic went into administration. B & C sued the administrators of Atlantic for damages for negligent misrepresentations said to have induced the acquisition of the shares. The administrators sought directions as to whether the damages, if recovered, would be subordinated to the claims of other creditors of Atlantic under a provision almost identical with that considered by the High Court in Webb Distributors. The House of Lords held that the provision did not apply. Of the ejusdem generis rule argument, Lord Browne-Wilkinson said at 323-324 that the words "by way of dividends, profits or otherwise", were illustrations of what constituted sums due to a member in that character as such and they neither widened nor restricted the meaning of the phrase. 55 Thirdly, the language is that of the nineteenth century and should not be construed with the subtleties of the twenty first century. The provision had its origin in s 38(7) of the Companies Act 1862 (25 & 26 Vic c 89). It was one of the qualifications upon the general liability of members in the event of a winding up. The provision was as follows: "In the event of a Company formed under this Act being wound up, every present and past Member of such Company shall be liable to contribute to the Assets of Company to an Amount sufficient for Payment of the Debts and Liabilities of the Company, and the Costs, Charges, and Expenses of the Winding-up, and for the Payment of such Sums as may be required for the Adjustment of the Rights of the Contributories among themselves, with the Qualifications following; (that is to say,)"

There followed limitations upon the liability of past members, the limitation of liability of any member to any amount unpaid on shares, the limitation of a member of a company limited by guarantee to the amount of the undertaking in the memorandum of association, a provision that the Act should not invalidate any provisions in a policy of insurance or other contract whereby the liability of individual members on such policy or contract was restricted and, finally, "(7) No Sum due to any Member of a Company, in his Character of a Member, by way of Dividends, Profits, or otherwise, shall be deemed to be a Debt of the Company, payable to such Member in a Case of Competition between himself and any other Creditor not being a Member of the Company; but any such Sum may be taken into account, for the Purposes of the final Adjustment of the Rights of the Contributories amongst themselves." 56 I adopt, with respect, the approach of the House of Lords in Soden. The limitation in s 563A of the Corporations Act 2001 (Cth) is to debts owed in a person's capacity as a member of the company. The words which follow are merely illustrative of that limitation. There is no need to construe down the word "otherwise" on the basis that there is some recognised genus in those illustrations. 57 Untutored by precedent, I would have thought that damages payable by a company to a shareholder under the Trade Practices Act 1974 (Cth), s 82 were not owed by the company to the shareholder in the capacity of a member of the company. The damages are payable because of the company's misleading and deceptive conduct. They have nothing to do with the congeries of rights the member of the company has under the shareholding. They do not stem from the statutory contract between the company and its members that had its origin in s 16 of the Companies Act 1862 (UK). It provided that the articles of association should be entered and stamped as if a deed and signed by each subscriber, and: "When registered, they shall bind the Company and the Members thereof to the same Extent as if each Member had subscribed his Name and affixed his Seal thereto, and there were in such Articles contained a Covenant on the Part of himself, his Heirs, Executors, and Administrators, to conform to all the Regulations contained in such Articles, subject to the Provisions of this Act; and all Monies payable by any Member to the Company, in pursuance of the Conditions and Regulations of the Company, or any of such Conditions or Regulations, shall be deemed to be a Debt due from each Member to the Company and in England and Ireland to be in the Nature of Speciality Debt." 58 The statutory contract is now to be found in the Corporations Act 2001 (Cth), s 140(1). It provides that a company's constitution, if any, and any replaceable rules that apply to the company have effect as a contract between the company and each member, between the company and each director and company secretary, and between a member and each other member, under which each person agrees to observe and perform the constitution and rules so far as they apply to that person. 59 In Soden the statutory provision analogous to s 563A of the Corporations Act 2001 (Cth) was s 74(2)(f) of the Insolvency Act 1986 (UK). Section 74(1) provided that when a company was wound up, every present and past member was liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities and the expenses of the winding up and for the adjustment of the rights of the contributories among themselves. Section 74(2) contained a number of qualifications. The qualification in s 74(2)(f) was as follows: "A sum due to any member of the company (in his character of a member) by way of dividends, profits or otherwise is not deemed to be a debt of the company, payable to that member in a case of competition between himself and any other creditor not a member of the company, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves." 60 The House of Lord interpreted that provision as applying to amounts payable to a member by reason of the statutory contract by which was meant the bundle of rights and liabilities created by the memorandum and articles of association of the company under the equivalent of s 140 of the Corporations Act 2001 (Cth) and other rights and liabilities of members imposed by the Act itself. At 323 Lord Browne-Wilkinson said: "Section 74(2)(f) requires a distinction to be drawn between, on the one hand, sums due to a member in his character of a member by way of dividends, profits or otherwise and, on the other hand, sums due to a member otherwise than in his character as a member. In the absence of any other indication to the contrary, sums due in the character of a member must be sums falling due under and by virtue of the statutory contract between the members and the company and the members inter se…."

Having quoted the equivalent of s 140(1) of the Corporations Act 2001 (Cth) and defined what he meant by the statutory contract His Lordship went on to dispose of the ejusdem generis rule argument and, at 324 he said: "But the reference to dividends and profits as examples of sums due in the character of a member entirely accords with the view I have reached as to the meaning of the section since they indicate rights founded on the statutory contract and not otherwise." 61 However, unless the decision is distinguishable, I am prevented from embracing the approach in Soden by the decision of the majority in Webb Distributors. I should mention in passing that McHugh J in his dissenting judgment took the view that the Trade Practices Act 1974 (Cth) was a fundamental piece of remedial and protectionist legislation that should be construed broadly and there was nothing to suggest that s 82 was to be read down in any way and the same should be said of the wide powers conferred on the court to make orders as seen fit in s 87. 62 The provision under consideration in Webb Distributors was s 360(1)(k) of the Companies (Victoria) Code, which, as I have said, was in almost identical terms to s 74(2)(f) of the Insolvency Act 1986 (UK). The High Court was asked to assume, as was the Supreme Court of Victoria, that there had been misleading or deceptive conduct such as would ground an action in deceit or under Trade Practices Act 1974 (Cth), s 52. At 35 the majority concluded that such a claim was within the purview of s 360(1)(k):

"Paragraph (k) of s 360(1) will not prevent claims by members for damages flowing from a breach of a contract separate from the contract to subscribe for shares ( In re Dale & Plant Ltd (1889) 43 Ch D 255; In re Harlou Pty Ltd [1950] VLR 449 at 454). But, in the present case, the members seek to prove in liquidation damages which amount to the purchase price of their shares, which is a sum directly related to their shareholding. Moreover, they sue as members, retaining the shares to which they were entitled by virtue of entry into the agreement and they seek to recover damages because the shares are not what they were represented to be. Accordingly, the claim falls within the area which s 360(1)(k) seeks to regulate: the protection of creditors by maintaining the capital of the company."

63 The issue that next arises is whether s 563A of the Corporations Act 2001 (Cth) applies only to subscribers for shares and does not apply to transferees of shares. Again, untutored by precedent, I would have thought that it makes no difference to the operation of s 563A whether the member acquired his shares directly from the company or acquired them from another member. There is nothing on the face of s 563A that suggests such a distinction. The provision is in general terms, applicable to amounts owed by a company to a member in that capacity regardless of how the member acquired the shares. 64 In Sons of Gwalia the shareholder acquired shares on market, allegedly induced by the company's failure to inform the stock exchange, contrary to the listing rules of ASX, that gold reserves and resources then held by the company were, or were likely to be, or may have been, insufficient to satisfy the gold delivery commitments of the company. Emmett J concluded at [43] that the decision in Webb Distributors applied only to members who had subscribed for their shares. His Honour distinguished the decision on that basis and concluded that the debt owed by the company to the shareholder in the case before him was not due in the shareholder's capacity as a member of the company. 65 In Webb Distributors, the building societies that had marketed the non-withdrawable shares instituted a system by which one society would take a transfer of the shareholding in another society from an investor wishing to redeem, in anticipation of making those shares available to a prospective investor. As the High Court observed at 24, the system depended upon the availability of potential new investors. That statement does not exclude the possibility that some of the non-withdrawable shareholders had acquired their shares by way of transfer. The likelihood is, however, that the shareholders were subscribers rather than transferees. At first instance in Re Pyramid Building Society (in liq) (1991) 6 ACSR 405 at 407, Vincent J recorded one of the matters upon which the court's direction was sought as whether the non-withdrawable shareholders were precluded from rescinding the contracts pursuant to which they purchased their shares in the building societies and were thereby precluded from maintaining an action or claim against the building societies for damages. That formulation is inapposite to a shareholder who obtained his shares by transfer. 66 The difficulty I have in restricting Webb Distributors to subscribing shareholders is that the language of the High Court is general, as is the language of the authorities analysed by the High Court. No distinction is overtly drawn between the position of a subscribing shareholder and that of a transferee shareholder. 67 All members of the High Court were of the view that the rule approved by the House of Lords in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 applied in Australia and was enshrined in the forerunner of s 563A of the Corporations Act 2001 (Cth). McHugh J was of the view that it was misconceived and a source of injustice. But because it had been applied on numerous occasions and followed in legislation, his Honour was of the view that the court should not overrule it. 68 As was explained in Webb Distributors at 28, two related lines of authority are involved. The first established the maintenance of the share capital of a company to protect the interests of the public. In Trevor v Whitworth (1887) 12 App Cas 409 it was held that a company incorporated under the Companies Act 1862 (UK) had no power to purchase its own shares. Lord Watson at 423 stated that one of the main objects contemplated by the legislature in restricting power of limited companies to reduce the amount of their capital was to protect the interests of the outside public who might become their creditors. 69 The principle was affirmed by the House of Lords in Ooregum Gold Mining Co of India v Roper [1892] AC 125. It was held that a company formed under the Companies Act 1862 (UK) had no power to issue shares as fully paid up for a consideration less than their nominal amount. A company could not excuse a shareholder from liability for the amount unpaid on the shares. As Lord Macnaghten pointed out at 145, the dominant and cardinal principle of Acts granting shareholders limited liability is that the investor purchases immunity from liability beyond a certain limit on the terms that there shall be and remain a liability up to that limit. 70 The second line of authority is to the effect that once the winding up of a company has begun, a shareholder cannot rescind a contract for the purchase of shares on the ground of fraud. In Oakes v Turquand (1867) LR 2 HL 325 the appellant applied on the faith of statements in a prospectus for shares in a limited liability company. The shares were allotted and his name was put on the register of shareholders. The company failed and was ordered to be wound up. The appellant's application to have his name removed from the list of contributories failed. 71 The case was explained in Tennent v City of Glasgow Bank (1879) 4 App Cas 615 at 621 by Earl Cairns LC on the basis that innocent third parties had acquired rights that would be defeated by the rescission. In that case, the appellant served a summons for reduction of his contract to take stock in the bank, on the ground that he was induced to purchase by the fraudulent misrepresentation of the directors, the day before an extraordinary resolution to wind up the bank was passed. It was held that the rights of innocent third parties had intervened and it was too late to exempt the appellant from liability. 72 Both Oakes and Tennent involved subscribers for shares as distinct from transferees. But the underlying principle is not circumscribed. Indeed, while Oakes was an original subscriber Peek, whose appeal was considered at the same time, purchased his shares in the market from an allottee or from a purchaser from allottee. At 341, Lord Chelmsford LC did not distinguish his case. He said: "In considering the case, I shall look at it throughout as if Oakes was the only Appellant, because if he fails to establish his right to be relieved from liability, Peek cannot possibly succeed." 73 The notion that it is too late to be relieved from liability once a company commences to be wound up applies equally to transferees as it does to subscribers. Once a transferee is put on the register of members, the statutory contract applies as much to the transferee as it does to the subscriber. If I take a transfer of partly paid shares, I am equally liable to calls as are allottee shareholders. 74 Oakes and Tennent were affirmed by the House of Lords in Houldsworth. It was held that not only did a shareholder lose the right to rescind the purchase of shares induced by fraudulent representation once the bank, from which the shares had been purchased, had gone into liquidation, but also that the shareholder lost any right to claim damages. It has been said that the decision was best explained by Lindley LJ in Re Addlestone Linoleum Co (1887) 37 Ch D 191 at 205-206: "The principle on which the House of Lords decided Houldsworth v City of Glasgow Bank was that a shareholder contracts to contribute a certain amount to be applied in payment of the debts and liabilities of the company, and that it is inconsistent with his position as a shareholder, while he remains such, to claim back any of that money - he must not directly or indirectly receive back any part of it, and this appears to me to govern the present case." 75 I would have thought that basis applies equally to subscriber and transferee. A transferee, bound to contribute any unpaid capital on shares, cannot by claiming damages against the company under the Trade Practices Act 1974 (Cth), s 82 receive back any part of the capital subscribed on the shares by the original allottee and cannot be relieved from liability to answer calls up to full payment on the shares. 76 In my view, while the cases, with the exception of Peek, concerned allottees of shares, the underlying principles in the cases discussed in Webb Distributors and the decision in that case were not confined to that situation and the principles discussed apply just as much to transferees. 77 With the greatest of respect, I do not agree with the conclusion in Sons of Gwalia that Webb Distributors is to be regarded as applying only to subscriber shareholders. 78 In Crosbie v Naidoo (2005) 216 ALR 105, Finkelstein J advised an administrator of a company that subscribers for shares who alleged that the prospectus contained false statements that induced them into subscribing, could not maintain a claim for damages in the absence of renunciation of the shares. His Honour went on to consider the situation of the administrator with respect to persons who alleged they acquired shares by way of transfer induced by the prospectus. His Honour pointed out that Houldsworth was not concerned with a claim by a transferee shareholder and its rationale did not easily fit such a situation because its underlying basis was that there was an inconsistency between a shareholder on the one hand retaining his shares, and on the other seeking, in effect, to recover the amount which he subscribed for those shares, that approbating and reprobating ought not to be permitted. 79 But, again with the greatest respect, the basis applies equally to a shareholder who is entered on the register of members as a result of a transfer and seeks damages against the company. His Honour goes on to say that the inconsistency between approbating and reprobating is avoided if the shares are renounced but a transferee shareholder cannot renounce except in unusual circumstances (Peek v Gurney (1873) LR 6 HL 377). 80 In my view, however, even in the absence of unusual circumstances, the equivalent of renunciation may be achieved by order for removal from the register of members under the Trade Practices Act 1974 (Cth), s 87. If I am induced to take a transfer of shares by the fraudulent misrepresentations of the directors of the company, I would have thought that the powers of the court under s 87(1) and s 87(1A) were sufficiently broad to order the removal of my name from the register of members if my application is made before the commencement of a winding up. True it is that such an order is not within the orders specified in s 87(2). But the court is not limited to those orders. Section 87(1) and s 87(1A) give the court the power to make any orders, including any of the orders in s 87(2), as it thinks appropriate. If a shareholder who has suffered loss at the hands of the directors of a company may not take action while remaining on the register of members, I would have thought it appropriate for the court to order the removal of the name from the register. 81 Finally, Finkelstein J in Crosbie pointed out that Soden was against the administrator's submission that Houldsworth should be extended to shareholders who acquired their shares by transfer. 82 His Honour took a similar view in Cadence Asset Management Pty Ltd v Concepts Sports Ltd [2005] FCA 1280. The plaintiff through a trustee subscribed for shares in Concept Sports allegedly on the strength of a prospectus that did not contain required information thereby enabling the plaintiff to recover damages under the Corporations Act 2001 (Cth), s 729. At [8], his Honour pointed out that the rule in Houldsworth would bar the claim if the action were for deceit or misrepresentation. His Honour said that the rule would not bar all the claims because, as well as acquiring shares by subscription, the plaintiff and some group members acquired shares on market allegedly in reliance on the prospectus. Citing Soden, his Honour concluded that the rule in Houldsworth would not prevent claims being brought in relation to those shares. For the reasons discussed above, I respectfully differ from that conclusion. 83 It may be noted that the rule in Houldsworth has been abrogated in United Kingdom in broad terms sufficient to cover transferee shareholders as well as subscriber shareholders. Section 111A of the Companies Act 1985 (UK) provides that a person is not debarred from obtaining damages or other compensation from a company by reason only of his holding or having held shares in the company or any right to apply or subscribe for shares or to be included in the company's register in respect of shares). 84 For the reasons set out above, I prefer the conclusion, consistent with Soden, that the shareholder's action against a company under the Trade Practices Act 1974 (Cth), s 82 does not fall within the Corporations Act 2001 (Cth), s 563A, whether the shareholder acquired the shares by subscription or by transfer. In my view, however, Webb Distributors cannot be confined to subscriber shareholders but extends, as well, to transferee shareholders and it concludes to the contrary of Soden on this aspect. I am bound by Webb Distributors to conclude that s 563A applies alike to transferee shareholders as it does to subscriber shareholders. 85 In consequence, I am of the view that if Mr Johnston had a claim to damages under the Trade Practices Act 1974 (Cth), s 82 that claim would be deferred until all debts of other creditors had been satisfied.

Does a debt postponed exclude a person from creditor's rights? 86 The Companies (Victoria) Code, s 360(1)(k) considered in Webb Distributors provided that a sum due to a member in his capacity as a member should not be treated as a debt of the company. The Corporations Act 2005 (Cth), s 563A postpones the debt to other creditors. It was submitted that the section should be construed in line with s 360(1)(k) so as to exclude the amount from proof of debt and exclude the member from participation as a creditor in the winding up of the company. 87 Emmett J dealt with this argument in Sons of Gwalia at [45]. I respectfully adopt his Honour's conclusion. Postponement till other debts and claims have been paid in full, does not exclude the debt or claim as one provable in the winding up of the company. There is nothing in the Corporations Act 2001 (Cth), s 563A or in any of the principles enunciated in the English decisions to suggest that a member should not be treated as a creditor, even if a creditor whose claim is postponed.

Claim of client legal privilege 88 A notice to produce addressed to Mr Johnston was answered by production of a statement made by him to his solicitor for the purpose of drafting an affidavit. The affidavit was ultimately sworn and read in the proceedings. No reference was made to the statement in the affidavit. Counsel for Mr Johnston claimed that the statement was made for the dominant purpose of the solicitor providing legal advice to Mr Johnston and the adducing of it in evidence would result in a disclosure of the contents of the confidential document in breach of the Evidence Act 1995, s 118. 89 It was argued, however, that its incorporation into the affidavit meant that Mr Johnston had knowingly and voluntarily disclosed the substance of his statement and s 122(2) of the Evidence Act 1995 provides that s 118 does not prevent the adducing of evidence if a client or party has knowingly and voluntarily disclosed to another person the substance of the evidence and the disclosure was not made in the exceptional circumstances set out in that provision. Further, section 122(4) provides that s 118 does not prevent the adducing of evidence if the substance of the evidence has been disclosed with the express or implied consent of the client or party other than in the circumstances set out in that provision. 90 In Attorney-General (NT) v Maurice (1986) 161 CLR 475 at 481, Gibbs CJ held that privilege in respect of materials used in drawing an affidavit and not referred to in the affidavit do not lose their privilege: "The decisions in which this question has been considered seem to me to be particular applications of the rule that in a case where there is no intentional waiver the question whether a waiver should be implied depends on whether it would be unfair or misleading to allow a party to refer to or use material and yet assert that that material, or material associated with it, is privileged from production. Thus it has been held that the privilege in respect of a document is not waived by the mere reference to that document in pleadings ( Roberts v Oppenheim (1884) 26 Ch D 724 ; Buttes Oil Co v Hammer (No 3) [1981] QB 223 at 252, 268) or in an affidavit ( Lyell v Kennedy (1884) 27 Ch D 1 at 24 ; Infields Ltd v P Rosen & Son [1938] 3 All ER 591 at 597 ; Tate & Lyle "International Co Ltd v Government Trading Corporation", The Times, 24 October 1984), although the position will be different if the document is reproduced in full in the pleading or affidavit : Buttes Oil Co v Hammer (No 3) [1981] QB at 252 . These cases may be explained by saying that it is not unfair or misleading to refer to a document in a pleading or affidavit which is not put into evidence but that if the document is set out in full the privilege is waived. A fortiori, of course, privilege in respect of materials used in drawing a pleading or an affidavit and not referred to therein, would not lose their privilege because they had been used in that way."

At 493, Deane J came to similar conclusion: "Where, however, he does no more than make use of privileged material (e.g. legal advice, expert opinion or statements of potential witnesses) for the purpose of formulating the statement in such a document of the details of the case which he proposes to make, it would be an affront to ordinary notions of fairness to hold that the effect of his compliance with that procedural requirement was that he has waived his legal professional privilege in relation to such material." 91 These passages were cited and followed by the Court of Appeal in Amalgamated Services Pty Ltd v Marsden [2000] NSWCA 63 in concluding that a statement in an affidavit as to how a statement had been obtained from a witness and the fact that particulars based upon it had been provided to the other side, did not constitute a waiver of the privilege. 92 I reject the submission that client legal privilege in respect of the statement of Mr Johnstone has been lost. 93 In the result I dismiss the applicant's originating process and order the applicant to pay the respondents' costs. **********

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