Supreme Court of WA|2005-03-30|Before: Mr P, Burt CJ

Willoughby & Ors v Clayton Utz [2005] WASC 47 (30 March 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : WILLOUGHBY & ORS -v- CLAYTON UTZ [2005] WASC 47

Practice and procedure - Application by defendant to dismiss action - Plaintiffs bankrupt when causes of action accrued - Action commenced by plaintiffs in own name during bankruptcy - Subsequent assignment of causes of action to plaintiffs - Effect of assignment - Whether action maintainable by plaintiffs

Rules of the Supreme Court 1971 (WA), O 18, O 21 r 5

Statement of claim so far as it relates to fourth plaintiff struck out

Bride v Peat Marwick Mitchell [1989] WAR 383

Bride v The Australian Bank & Ors, unreported; FCt SCt of WA; Library No 960565; 25 September 1996

Chen v Karandosis [2002] NSWCA 412

Christensen v Scott (1996) 1 NZLR 273

Cia de Seguros Imperio v Heath (REBX) Ltd [2000] EWCA Civ 219; (2001) 1 WLR 112

Cole v Challenge Bank Ltd [2001] FCA 1425

Cummings v Claremont Petroleum & Anor (1995-1986) 185 CLR 124

Daemar v Industrial Commission of New South Wales & Anor [No 2] (1990) 22 NSWLR 178

Dye v Griffin Coal Mining Co Pty Ltd (1998) 19 WAR 431

Edward James Bride as Trustee of the Pinwernying Family Trust v Stewart [1999] WASCA 116

Grant v Eddington [2000] FCA 1550

Harris v Milfull [2002] FCAFC 442

Homestyle Pty Ltd v City of Belmont [1999] WASCA 59

Johnson v Gore Wood & Co (a firm) [2000] UKHL 65; (2001) 2 WLR 72

Morgan v Banning (1999) 20 WAR 474

News Limited v Australian Rugby Football League Limited [1996] FCA 870; (1996) 64 FCR 410

Prudential Assurance Co Ltd v Newman Industries Ltd & Ors [1982] Ch 204

Rogala v Caris Corp Ltd, unreported; SCt of WA (Burt CJ); Library No 5089; 27 September 1983

Scarborough v Klich [2001] NSWCA 436

Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47

Vandervell Trustees Ltd v White [1971] AC 912

Advance Switching Services Pty Ltd v State Bank of New South Wales [2001] FCA 1508

ANZ Banking Group Ltd v Capper [2001] NSWSC 946

Barings plc v Coopers and Lybrand [1997] 1 BCLC 427

BWK Elders (Aust) Pty Ltd v Westgate Wool Co Pty Ltd (No 2) [2002] FCA 87; (2002) ATPR 41-860

Clough & Rogises v Frog (1974) 4 ALR 615

Crackenback Investments Pty Ltd v Wywsik, unreported; SCt of NSW; 1440 2/81; 25 August 1983

Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383

Dwyer v O'Mullen (1887) 13 VR 933

Esplin v Murray [1999] NSWSC 338

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchanges Ltd [1988] FCA 202; (1988) 81 ALR 397

Fried v National Australia Bank Ltd [2001] FCA 907

Heedes v Telstra Corporation Ltd [2001] WASC 297

Hooker Corporation Ltd v Commonwealth of Australia (1986) 65 ACTR 32

John Cooke & Co Pty Ltd v Commonwealth (Skin Wool/Wool Clip Case) (1922) 31 CLR 349

Lideen v Composite Buyers Ltd (1996) 139 ALR 549

Long v Crossley (1879) 13 Ch D 388

March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506

Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1

Noye v Gwilliam [2002] WASC 227

Re Brogden; Billing v Brogden (1888) 38 Ch D 546

Re Trade Practices Commission v Milreis Pty Ltd; Ex parte; Thomson Publications (Australia) Pty Ltd (1978) 18 ALR 17

Shannon v Lee Chun [1912] HCA 52; (1912) 15 CLR 257

Smith Kline & French Laboratories (Aust) Ltd v Department of Community Services (1989) 16 IPR 281

Tildesley v Harper (1878) 10 Ch D 393

1 MASTER NEWNES: I have before me applications by the plaintiffs to amend the originating process and their statement of claim in terms of minutes which have been filed, and an application by the defendant to strike out the action. The proposed amendments to the originating process and the statement of claim include the addition of a claim for breach of fiduciary duty. It was made clear by the second plaintiff, on behalf of the plaintiffs, at the outset of the hearing of the applications that the minute of substituted statement of claim dated 13 January 2005 sets out the claim now sought to be made against the defendant and no reliance was placed on the existing statement of claim, with the result that the latter was not the subject of argument.

2 On the hearing of the application the second plaintiff appeared in person. The other plaintiffs did not appear nor were they represented but, as I understood the position, the other plaintiffs simply relied on the written outline of submissions dated 20 October 2004, prepared and filed by the plaintiffs' then solicitors, and the oral submissions put by the second plaintiff. It seems that they have relied upon the second plaintiff to present oral submissions on their behalf through the many hearings in which they have been involved since 1990.

3 The genesis of the current action goes back to 1990 when the plaintiffs and two companies associated with them, Contractor Services Pty Ltd and Willoughby Investments Pty Ltd (the "family companies"), brought proceedings in the Federal Court against Esanda Finance Limited ("Esanda"), claiming, in essence, that the plaintiffs and the family companies (the "applicants") had been induced to purchase a hotel by misleading and deceptive conduct on the part of Esanda. Judgment in the action was delivered by French J on 18 September 1990. In the result the applicants' claim was dismissed and judgment was entered for Esanda on its cross-claim. On 10 December 1990, sequestration orders were made against the estates of the current first, second and third plaintiffs.

4 The applicants in the Federal Court proceedings sought to appeal against the judgment of French J. By a deed dated 9 February 1991 the Official Trustee in Bankruptcy assigned to the current first, second and third plaintiffs (the "bankrupt plaintiffs") the right to appeal against the judgment and, subject to certain payments to creditors as provided for in the deed, any damages that might be obtained if the appeal were successful.

5 On 25 October 1991 the Full Court of the Federal Court upheld the applicants' appeal, set aside the orders of French J and ordered that the matter be remitted to French J for the determination of final relief under s 87 of the Trade Practices Act 1974 (Cth).

6 The applicants consulted the defendant in about December 1991. The plaintiffs say the defendant was retained to act, among other things, in relation to the determination of final relief in the Federal Court proceedings.

7 In October 1993, the defendant recommended to the plaintiffs and the family companies that they should compromise their claims on terms which were subsequently set out in a Deed of Release and Discharge made between the applicants and Esanda on or about 23 November 1993. Settlement under that deed was effected on or about that date.

8 The bankrupt plaintiffs were discharged from bankruptcy on 16 January 1994. Subsequently, the first plaintiff was declared bankrupt for a second time on 18 August 1997, and the second plaintiff was declared bankrupt for a second time on 25 November 1997. The dates on which they were respectively discharged from that second bankruptcy were not in evidence, although in the ordinary course they would not have been discharged before the effluxion of three years from the date of the filing of their statement of affairs: Bankruptcy Act 1966 (Cth) (the "Act"), s 149.

9 In about September 1998, the bankrupt plaintiffs informed the Official Trustee in Bankruptcy that they intended to issue proceedings against the defendant for negligence in relation to the settlement of the claim against Esanda. In an affidavit in this application the second plaintiff says that late in 1998 and early 1999 the Official Trustee in Bankruptcy indicated to the plaintiffs that it would be in order for the plaintiffs to proceed with an action and that an assignment of the cause of action would "be in order". I might say that there does not appear to be anything to that effect in such of the contemporaneous correspondence as was in evidence on this application.

10 In any event, the bankrupt plaintiffs did not wait for an assignment to be effected. The plaintiffs commenced proceedings against the defendant in the Federal Court on 22 December 1998. The plaintiffs claimed against the defendant damages for breach of contract, negligence, and misleading and deceptive conduct under the Trade Practices Act 1974 (Cth).

11 In early 1999, the solicitors for the Official Trustee notified the solicitors acting for the defendant that the bankrupt plaintiffs had requested an assignment of any rights of action against the defendant in respect of the settlement with Esanda, and invited the defendant to submit any offer they wished to make for any such rights of action those plaintiffs may have.

12 The Official Trustee subsequently accepted an offer of $5100 made by LawCover Pty Ltd, the professional indemnity insurer of the defendant, for the rights of action. A deed made between the Official Trustee and LawCover Pty Ltd dated 14 April 1999 provided that the Official Trustee "hereby transfers and vests the Action and underlying causes of action (apart from causes of action under the Trade Practices Act pleaded in the Action) to [LawCover]". The "Action" was defined to mean the Federal Court proceedings commenced by the plaintiffs on 22 December 1998. I should mention that the cause of action under the Trade Practices Act was not assigned because the Official Trustee took the view that the claim had no prospect of success, the time limited for such a claim having expired before the proceedings were commenced. The Official Trustee expressly consented to that claim being dismissed.

13 On 18 June 1999 the bankrupt plaintiffs filed an application in the Federal Court under s 178 of the Act seeking a review of the Official Trustee's decision to assign the action and the underlying causes of action to LawCover. That application was heard by Nicholson J who, on 10 December 1999, dismissed it. The bankrupt plaintiffs appealed to the Full Federal Court and on 8 June 2000 the appeal was upheld and the application for review under s 178 was remitted Nicholson J for further hearing. Following a further hearing on 20 June 2001, Nicholson J ordered the Official Trustee to assign the action and the underlying causes of action to the bankrupt plaintiffs. The Official Trustee then applied for further directions in relation to the assignment and those directions were given on 20 September 2001.

14 Ultimately, a deed was entered into between the Official Trustee and the bankrupt plaintiffs. The deed is dated 29 May 2002. It recites that on 22 December 1998 the bankrupt plaintiffs, together with the fourth plaintiff, commenced proceedings in the Federal Court against the defendant relating to acts or omissions alleged to have occurred in late 1993, prior to the discharge of the bankrupt plaintiffs from bankruptcy. It also recites that the action is a chose in action which vested in the Public Trustee pursuant to s 58 of the Act as an after-acquired asset in the bankruptcies of the bankrupt plaintiffs of 10 December 1990. The Deed provides that the Official Trustee "hereby transfers and vests the Action and underlying causes of action (apart from causes of action under the Trade Practices Act pleaded in the Action) to the [bankrupt plaintiffs]". The transfer and vesting was to take effect upon the purchasers paying the sum of $100 each to the Official Trustee and that was to be done within 21 days of the date of the Deed. There are certain other provisions relating to the payment of moneys to creditors of the bankrupt estates of the first and second plaintiffs, which are not relevant for present purposes.

15 The action continued in the Federal Court until 28 February 2003 when Nicholson J ordered that it be transferred to this Court. At that time the plaintiffs' application to amend the originating process and the statement of claim was pending, as was the defendant's application to dismiss the action.

16 The defendant says that the current action is fundamentally and incurably flawed. At the time the action was commenced, the first three plaintiffs were bankrupt and the causes of action currently asserted in the action were therefore vested in the Official Trustee pursuant to s 58 of the Act. Accordingly, those plaintiffs had no standing to commence the action and it was a nullity. That could not be overcome by a subsequent assignment of the causes of action by the Official Trustee to those plaintiffs.

17 The defendant says that the fourth plaintiff, who has not been bankrupt, has no cause of action against the defendant. His claim is simply for the diminution in the value of his shares in the family companies as a result of the alleged inadequacy of the amount of the companies' settlement with Esanda. It was submitted that it is clearly established that a shareholder has no cause of action for such damage.

18 The defendant says that the plaintiffs' application to amend the statement of claim by introducing a claim for breach of fiduciary duty is not maintainable because such a claim is time barred. Counsel noted that the Limitation Act 1935 (WA) did not prescribe any specific limitation period for such a claim but submitted that equity follows the law by analogy in relation to limitation periods and referred to Cia de Seguros Imperio v Heath (REBX) Ltd [2000] EWCA Civ 219; (2001) 1 WLR 112. It was submitted that the relevant limitation period is six years: s 38(1)(c) of the Limitation Act. In this instance, any breach of fiduciary duty occurred not later than November 1993 and any claim was thus time-barred by the end of November 1999.

19 In an affidavit sworn on 9 July 2002, the second plaintiff conceded that the claim for breach of fiduciary duty was out of time, but contended that the amendment ought to be allowed because it arose out of the same facts as the existing claims. I should mention that the affidavit, on which the second plaintiff relied on the hearing of this application, was prepared by the plaintiffs' solicitors at a time when the plaintiffs were represented by solicitors. The affidavit appears to have been sworn on behalf of all of the plaintiffs. In the course of oral argument, the second plaintiff reiterated that the plaintiffs accepted that the claim for breach of fiduciary duty was out of time. That concession was consistent with the approach taken in the written outline of submissions, which had been prepared and filed on behalf of the plaintiffs by the same solicitors. The matter was therefore argued on the basis of whether the amendment was permitted under O 21 r 5 of the Rules of the Supreme Court 1971 (WA).

20 The defendant submitted that the plaintiffs' application to amend the originating process and the statement of claim under O 21 r 5 was misconceived. It was submitted that such a claim was a new claim of an entirely different nature from the existing claims and based on quite different facts.

21 In the event that their existing claims are struck out, the bankrupt plaintiffs have also applied to be joined in the proceedings brought by the fourth plaintiff as parties necessary to that action, pursuant to O 18.

22 It was submitted on behalf of the defendant that the application under O 18 is untenable. The bankrupt plaintiffs are not necessary parties to the action by the fourth plaintiff. The claim of the fourth plaintiff is as a shareholder of the family companies for damages for the diminution in the value of his shares. If such a claim is maintainable, which the defendant contends it is not, any shareholder could have brought such a claim without joining any other shareholder. Moreover, any such action by the other plaintiffs would now be out of time.

23 Turning first to the question of whether the bankrupt plaintiffs have any arguable cause of action, it was not in issue that the causes of action relied upon by the plaintiffs accrued in late 1993, when they entered into and settled upon the terms of the Deed of Release and Discharge of November 1993. As I have mentioned, the bankrupt plaintiffs - that is, the first to third plaintiffs in this action - were declared bankrupt on 10 December 1990 and discharged from bankruptcy on 16 January 1994. Accordingly, they were undischarged bankrupts at the time the causes of action are said to have accrued. Moreover, further sequestration orders were made against the estates of the first and second plaintiffs in late 1997. The second plaintiff could not recall when they were discharged from the second bankruptcy although the terms of the recitals to the deed of 29 May 2002 seem to suggest that the first and second plaintiffs were still undischarged bankrupts at the date of the deed. In any event, in the normal course they would not have been discharged before August and November 2000 respectively. That is, the first to third plaintiffs were bankrupt at the time the causes of action are said to have accrued in 1993, and it seems the first and second plaintiffs were bankrupt again at the time the proceedings against the defendant were commenced in December 1998.

24 The causes of action pleaded in the action are clearly properly within the meaning of the Act: s 116, Re Nguyen [1992] FCA 150; (1992) 35 FCR 320 at 325; Cummings v Claremont Petroleum & Anor (1996) 185 CLR 124 at 137-8. Section 58(1)(a) of the Act provides that at the date of bankruptcy all of the property of the bankrupt vests forthwith in the Official Trustee and s 58(1)(b) provides that any after-acquired property vests in the Official Trustee as soon as it is acquired by, or devolves on, the bankrupt. Accordingly, upon the accrual of the causes of action in November 1993 they vested in the Official Trustee pursuant to s 58(1)(b) of the Act. They remained vested in the Official Trustee even after the plaintiffs' discharge from bankruptcy: Bride v Peat Marwick Mitchell [1989] WAR 383 per Malcolm CJ at 393; Daemar v Industrial Commission of New South Wales & Anor [No 2] (1990) 22 NSWLR 178 (CA).

25 It follows that when the action was commenced by the bankrupt plaintiffs against the defendant on 22 December 1998, the causes of action were vested in the Official Trustee and the bankrupt plaintiffs had no standing to bring the action: Bride v Peat Marwick Mitchell (supra); Bride v The Australian Bank & Ors, unreported; FCt SCt of WA; Library No 960565; 25 September 1996; Daemar v Industrial Commission of NSW & Anor [No 2] (supra). Moreover, as at 22 December 1998 the first and second plaintiffs were undischarged bankrupts.

26 I do not consider that the position was altered by the deed of 29 May 2002 made between the Official Trustee and the bankrupt plaintiffs. It was not until the causes of action were assigned to the bankrupt plaintiffs under the deed that they had a cause of action against the defendant and were entitled to commence proceedings against the defendant. The deed effected an assignment of the causes of action, but it did not purport to do so retrospectively. By the terms of the deed, the assignment was effective when each of the bankrupt plaintiffs paid the sum of $100 to the Official Trustee and therefore, at the earliest, as at 29 May 2002. In my view, the deed was not effective to vest the causes of action in the bankrupt plaintiffs as at 22 December 1998 or any date prior to 29 May 2002. The bankrupt plaintiffs were not, therefore, entitled to commence action in their own right against the defendant until 29 May 2002, at the earliest.

27 In Bride v The Australian Bank (supra) the plaintiffs/appellants commenced proceedings in respect of causes of action which had accrued before their bankruptcies, and which were therefore vested in their trustee in bankruptcy. After their discharge, and after the relevant limitation periods had expired, the trustee assigned to them any causes of action that the bankrupt estates had against the respondents. Heenan J (with whom Franklyn and Wallwork JJ concurred) said (at 10):

"The plain, inescapable fact is that at the date of issue of each of the writs they [the plaintiff/appellants] were not entitled to bring the present actions in their personal capacity. As the deed of assignment has no retrospective effect, the writs, if issued by the appellants in their personal capacity would have been set aside because the appellants had no standing to sue. ... Their obtaining of the deed of assignment in January 1995 has not cured that fundamental defect."

28 See also Edward James Bride as Trustee of the Pinwernying Family Trust v Stewart [1999] WASCA 116 per Ipp J at [17].

29 It follows, in my view, that the current action by the first three plaintiffs must be dismissed. When it was brought, those plaintiffs had no cause of action. The assignment to them of the causes of action some years later did not retrospectively validate the action.

30 It might well be thought that in circumstances where the delay in effecting an assignment of the causes of action to the bankrupt plaintiffs was apparently not attributable to any fault on their part, that leads to a manifestly unfair outcome, as any action they now sought to bring, or indeed which they might have sought to bring in May 2002, would be statute-barred. That, however, cannot alter the fact that, at the time the action was commenced, the causes of action remained vested in the Official Trustee and the bankrupt plaintiffs had no standing to bring the action. The action was fatally defective from the outset.

31 I might add that it would appear that the causes of action could not, in any event, have been assigned to the first and second plaintiffs prior to the date of their discharge from their 1997 bankruptcy. In Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47, Wheeler J considered whether there was power in the Official Trustee to assign a chose in action to a bankrupt during the term of the bankruptcy and concluded (at 54) that there was no such power, noting that the scheme and purpose of the Act is directed at absolute control of the bankrupt's property to the benefit of creditors. Her Honour observed (at 52) that there would appear to be difficulties with such an assignment as the chose in action could well fall into the category of "after acquired property" (s 58(1)(b)) and immediately revest in the trustee and (at 54) that the Act seeks to protect other parties from litigation commenced by a bankrupt who will neither be personally at risk as to costs, nor able to meet an order for costs. In the present case, as the first and second plaintiffs were bankrupt from 18 August 1997 and 25 November 1997 respectively until, probably at the earliest, some time in late 2000, any assignment to them after their discharge from bankruptcy would have been outside any relevant limitation periods.

32 That leaves the question of the claim for breach of fiduciary duty and the position of the fourth plaintiff.

33 It was submitted, among other things, on behalf of the defendant that any claim for breach of fiduciary duty was not the subject of the assignment to the bankrupt plaintiffs under the deed of May 2002 and therefore remains vested in the Official Trustee so far as those plaintiffs are concerned.

34 The deed specifically assigned to the bankrupt plaintiffs some (but not all) of the causes of action in the extant Federal Court proceedings. It expressly did not assign any cause of action under the Trade Practices Act. Nor did it purport to assign any other causes of action to the bankrupt plaintiffs. The deed cannot, in my view, be regarded as effecting an assignment of any cause of action that the bankrupt plaintiffs may thereafter seek to raise against the defendant. It is an assignment of the causes of action pleaded in the action at that time. At that time no cause of action for breach of fiduciary duty was pleaded. Accordingly, I consider that any such cause of action remains vested in the Official Trustee so far as the bankrupt plaintiffs are concerned.

35 Even if I were wrong in that, and in any event to the extent it is now sought to be pleaded by the fourth plaintiff, I do not consider that the proposed amendment to add a claim for breach of fiduciary duty falls within O 21 r 5.

...

(c) the following provisions of this Rule,

the Court may at any stage of the proceedings allow the plaintiff to amend his writ, or any party to amend his pleading, on such terms as to costs or otherwise as may be just and in such manner (if any) as the Court may direct.

(2) Where an application to the Court for leave to make the amendment mentioned in paragraph (3), (4) or (5) is made after any relevant period of limitation current at the date of issue of the writ has expired, the Court may nevertheless grant such leave in the circumstances mentioned in that paragraph if it thinks it just to do so.

...

(5) An amendment may be allowed under paragraph (2) notwithstanding that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment."

37 It is apparent from the decisions of the Full Court in Dye v Griffin Coal Mining Co Pty Ltd (1998) 19 WAR 431 and Morgan v Banning (1999) 20 WAR 474 that "cause of action" in this context refers to a factual situation which would entitle a person to approach the Court for relief, rather than the old categories of action, being the "forms of action". It is the "fact or combination of facts which gives rise to a right to sue": Dye v Griffin Coal Mining Co Pty Ltd (supra) per Owen J at 434. Order 21 r 5(5) applies, in essence, where there is a "relabelling, addition, modification or clarification of an existing cause of action": Morgan v Banning (supra) per Wheeler J at 486. It is no objection that some of the facts out of which the new cause of action arises are peculiar to it and that some of the facts out of which the old cause of action arises are peculiar to it. It is enough if the overlap is so great that the new cause of action can fairly be said to arise out of substantially the same facts as the old cause of action. That will essentially be a matter of impression: Dye v Griffin Coal Mining Co Pty Ltd (supra).

38 In my view, it cannot be said that the proposed claim for breach of fiduciary duty arises out of substantially the same facts as the existing claims for breach of contract and negligence. The current statement of claim, which is dated 21 June 2000, and the minute of substituted statement of claim both plead the retainer of the defendant, implied terms that the defendant would exercise reasonable skill, care and diligence in the discharge of the retainer and a corresponding duty of care in tort. It is alleged that the defendant breached the terms of the retainer and the duty of care in that there was no proper basis for the advice they gave in recommending the settlement with Esanda, and they advised the plaintiffs to settle for a sum that was substantially less than they were entitled to. The plaintiffs claim damages for those alleged breaches. Those claims are therefore concerned with whether the defendant exercised reasonable skill and care in providing that advice.

39 The claim for breach of fiduciary duty proceeds on quite a different basis. In respect of that claim, the plaintiffs allege that the defendant knew, or ought to have known, by virtue of its knowledge of the plaintiffs' financial circumstances, that their retainer was speculative in that, if the plaintiffs were unsuccessful in obtaining compensation, the defendant would not be remunerated for the services it provided to the plaintiffs and the family companies. It is alleged that, in advising the plaintiffs, the defendant allowed its own interests in ensuring that funds were available to pay for its services to influence the advice it gave to the plaintiffs, and that that caused it to induce the plaintiffs to enter into a settlement for a sum less than the amount to which they were entitled.

40 The claim for breach of fiduciary duty, in my view, relies on substantially different facts to the claims of breach of a contractual or tortious duty to exercise reasonable care. The principal factual elements necessary to establish the former are substantially different to the latter. I consider that O 21 r 5 has no application to the proposed amendment.

41 It is necessary then to turn to the claims brought by the fourth plaintiff. The fourth plaintiff has not been bankrupt and is therefore unaffected by any issues arising under the Act. It was not contended that the claims made by him in the action for breach of contract or negligence are statute-barred. But the defendant says that the fourth plaintiff has no arguable cause of action. That, it submits, is because the fourth plaintiff's claim, and in part the claims by the bankrupt plaintiffs, are for losses allegedly suffered by the diminution in the value of their shareholding in the family companies as a result of the family companies recovering an inadequate amount in the settlement with Esanda. Such losses, it was submitted, are not recoverable at the suit of a shareholder.

42 It is necessary to look to the particular claim sought to be brought in that respect. In the minute of substituted statement of claim it is pleaded that each of the plaintiffs was a shareholder in each of the family companies. I should note in passing that it is apparent from the pleading that they were not the only shareholders. It is alleged that the defendant owed to the plaintiffs and to the family companies a duty both in contract and in tort to exercise reasonable skill, care and diligence in relation to the retainer and that, in breach of that duty, the defendant advised the plaintiffs and the family companies to compromise the claim against Esanda for a sum substantially less than they were entitled to. It is pleaded that, by reason of the defendant's negligence and or breach of contract, the plaintiffs suffered loss and damage. In respect of the first to third plaintiffs the alleged loss and damage includes, and in respect of the fourth plaintiff it is solely, "losses by reason of a diminution in the value of their respective shares in the family companies due to the family companies having been deregistered and also losing the opportunity of recovering from Esanda and any other parties to the Claim an amount of damages which they ought reasonably have recovered in respect of the Claim". The "Claim" is defined as the entitlement to relief against Esanda under s 87 of the Trade Practices Act.

43 The relevant principle was stated by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd & Ors [1982] Ch 204 at 210 as follows:

" ... A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested".

" ... what he [i.e., a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only `loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company."

44 That decision was cited with approval by the High Court in Gould v Vaggelas [1984] HCA 68; (1985) 157 CLR 215, per Gibbs CJ at 219, Wilson J at 245 and Brennan J at 253.

45 In Gould v Vaggelas (supra), a husband and wife (the Goulds) were induced by misrepresentation to purchase a tourist resort on terms which included the transfer to the vendors of valuable property and a mortgage-back to them to secure the balance of the purchase price. A company was formed and the purchase completed, using the company as the purchasing vehicle. The Goulds were the only shareholders. They funded the purchase, their advances being treated as loans in the books of the company. They also guaranteed its obligations to the vendors (Vaggelas). The company defaulted in repaying the purchase price. Vaggelas exercised his power of sale under the mortgage and also sued the husband and wife as guarantors. They counterclaimed for damages for deceit. The company was wound up. The liquidators had no funds with which to proceed against Vaggelas. The Goulds did so, claiming loss of funds advanced, including those advanced to, or on behalf of the company.

46 In the course of his judgment, Gibbs CJ said (at 219 - 220):

"It is of course elementary to say, as was said in Prudential Assurance Co Ltd v Newman Industries Ltd [No 2] [footnote omitted], at p 210, 'that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested'. Any loss suffered by Gould Holdings as a consequence of the fraud can be recovered only by the company itself. Even if the company had not commenced an action within the limitation period, its failure to enforce its own rights would not have enhanced the rights of the Goulds: see Prudential Assurance v Newman Industries [No 2] [footnote omitted]. However, although the Goulds cannot recover damages merely because Gould Holdings has suffered damage, and cannot recover damages which are merely a reflection of a loss suffered by the company, they may recover damages for the loss which they personally have suffered and which is separate and distinct from the loss suffered by the company. That this is so is clear in principle, but if authority is needed, the judgment in Prudential Assurance v Newman Industries [footnote omitted] provides it."

47 The House of Lords has recently considered the question in Johnson v Gore Wood & Co (a firm) [2000] UKHL 65; (2001) 2 WLR 72. Lord Bingham of Cornhill, after referring to Prudential Assurance Co Ltd v Newman Industries Ltd & Ors (supra) and other authorities, dealt with the principles to be applied (at 35 - 36) as follows:

"These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204, especially at 222-223 ... (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192 at 195-196, The Fischer case and Gerber. (3) Where a company suffers a loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by a breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

48 Lord Millett, with whose reasons Lord Goff of Chieveley agreed, said (at 61-2):

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf ... Correspondingly, of course, a company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.

This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none ... Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant's actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.

The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, although they have not always been faithfully observed."

"The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder's loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders ... The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations ..."

49 To the extent that the Court of Appeal of New Zealand had expressed views to the contrary in Christensen v Scott (1996) 1 NZLR 273, the House of Lords disagreed with those views.

50 The decisions in Prudential Assurance Co Ltd v Newman Industries Ltd and Gould v Vaggelas have been applied in a number of cases. See, for instance, Grant v Eddington [2000] FCA 1550; Cole v Challenge Bank Ltd [2001] FCA 1425; Scarborough v Klich [2001] NSWCA 436 per Powell JA (with whom Priestley JA and Studdart JA agreed) at [117] - [119] and Chen v Karandosis [2002] NSWCA 412. In Harris v Milfull [2002] FCAFC 442 the authorities are reviewed in some detail.

51 It is necessary, therefore, to identify the nature of the claimed loss to determine whether it is merely a "reflective loss" or whether it is a separate loss which is recoverable by the plaintiffs.

52 As I have said, the plaintiffs claim that in breach of a duty owed to the plaintiffs and the family companies, the defendant advised the plaintiffs and the family companies to compromise their claim against Esanda for a sum substantially less than the amount to which they were entitled. The plaintiffs say that they suffered loss and damage by reason of a diminution in the value of their respective shares in the family companies because the family companies recovered an inadequate amount from the settlement.

53 It is not suggested that the family companies did not have a cause of action against the defendant for the alleged inadequacy in the amount of the settlement sum that is said to have caused the diminution in the value of the shares. On the contrary, it is alleged that the inadequacy of the settlement sum was caused by the breach by the defendant of duties of care owed to the family companies when advising them to enter into the settlement with Esanda.

54 It is clear, in my view, that the diminution of the value of the plaintiffs' shares is simply a reflection of the losses allegedly suffered by the family companies in entering into that settlement. It is not to the point that the companies did not make claims against the defendant for those losses. As Lord Bingham observed in Johnson v Gore Wood & Co (a firm) (supra), a claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company has declined or failed to make good that loss. I might add that there was no evidence before me to explain why the family companies did not make such claims.

55 In my view, the claims for damages for the alleged diminution in the value of the plaintiffs' shares disclose no reasonable cause of action.

56 It follows that the fourth plaintiff's claim in tort for negligence should be dismissed, damage being an essential element of that cause of action. While that does not apply to the claim by the fourth plaintiff for breach of contract, as matters stand it would appear that the fourth plaintiff would be entitled to no more than nominal damages, it not being suggested that he has suffered any substantial damage beyond the diminution in the value of his shares.

57 The application, made by the other plaintiffs in the alternative, that they be joined as necessary parties to the fourth plaintiff's action under O 18, must fail so far as it relates to the fourth plaintiff's claim in negligence. There is no action to which they may be joined. In any event, I accept the defendant's submission that the first three plaintiffs would not be necessary parties to such an action, had it been maintainable, nor would they be necessary parties to the fourth plaintiff's claim in contract. The rule does not give the Court the power to join a party whenever it is just or convenient to do so, but only when they ought to have been joined or their presence is necessary to ensure that all the questions between the original parties are effectually and completely disposed of: Vandervell Trustees Ltd v White [1971] AC 912 at 936. It is not sufficient that the resolution of the litigation between the existing parties will affect the applicant simply in a commercial sense: Rogala v Caris Corp Ltd, unreported; SCt of WA (Burt CJ); Library No 5089; 27 September 1983. A person ought to be added as a party if any order which might be made in the proceedings would directly affect that person's rights against or liabilities to a party to the action: News Limited v Australian Rugby Football League Limited [1996] FCA 870; (1996) 64 FCR 410 at 525; Homestyle Pty Ltd v City of Belmont [1999] WASCA 59. In the present case, no basis has been advanced, and none is apparent, upon which it could be said that the joinder of the first to third plaintiffs to the action by the fourth plaintiff is necessary to that action within the meaning of O 18.

58 In addition, no purpose would be served by such joinder as any claims by the first to third plaintiffs would be statute barred. Joinder of a plaintiff under this rule takes effect when the writ is amended. The rule cannot override the provisions of a statute of limitations. As any cause of action against the defendant arose in November 1993, the time within which it must be brought has long since expired.

59 I would therefore refuse leave to amend the statement of claim and would dismiss the action by the first to third plaintiffs and the action in negligence by the fourth plaintiff. I would strike out the balance of the existing statement of claim, which pleads a claim in contract by the fourth plaintiff. It was made apparent in the course of argument that the plaintiffs no longer wished to rely upon the existing statement of claim and, in any event, it is plain that the damages claim is inadequately particularised. If the fourth plaintiff wishes to press his claim for breach of contract a minute of amended statement of claim should be filed, together with a fresh application to amend the statement of claim.

60 I will hear the parties on the form of orders and on costs.

Willoughby & Ors v Clayton Utz [2005] WASC 47

At a glance

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Judgment (127 paragraphs)

Willoughby & Ors v Clayton Utz [2005] WASC 47 (30 March 2005)

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Legislation Cited (1)

Cases Cited (19)