Quigley v Lunchalot Club Pty Ltd

REASONS FOR JUDGMENT 1 This is an interlocutory application filed 12 August 2014 by the second respondent ("Mr Tenser") for leave to file a notice of cross-claim and a statement of cross-claim (together "cross-claim") against the applicant ("Mr Quigley"), in the forms annexed to the affidavit of Mr Tenser sworn 11 August 2014, filed 12 August 2014 and read on the hearing in support of the application. 2 On 1 August 2014, Mr Quigley, through his solicitors, had been provided with a copy of the proposed cross-claim. By letter dated 5 August 2014, Mr Quigley's solicitors indicated that their client did not consent to the filing of this process. 3 On the hearing of the application I indicated that I did not think Mr Tenser required the leave of the Court to file his cross-claim. A respondent can file a cross-claim without the leave of the Court prior to filing his affidavit evidence in reply to the applicant's affidavit evidence in the principal proceeding: r 15.04(b) of the Federal Court Rules 2011 ("FCR"). The respondents' affidavit evidence in the principal proceeding was only filed on 4 August 2014. The cross-claim was served on Mr Quigley on 1 August 2014. It was not filed that day because I had directed it to be first served on Mr Quigley to ascertain his response. I am, however, prepared to treat the cross-claim, for the purposes of r 15.04(b), as having been filed on that day, namely, 1 August 2014. 4 Counsel for Mr Quigley submitted that leave was nevertheless required because on 1 November 2013 I had directed the respondents to file and serve a defence to the amended statement of claim and any cross-claim on or before 5 December 2013. However, in response, I indicated that I did not view that direction, in the absence of express terms, as abrogating any rights of Mr Tenser under the FCR. 5 Counsel for Mr Quigley submitted that even if leave was not required, while this would remove the third of the three bases upon which opposition to leave being granted was predicated, there remained two bases which were still relevant for the Court to consider because they rendered the proposed cross-claim, at least in part, susceptible to strike out. Better that these matters be dealt with now prior to filing the cross-claim than waiting for a strike-out application to be brought. I accept the merit of that submission and proceeded to hear the parties on these two matters. 6 Mr Tenser's proposed cross-claim, as well as seeking an order that Mr Quigley transfer the shares held in the first respondent, Lunchalot Club Pty Ltd ("Lunchalot"), seeks damages and interest. 7 Mr Tenser's claim for damages is put on the basis that Lunchalot suffered loss and damage and that as a consequence the value of the shares he holds is less. Paragraphs 31 and 35 of the statement of cross-claim plead as follows: 31. As a result of the Repudiation [as defined in paragraph 29]: a. the Businesses' growth in value has been restricted; b. Lunchalot has suffered loss and damage; and c. the value of the Tenser Shareholding is less than it would be had the Breach not occurred. … 35. As a result of the Breach [as defined in paragraph 33]: a. the Businesses' growth in value has been restricted; b. Lunchalot has suffered loss and damage; and c. the value of the Tenser Shareholding is less than it would be had the Breach not occurred. 8 The reference to the growth of "the Business" is a reference to the business of Lunchalot (see para 4(b) of the statement of cross-claim). It is on the basis of the value of the "Tenser Shareholding" being less, that damages are claimed in para 36(b) of the statement of cross-claim. 9 Counsel for Mr Quigley submitted that the damages claimed by Mr Tenser are reflective of the alleged loss and damage suffered by Lunchalot and are therefore not claimable by Mr Tenser: reference was made to Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204 at 222-223; Chen v Karandonis [2002] NSWCA 412 at [33]-[47], [53] and [136]; Vplus Holdings Pty Ltd v Bank of Western Australia Ltd (2012) 91 ACSR 545 at [28]-[32]. 10 In Vplus Holdings Pty Ltd, Stevenson J said at [28]-[32]: [28] The relevant principle is that a shareholder of a company cannot recover damages merely because the company has suffered damage, and cannot recover damages that are merely a reflection of a loss suffered by the company. A shareholder may only recover damages for loss suffered personally that is separate and distinct from the loss of the company: Chen v Karandonis [2002] NSWCA 412 at [34]-[53] (Chen) (per Beazley JA, with whom Heydon and Hodgson JJA agreed) and Ballard v Multiplex (2008) 68 ACSR 208; [2008] NSWSC 1019 at [31]-[41] (Ballard) per McDougall J. [29] In Chen Beazley JA cited with approval the following observations of the Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204 at 222-3; [1982] 1 All ER 354 at 366-7: … But what [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a "loss" is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only "loss" is through the company, in the diminution of the value of the net assets of the company, in which he has ... [a] ... shareholding. The [shareholder's] shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. [30] In Johnson v Gore Wood & Co [2002] 2 AC 1; [2001] 1 All ER 481 Lord Millett (at AC 62; All ER 528), explained the rationale of this principle: … If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. [31] The principle is not confined to shareholders claiming the loss of value of their shares. It extends to all other payments that the shareholder might have obtained from the company if it had not been deprived of its funds (Ballard at [35]), including the recovery of loans made to the company (Chen at [53]). [32] The principle cannot be avoided by pleading a cause of action separate and distinct from the cause of action the company might have. The question is not whether the duties owed to the company and the shareholder are the same, but rather whether the loss claimed is truly reflective of the company's loss; that is a question of substance, not form: Thomas v D'Arcy [2005] 1 Qd R 666; 52 ACSR 609; [2005] QCA 068 at [18], [29]-[31] and [37]; Ballard at [41]. 11 Counsel for Mr Quigley submitted that application of the above principles precludes Mr Tenser from claiming loss by reason of alleged diminution of the value of his shareholding. 12 Counsel for Mr Tenser rejected this analysis principally on the basis that under the proposed cross-claim, it is Mr Tenser and Mr Quigley who are pleaded to be parties to the First Agreement (statement of cross-claim at para 8) not Lunchalot and Mr Quigley, and similarly in relation to the Second Agreement (statement of cross-claim at paras 20 and 21). Consequently, any finding of repudiation or breach of those agreements by Mr Quigley could not give rise to a cause of action by Lunchalot against Mr Quigley. 13 Counsel for Mr Quigley responded by submitting that it is not difficult to envisage Lunchalot pleading, on the facts asserted in the proposed cross-claim, a cause of action based on a breach of fiduciary duty (Mr Quigley was a director of Lunchalot) and misrepresentation notwithstanding it was not a party to the First and Second Agreements, as pleaded in the proposed cross-claim. 14 Subsequent to the hearing of the application, Lunchalot has provided Mr Quigley with the following undertaking: 12 September 2014 To: Shane Quigley Lazarus Legal Group Pty Ltd Suite 205, Level 2 55 Grafton Street BONDI JUNCTION NSW 2022 Att: Barry Lazarus By email: Dear Mr Quigley, UNDERTAKING SHANE QUIGLEY V LUNCHALOT CLUB PTY LTD ACN 154 977 885 & ANOR FEDERAL COURT PROCEEDINGS NSD 1750 of 2013 Lunchalot Club Pty Ltd hereby undertakes not to commence or carry on any new proceedings against Shane Quigley arising out of the facts and circumstances the subject of any cross-claim that Richard Tenser files in proceedings NSD 1750 of 2013 and proceeds to judgment or settlement. Yours faithfully, (Signed: Richard Tenser) (Signed: N Tenser) Richard Tenser Nataliya Tenser Director Company Secretary 15 In these circumstances, Mr Tenser should not be required to abandon his claim for damages in the proposed cross-claim. 16 The second ground of Mr Quigley's opposition to the proposed cross-claim relates to the implied terms pleaded at para 11 of the statement of cross-claim. It reads: 11. It was an implied term of the First Agreement that, at least until Lunchalot was sufficiently profitable to repay the loans from Tenser and Quigley and no earlier than 2 years from entering the First Agreement, Quigley was entitled to the Shares so long as he continued to provide the Quigley Services to Lunchalot. Particulars The term is implied by law. As to reasonable time for which the Quigley Services had to be provided see the following non-exhaustive examples: (a) The First Agreement's express terms; and (b) Tenser's email of 13 November 2012 at 1:55pm. 17 Counsel for Mr Quigley made a number of submissions in relation to this matter: (1) The term pleaded in para 11 of the statement of cross-claim is central to Mr Tenser's damages claim as the alleged "Repudiation" and "Breach" referred to in paras 27-35 (pursuant to which damages are claimed) of the statement of cross-claim rely solely on breach of the alleged implied term. (2) The alleged agreement between Mr Quigley and Mr Tenser (which is defined in the proposed cross-claim as "the First Agreement") is not of a particular class into which the Court would imply such a term. (3) In any event, breach of any such implied term would not give rise to damages; such a term would, rather, be pleaded in defence of Mr Quigley's claim in order to defer repayment of the funds advanced by Mr Quigley to Lunchalot and/or relied upon in connection with a claim confined to forfeiture of the shares held by Mr Quigley. 18 Counsel for Mr Quigley referred to a further difficulty, and that is at para 29 of the statement of cross-claim where it is said Mr Quigley repudiated the First and Second Agreements. But there is no term of the Second Agreement similar to what is pleaded at para 11 in relation to the First Agreement that could have been breached. What is asserted at para 29 is that Mr Quigley did not work for the whole two years and therefore breached the Second Agreement. In respect of the First Agreement it is pleaded (at para 11) that there was an implied term to work for two years, but there is no such term pleaded in respect of the Second Agreement. 19 This further difficulty could be cured by further pleading. So much was accepted by counsel for Mr Quigley. Moreover, it should be cured prior to filing. 20 As to the submissions in [17] above, while they have some force, it could not be suggested that the pleading in para 11 creates any difficulty for Mr Quigley to plead a defence. The submissions raised by way of opposition are best left to be resolved by way of evidence and legal argument at trial. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.