Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic

REASONS FOR JUDGMENT JACOBSON J Introduction 64 I have had the benefit of reading in draft the reasons for judgment of Finkelstein J and Gyles J. I agree that the appeal must be dismissed. 65 Gzell J said in Johnston v McGrath [2005] NSWSC 1183 ("Johnston") at [46] the law on the question of the effect of s 563A of the Corporations Act 2001 (Cth) ("the Act") is "to say the least, confused". Without, I hope, adding any confusion, I wish to state my reasons separately. 66 I agree with Finkelstein J and Gyles J that the decision of the High Court in Webb Distributors (Aust) Pty Limited v The State of Victoria (1993) 179 CLR 15 ("Webb") is confined to the case of a subscribing shareholder and that it does not deal with the position of transferee shareholders. That was the view of Emmett J which, in my opinion, is correct. I will state my reasons for this view below. 67 However, as Gzell J observed in Johnston at [66], the difficulty in restricting Webb to subscribing shareholders is that much of the language of the High Court is general, as is that of the authorities which underlie the reasons of the majority Justices. 68 Moreover, if the rationale for the principle stated in Webb is capital maintenance, there may be no reason in logic for confining the rule to the case of a subscribing shareholder. A transferee of partly paid shares whose name is placed on the register of members has the same liability for calls as the subscribing shareholder; see Johnston at [73]. 69 Accordingly, I will try to distil from the authorities the reasons for my view that the claim in the present case does not fall within s 563A of the Act. Background 70 On 18 August 2000, Luka Margaretic ("the Shareholder") purchased on the market conducted by the Australian Stock Exchange ("ASX"), 20,000 fully paid shares in the capital of Sons of Gwalia Limited ("the Company") for approximately $26,000. The Shareholder's name was entered on the Register of Members of the Company on 23 August 2004. 71 Unbeknown to the Shareholder, at the time when he acquired the shares, it appears that the Company may have been in breach of its obligation of continuous disclosure of gold reserves pursuant to s 674 of the Act. The shares were therefore worthless at the time when the shareholders acquired them. 72 The shareholder therefore has a potential claim against the Company for loss and damage by reason of the Company's contravention of s 52 of the Trade Practices Act 1974 (Cth) ("Trade Practices Act") and the related provisions of s 1041H of the Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). 73 Administrators ("the Administrators") were appointed to the Company on 29 August 2004 under s 436A of the Act. The Administrators have proposed a Deed of Company Arrangement ("the Deed") pursuant to s 439A(4)(b) of the Act. 74 Clause 3.7 of the Deed makes the provisions of s 563A of the Act applicable to claims of creditors. Clause 3.7 is expanded upon in clause 4.2(d), which Emmett J set out in full at [18] in his judgment. I will reproduce this clause including the emphasis added by his Honour:- "(d)For the avoidance of doubt, payment of any debts or liabilities owed by the Company to Members in the Members' capacity as a member of the Company, whether by way of dividends, profits or otherwise are, to the extent contemplated by Section 563A of the Act and the general law, to be postponed until all debts owed to, or claims made by, Creditors have been satisfied." [Emphasis added] 75 Clause 1.1 of the Deed defines "creditor" to mean "any person who has or asserts a claim". The term "claim" is defined in language based upon the provisions of s 553(1) of the Act. It includes a "debt" and a "claim" against the Company, present or future, certain or contingent of sounding only in damage, being debits or claims arising on or before 29 August 2004 or out of circumstances occurring before that date. Section 563A of the Act 76 Section 563A of the Act provides as follows:- "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 satisfied." 77 In Webb, the Court was concerned with an earlier form of that provision found in s 360(1)(k) of the Companies (Victoria) Code ("the Code"). That sub-section was as follows:- "(k) a sum due to a member in his capacity as a member by way of dividends, profits or otherwise shall not be treated as a debt of the company payable to that member in a case of competition between himself and any other creditor who is not a member, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves." 78 As their Honours observed in Webb at 34, the language of s 563A of the Act draws more strongly on the language of priority than did its predecessor. However, their Honours referred at 34-35 to a statement in the Explanatory Memorandum to the Corporate Law Reform Bill 1992 that s 563A was intended to have the same effect as another section in virtually identical terms to s 360(1)(k) of the Code. The Decision of the Primary Judge 79 In the proceedings before Emmett J, the Company, through the Administrators, sought two declarations. The first was that the Shareholder's claim for damages would not be provable under the Deed. The second was that payment of the Shareholder's claim under the Deed would be postponed until debts or claims owed to, or made by, persons otherwise than in their capacity as members, have been satisfied. 80 The Shareholder filed a cross-claim which was described by Emmett J at [24]. The relief sought included a declaration that he is a creditor of the Company within Part 5.3A of the Act and is entitled inter alia to vote at meetings of creditors. 81 ING Investment Management LLC, ("the Creditor"), which is a creditor of the Company, was joined to the proceedings. The Creditor was the true contradictor of the arguments put by the shareholder. 82 It was common ground that the Shareholders' claim fell within s 553 of the Act which, as Emmett J pointed out at [25], would be imported into the Deed. However, as his Honour went on to say, the Company and the Creditor contended that the effect of s 563A is that, insofar as the Shareholder's claim is a debt, it is owed to the Shareholder in his capacity as a member of the Company and is therefore postponed as provided in the concluding words of the section. 83 The Shareholder also contended that even if his claim is a debt owed by him to the Company in his capacity as a member, he is entitled to be treated as a creditor for the purposes of Part 5.3A of the Act and under the Deed; see at [26]. 84 The primary contention of the Company and the Creditor before his Honour was that the question of the effect of s 563A must be determined adversely to the Shareholder by reason of the decision in Webb. His Honour said at [27] that the precise ratio of Webb is neither clear nor certain. 85 The learned primary Judge then analysed in some detail the factual background and claims in Webb as well as the reasons of the majority Justices, and the decision of the Appeal Division of the Supreme Court of Victoria which was upheld by the High Court on appeal. 86 As Emmett J said at [34] the High Court, by majority, dismissed the appeal on the basis of what it considered to be two well established lines of authority laid down in English decisions of the 19th Century. His Honour referred at [35] - [36] to the two lines of authority cited in Webb. 87 The first was the principle of capital maintenance laid down in Trevor v Whitworth (1887) 12 App Cas 409 and Ooregum Gold Mining Company of India v Roper [1892] AC 125. The second was the principle that once the winding up of a company has begun, a shareholder cannot rescind, on the ground of fraud, a contract for the purchase shares from the Company; see Oakes v Turquand (1867) LR 2 HL 325; Tennent v City of Glasgow Bank (1879) 4 App Cas 615; Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 ("Houldsworth"). 88 After a discussion of these two lines of authority, the learned primary Judge came to the view that the passage at 35 of the majority judgment in Webb, set out at [105] below, indicates that their Honours were addressing the question on the basis of a claim by a subscribing member of the building society who had acquired "non-withdrawable" shares in the society. His Honour also observed that the formulation of the question before the primary Judge in Webb, Vincent J, supports that view. 89 Emmett J then said at [43]:- "I do not regard Webb's Case as authority for the principle that a claim by a person who, in reliance upon conduct of a company in a contravention of a prohibition on misleading or deceptive conduct, acts to the person's detriment, albeit by buying shares in the company from a third party in a transaction that has no connection whatsoever in the company, is a claim by that person in his capacity as a member of the company. I do not consider that the Shareholder's Claim is a debt owed by the Company to the Shareholder in the Shareholder's capacity as a member of the Company. If it is a debt at all, it is a debt arising as a result of the operation of the consumer protection provisions referred to above, which prohibit misleading and deceptive conduct in various circumstances. Section 563A would not require postponement of that debt until debts owed to, or claims made by, persons otherwise than as members have been satisfied. It follows that the adoption of s 563A in the proposed deed of company arrangement would not require the postponement of the Shareholder's Claim in the course of the administration." The decision in Webb 90 Webb concerned the claims of holders of non-withdrawable shares in three building societies. A number of the shareholders complained that they had been misled as to the nature of the shares and, in particular, that they were redeemable "like a deposit". 91 The liquidator of the societies asked three questions in a summons for directions in the Supreme Court of Victoria. The questions were set out in the Report of the decision at 17. The questions were as follows:- "(a) Whether unliquidated damages claims by non-withdrawable shareholders are provable in the liquidation of the abovenamed building societies pursuant to the provisions of s 438(2) of the Companies (Victoria) Code incorporating s 82 of the Bankruptcy Act 1966 (Cth). (b) Whether non-withdrawable shareholders are precluded from rescinding the contracts pursuant to which they purchased their shares in the abovenamed building societies and are thereby precluded from maintaining an action or claim against the abovenamed building societies for damages. (c) Where the liquidator forms the view that there is a valid claim by a non-withdrawable shareholder to prove in the liquidation of one of the abovenamed building societies on the basis of a cause of action founded upon misleading or deceptive conduct, and where the liquidator forms the view that that non-withdrawable shareholder would have deposited the relevant sum with the relevant building society had that person not been misled or deceived, whether the proper amount for which the non-withdrawable shareholder is to be admitted to prove is to be discounted by reference to the estimated dividend to depositors of the relevant building society in the winding up of that society." 92 The background facts which gave rise to the claims of misleading conduct were explained in the majority judgment at 24 as follows:- "The three societies began to market non-withdrawable shares to the public in late 1986. Many of the holders of those shares complain that they were misled as to the nature of the shares. Their complaints generally focus on statements alleged to have been made on behalf of the societies that the shares were redeemable and 'like a deposit' and that they were thereby diverted from their intention to invest as depositors. The societies 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. Clearly that system depended upon the availability of potential new investors; in the meantime shares were held on what were known as 'inter-society holdings'. The 'prospectuses' did not explain this system. They stated only that the building societies would maintain a register of persons wishing to take transfers." 93 Their Honours observed at 24 that the question of whether the societies misrepresented the nature of the shares was not before the Court. They said that the High Court was asked to assume, as was the Supreme Court of Victoria, that there had been misleading or deceptive conduct as would ground an action in deceit or under s 52 of the Trade Practices Act. 94 Vincent J at first instance held that the claims for damages of the shareholders were provable in the liquidation. That decision was reversed by the Appeal Division of the Supreme Court of Victoria in State of Victoria v Hodgson [1992] 2 VR 613 ("Hodgson"). 95 The leading judgment in Hodgson was delivered by Tadgell J. His Honour said at 624 that the questions asked of the Court were not made easier by the absence of the exact facts giving rise to the claims for unliquidated damages. 96 It is to be noted that Tadgell J said at 624 that question (b) seemed "to assume that all relevant holders of non-withdrawable investing shares acquired them by subscription and not by transfer". 97 Tadgell J approached the matter by dealing first with question (b). This raised the applicability and scope of the decision in Houldsworth. His Honour analysed that decision including the criticisms made of it, one being that it cannot survive Salomon v Salomon & Company Limited [1897] AC 22. 98 However, Tadgell J pointed out at 626 that one basis for the decision in Houldsworth is that to permit a claim for damages by a member against a company of which he or she is a shareholder would be inconsistent with implied terms of the contract by which the shareholder became a member, because the claim would entrench on share capital to the detriment of creditors and other members. 99 Tadgell J went on at 626 to say that this explanation of Houldsworth finds support in the speeches of Lord Cairns and Lord Selborne. He said that their remarks suggested the thesis that one of the implied terms of the contract of membership of a company is:- "… that the company's property is to be used only for the purpose of achieving its objects, which do not include the payment of compensation to defrauded subscribers …" 100 Tadgell J then said that whatever the difficulties of applying the decision in Houldsworth where a company is not in liquidation, it does apply where the company is in liquidation. His Honour went on to say at 627:- "In my opinion the principle of limited liability leads inevitably to the conclusion that a member at the commencement of the winding up of a company limited by shares cannot prove in the winding up for damages designed to indemnify him for loss sustained in subscribing share capital to the company. The member's only title to such damages would depend on his having sustained loss through a subscription of share capital. If he were to obtain indemnity from the company in respect of that loss he could not logically be regarded as having subscribed the share capital for the subscription of which the company had indemnified him." 101 This passage was set out in full in the majority judgment in Webb at 25. 102 I do not propose to set out the analysis of the two lines of authority which underlie the conclusion of the majority in Webb; it is to be found at 28 - 34. Emmett J referred to their Honours' discussion of the authorities at [35] - [39]. 103 In the course of their discussion, Mason CJ, Deane, Dawson and Toohey JJ said at [33] - [34]:- "However, the critical question is not whether Houldsworth is right or wrong but whether the proposition which the House of Lords distilled in the case from the provisions of the Companies Act 1862 is incorporated in the provisions of the Code. That proposition, namely, that a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the capital of the company, cannot now be supported in absolute terms. A direct return of capital may be effected with the approval of the court having regard, inter alia, to the interests of creditors: See s.123 of the Code; s.195 of the Corporations Law. The statutory provisions authorising the return of capital are not inconsistent with the Houldsworth proposition. Indeed, they proceed on an acceptance of part of the reasoning which underpinned the decision in that case. They permit a return of capital to shareholders when it is established to the satisfaction of the court that the return of capital will not prejudice the interests of creditors or when it is consented to by creditors. Hence, the statutory provisions treat the subscribed capital as a protection to creditors and accept that the capital should not be returned directly to shareholders otherwise than pursuant to a permissible reduction of capital." 104 Their Honours observed at 33 that Tadgell J concluded that the principle in Houldsworth received statutory recognition in s 360(1) of the Code. Their Honours agreed with that conclusion which they said was supported by the provisions of s 360(1)(k) of the Code. 105 The conclusion of the majority Justices as to the scope and application of s 360(1)(k) of the Code is to be found in the following passage at 35:- "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 the shares: In re Dale and Plant Limited (1889) 43 ChD 255; In re Harlou Pty. Ltd. (In Liq.) [1950] VLR 449 at p.454. But, in the present case, the members seek to prove in the 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." 106 Their Honours considered an argument that the shareholders' claim under the Trade Practices Act must be unaffected by the provisions of s 360(1) of the Code. They observed at 37 that the Trade Practices Act is not concerned with regulating the position between members and creditors. They then said- "Whether the actual decision in Houldsworth can stand against the provisions of the Trade Practices Act is a question which does not arise. As we said earlier in these reasons, the critical question in this appeal concerns the provisions of the Code." 107 Their Honours concluded by saying that the Trade Practices Act is unquestionably a piece of innovative legislation but it is not to be seen as eliminating "by a side-wind" more than a century of legal principle governing the winding up of companies. The issues in Webb were confined to the position of subscribing shareholders 108 There are two reasons why in my view the issues before the Court in Webb were confined to the position of subscribing shareholders. 109 First, the issues must be taken to have been defined by the statement of the three questions asked in the summons. Tadgell J observed in Hodgson at 624 that question(b)appeared to assume that all relevant shareholders were subscribers, not transferees. Vincent J, at first instance, was apparently of the same view, as was Gzell Jin his consideration of Webb in Johnston:see[65]. 110 Although questions (a) and (c) are perhaps not so clearly confined, the High Court paraphrased the questions in a way which in my view confirms that the case was treated as one of subscription. The majority Justices said at 25:- "The questions asked by the liquidator were primarily aimed at determining whether: (a) unliquidated damages claimed by non-withdrawable shareholders are provable in the liquidation of the building societies; (b) non-withdrawable shareholders are now precluded from rescinding the contracts under which they acquired their shares and whether they are thereby precluded from prosecuting an action for damages against the building societies in relation to the acquisition of the shares." 111 Second, I agree with Gyles J that although the summary of the facts at 24, which I have set out at [92], may not involve subscription in its purest form, the manner in which the High Court dealt with the case in the passage at 35, set out above at [105], is consistent only with the proposition that the case was treated as one of subscription. Their Honours referred to the shareholders retaining the shares to which they were entitled by virtue of entering into the agreement under which they claimed. 112 The Creditor submitted that material filed in the High Court in Webb, and material filed in the Supreme Court of Victoria in the Pyramid matter (proceeding number 6166 of 1991), which largely post-dates the High Court decision in Webb, showed that Webb included claims made by shareholders who had acquired their shares by transfer through the system of inter-society holdings. This material was collected in an affidavit of Mr Zwier, relied upon in these proceedings, and included affidavits of the liquidator in Pyramid as well as other affidavits, statements of facts, written submissions and transcript of argument before the High Court. 113 In my opinion, the material put before us by the Creditor provides an unsatisfactory basis for determining how the High Court approached the matter. The issues can only be determined by an examination of the originating process and the way in which the High Court dealt with it. To approach the matter in the way suggested by the Creditor would lead in this, and other cases, to unending arguments about the scope and application of a judgment. 114 In any event, I can see nothing in the material which clearly defines the issues in the way suggested. 115 However, the question which remains open is whether the underlying principles in the authorities discussed in Webb, and the principle which underlies the decision in Webb applies equally to transferees. Whether the Shareholder's claim is a debt owed to him in his character as a member 116 In my opinion the question of whether the claim is a debt owed by the Company to the Shareholder in his capacity as a member can be determined without the need to repeat in detail the analysis of the two lines of authority discussed by the High Court in Webb. The authorities are referred to by Emmett J and Finkelstein J, and by Gzell J in his judgment in Johnston. 117 The authority which exposes the conundrum at the heart of the differing views is the decision at first instance and on appeal, In re Addlestone Linoleum Company (1887) 37 Ch D 191 ("Addlestone"). 118 In Addlestone shares were issued purportedly at a discount of ₤2 10s. On liquidation a call was made for the remaining ₤2 10s. Some of the shareholders sought to prove in the winding up for damages in that amount "for breach of contract or otherwise" in respect of the shares. 119 At first instance, Kay J held that the claim was excluded by s 38(7) of the Companies Act 1862 (UK) which was in similar terms to s 360(1)(k) of the Code. 120 Finkelstein J has set out an extract from Kay J's reasons at [15]. At the risk of some repetition I wish to expand upon the extract of what was put by Kay J at 197 - 198 as follows:- "Now, unquestionably the Applicants - retaining these shares and claiming damages because the shares are not exactly what they were represented to be - are making such claims in the character of members of the company, and the only question is whether such claims are for sums due 'by way of dividends, profits, or otherwise'.… Practically, what these Applicants are seeking to recover by their proof is a dividend in respect of the Ł2 10s per share which they have been compelled to pay in the winding up. But as shareholders they have contracted that they will pay this money, and that it shall be first applied in payment of the creditors whose debts are not due to them as members of the company - that is, they are practically admitting their liability to pay the Ł2 10s per share to such other creditors and yet seeking to get part of it back out of the pockets of those very creditors themselves. I confess it seems to me that the money so claimed is not only claimed in the character of members but that the claim is just as unreasonable as if it were a claim of dividends or profits, and that, accordingly, it comes within the words 'or otherwise' which I have read from s 38." 121 What this passage indicates is that the claim was brought by the shareholders in their capacity as members because the terms of their contract bound them to pay the call which was to be applied toward payment of creditors. It was, as is shown by the analysis of Tadgell J in Hodgson at 627, a statutory obligation to contribute assets to a fund to be applied to meet the debts of creditors and to adjust the rights of contributors or members. It was part of the price for which the shareholders purchased limited liability. 122 The same explanation underlies Lindley LJ's statement, on appeal in Addlestone, of the principle in Houldsworth. His Lordship said at 205 - 206 that the principle on which that case was decided was that a shareholder contracts to contribute a certain amount to be applied in payment of the debts of the company and it is inconsistent with the shareholder's position as a shareholder, while he (or she) remains a shareholder, to claim back any part of the money. The relevant passage was set out in Webb at 31, where their Honours described it as perhaps the best explanation of Houldsworth. 123 As Tadgell J explained in Hodgson at 630, the same approach must be taken whether the shares are partly or fully paid. His Honour observed that there is no difference between the case of a holder of partly paid shares who pays a call in the winding up and then seeks to prove for damages for the amount of it, and the case of a holder of fully paid shares who seeks to prove for the amount paid for the shares. Allowance of a proof of debt would be inconsistent with the statutory obligation of shareholders to contribute to the statutory fund. 124 In my view there is force in the observation of Gzell J in Johnston at [75] that the basis upon which Lindley LJ explained Houldsworth is equally applicable to subscribers and transferees. As was said earlier, a transferee of partly paid shares is equally liable to pay calls as was the original subscriber. The explanation for this is to be found in the statutory contract which is now expressed in s 140 of the Act. 125 Addlestone was distinguished by the House of Lords in Soden v British and Commonwealth Holdings Plc [1998] 1 AC 298 ("Soden"). Lord Browne-Wilkinson said at 325 that the reasons given by Kay J for treating the case as falling within s 38(7) were directed exclusively to matters relevant to a claim involving the issue of shares by a company but irrelevant to a claim in relation to the purchase of fully paid shares from a third party. 126 His Lordship went on to say at 326 that if, in Addlestone, the payment of ₤2 10s was not made the capital of the company would not be maintained and the general body of creditors would be thereby prejudiced. But, as Tadgell J explained in Hodgson, the same principle applies to fully paid shares. 127 Nevertheless, Lord Browne-Wilkinson then said at 326:- "There is nothing in the Addlestone Case to justify the application of that decision to cases where the claim against the company is founded on a misrepresentation made by the company on the purchase of existing shares from a third party. To allow proof for such a claim in competition with the general body of creditors does not either directly or indirectly produce a reduction of capital. The general body of creditors are in exactly the same position as they would have been in had the claim been wholly unrelated to shares in the company." 128 Earlier, at 323, his Lordship observed that s 74(2)(f) of the Insolvency Act 1986 (UK), which is in similar terms to s 563A of the Act, requires a distinction to be drawn between on the one hand, sums due to a member in his or her character as a member by way of dividends, profits or otherwise, and, on the other hand, sums due to a member otherwise than in that character. His Lordship said that sums due in the character of a member must be sums falling due under the statutory contract. To that bundle of rights and liabilities, his Lordship said, must be added the rights and obligations imposed on members under the Companies Act 1985 (UK). 129 The rationale for this distinction was said to be to ensure that the rights of members as such do not compete with the rights of the general body of members. The principle is not that members come last, but that a member having a cause of action independent of the statutory contract is in no worse position than other creditors. This construction was said to be supported by the words "by way of dividends, profits or otherwise" which illustrate what constitute sums due to a member in that character: see at 323 - 324. His Lordship observed at 325 that if there was a cause of action in Addlestone it must have been based on the statutory contract. 130 His Lordship was of the view that the decision of the High Court in Webb was "carefully delimited" to cases of contracts to subscribe for shares. He said that the decision and reasoning in Webb were dependent upon the same considerations as Addlestone, that is, protection of creditors from indirect reductions of capital. He said that those factors are relevant to cases of subscription but are wholly irrelevant to purchases from third parties of already issued shares: see 326. 131 The same view is reached by Gyles J at [62]. His Honour points out that an action in tort for misleading conduct in connection with the purchase of fully paid shares from a third party has nothing to do with a return of capital. I agree with his Honour. It is a cause of action independent of the statutory contract. It is not based upon the rights of a member contained in the Act. 132 I am reinforced in the view that I have reached because Gzell J said at [84] in Johnston that he prefers the conclusion consistent with Soden, that a shareholder's action for damages against a company under s 82 of the Trade Practices Act does not fall within s 563A of the Act, but he considered himself constrained by Webb in coming to that view. 133 Once it is accepted that the issues in Webb were limited to a consideration of the position of subscribing shareholders it is open to a Full Court to reach the same conclusion as was stated in Soden. 134 Whilst recognising the force of some of the logical inconsistencies which may be thought to flow, in particular, from the careful analysis of Tadgell J in Hodgson, I prefer the view of the House of Lords in Soden. 135 I do not consider that this is to elevate the dissenting judgment of McHugh J in Webb to that of a majority opinion. The observations of the majority in Webb that the Trade Practices Act is not to be seen as eliminating more than a hundred years of case law governing the winding up of companies must be read in context; that is to say, in light of the issues before the Court. 136 Finally, I agree with Gyles J that if the reasoning of the Full Court in Cadence Asset Management Pty Limited v Concept Sports Limited [2005] FCAFC 265 ("Cadence") is correct, this appeal cannot succeed. The decision in Cadence was handed down after we reserved our judgment in the present case. In the absence of argument, it is not appropriate for us to canvass the Full Court's decision. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

REASONS FOR JUDGMENT FINKELSTEIN J 1 A point which of late has attracted some excitement within the commercial community is whether a purchaser (as opposed to an allottee) of shares can in a winding up prove for damages against the company for the misrepresentation which induced the purchase. In Soden v British & Commonwealth Holdings Plc [1998] AC 298 the House of Lords held that the proof was maintainable. Were it not for the decision of Gzell J in Johnston v McGrath [2005] NSWSC 1183, the only substantive issue on this appeal would be whether we should follow the House of Lords. But Gzell J has said that in Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15 the High Court held that the purchaser could not prove for such a claim. If that is what the High Court has decided then its decision must be followed. So, before we can consider whether Soden correctly states the law it is necessary to clear up what is the effect of Webb Distributors. 2 These issues arise out of the collapse of Sons of Gwalia Limited, a publicly listed mining company. In mid-2004 the directors completed a review of the affairs of SOG and its subsidiaries. The review disclosed that there had been a serious deterioration in the status of the group's gold reserves and its ability to meet its hedge book commitments. It also indicated that the group was insolvent. Administrators were appointed to SOG and certain of its subsidiaries on 29 August 2004. An investigation by the administrators showed that net group liabilities were at least $862 million, an amount which exceeded group assets "by several hundreds of millions of dollars". 3 The administrators are currently working on a proposal for the restructure of the SOG group, a restructure that will probably involve the sale of several of its mining assets. Much work is still to be done before the proposal can be put to creditors, most likely in the form of a scheme of arrangement. In the meantime, on the recommendation of the administrators, the creditors of each group company in administration resolved that their company execute what has been described as a "holding" deed of company arrangement. It is called a "holding" deed of company arrangement because it is intended to be only a temporary measure, one that will maintain the status quo until the administrators can come up with a final suggestion for a restructure. For this reason the principal effect of each deed (the deeds were executed in August 2005) is to put in place a moratorium on proceedings against each company. It is expected that the moratorium will last for about eight to 12 months. 4 The imposition of a moratorium is not, however, the only purpose of the deeds. The administrators have been told that many members of SOG who purchased their shares on-market during July and August 2004 are asserting that they have claims against the company. The allegation is that in breach of the listing rules SOG had failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its gold delivery contracts and that it could not continue as a going concern. Thus the members say that they were deceived into purchasing shares in SOG and so have claims in damages or for compensation for contraventions of s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Corporations Act 2001 (Cth) or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). The quantum of the damages or compensation is said to be the difference between the purchase price of the shares (plus brokerage and GST) and the present value of those shares, which is nil. Between them the members claim damages or compensation totalling something between $75 and $100 million. The other purpose of the deeds then, particularly the SOG deed, is, as the administrators explained to the creditors, "[t]o progress [a] test case, regarding the question of whether any shareholders who have been misled are creditors, and are therefore entitled to prove with respect to the assets of the SOG Companies". 5 To give effect to this latter purpose, provision is made in the SOG deed for the establishment under the control of the administrators of a fund for distribution between creditors. The fund is to consist "of those funds which may be set aside by the Administrator from time to time" from several sources. Subject to certain immaterial variations the fund is to be distributed in the same order of priority as would apply if SOG were being wound up. In a winding up claims of members would be postponed to claims of creditors. To ensure that this also occurs under the deed cl 4.2(d) provides that "payment of any debts or liabilities owed by the Company to Members in the Members' capacity as a member of the Company, whether by way of dividends, profits or otherwise are, to the extent contemplated by Section 563A of the [Corporations] Act and the general law, to be postponed until all debts owed to, or claims made by, Creditors have been satisfied." In due course it will be necessary to come back to this clause and to s 563A, for the entitlement of members to prove is dependent upon their effect. 6 Notwithstanding the provisions of the deed, it is unlikely that the administrators will establish the fund. When the proposed deed was explained to creditors, the administrators informed them that: "It is not anticipated that there will be any distribution under the [deed] to creditors." Presumably what the administrators and their advisers had in mind was to obtain a ruling on the status of members' claims and then decide how best to structure the final proposal for the group's future. It is far from clear whether a notional distribution fund is an appropriate vehicle for testing the claims of members. It does have the hallmarks of a request for an advisory opinion. Nonetheless, the creditors will in due course be asked to vote on a restructure and for that purpose they will need to know how members' claims will be dealt with under a deed of company arrangement or scheme of arrangement which incorporates s 563A. So it is as well to have the point resolved at this juncture. 7 In anticipation of the adoption of the deed one member, Luka Margaretic, lodged an "informal" proof of debt asserting a claim of $26,288.59. The amount represents the total cost (including brokerage and GST) of the shares which Margaretic purchased on-market on 18 August 2004. It had been agreed in advance that the administrators would not determine whether the proof should be admitted but, instead, would bring the matter before the court, with Margaretic's costs to be paid out of SOG's assets. The object of the action would be to resolve not only Margaretic's right to prove but also the right to prove of other members standing in a similar position. 8 The originating application was issued joining both Margaretic and ING Investment Management LLC as defendants. ING Investment is an ordinary unsecured creditor of SOG. Although ING Investment was joined as a defendant, SOG only sought relief, namely declarations, against Margaretic. SOG sought a declaration first that Margaretic's claim "[was] not provable in the deed of company arrangement" in respect of SOG, and alternatively "that payment of [Margaretic's claim] pursuant to the deed of company arrangement will be postponed until all debts owed to, or claims made by, persons otherwise than in the capacity as members of [SOG] have been satisfied." Subject to one qualification, this was a convenient procedure by which to resolve the issues thrown up by Margaretic's informal proof. It brought before the court two parties with opposing interests to argue the case. SOG itself was not entitled to be partisan. Being under the control of the administrators it was bound to adopt an even-handed approach. That is, the administrators (through SOG) were "entitled to submit the questions to the Court, holding the scales evenly between the various creditors and apparent or purported creditors": Australia and New Zealand Banking Group Limited v National Mutual Life Nominees Limited (1977) 137 CLR 252, 264 per Jacobs J, but substituting the word "creditors" for "beneficiaries". The administrators satisfied this duty, more or less. 9 The qualification to which I earlier referred concerns the parties. An action for a declaration of rights serves a legitimate purpose where all persons who are interested in or might be affected by the enforcement of such rights and who might question in a court the existence and scope of such rights, are parties to the action and have an opportunity to be heard. Persons who are not parties to a declaratory judgment are not bound by it: London Passenger Transport Board v Moscrop [1942] AC 332, 345. For them the declaratory judgment is a mere academic pronouncement. For this reason a court will not ordinarily grant declaratory relief unless all persons interested are made parties by representation orders or otherwise. This is all the more important in litigation which the parties have described with some justification as a "test case", that is a case in which it is intended to test the rights of all potential claimants. This seems to have been recognised by the parties who proposed that the trial judge (Emmett J) make a representation order under O 6, r 13. The judge declined to make such order at the commencement of the hearing but indicated that he would give further consideration to that issue "once the questions raised by the Company's and the Shareholders' cross-claim had been answered." Unfortunately, when those answers were provided the parties question was not revisited. For any declaration to serve a practical end it is preferable that it resolve the dispute that exists not only between the administrators and the present claimants but also between the administrators and all potential claimants. This could have been achieved if all persons who may be affected by the result were joined by an appropriate representation order. This course was not pressed by the parties and the failure to make a representation order though undesirable is not fatal. 10 Coming back to the application, the point raised by the first declaration sought was the applicability of the rule in Houldsworth's case (Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317) to claims in fraud or misrepresentation by on-market purchasers of shares. The point raised by the alternative declaration sought was the effect of s 563A (not as a statutory provision but as a term of the deed of company arrangement) on such claims. 11 The judge decided the case by reference only to s 563A. He held that as a term of the deed the section did not postpone claims in damages by on-market purchasers to the claims of other creditors. Hence he refused to make the declarations sought. Instead the judge made a declaration that Margaretic was "a creditor of [SOG] within the meaning of Part 5.3A of the Corporations Act 2001 … for such amount as the Deed Administrators of [SOG] may admit or be ordered to admit to proof". He also made a declaration that Margaretic's claim is "not postponed until all the debts owed to, or claims made by, persons other than [Margaretic] have been satisfied, by reason of the inclusion of section 563A of the [Corporations] Act in the deed of company arrangement in respect of [SOG]." Both SOG and ING Investment appeal from those declarations, but SOG has left it substantially to ING Investment to press the appeal. 12 It is perhaps best to begin with Houldsworth's case. There the House of Lords laid down the rule that a person who subscribed for shares cannot recover damages from the company in an action in deceit for the misrepresentation which induced him to take the shares. His remedy is to rescind the allotment and obtain restitution of his subscription money. There are two explanations for the decision. The first is that to permit recovery by the shareholder would be inconsistent with his statutory contract with the company and the other shareholders under which his subscription money is to be applied towards the discharge of the company's debts. The second explanation is that the share capital of the company is a fund that is available for creditors and therefore claims by a member must be subordinated to those of creditors. 13 The rule applies whether or not the company is in liquidation. In other words, a member who has not rescinded the allotment cannot while the company is a going concern bring an action in damages against the company: In re Addlestone Linoleum Company (1887) 37 Ch D 191. Nor can he be admitted to proof if the company is being wound up: Oakes v Turquand (1867) LR 2 HL 325; Tennent v City of Glasgow Bank (1879) 4 App Cas 615. Indeed, as these cases show, once the winding up has commenced the right to rescind, and therefore the right to claim damages, is forever lost: Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15, 30. It makes no difference that the liquidator has sufficient assets to pay creditors in full: In re Hull and County Bank (1880) 15 Ch D 507. In Cadence Asset Management Pty Ltd v Concept Sports Limited (2005) 55 ACSR 145, 147-148 I explained by reference to earlier authority that on the winding up of a company (1) the status and relative position of the parties is altered because the shareholder ceases to exist, being converted into a contributory, and the company ceases to exist (albeit not technically), being converted into a body of such contributories; (2) the subject-matter of the statutory contract is altered, there being no longer any shares but only forced contributions of the contributories; and (3) the rights of creditors have intervened and those creditors are entitled to be paid in priority to all other claimants on the assets of the company, including the capital subscribed by the shareholders. 14 In any event, putting to one side the rule in Houldsworth's case, a subscribing shareholder with a claim could not in a winding up prove for damages in deceit or for restitution in competition with the general body of creditors. As I will show, that is one of the effects of s 563A. The section provides: "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 satisfied." This provision can be traced back through s 525 of the Corporations Law and s 360(1)(k) of the Companies Codes to s 38(7) of the Companies Act 1862, 25 & 26 Vict c 89. Up until the Corporations Law Reform Act 1992 (Cth) the provision was virtually identical with s 38(7), the only notable difference being that "capacity" had been substituted for "character". Section 563A is worded differently but according to the explanatory memorandum it was intended to have the same effect. In England, the equivalent provision now is s 74(2)(f) of the Insolvency Act 1986 (UK). 15 The first case in which it was held that a claim by a subscribing shareholder may be caught by the section is In re Addlestone Linoleum Company (1887) 37 Ch D 191. The company purported to issue Ł10 preference shares on payment of only Ł7 10s, but issued certificates stating that the shares were fully paid. Following the winding up the liquidator made calls of Ł2 10s per share. The shareholders then sought to prove in the liquidation for "damages for breach of contract or otherwise". The amount of their proof was Ł2 10s per share, being the amount which the shareholders had been required to pay. Kay J held that the rule in Houldsworth's case precluded the shareholders from bringing their claim against the company, even if it were not being wound up. He said (at 200) the shareholders' only remedy was rescission but it was too late to assert that remedy because of the winding up. Strictly speaking that was sufficient to dispose of the case. Nevertheless, Kay J went on to consider whether the claim was caught by s 38(7) on the "assum[ption] for the present that the [shareholders] might elect to retain the shares and sue the company for damages." On that assumption Kay J decided that s 38(7) barred the proof in competition with creditors. He said (at 197-198): "Now, unquestionably the Applicants - retaining these shares and claiming damages because the shares are not exactly what they were represented to be - are making such claims in the character of members of the company, and the only question is whether such claims are for sums due 'by way of dividends, profits, or otherwise.' To determine that it is necessary to consider the scope and intent of this provision in the statute. The obvious analogy is the case of a partner attempting to prove in bankruptcy in competition with the creditors of the firm. But whether this section is intended to have entirely the same effect or not, it is quite clear from the language of it that a debt due to a member in that character, such as for dividends, directors' fees, or the like, could not be so proved." 16 In the Court of Appeal Cotton LJ correctly identified (at 204) the two questions that arose, viz, were the shareholders entitled to prove and if they were, whether they were to be postponed to outside creditors. He held (at 204) that Houldsworth's case "precludes us from allowing this proof". As regards s 38(7) he said (at 205) only this: "[I]f [the shareholders] could have been admitted to prove at all, I think it would have been very difficult to come to the conclusion that they could compete with the outside creditors." Lindley LJ decided the case only on the Houldsworth principle. Lopes LJ agreed that the Houldsworth principle applied, noting (at 206) that there was no substantial distinction between a claim for damages for misrepresentation as in Houldsworth's case and a claim for damages for breach of contract as in the case before him. He went on to say (also at 206) that he agreed with the construction of s 38(7) put by Kay J. 17 In Australia it has been held that Houldsworth's case will defeat actions in deceit by subscribing shareholders. The issue seems first to have arisen in Re Dividend Fund Incorporated (in liq) [1974] VR 451 where the Houldsworth principle was applied to a claim against an unlimited liability company. The applicability of the rule was confirmed in the litigation that arose out of the collapse of the Pyramid group of building societies. Following his appointment to the group the liquidator discovered that holders of non-withdrawable shares in the building societies (there were three societies whose windings-up were governed by the Companies Code) had been misled into acquiring their shares, having been wrongly told that they were "redeemable" and like a "deposit". Some shares had been acquired by allotment and others by transfer from one of the building societies. There had been a practice that if a member wished to "redeem" his shares, they would be acquired by one of the societies (not the society whose shares were being redeemed) and held by that society until a purchaser for them could be found. The shareholders claimed to be entitled to prove in the windings up for the damages they suffered. 18 The liquidator sought advice from the Supreme Court of Victoria whether the shareholders should be treated as creditors in respect of their claims. On a summons for directions (Re Pyramid Building Society (in liq) (1991) 6 ACSR 405) the liquidator raised the following question: "Whether non-withdrawable shareholders are precluded from rescinding the contracts pursuant to which they purchased their shares in the abovenamed building societies and are thereby precluded from maintaining an action or claim against the abovenamed building societies for damages." This question was concerned only with the fate of subscribing shareholders. 19 The trial judge, Vincent J, noted (at 407-408) that it had been accepted by all parties concerned "that a shareholder cannot rescind a contract for the purchase of shares after the commencement of the winding up of the company". Thus he said (at 408) that: "The point at issue is whether a shareholder is also prohibited from proving for damages once winding up has commenced." The case turned on the application of the Houldsworth principle. The judge found that the rule established by the case applied only to unlimited liability companies. Hence he found (at 411) that the shareholders while being "precluded from rescinding their contracts [were not precluded] from maintaining an action against the respective building societies for damages." 20 The decision was taken to the Appeal Division of the Supreme Court in State of Victoria v Hodgson [1992] 2 VR 613. The principal judgment was delivered by Tadgell J, with whom Fullagar and Gobbo JJ agreed. The judgment dealt only with the position of subscribing shareholders. Tadgell J said (at 617): "The central issue seems to be this: whether a person who has subscribed share capital, and would in a winding up rate for repayment of capital behind unsecured creditors, may, instead of being left to his rights as a contributory, prove as an unsecured creditor for an unliquidated sum if he can make out a cause of action sounding in damages designed to compensate him for having subscribed the share capital." Once again the answer turned on the application of Houldsworth's case. As to this Tadgell J disagreed with the trial judge. He said (at 627): "In my opinion the principle of limited liability leads inevitably to the conclusion that a member at the commencement of the winding up of a company limited by shares cannot prove in the winding up for damages designed to indemnify him for loss sustained in subscribing share capital to the company. The member's only title to such damages would depend on his having sustained loss through a subscription of share capital. If he were to obtain indemnity from the company in respect of that loss he could not logically be regarded as having subscribed the share capital for the subscription of which the company had indemnified him." Accordingly, Tadgell J found that the subscribing shareholders were precluded from proving for damages in the winding up of their respective building societies. 21 An argument had been put in the Appeal Division that in any event s 360(1)(k) of the Companies Code precluded the non-withdrawable subscribing shareholders from proving in competition with other creditors on the basis that their claims were made in their capacity of members. As Tadgell J had held that the Houldsworth principle defeated the shareholders' claim he declined to deal with this submission. He did (at 631) say, however, that: "The submission involves treating claims for damages by shareholders as claims made by them in the capacity of members, a view for which Re Addlestone Linoleum Co., affords support." 22 The case then went to the High Court as Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15. It is necessary to examine closely the basis upon which the High Court affirmed the decision below because of the controversy regarding the ratio of the case. It is convenient to begin this examination by looking at what the High Court considered were the questions raised by the liquidator. The majority (Mason CJ, Deane, Dawson and Toohey JJ) said (at 25) that the questions asked by the liquidator were aimed at determining whether (a) unliquidated damages claimed by non-withdrawable shareholders were provable in the liquidation of the building societies and (b) non-withdrawable shareholders were precluded from rescinding the contracts under which they acquired their shares and whether they were thereby precluded from prosecuting an action for damages against the building societies in relation to the acquisition of the shares. The majority observed (at 25) that the Appeal Division had answered these questions adversely to the shareholders because they "were precluded both from rescinding the contracts under which they acquired shares and from maintaining an action for damages in respect of that acquisition." The majority then identified as the principal reason lying behind the Appeal Division's decision what had been said by Tadgell J in the passage earlier cited. It was this reasoning that was subject to attack by the appellants in the High Court. 23 The majority acknowledged (at 28) that the conclusion reached by Tadgell J was underpinned by two lines of authority. The first (which included cases such as Trevor v Whitworth (1887) 12 App Cas 409 and Ooregum Gold Mining Co of India v Roper [1892] AC 125) stood for the proposition that the dominant principle of the Companies Act 1862 (the first modern companies statute) was that in return for limited liability, share capital could not (except as permitted by a statute) be returned to the shareholder but had to be applied only in the legitimate course of the company's business. The second line of cases, of which Oakes v Turquand (1867) LR 2 HL 325, Stone v City and County Bank, Limited (1877) 3 CPD 282 and Tennent v City of Glasgow Bank (1879) 4 App Cas 615 are instances, established that once a winding up has commenced a shareholder cannot rescind his contract to subscribe for shares because otherwise the rights of innocent third parties (creditors and contributories) would be defeated. 24 The appellants did not challenge the Oakes v Turquand line of cases but nevertheless argued that Houldsworth's case did not preclude them from proving for damages in the winding up. This argument was rejected. The majority said (at 33) that the "critical question" was whether the proposition which in Houldsworth's case had been distilled from the Companies Act 1862 had also been incorporated in the provisions of the Companies Code. That proposition was "that a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the capital of the company": (1993) 179 CLR 15, 33. The majority accepted that this proposition was not true in absolute terms, for the companies legislation itself permitted a return of capital in certain circumstances. At the time s 123 of the Companies Code permitted a reduction in capital with court approval; see now Pt 2J.1 of the Corporations Act. This exception notwithstanding, the majority accepted as correct Tadgell J's application to the Companies Code of the principle enunciated in Houldsworth's case. 25 The majority said that Tadgell J's conclusion (which was that shareholders could not prove for damages) "draws support" from s 360(1)(k) which subordinated claims due to a member in his capacity as a member to claims due to non-members. In that connection they referred to In re Addlestone Linoleum Company stating (at 34) that s 360(1)(k) should be given the same meaning as had been ascribed to s 38(7). The majority then said (at 35): "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 the shares. But, in the present case, the members seek to prove in the liquidation damages which amount to the purchase price of their shares, which is a sum directly related to their shareholdings. 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." 26 There is a footnote to the first sentence that picks up two cases, In re Dale and Plant Limited (1889) 43 Ch D 255 and In re Harlou Pty Ltd (in liq) [1950] VLR 449. The first concerned a proof by a director for arrears of salary. Pursuant to the articles the director was required to hold shares in the company. The liquidator had rejected the proof, basing his decision on s 38(7). Kay J overturned the liquidator's decision, holding that the claim by the director was not "in his character of a member". In the course of explaining the difference between a claim made in that character and a claim by a shareholder in another capacity, Kay J provided the following example (at 258-259): "Suppose a company bought a million of bricks from a man who was a brick-maker. If he happened to be a shareholder, no one could doubt that that circumstance would not prevent him from proving in competition with the other creditors. But suppose that the articles of association contained provisions that no bricks should be bought of any person who was not a shareholder in the company. Is, then, the money paid as the price of the bricks money due to the vendor of them in his character of member? Certainly not. It is not money due to him in his character of member, but money due to him in his character of brick-maker or brick-seller, and the fact that one of the articles provided that the company should not buy of any one who was not a member would not make the price of the bricks money due to him in his character of member, any more than it would be if there were no such article." 27 In In re Harlou Pty Ltd the company had employed a book-keeper requiring him to hold 500 shares, but promising that if he left his employment within six months, the company would find a purchaser for the shares willing to pay not less than par. The book-keeper did leave his employment within six months but the company did not find a purchaser. The book-keeper then sought to prove in the liquidation. The liquidator rejected the proof relying on s 158(g) of the Companies Act 1938 (Vic), which was in the same terms as s 38(7). O'Bryan J found against the liquidator. He said (at 454): "The 500l. due to the appellant is not due to him in his character of a member at all. It is not because he is a shareholder that he is entitled to these damages, but it is because he has made a contract with the company of the character to which I have referred, which contract the company has broken, that he is entitled to damages." 28 There are other cases which have turned on the distinction between a claim by a person who happens to be a member of a company and a claim in his character or capacity of member. The cases include: In re Cinnamond Park and Company Limited [1930] NI 47 (unpaid director's fees), Re Automatic Bread Baking Co Ltd (1939) 40 SR NSW 1 (unpaid director's fees) and Re L B Holliday & Co Ltd [1986] 2 All ER 367 (where it was alleged that an unpaid dividend had been converted to a loan). A particularly strong case is In re W H Eutrope & Sons Pty Ltd (in liq) [1932] VLR 453. That case concerned a two-man company where it had been resolved for income tax purposes to distribute profits by way of remuneration rather than dividends. One of the directors lodged a proof of debt when the company went into liquidation. Mann J allowed the proof and said (at 459) that it was not within the power of the court to turn a resolution fixing remuneration into a resolution declaring a dividend. 29 Returning to Webb Distributors, the following two points can be taken from the judgment of the majority. First, conformably with earlier authority, the High Court accepted that a subscriber for shares cannot sue the company for damages for the misrepresentation which induced his subscription while he remains a shareholder. The reason is that one of the terms of his statutory contract with the company is that the company's property shall only be used for the purpose of achieving its objects and those objects do not include payment of compensation to defrauded subscribers: see also Pennington's Company Law 6th ed (1992) at 277. Second, to the extent that a member has a claim against the company in his capacity as a member (and a claim in restitution for the return of share capital is such a claim) that claim must be deferred to the claims of creditors. On the other hand, if the condition of membership is irrelevant, then the member's claim will stand on an equal footing with other claims against the company. 30 There is a possible ambiguity with the majority ruling. The High Court accepted (an acceptance which on any view must be correct) that a shareholder who has not rescinded his subscription contract has no claim against the company. Once that conclusion is reached then it seems clear enough that one simply does not get to s 563A. That provision is only concerned with provable claims. That is the view that had been taken in the earlier cases. See eg In re Addlestone Linoleum Company (1887) 37 Ch D 191, 205 per Cotton LJ; 206 per Lindley LJ; State of Victoria v Hodgson [1992] 2 VR 613, 631 per Tadgell J. Indeed, in Webb Distributors itself McHugh J (who was in dissent on another aspect) made the point quite clearly when he said (at 40): "In any event, even if this Court refused to follow Houldsworth, the provisions of s 360(1)(k) would prevent a shareholder from proving 'a debt' based on the common law or, in the absence of a contrary intention, a State statute." The potential for ambiguity arises from the statement by the majority (at 35) that the claim of a defrauded shareholder "falls within the area which s. 360(1)(k) seeks to regulate". 31 Section 360(1)(k) would only "regulate" (to adopt the High Court's term) a claim which exists at the date of liquidation, being the point at which every provable claim must exist. But, at the risk of being repetitious, once Houldsworth's case was applied, a defrauded shareholder who had not rescinded his contract to take shares had no claim against the building societies. 32 There are three ways one might read the High Court's observation in a manner which is consistent with its own holding regarding the applicability of Houldsworth's principle. The first is that s 563A is one of the provisions which "regulates" claims by members qua members by establishing, along with other provisions, the principle that the claim is neither maintainable against the company as a going concern nor provable in a winding up. The second is that the discussion about s 360(1)(k) is conditional (the condition being that Houldsworth'scase did not apply and the shareholder had a claim in damages), which is the way Kay J seems to have approached the matter in In re Addlestone Linoleum Company. It is clear that this is how McHugh J understood the issue. Another way to read what the High Court said is to confine it to claims by defrauded shareholders who had renounced their shares before the liquidation of the building societies. That is to say, s 360(1)(k) would subordinate their claims for restitution. 33 There is another reading. In Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCAFC 265 the Full Court said (at [39] and [43]) that according to the High Court s 563A "modifies the rule [in Houldsworth's case]" by permitting a proof for damages by "[a shareholder] whose rights were postponed to the rights of creditors." That is, on this view, dependent upon the type of claim being put forward, a claim which is incapable of being maintained against a company while it is a going concern - because the shareholder has no cause of action - is revived on and may be proved in its liquidation, provided the proof is not in competition with other creditors. There are, of course, several difficulties with this approach. For one thing s 563A cannot "modify" Houldsworth's case. Section 38(7) of the 1862 CompaniesAct, which is the forerunner of s 563A, is one of the provisions that produced the rule in Houldsworth's case. Second, the approach is directly inconsistent with cases such as In re Addlestone Linoleum Company and State of Victoria v Hodgson, the reasoning in which was approved by the High Court in Webb Distributors. Finally, the result of the approach may be capricious. It would give to a member of a company that is being wound up the ability to recover his subscription money while denying the same ability to a member of a company that is a going concern. And the latter member could not advance his position by forcing a winding up because the approach carries with it the implicit assumption that the defrauded member is not a creditor before liquidation and therefore has no standing to petition for a winding up. Fortunately, the correctness of the Full Court's reasoning on these and other aspects can await another day. 34 At the commencement of these reasons I noted that there is a controversy regarding the effect of Webb Distributors. There the question raised by the liquidator was concerned only with the effect of Houldsworth's case on claims by subscribing shareholders. It will by now be apparent that this appeal deals only with the position of on-market purchasers of shares. The appellant says, at one point with the vigorous support of the administrators, that the ratio of Webb Distributors covers them as well. In support of its argument it relies upon the dictum of Gzell J in Johnston v McGrath [2005] NSWSC 1183. 35 In Johnston v McGrath the plaintiff alleged that he had been induced by misleading conduct to purchase shares in HIH Insurance Ltd. He sought to prove in its liquidation for the damage he had allegedly suffered. On appeal from the liquidator's rejection of his proof of debt, Gzell J found that the plaintiff had not relied on any allegedly misleading statements when deciding to purchase the shares and so he dismissed the appeal. The judge went on, however, to express the obiter opinion that, in any event, the claim the subject of the proof would have been subordinated pursuant to s 563A. He found that that section applied to claims by defrauded transferee shareholders. He said that Houldsworth's case and In re Addlestone Linoleum Company apply equally to allottees and transferees as do the principles in cases such as Oakes v Turquand and Tennent v City of Glasgow Bank. More importantly, he said that the holding in Webb Distributors itself covered transferee shareholders and so he was bound to apply it to them. 36 There are formidable difficulties in the way of accepting this view. The difficulties arise, first, from fact that the only issue before the High Court in Webb Distributors was whether subscribing shareholders could prove for damages in deceit or for misrepresentation. The argument of counsel in the case was also confined to claims by subscribing, not transferee, shareholders. The submissions of counsel are not available. But the nature of the arguments can be gathered from the summary in the Commonwealth Law Reports: (1993) 179 CLR 15, 18-23. That summary indicates that one submission put by the shareholders against both the application of Houldsworth's case and s 360(1)(k) was that an estoppel prevented the liquidator from relying upon them. For the creditors it was said that the cases upon which the shareholders placed reliance did not concern subscribers, it being conceded that the position would be different if the court had been dealing with transferees. 37 The distinction between the two types of potential claimants was not lost on the majority. Lest there be any doubt about the matter they said as regards s 360(1)(k) that the section would not "prevent claims by members for damages flowing from a breach of a contract separate from the contract to subscribe for their shares": (1993) 179 CLR 15, 35 (emphasis added). This is a clear indication by the majority that they were confining their ruling to the position of subscribing shareholders. 38 This is not the only problem with the argument. It finds no support in Houldsworth, Oakes v Turquand and In re Addlestone Linoleum Company. I propose to do no more than refer to the relevant passages which, to my mind, support the opposite conclusion. The passages are: Houldsworth v City of Glasgow Bank [1885] App Cas 317, 325 per Earl Cairns LC, 329-330 per Lord Selborne, 333-334 per Lord Hatherley; In re Addlestone Linoleum Company (1887) 37 Ch D 191, 204 per Cotton LJ, 206 per Lindley LJ, 206 per Lopes LJ. Reference might also be made to State of Victoria v Hodgson [1992] 2 VR 613, 625 per Tadgell J, a judge well-known for his expertise in company law. 39 Next there are the textbooks. All of the leading company textbooks (many were cited by Tadgell J in State of Victoria v Hodgson [1992] 2 VR 613, 625) refer to the Houldsworth principle and treat it as being confined to subscribing shareholders. 40 Last but not least the appellant's argument is contrary to authority. Soden v British and Commonwealth Holdings Plc [1995] 1 BCLC 686 involved a proof for damages for misrepresentation inducing an on-market purchase of shares. Robert Walker J considered that both In re Addlestone Linoleum Company and Webb Distributors were concerned only with original members. Indeed, in admitting the plaintiff's proof Robert Walker J said (at 699) that he was "follow[ing] what [he understood] to be the principle stated by the majority of the High Court in the Webb Distributors case: the wrong of which [the plaintiffs] complain is separate from any transaction by which any original holder took up shares and so became a member of the company." The Court of Appeal was of a like view: see Soden v British & Commonwealth Holdings Plc [1998] AC 298. Peter Gibson LJ (delivering the judgment of the Court) said (at 314): "The Webb Distributors case is therefore of high persuasive authority for the proposition that damages in tort for misrepresentation by a company as to the nature of its shares, which induces a contract to subscribe for shares in the company, come within section 74(2)(f)." There was no suggestion that the case also covers the position of transferee shareholders, as in the case before the Court of Appeal. In the House of Lords, Lord Browne-Wilkinson (with whom Lords Lloyd, Steyn, Hoffmann and Hope agreed) said (at 326) in relation to Webb Distributors: "The High Court held that the claim [of non-withdrawable shareholders] was excluded by the Houldsworth principle and held that the proposition deducible from that case was that a shareholder may not directly or indirectly receive back any part of his or her contribution to the capital save with the approval of the court. The High Court further relied on the Addlestone decision and section 360(1) but carefully delimited its application to cases of contracts to subscribe for shares. They held … that the claim in that case 'falls within the area which section 360(1)(k) seeks to regulate: the protection of creditors by maintaining the capital of the company.' It is therefore quite clear that both the decision and the reasoning of the High Court were dependent upon the same factors as those in the Addlestone case, i.e. the protection of creditors from indirect reductions of capital. Those are factors relevant to cases of subscription for shares issued by the company but wholly irrelevant to purchases from third parties of already issued shares." 41 Moving to Australia, the trial judge here took the view that in Webb Distributors the majority "were addressing the principle of whether a member could claim damages against the building society as a consequence of breach of a contract between the member and the building society": Sons of Gwalia Ltd (admin apptd) v Margaretic (2005) 55 ACSR 365, 376. I also subscribed to that view in Re Media World Communications Ltd (admin apptd) (2005) 52 ACSR 346 and Cadence Asset Management Pty Ltd v Concept Sports Limited (2005) 55 ACSR 145. To be fair, in each of my cases the contrary view was not seriously argued, if it was argued at all. 42 Having given the matter a good deal of consideration I have reached the firm conclusion that the principle in Webb Distributors is confined to subscribing shareholders. I can find nothing said in that or in any other decision that lends support to the contrary view. 43 For what it is worth, and it is probably not worth very much, the position I take on this point is the same as that taken by all counsel who appeared in Webb Distributors. Following the ruling by the High Court, the parties returned to the Supreme Court with a further set of questions proposed by the liquidator which in the event were resolved by consent but had been designed to determine whether the claims by transferee shareholders were barred from proof by s 82(2) of the Bankruptcy Act 1966 (Cth). If the appellant's argument is correct those questions would not have arisen. 44 This brings me to the real point on the appeal, namely whether Margaretic's claim is brought "in [his] capacity as a member" of SOG. When considering this question it is helpful to refer to the principle which goes back to the earliest days of limited liability companies requiring the maintenance of a company's capital. It is helpful to return to this principle because, as the High Court pointed out, in its original form (as s 38(7) of the 1862 Companies Act) the provision was one of a number of provisions in that Act upon which the principle was based. 45 In Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 Kitto J (in dissent on other aspects) said (at 413): "[T]he fundamental principle of company law [is] that the whole of the subscribed capital of a company … unless diminished by expenditure upon the company's objects (or … by means sanctioned by statute) shall remain available for the discharge of its liabilities: Trevor v Whitworth; In re Walters' Deed of Guarantee. One aspect of this principle is that every transaction between a company (while it is a going concern) and any of its members, by means of which any of the money paid to the company in respect of the member's shares is returned to him, is prohibited, unless the court has sanctioned the transaction". (footnotes omitted) This passage was cited with approval by Dixon CJ, McTiernan and Taylor JJ in Australasian Oil Exploration Limited v Lachberg (1958) 101 CLR 119, 132. The decision in that case was that the transaction before the court was an infringement of the principle and void because "under the scheme envisaged by the agreement the benefits given to the shareholders would be received, indirectly, through an intermediary." 46 The principal passages in the speeches in Trevor v Whitworth which Kitto J probably had in mind include the following. Lord Herschell (at 419) after citing Cotton LJ in Guinness v Land Corporation of Ireland (1882) 22 Ch D 349, 375, adopted the test that: "… whatever has been paid by a member cannot be returned to him. In my opinion … the capital cannot be diverted from the objects of the society. It is, of course, liable to be spent or lost in carrying on the business of the company, but no part of it can be returned to the member". Lord Watson said (at 423): "… the effect of [the] statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the Court has sanctioned the transaction." Finally Lord MacNaghten said (at 432-433) in a passage often cited: "… the broader question whether it is competent for a limited company under any circumstances to invest any portion of its capital in the purchase of a share of its own capital stock, or to return any portion of its capital to any shareholder … is contrary to the plain intention of the Act of 1862". The effect of these statements is that if a transaction can be seen to involve a return of capital in whatever form, under whatever name, and whether direct or indirect, to the shareholder, the transaction is void. Moreover, the use of the word "return" suggests the existence of a relationship between the member and the company underlying the transaction. 47 Now, it must be accepted that the effect of s 563A is wider than the rule in Trevor v Whitworth. It is wider because the rule that capital may not be returned to shareholders does not preclude the payment by a company of a dividend (which can only be paid out of profits) or the payment of a share of profits. Nonetheless, s 563A is designed to protect creditors in much the same way as the rule in Trevor v Whitworth by ensuring that the subscribed capital is there for the benefit of the creditors. 48 Needless to say, Margaretic's claim is not to be determined by reference to the rule requiring the maintenance of capital or, if there is not enough money to go around, according to some ill-defined notion that members' claims must come last. Margaretic's claim must be determined by reference to the statutory criteria that has been incorporated into the deed. Thus the question is: Is Margaretic's claim brought in his "capacity as a member"? 49 The answer to the question requires a reliable test. In Soden one finds several tests. At first instance Robert Walker J articulated the so-called "corporate nexus" test. He said ([1995] 1 BCLC 686, 698-699): "Ultimately the point comes down to whether a claim made by an open-market purchaser of shares in a company (as opposed to an original subscriber or allottee), the claim being based on negligent misrepresentation by the company as to its assets, is sufficiently closely related to the corporate nexus as to be characteristically a member's claim. Addlestone and Webb Distributors were both claims by original members. The claimants were complaining of the very transaction under which, by becoming members, they had contributed part of the company's capital … In this case, by contrast, [British and Commonwealth Holdings] was never an original member in respect of any shares in Atlantic … [British and Commonwealth Holdings] nor [Barclays de Zoete Wedd Ltd] seeks to withdraw from Atlantic, directly or indirectly, any capital which either has ever contributed." In the Court of Appeal Peter Gibson LJ said ([1998] AC 298, 316): "We doubt if it is right to describe a member claiming damages for misrepresentation or breach of a contractual warranty when induced to subscribe for shares as being entitled to the damages in his character as a member as his claim does not arise from a right which is part of the bundle of rights and obligations which make up his shares, though we acknowledge it has a relation to what the judge called the corporate nexus. But in our judgment when a member claims damages for misrepresentation inducing him to purchase shares in the market, the damages are not due to him in his character of a member. We repeat the words of the majority of the High Court of Australia in the Webb Distributors case that the statutory provision 'will not prevent claims by members for damages flowing from a breach of contract separate from the contract to subscribe for the shares.' By parity of reasoning a claim for damages in tort for misrepresentation inducing a contract other than one to subscribe for the shares will also not be prevented by the section." The House of Lords also stated a test, but one that was different from those below. Lord Browne-Wilkinson said (at 323): "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 constituted by section 14(1) of the Companies Act 1985. … To the bundle of rights and liabilities created by the memorandum and articles of the company must be added those rights and obligations of members conferred and imposed on members by the Companies Acts … as the 'statutory contract'. … In my judgment, in the absence of any contrary indication sums due to a member 'in his character of a member' are only those sums the right to which is based by way of cause of action on the statutory contract." Expressed in this way, a claim by a subscribing shareholder for the return of his capital appears not to be caught. But this is not so. Lord Browne-Wilkinson explained (at 325) that: "… the principle must apply equally to negative claims; claims based upon having paid money to the company under the statutory contract which the member says that he is entitled to have refunded by way of compensation for misrepresentation or breach of contract. These, too, are claims necessarily made in his character as a member." On the other hand, claims by transferee shareholders are not caught. In those claims membership is not the foundation of the cause of action: Soden v British & Commonwealth Holdings Plc [1998] AC 298, 324. 50 Lord Browne-Wilkinson's test is consistent with the decision in Webb Distributors. It confirms the majority view (if confirmation be necessary) that s 360(1)(k) "will not prevent claims by members for damages flowing from a breach of contract separate from the contract to subscribe for the shares": (1993) 179 CLR 15, 35. I would add a fortiori in relation to a claim for misrepresentation inducing the purchase of shares. The test also provides an analytical foundation for cases such as In re Cinnamond Park and Company, Limited [1930] NI 47; In re W H Eutrope & Sons Pty Ltd (in liq) [1932] VLR 453; Re Automatic Bread Baking Co Ltd (1939) 40 SR NSW 1; In re Harlou Pty Ltd (in liq) [1950] VLR 449 and Re L B Holliday & Co Ltd [1986] 2 All ER 367. In each of these cases a claim based on a contract independent of the statutory contract was admitted to proof, although it was a claim brought by a shareholder. 51 Having come to the conclusion that Webb Distributors does not apply to claims by on-market purchasers, I would in relation to s 563A adopt the test articulated by the House of Lords for the equivalent section in England. On that basis it is clear that if Margaretic has a claim against SOG it is not brought in his "capacity as a member" and so is not caught by s 563A. 52 In these circumstances it is not necessary to deal with the argument that even if he were to be admitted to proof, Margaretic was not a creditor of SOG for voting purposes. 53 It is, however, necessary to deal with costs. In a case such as this it may be appropriate for the costs of ING Investment and Margaretic to be borne by SOG. That is the usual course in cases of this kind. I am, however, concerned about SOG's costs and whether they too should be borne by the fund available to the administrators. In the view that I take, which is only a tentative view, SOG should have been a submitting party and not an appellant taking an active role on the appeal. I would like to have written submissions from the administrators on this point. 54 I would therefore order that each appeal be dismissed, but reserving the question of costs. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

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