Leonard v Booth

[1954] HCA 64

High Court of Australia|1954-07-01|Before: Taylor JJ, Sholl J

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Court

High Court of Australia

Decision date

1954-07-01

Before

Taylor JJ, Sholl J

Source

Original judgment source is linked above.

Judgment (43 paragraphs)

[1]

High Court of Australia Dixon C.J. Webb, Fullagar, Kitto and Taylor JJ. Leonard v Booth [1954] HCA 64

[2]

There are before us twelve appeals from judgments given in as many actions by Sholl J. by which the respective plaintiffs recovered various sums of money. The appellant is the defendant in each of these twelve actions. The relevant circumstances are the same in each of the cases and they give rise to the same questions. It is best, however, to consider one of the cases separately and apply the result to the other eleven. It is convenient to take the appeal arising out of the action of the respondent John William Booth against the appellant Henry Victor Leonard.

[3]

The action, like the other eleven actions, is brought upon a covenant in a deed as varied by a deed of the same date. Each of the two deeds on which Booth's cause of action is founded is expressed as an agreement made on 18th March 1952 between the respondent Booth, thereinafter referred to as the assignor, of the one part, and the appellant Leonard, thereinafter referred to as the assignee, of the other part. The principal deed contains a number of recitals tracing the transactions between the parties leading up to the actual agreement. In effect the recitals describe the formation of a syndicate named Wauchope Wolfram Developments for the purpose of acquiring from the appellant an option of purchase of certain rights in mining leases in the Northern Territory. The document goes on to recite that the respondent had subscribed to the funds of the syndicate the sum of £1,250 for the purposes referred to and as a member thereof. Finally it recites that disagreements have occurred among the members of the syndicate and that the appellant has offered by way of purchase money for their rights as members of the syndicate to return to the respondent and to the members of the syndicate referred to in the body of the agreement the whole of the moneys subscribed by them in all cases together with a sum equivalent to four and one-half per cent per annum on such sums from the dates when they were paid over to the manager of the syndicate, and that the respondent has accepted the offer to purchase the rights provided that all the members of the syndicate so described other than himself do likewise.

[4]

The operative part of the instrument consists of several clauses. The first clause assigns and transfers to the appellant all the estate, right, title and interest acquired by the respondent as a member of the Wauchope Wolfram Development Syndicate in the mining leases, certain agreements and certain equipment, stores and other assets. The second clause states that the agreement is to be deemed an escrow until all the members of the syndicate, which it proceeds to name, have executed assignments and transfers, in terms similar to the document, of their estate, right, title and interest to the aforesaid assets and things; otherwise the agreement is to be void. The clause mentions twenty-one names, so that with the appellant and the respondent there would be twenty-three syndicators. Of the other clauses that which is material is the fourth and that was replaced by another clause so numbered. This was done by a separate agreement, the second of the two deeds executed on the same day. It is on this clause that the respondent has recovered judgment before Sholl J. It provides that the appellant shall on or before 1st June 1952 pay to the respondent in consideration of the transfer and assignment aforesaid a sum equal to fifty per cent of the whole of the moneys subscribed by him to the syndicate, together with such sum as equals four and a half per cent per annum calculated from the date when the respondent paid the sum to the credit of the syndicate until 1st June 1952 and so on, and before 1st September 1952 pay to the respondent in further consideration of the transfer and assignment aforesaid the balance of the moneys subscribed by him to the syndicate, together with a sum for interest calculated in the manner already stated. As the writ was issued on 10th July 1952 when the second of these two sums had not accrued due it could not be included in the claim. The principal sum sued for was £625, being half of £1,250 already mentioned as the amount subscribed by the respondent; a claim for interest was added.

[5]

The appellant set up the defence of illegality. He said that the syndicate was a company or association consisting of more than twenty persons formed for the purpose of carrying on a business that had for its object the acquisition of gain by the company or association or by the individual members thereof and that it had not been registered as a company under Pt. I of the Companies Act 1938 Vic and had not been formed under any other part of the Act or any other Act of Parliament or of letters patent. Consequently the syndicate was illegal under s. 358 of the Companies Act 1938 and the formation of the syndicate was an offence under s. 382, penalized by s. 383. The appellant's case is that the covenant upon which the respondent has sued is tainted with illegality, that in order to make out the respondent's cause of action the latter had necessarily to rely upon an illegal transaction or matter, the formation and existence of the syndicate. The appellant says alternatively that the respondent can make no title to the share which by the deed he professes to assign. He cannot do so by reason of the illegality. The moneys sued for are payable in consideration of the assignment of the share and therefore they are not recoverable. Section 395, contained in Pt. II of the Companies Act, provides that notwithstanding anything in s. 358 any company, association or partnership formed for mining purposes may be formed and, if incorporated as a company for mining purposes on the no-liability system under Pt. II, may carry on any mining business that has for its object the acquisition of gain to such company, association or partnership or to the individual members thereof, without being registered as a company under Pt. I or formed in pursuance of any other Act of the Parliament of Victoria or of letters patent. It is, of course, a necessary part of the appellant's defence that the syndicate was not incorporated as a company for mining purposes on the no-liability system under Pt. II and was not registered or incorporated as a company pursuant to Pt. I of the Act or registered as a company for mining purposes on the no-liability system under Pt. II and was not formed in pursuance of any part of the Act other than Pts. I or II or in pursuance of any other Act of Parliament or of letters patent. But all this occasions the defendant appellant no difficulty for it is so in fact. Further, it may readily be conceded that a contract is illegal and unenforceable if it has the design or effect of carrying out any of the purposes of a company or association of more than twenty members which, though falling within s. 358, is not registered: cf. In re South Wales Atlantic Steamship Co. [1] ; Jennings v Hammond [2] ; Shaw v Benson [3] ; In re Padstow Total Loss & Collision Assurance Association [4] .

[7]

The facts of the present case may, for the purposes of this judgment, be stated quite briefly. Early in the year 1951 a syndicate was formed and called Wauchope Wolfram Developments and by the end of March it had come to consist of more than twenty persons. By an agreement dated 1st November 1950 and amended by another agreement made three days later, the basis of the syndicate was laid down. These agreements were expressed to be made between a lady who was in the position of a nominee and the appellant's brother and such further persons as might become parties or subscribers with the consent of the two foregoing persons. It seems plain, in spite of a confusion in the text of the document, that it was intended to limit the number of syndicators to twenty in all. The recitals of this agreement were to the effect that the parties had obtained an option to purchase and operate an area in the Northern Territory called the Wauchope Wolfram Field and that they had agreed to form a syndicate on terms which appear to mean that there should be a capital equivalent to 35,000 units of £1 and 25,000 units of 1s. 0d. which were to be disposed of. The clauses of the agreement declared that the syndicate should be called Wauchope Wolfram Developments, that it should have the capital described, that the two named parties should respectively have a certain number of units, that holders for the time being of units of the syndicate should be members of the syndicate, and that the units should be transferable. Provisions were also included for the appointment of a trustee and manager and for the custody of documents and moneys. Each of the persons who became a member of the syndicate signed a separate agreement. The respondent signed such an agreement on 2nd November 1950. All the agreements were in the same form. After reciting the formation of the syndicate and its nominal capital the agreement provided that the subscriber, in this case the respondent Booth, should become a member of the syndicate, giving its name. The agreement then set out the objects of the syndicate. The objects were, stated shortly, to acquire the options already mentioned (plant, equipment and machinery belonging to the vendors), to negotiate for the formation of the syndicate into a company with a nominal capital of £60,000, to acquire further options and equipment and to do all other things necessary to develop the mines. The document concluded with an obligation on the part of the respondent to subscribe the sum of £1,250. The respondent in fact paid his subscription in three instalments, £50 on 2nd November 1950, £950 on 10th April 1951 and £250 on 19th July 1951. At the date when the respondent signed the agreement to become a member of the syndicate less than twenty members had joined, but by 21st March 1951 twenty-five persons had become members. It seems probable that the five who joined after the number had reached twenty became members in Victoria, but on this point there may be a little uncertainty.

[9]

By November 1951 some dissension seems to have occurred in the syndicate and on 27th November an offer was made in the name of the appellant's brother to buy out the syndicate. The offer was first conveyed in a letter from his solicitor in the following words: - "If the syndicate as a whole is not satisfied with my client's conduct of its affairs, he is quite willing to buy it out. He has been able to arrange the necessary backing and finance, and therefore can now offer to the members of the syndicate the whole of the moneys invested by them, plus interest thereon at 4½% from the date of their investment to date of payment, in exchange for their holdings. My client stipulates, however, that all members of the syndicate must accept his offer, or it is of no effect. He will not purchase individual holdings piecemeal". A meeting of the syndicators was called early in December 1951 and after some negotiations the offer was accepted. In the end all the syndicators signed or assented to agreements in the form of that made between the appellant and respondent upon which the respondent has recovered judgment. At all events it may be assumed that the document ceased to be an escrow and took effect and that the condition that all syndicators should assign their shares to the appellant was fulfilled. The recitals in the agreement of 18th March 1952 give a full narrative of the steps by which the transaction came about, but it is only in the body of the agreement, namely in cl. 2, that it is disclosed that more than twenty persons were members of the syndicate and that appears simply from the number of names mentioned. If s. 358 be considered apart from s. 395, there can be little doubt that the syndicate fell within the scope of the provision. It was suggested, however, that the syndicate was not formed wholly in Victoria and that the five members who joined latest and so brought the numbers beyond twenty became parties outside Victoria, or at all events were not shown to have become parties within Victoria. Further, it was said that as the foundation instrument intended that the syndicate should consist of no more than twenty and as to increase it beyond twenty would be contrary to s. 358, the agreements by which the additional persons joined were void and of no effect, so that the syndicate remained an association of twenty persons. The respondent's chief reliance, however, for the purpose of taking the syndicate out of the operation of s. 358, was upon s. 395. Clearly enough the object for which the syndicate was formed was mining purposes and it was said for the respondent that under s. 395 a syndicate of more than twenty might be formed for mining purposes without registration although it was not denied that before it carried on any mining business it was necessary that it should be registered on the no-liability system under Pt. II of the Companies Act. To this the appellant answered first that the syndicate was not so constituted as to be capable of registration without adopting articles or regulations of a different type and that s. 395 allowed only of the formation of a company, association or partnership which was capable of being registered; and second that in fact the syndicate did carry on business and thus took itself outside any protection afforded by s. 395.

[12]

It may at once be conceded in favour of the appellant's argument that all contracts made directly for the purpose of carrying on the business of an unregistered association falling within s. 358 are illegal and unenforceable: cf. Jennings v Hammond [5] . But the question is whether the agreement sued upon can be brought within the principle. Clearly enough its object is not contrary to the policy or purpose of s. 358. Its operation, considered in conjunction and combination with the contracts with which it is interdependent, is to terminate the condition of illegality. The whole transaction by which the appellant undertook to purchase the interests of the syndicators, provided they all concurred, brought the syndicate to an end and thus made legal whatever further operations might be carried on. It is not a case where the contract it is sought to enforce is directly within the statutory prohibition. The argument for the appellant cannot be put higher than a claim that the covenant arises out of a transaction which is within the statutory prohibition of s. 358 and that the share in the syndicate which the agreement purports to assign is itself a share in an illegal association. The contention was advanced that, upon the form of the promise expressed in the covenant or clause, membership of the syndicate was a necessary part of the respondent's title. The respondent, it was said, is so described, the share is described as a share in the syndicate, and the consideration expressed in the fourth clause, on which the cause of action rests, is the transfer and assignment of that share. This argument overlooks the fact that the purpose and effect of assigning the share in the syndicate is not that the assignee may become a member of the syndicate. It is assigned for the purpose of terminating the syndicate. The argument that the assignor could have nothing to assign because his title was unlawful and void depends on a dubious premise. But in any case, having regard to the recitals, it would be wrong to construe cl. 4 as meaning that it should be an essential condition of the covenant to pay the two sums referred to, amounting to £1,250, that the assignor the respondent should have a good legal title to the share which he transferred. A short answer to the appellant's case is that the agreement which he says is tainted with illegality is not an agreement which is either designed to carry out or further the forbidden purpose or would operate to do so but, that on the other hand, it contributes its part to terminating the association which existed in disobedience to the statutory provision. In his reasons for judgment Sholl J. said that the transactions constituted by the instruments of assignment were not entered into by persons who were then parties to any current illegality: "The deeds they executed were not designed to effectuate any of the purposes of an illegal association. For they were not designed to enable an unregistered and unincorporated association of more than twenty persons, which, even if legally formed, could not legally carry on business in Victoria, to carry on business, either in Victoria or anywhere else. They were indeed such that their effect must necessarily be to prevent the association from continuing to exceed twenty persons, and from being in a position unlawfully to recommence the carrying on of business. The carrying out of the transaction which the deeds embodied would result in the syndicate consisting at most of the defendant and two or three other persons". I agree in this conclusion.

[19]

As to (2): consideration was not required to be shown as the respondent sued on a deed. But if it were required the interest of the respondent in the syndicate constituted the consideration, unless the applicant showed that the syndicate did not become the owner of the property it purported to buy in March 1951, as it was on the ownership of that property by the syndicate that the value of the interest of the respondent depended. The onus of proof that the syndicate did not become the owner was on the appellant. It could have been that the syndicate did not become the owner if the purported sale to the syndicate in March 1951 was unlawful. Now it is true that the appellant was the vendor in that sale; but even if he knew of the illegality when he made the sale, as, having regard to the part he played in initiating and carrying through the various transactions up to and including the contract sued on, he is likely to have known if it were the fact, still I think that did not preclude him from raising the defence of illegality, and so setting up and proving his own wrong doing, as the illegality he alleged arose from the breach of a public statute. However, the appellant had to prove that the syndicate at the time of the purported sale to it was operating in violation of the law and intended to continue to do so and to use the property for the unlawful purpose, i.e. in carrying on the business. Now it had an office, made "joining" agreements with its members, and made the contract of purchase, and so may be said to have carried on business: see In re "Otto" Electrical Manufacturing Co. (1905) Ltd., Jenkins' Claim, per Buckley J. [1] . Then if this was all that had to be considered it might be that the onus of proof that the acquisition of the property by the syndicate was unlawful had been discharged. But this was not all. The acquisition by the syndicate would, I think, have been invalid only as to property shown to have been acquired by it for an unlawful purpose, i.e. for the carrying on of the business in violation of the Companies Act, that is to say, unregistered or unincorporated. But that was not proved as regards any part of the property: it was not proved that the syndicate bought the property to use in its business while continuing unregistered or unincorporated. If when the syndicate acquired the property it had the intention of not using the property in its business, or had the intention of becoming registered or incorporated before so using it, then there was no unlawful purpose in the acquisition. But neither intention was negatived. The syndicate's intentions at the time of acquisition were not a matter peculiarly within the knowledge of its members other than the appellant; and so it could not properly be said that the onus of proof of those intentions rested on them and not on him. There was, of course, no presumption of illegality, but the contrary presumption. Moreover, as Sholl J. points out, the appellant accepted payment from the syndicate for the assets he sold to it in March 1951 and the syndicate took possession of the assets as its property. Again, the appellant took possession of the assets of the syndicate under the contract of March 1952, that is to say, the contract sued on. So that the appellant's attitude throughout was inconsistent with his defence that the syndicate did not lawfully acquire the property from him in March 1951. I do not say that this attitude was conclusive as a matter of law; but it was, I think, an important fact to be considered with other facts, more particularly in view of the appellant's probable knowledge of the circumstances attending each transaction, including the purpose for which the property was acquired by the syndicate and the intention of the syndicate in the matter of the use of the property in the business, or of the registration or incorporation of the syndicate before so using it. Then the property could have been lawfully acquired; and the appellant's attitude, in the absence of any explanation by him, was consistent only with its lawful acquisition.

[27]

The reason for the particular change made in the law when s. 395 of the Act of 1938 took the place of s. 295 of the Act of 1928 is not apparent at first sight. It is clear, of course, that it was decided, as a matter of policy, that there should henceforth be a restriction on the numbers of unincorporated mining partnerships, which had hitherto been free from any such restriction. But, this being decided, why was not the old s. 295 simply omitted, and s. 358 thus left to operate with general application? The reason, I think, is to be found in s. 403 (1), which requires that, before a company formed for mining purposes can be incorporated under Pt. II, at least twenty-five per cent of its share capital must be subscribed and at least five per cent of its subscribed capital paid up. It was unnecessary in s. 358 to refer at all to the carrying on of business by an unincorporated association of more than twenty persons. The very formation of such an association was prohibited, and such an association could not carry on business without being "formed". If such an association were formed de facto, not only would its members be liable to penalties under ss. 382 and 383, but, because it was an illegal association, its very existence could not be recognized by the law, and, generally speaking, contracts could not be enforced either by or against it: see Palmer's Company Precedents (1931) 14th ed., Pt. I, p. 92, and cases there cited. When, however, the legislature came to deal with associations for mining purposes, it could hardly, consistently with the scheme which it was establishing, prohibit the formation of associations consisting of more than twenty persons. For it was requiring, as a condition of incorporation under the "no-liability system", that a percentage of share capital should be subscribed and a percentage of subscribed capital paid up. Those requirements could not practically be met unless there were something in the nature of a formation of an association before steps were taken to obtain incorporation. And, this being so, there was no real reason for limiting the number of members of an association which might be thus formed, and there was a reason for not doing so, inasmuch as it might be found difficult to obtain the necessary subscriptions and payments without enlisting more than twenty persons. On the other hand, the very reason which suggested that there should be no limitation on the number of members of an association which might be formed would suggest that an association, whose numbers exceeded the maximum dictated by general policy, ought not to be allowed to carry on business without complying with the conditions as to minimum subscription and payment up, and becoming incorporated.

[39]

The syndicate Wauchope Wolfram Developments was originally formed on 1st November 1950. By an agreement of that date purporting to be made between one Merle Thomas and Gordon Leonard, a brother of the appellant, "and such further persons (not exceeding in addition to the parties hereto twenty (20) persons) as may from time to time with the consent of the abovenamed parties become parties or subscribers hereto", it was recited that the parties thereto had agreed to form a syndicate having as its object the proving and mining of wolfram and similar objects, the purchase, sale or lease of areas and the formation of any company or companies for the furtherance of the said objects and, thereafter, it was agreed that "a new syndicate is hereby declared to be established called Wauchope Wolfram Developments". The capital of the syndicate was fixed by a somewhat curious and inaccurate formula and Gordon Leonard was appointed the trustee and paid manager of the syndicate. Provision was made for the allotment of units to other persons and it was provided that the holders of units for the time being should be members of the syndicate. The agreement has a number of curious features but they are not material to the present case and no purpose would be served by adverting to them. But notwithstanding the presence of these features a number of persons became members of the syndicate and by March 1951 it had at least twenty-one members. Indeed, the learned trial judge found that at a later stage there were twenty-five members and that, in all, twenty-three pairs of deeds, similar to those above referred to, were executed. There appears to be some doubt as to who was the twenty-first member or, indeed, whether the twenty-first member was a resident of Victoria or of some other State, or, whether the agreement by which he became a member was made in Victoria or elsewhere. But it is clear that at this stage of its career the syndicate had at least twenty-one members and this is a circumstance upon which the appellant relies. At this stage it was, according to the submission made on his behalf, a "company association or partnership consisting of more than twenty persons formed for the purpose of carrying on any business other than the business of banking having for its object the acquisition of gain by the company association or partnership or by the individual members thereof " (Companies Act 1938 s. 358) and as such, from March 1951 onwards, an unlawful body incapable, in law, of acquiring or disposing of property. Accordingly, it was said, none of the members of the syndicate as such acquired any interest in the assets which the trustee for the syndicate purported to acquire on behalf of its members and for that reason the consideration upon which the appellant undertook to pay each amount claimed had wholly failed. The alternative submission was also made during the course of argument that the agreements upon which each action was founded were given for an illegal consideration and were therefore void and of no effect.

[41]

Upon the view which I have formed concerning what I regard as the principal point discussed in the case I find it unnecessary to discuss or decide the other questions involved in the respondent's submissions. On the assumption, which I am prepared to make for the purposes of this case, that the syndicate had no lawful standing as an association or company it is incontestable that its de facto members might have acquired proprietary rights as a result of the activities of those who purported to act for the syndicate either in the acquisition of property preparatory to the commencement of business or thereafter in the course of business activities carried on unlawfully. There is abundant authority that title to property may be acquired in the course of dealings or activities which are unlawful and that, in many cases, the transfer or assignment of property in the course of such activities confers an indefeasible title (see for instance Scarfe v Morgan [1] ; Alexander v Rayson [2] and cases there referred to: Bowmakers Ltd. v Barnet Instruments Ltd. [3] ). Accordingly it is no answer to a claim for the recovery of money seized by a member of the police force that the plaintiff had acquired the money in the course of conducting an unlawful business (Gordon v Chief Commissioner of Metropolitan Police [4] ). And if one person may acquire property in the course of carrying on a business which is illegal I see no reason why a similar result should not follow where several persons are concerned and where the illegality alleged is the formation of an association of more than twenty persons for the purpose of carrying on business with the object of the acquisition of gain by the company, association or partnership or by the individual members thereof, or the carrying on of business by such an association where the normal legal effect of the transactions involved in the business carried on would be to vest property in its de facto members. Indeed, this consequence has been recognized in a number of cases. In re Thomas; Ex parte Poppleton [5] is some authority for the proposition that the property of an unincorporated association of more than twenty persons may devolve upon an incorporated association formed for the purpose of acquiring and taking over the business assets and liabilities of the unincorporated association whilst in In re South Wales Atlantic Steamship Co. [6] the facts showed that a similar sequence of events had occurred. Reg. v Tankard [7] is clear authority for the proposition that the de facto members may acquire proprietary interests whilst the majority of the court in Marrs v Thompson [8] considered that the trustees of such an association might maintain an action for money had and received against an officer of the association. It is, I should think, not only much too late but contrary to principle to suggest that the members of such an association will not be the beneficial owners of property which, apart from any question of the legality of the association, would otherwise vest in them or in trustees on their behalf though, no doubt, it may be contended that where proceedings against a trustee or any other person or persons are necessary to secure the enjoyment of a beneficial interest such proceedings may be defeated if it necessarily appears or is alleged and proved that the interest was created by an agreement which itself was illegal. This, however, is not such a case. The syndicate was not originally formed in breach of the statute nor does it necessarily follow that its later assumption of unlawful character was permanent or enduring. Whilst the increase of the number of its members beyond twenty may have constituted a contravention of s. 358, I see no reason why a decrease below that number should not restore its earlier character. This being so, it by no means follows that, even if the rights of members might be defeated at some stage by the circumstance that the association is unlawful, this must always be so. Indeed, the effect of the agreement sued upon was to remove the taint of illegality. The several respondents are not now members of the association; their rights are vested in the appellant and there can be no answer to any claim made by him against the trustee to enforce his rights against the syndicate property. Any defence based on the allegation that the property was acquired in the course of carrying on business contrary to the provisions of the statute is now a matter of past history just as much as was the substance of the defence in Gordon v Chief Commissioner of Metropolitan Police [1] .