High Court - Jurisdiction - Exclusive jurisdiction - Suit by a State against the Commonwealth - Suit by State Bank - Whether the State - Judiciary Act 1903 (Cth), s.38(d).

Constitutional Law (Cth) - Relationship between Commonwealth and States - Whether State Bank equivalent to State in action against Commonwealth - State Bank Act 1981 (N.S.W.).

CAUSE removed pursuant to s. 40(1) of the Judiciary Act 1903 (Cth) and APPEAL from the Supreme Court of New South Wales.

GIBBS C.J., MASON, WILSON, BRENNAN, DEANE and DAWSON JJ. The appellant instituted proceedings in the Supreme Court of New South Wales for the recovery of a substantial sum of money allegedly due under an agreement with the respondent. The respondent then sought a declaration that the proceedings were within the exclusive jurisdiction of this Court by reason of s.38(d) of the Judiciary Act 1903 (Cth), as amended. Clarke J. made the declaration. An appeal was pending in the New South Wales Court of Appeal when this Court, on the application of the Attorney-General for New South Wales in accordance with s.40(1) of the Judiciary Act, removed the cause.

2. Section 38 reads as follows:

"38. Subject to section 44, the jurisdiction of

jurisdiction of the several Courts of the States in

(b) suits between States, or between persons suing

or being sued on behalf of different States,

or between a State and a person suing or being

sued on behalf of another State;

(c) suits by the Commonwealth, or any person suing

on behalf of the Commonwealth, against a

State, or any person being sued on behalf of a

State;

(d) suits by a State, or any person suing on behalf

of a State, against the Commonwealth or any

person being sued on behalf of the Commonwealth;

(e) matters in which a writ of mandamus or

prohibition is sought against an officer of

the Commonwealth or a federal court".

It is not contested by the appellant that the respondent satisfies the description of "the Commonwealth or any person being sued on behalf of the Commonwealth". In the face of the decision of this Court in Inglis v. Commonwealth Trading Bank of Australia [1969] HCA 44; (1969) 119 CLR 334 it would be difficult to mount such a contest. The sole point at issue is whether the appellant is "a State, or any person suing on behalf of a State".

3. It is convenient to begin with an examination of the decision in Inglis. There it was held by majority that the Commonwealth Trading Bank is an instrument by which, together with the Commonwealth Savings Bank and the Commonwealth Development Bank, the Commonwealth participates in the business of banking, and when it is sued as the emanation by which the Commonwealth operates in the field of general banking the matter is within s.75(iii) of the Constitution. The reasons for decision of the majority were delivered by Kitto J., with whom Barwick C.J. and Windeyer J. agreed. The precise issue was whether the Bank, in an action arising out of the conduct of its general banking business was "the Commonwealth, or a person ... being sued on behalf of the Commonwealth". Kitto J. clarified that issue, at pp.337-338:

"The decisive question is not whether the

activities and functions with which the respondent

is endowed are traditionally governmental in

character, though their possession of a traditional

or generally accepted governmental character may

well help in the ascertainment of the legislative

intention. The question is rather what intention

appears from the provisions relating to the

respondent in the relevant statute: is it, on the

one hand, an intention that the Commonwealth shall

operate in a particular field through a corporation

created for the purpose; or is it, on the other

hand, an intention to put into the field a

corporation to perform its functions independently

of the Commonwealth, that is to say otherwise than

as a Commonwealth instrument, so that the concept

of a Commonwealth activity cannot realistically be

applied to that which the corporation does?"

The features of the legislation which led his Honour to his conclusion may be briefly stated. First, the absence of corporators was significant. In this respect Kitto J. agreed with the observation of Rich and Williams JJ. in Bank of N.S.W. v. The Commonwealth ("the Bank Case") [1948] HCA 7; (1948) 76 CLR 1, at p 274, that that circumstance pointed to a conclusion that the intention of the Parliament was to give the Commonwealth "the outward form of a corporation as a convenient means of carrying on a Commonwealth activity". Second, it was the duty of the Board of the Banking Corporation in exercising its powers of control over the affairs of the Bank to ensure that its policy was directed to the greatest advantage of the people of Australia and had due regard to the stability and balanced development of the Australian economy. Third, the Board did not have the final say as to policy. It was required to inform the Government from time to time of its policy and in the event of a difference of opinion between the Government and the Board as to whether the policy conformed to the statutory direction, the Commonwealth Treasurer and the Board were to endeavour to reach agreement and failing agreement the Governor-General, acting with the advice of the Federal Executive Council, could by order determine the policy of the Bank. Fourth, the members of the Board, with the exception of the Secretary to the Department of the Treasury, were appointed by the Governor-General and were remunerated as the Governor-General determined. Fifth, the net profits of the Trading Bank, determined after payment of income tax, were either to go back into the system or to be paid to the Commonwealth. Finally, a point that seemed to his Honour to provide a strong indication "of the substantially government character of the Trading Bank" was that the accounts and financial records of the Bank were subject to inspection and audit by the Auditor-General and report by him to the Treasurer. Taking all these considerations into account, Kitto J. concluded that the Trading Bank was being sued as the instrument or emanation by which the Commonwealth operated in the field of general banking and was therefore sued "on behalf of the Commonwealth" within the meaning of that expression in s.75(iii) of the Constitution. It may be noted that Barwick C.J., without finding it necessary to decide the point, expressed a personal preference for regarding the matter as one in which the Commonwealth itself was a party (p.336). In Maguire v. Simpson [1977] HCA 63; (1977) 139 CLR 362 Mason J., at pp 397-398, likewise preferred the wider view of the word "Commonwealth" and Jacobs J., at pp 405-406, and Murphy J., at p.407, seem also to have been of that opinion. See also Crouch v. Commissioner for Railways (Q.) [1985] HCA 69; (1985) 59 ALJR 831, at pp 834, 839; [1985] HCA 69; 62 ALR 1, at pp 6-7, 14-15.

4. The legislative intention with respect to the status of the appellant is to be found in the provisions of the State Bank Act 1981 (N.S.W.), as amended, ("the Act"). It is an Act, inter alia, to constitute the State Bank of New South Wales ("the Bank") and to define its functions. Section 7 declares that "there is hereby constituted a corporation with the corporate name 'State Bank of New South Wales'". There are no corporators. Section 8 of the Act constitutes a State Bank Board ("the Board") consisting of seven directors. The directors are appointed by the Governor but one of them shall have been elected by employees of the Bank and shall be a part-time director. Of the remaining six appointees, two are to be full-time directors and four part-time directors (Sched.1 cl.2(1)). The full-time directors shall be appointed by the Governor to be the managing director and deputy managing director respectively (Sched.1 cl.5). The Governor will also appoint one of the non-elected part-time directors to be the chairman of the Board (Sched.1 cl.4).

5. The term of office of a full-time director is such period not exceeding seven years as may be specified in the instrument of appointment. For an appointed part-time director the period may not exceed five years, while for an elected part-time director the term is three years (Sched.1 cl.7). The Governor may remove a director only if he is satisfied that the director is incapable or incompetent or has misconducted himself (Sched.1 cl.11(3)). He may retire a full-time director after he attains the age of sixty years (Sched.1 cl.11(2)). Ordinarily, a full-time director and an elected director will be deemed to have vacated office on attaining the age of sixty-five years and a part-time director on attaining the age of seventy years (Sched.1 cl.11(1)(g)).

6. The Board is the governing body of the Bank and, subject to the Act, has power to determine the policy of the Bank in relation to any matter, and to control the affairs of the Bank (s.9(1) and (2)). It is the duty of the Board, within the limits of its powers, to ensure that the policy of the Bank is directed to the greatest advantage of the people of New South Wales and has due regard to the stability and balanced development of the economy of the State (s.9(3)). Part III (ss.13-35) outlines the general banking functions of the Bank. It is invested with all such powers as are necessary for the purpose of carrying on general banking business (s.13(3)). Section 15 defines the liquidity level to which the Bank must conform. The payment of all moneys due by the Bank in respect of its general banking business is guaranteed by the Government of New South Wales ("the State Government") and the Consolidated Revenue Fund is appropriated accordingly (s.16). The Bank may borrow money from time to time but only with the consent of the Treasurer (s.22). The due repayment of money borrowed and due payment of interest and other charges relating thereto are guaranteed by the State Government, and the Consolidated Revenue Fund is appropriated accordingly (s.25). Contract notes and transfers in relation to debentures and inscribed stock issued by the Bank under the Act are exempt from stamp duty (s.27). A proportion of the net profits derived by the Bank from its general banking business, determined in accordance with the formula set out in s.30 of the Act, is payable each year by the Bank to the Treasurer for payment into the Consolidated Revenue Fund. The Court was informed by counsel in the course of argument that the proportion of net profits so payable during the last year amounted to 73 per cent. Furthermore, the Treasurer may require the Bank to make advance payments of its liability in this regard at such times and in such amounts as he determines (s.30(3)). The remainder of the Bank's profits in any year is to be credited to a Reserve Fund of the Bank for meeting any loss or deficiency in connection with its general banking business and any deficiency in that Fund at the end of a financial year shall be made good from the Consolidated Revenue Fund which is appropriated accordingly (s.30(7) and (8)). The Bank may make use of the services of any employees of a government department or statutory body provided that it has the approval of the department or body concerned and of the relevant Minister (s.35).

7. Part IV of the Act (ss.36-60) deals with the agency business of the Bank. This business, which is to be carried on separately and distinctly from the general banking business of the Bank (s.39), derives from the exercise of functions which the Governor may, by order, appoint the Bank to undertake on behalf of the State Government or any body constituted by or under any Act (s.37). The Bank is fully indemnified by the State Government in respect of any act done by it and of any losses, costs or damages incurred by it in the bona fide exercise of the functions conferred or imposed upon it in respect of its agency business (s.48; see also s.26). The Part makes specific provisions with respect to a number of existing agencies, namely, the Rural Industries Agency, the Advances to Settlers Agency, the Irrigation Agency, the Rural Assistance Agency and the Special Industries Agency.

8. The Bank is a statutory body for the purposes of the Public Finance and Audit Act 1983 (N.S.W.). It is required by that Act to keep proper accounts and records and they are subject to inspection, audit and report by the Auditor-General (ss.39-43). The Bank is also required to provide an annual report to the Minister for tabling in each House of the Parliament (the Act, s.71).

9. Finally, the Bank may make by-laws, not inconsistent with the Act, for or with respect to, inter alia, (a) the management of the Bank and the conduct of its business and (b) any function conferred or imposed on the Bank (the Act, s.77(1)). A by-law must be submitted for the consideration and approval of the Governor (s.77(2)) and may impose a penalty not exceeding $200 for any breach thereof (s.77(3)).

10. It is common ground between the parties that the words "the Commonwealth, or a person suing or being sued on behalf of the Commonwealth" in s.75(iii) of the Constitution have the same meaning as the similar words in s.38 of the Judiciary Act. It follows that the observations with respect to the meaning of the constitutional phrase that are to be found in the Bank Case, in Inglis and more recently in Crouch provide relevant guidance to the construction of the Judiciary Act, including the related phrase "a State, or any person suing on behalf of a State". Counsel for the appellant, Mr Hulme, argued that to satisfy the description the entity must be one of which it can be said that in the matter out of which the action arises either (a) it was or acted as an organic part of that broad structure of executive government by which the affairs of the State are governed, as distinct from it being merely a participant, albeit a participant having a public character, in such affairs or (b) it was or acted as an organic part of that broad structure of executive government by which what are properly to be regarded as governmental activities of the State are carried on. Mr Hulme relied heavily on the statement by Dixon J. in the Bank Case, at p.358, to the effect that the application of s.75(iii) to a claim against the Commonwealth Bank must depend on the relation found to exist between that corporation and the executive government of the Commonwealth. This statement became the launching pad for a submission that ultimate control of the corporation by the executive government was of fundamental importance, save in those rare cases such as the Ombudsman and the Auditor-General where identification with the structure of government and freedom from government control went hand in hand. This submission provided the basis for distinguishing the decision in Inglis because, notwithstanding the presence of features common to both the appellant and the Commonwealth Trading Bank the latter was ultimately subject to executive control in the field of general policy while the appellant was not. The question of control is obviously an issue of central importance to a resolution of the present case. But we think that Mr Hulme places rather too much emphasis on the statement by Dixon J. It led him to draw more support than is warranted from cases dealing with Crown immunity. The constitutional conception is a broader one, as Dixon J. himself recognizes later in his judgment when his Honour says that in s.75(iii) the framers of the Constitution were concerned with

"amenability to the jurisdiction of persons in whom

causes of action were vested, or against whom

causes of action lay, but in their official

capacity only and as agencies or emanations of the

Commonwealth" (p.363).

His Honour had earlier (at p.361) referred to the statement of Griffith C.J. in Heiner v. Scott [1914] HCA 82; (1914) 19 CLR 381, at p 393, referring to the Commonwealth Bank Act 1911 (Cth), that

"Probably the true effect of the Act is a

declaration that the Commonwealth may itself carry

on the business of banking under the name of the

'Commonwealth Bank of Australia'",

and to a statement of Isaacs J. in the same case referring to the Commonwealth in a broader sense than the executive government. Inglis clearly supports an approach that would not require the corporation to be tied narrowly to the executive government. At pp.335-336 Barwick C.J. asserted that the fundamental purpose of s.75(iii)

"was to ensure that the Commonwealth either in its

form as established under the Constitution, or in

any form with which it may lawfully clothe itself

should not be compelled to pursue its rights in the

courts of the States. ... If in reality the

Commonwealth is before the Court in the litigation,

no matter of form or of nomenclature can be allowed

to deny the Court jurisdiction to hear and

determine the rights asserted by or against it".

Kitto J. referred with approval to the statement by Dixon J. in the Bank Case (at p.363) that we have cited, saying that Rich, Williams and Starke JJ. were of one mind with Dixon J. (p.336). His Honour proceeded to cite a further sentence from the judgment of Dixon J. in the Bank Case (at p.367) as follows:

"At all events, the purpose of providing a

jurisdiction which might be invoked by or against

the Commonwealth could not, in modern times, be

adequately attained and secured against colourable

evasion, unless it was expressed so as to cover the

enforcement of actionable rights and liabilities of

officers and agencies in their official and

governmental capacity, when in substance they

formed part of or represented the Commonwealth".

11. It is against this broad concept of s.75(iii) of the Constitution, and hence of s.38 of the Judiciary Act, that the legal character of the appellant is to be evaluated. First, there is the absence of corporators, a point that Kitto J. found to be significant in Inglis. The legislature brings into being a corporation with the corporate name of "State Bank of New South Wales". Of course, the absence of corporators is not determinative of itself but it is at least consistent with the constitution of a corporation as a convenient means of the State participating in the business of general banking.

12. Next, the uninhibited power to appoint six of the seven directors of the Board resides in the Governor. It is true that there is no general power of removal of a director without cause and hence removal is not available as a means of resolving a difference of opinion on policy between the Board and the State Government. Nevertheless, some measure of control must be seen to arise from the power of appointment of the directors. In Superannuation Fund Investment Trust v. Commissioner of Stamps (S.A.) [1979] HCA 34; (1979) 145 CLR 330 one of the questions before the court was whether the Trust was the Crown in right of the Commonwealth. The three members of the Trust were appointed by the Governor-General and were subject to removal before the expiration of their term of office only for misbehaviour or incapacity. At p.354, Mason J., with whom Barwick C.J. agreed in this respect, in coming to an affirmative conclusion, said:

"Although the Trust is a separate corporate entity

the control which the Crown has over its membership

and its activities shows that it is an alter ego of

the Crown. Thus its members are appointed and

liable to removal by the Executive Government, it

is bound to furnish information to the Treasurer at

his request and it must submit its annual report

and financial statements to the Treasurer after

they have been audited by the Auditor-General. The

Trust, in determining the investment policy which

it will pursue within the prescribed investments

which it is authorized to make (see s.42(2) and

(4)), is free of directions by the Treasurer and

the Government, but this in itself does not show

that it has been established as a body independent

of the Crown".

Stephen and Aickin JJ. each came to the conclusion that the Trust was not to be identified with the Crown, although Stephen J. acknowledged that some measure of control was to be found in the power of appointment (p.348). Aickin J., at p.366, expressed the view that the mere power of appointment did not constitute control of the Trust or of its function, "there being no power to dismiss except for misconduct or incapacity". However, if the result in this case was inconclusive, a majority of the court in State Superannuation Board v. Trade Practices Commission [1982] HCA 72; (1982) 150 CLR 282 observed that there were significant differences between the Superannuation Board and the Trust in the earlier case. At p.308, in a joint judgment Mason, Murphy and Deane JJ. said:

"First, the appellant has greater autonomy and

independence than the Trust. Three of the

appellant's six members are elected by

contributors; other members are to include an

actuary and the Government Statist. The

composition and mode of election of the membership

of the appellant emphasize its autonomy and equip

it to make independent decisions respecting the

provision of benefits and investment of funds".

The other members of the Court did not find it necessary to discuss the point. Again, in Inglis, Kitto J. noted that all the members of the Board were appointed by the Governor-General.

13. Next, the public character of the functions of the appellant in its general banking business is emphasized by the declared duty of the Board to ensure that the policy of the Bank is directed to the greatest advantage of the people of New South Wales and has due regard to the stability and balanced development of the economy of the State. These objectives coincide with the responsibility of the State Government.

14. The financial provisions of the Act are of great significance. First, the payment of all moneys due by the Bank in respect of its general banking business is guaranteed by the State Government. Second, the Bank may borrow money and issue debentures and inscribe stock only with the consent of the Treasurer and due repayment of such borrowed money together with interest and other charges is guaranteed by the State Government. In each case, the Consolidated Revenue Fund is appropriated accordingly. The greater part of the net profits derived by the Bank from its general banking business go into the Consolidated Revenue Fund with the balance being credited to a Reserve Fund for meeting any loss or deficiency in connection with the general banking business. If there is any deficiency in the Reserve Fund at the end of a financial year then such deficiency will be made good from the Consolidated Revenue Fund. These provisions demonstrate a very close relation between the results of the general banking business of the Bank and the financial resources of the State such as one would expect if the corporation was chosen by the legislature to be the means by which the State carried on the business of general banking. The obligations of the Bank with respect to the preparation of an annual report and proper accounts and the role of the Auditor-General, while not conclusive in themselves, are nevertheless wholly consistent with a conclusion opposed to the appellant's submission. Finally, the power to make by-laws invests the Bank with a regulatory role which, although it may be a modest one, is suggestive of governmental activity.

15. The Bank undertakes a substantial amount of agency work, but the cause of action on which the Bank sues is unrelated to the performance of that work. As the question for determination is whether the Bank is suing as an emanation by which the State operates in the field of general banking, it is better to put aside consideration of the agency work functions. Those functions do not necessarily affect the character of the general banking business. At all events they do not tend to show that the Bank is not an emanation of the State.

16. There remains the point of contrast in terms of control between Inglis and the present case. We do not find it a consideration of sufficient weight to withstand the conclusion to which the other considerations tend. It will be recalled that in Inglis there was no power in the government to interfere with the Board's day-to-day control of its banking business. The legislation gave the Governor-General power to resolve a difference of opinion between the Treasurer and the Board only with respect to the question whether the policy of the Board was directed to the best advantage of the people of Australia and had due regard to the stability and balanced development of the Australian economy. While the Act lays an analogous duty upon the Board there is no comparable overriding power in the Governor. However, the absence of such a power is in our opinion of little significance. The occasion for the exercise of such a power, if it existed, would be rare indeed, the effective feature of the scheme being the imposition of the duty on the Bank's administration.

17. Having regard to all the circumstances, we are satisfied that the State carries on banking through its statutory corporation, the Bank, and that it necessarily follows that the Bank is for this purpose the State of New South Wales. It follows that Clarke J. acted correctly in making the declaration sought by the respondent and the appeal must be dismissed.