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.