Woodgate v Davis

Background 1 These proceedings concern the affairs of two companies, Chircan Holdings Pty Limited and Mahiya Holdings Pty Limited (respectively the second and third plaintiffs), which are in liquidation following earlier steps by their sole director, Mr Davis (the defendant), to place them in voluntary administration. The winding up is, in each case, of the kind deemed by s.446A of the Corporations Act 2001 (Cth) to arise upon the passing of a resolution of creditors under s.439C(c) and is accordingly a creditors voluntary winding up. Mr Woodgate (the first plaintiff) became liquidator of each company and remains in office. 2 The two companies carried on business in partnership. At the centre of the present litigation are claims that the defendant who, as I have said, was the sole director of each company, failed to prevent the company from incurring certain debts at a time when the company was insolvent and thereby contravened s.588G of the Act in respect of each such debt. The plaintiffs seek, on this basis, to recover from the defendant pursuant to s.588M a total of $3,373,038.58. 3 The defendant has filed a defence paragraph 17 of which is in the following terms: "Further and in the alternative, in answer to all the matters alleged in the Claim, the defendant says that the claims made by the first plaintiff or alternatively, the second plaintiff and the third plaintiff, or alternatively the first plaintiff, the second plaintiff and the third plaintiff, respectively are not maintainable as, on their proper construction, sections 588G and 588M of the Act are not available where the debts sued upon are those incurred by a partnership where all or one or more of the partners is a company." 4 On 13 May 2002, I made by consent an order that the following questions be determined as separate and preliminary questions pursuant to Part 31 Rule 2 of the Supreme Court Rules: "1. Whether paragraph 17 of the Defence filed 14 February 2002 provides a complete defence to the Statement of Claim filed on 13 December 2001 (the 'Claim'). 2. If the answer to question 1 is yes, whether the Claim should be dismissed or struck out." 5 In accordance with directions, written submissions in relation to these separate questions were filed by the parties. I heard supplementary oral argument on 1 July 2002 when Mr Svehla of counsel appeared for the defendant to argue that the questions should be answered in the affirmative and Mr Aldridge SC appeared for the plaintiffs to make submissions to the contrary. 6 The basic position Mr Svehla took by reference to a number of submissions to which I shall turn in due course is that, where a company is a member of a partnership and debts are incurred in such circumstances as to be "debts and obligations of the firm" as referred to in s.9 of the Partnership Act 1892, s.588G and related provisions of the Corporations Act can never apply to or in relation to directors of that company by reference to those debts. For that position to be sustainable, one of two propositions must be made good. It must be shown either that it is incorrect to regard the company as having incurred the debt (that being the act upon which s.588G focuses) or that, for some other reason manifested on the face of the Corporations Act, s.588G and related provisions are not concerned with the incurring of a debt by a company which is a partner in a partnership. The "incurring" question 7 Section 9 of the Partnership Act is in the following terms: "Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and after the partner's death the partner's estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner's separate deeds." 8 When s.9 speaks of "debts and obligations of the firm", it is referring to debts and liabilities of the collection of persons who make up the partnership, the "firm" being no more than those persons collectively: see s.4. There are basically two ways in which the partners collectively may voluntarily undertake an obligation. They may act in concert or unison to bring about that result, for example, by all signing a loan agreement or some other engagement. Alternatively, they may acquiesce in arrangements of the usual kind under which, in the conduct of the partnership business, a particular partner or particular partners act for all (either personally or through agents such as employees) so that the actor or actors, both as principals and as agents for the remaining partners, enter into the relevant engagement. Partners are, after all, "associated for … a common end and are agents for one another in its accomplishment": Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 per Dixon J. Each has "prima facie actual authority to act as an agent of the firm and his other partners for the purposes of the business of the partnership": Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1984) 155 CLR 541 per Mason, Wilson, Brennan, Deane and Dawson JJ. This is, in any event, the effect of s.5 of the Act: "Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner." 9 A central issue in this case is whether, when a partner becomes subject to the joint liability referred to in s.9 of the Partnership Act in respect of a partnership debt, it is correct to say that, for the purposes of s.588G of the Corporations Act, the partner thereby "incurs a debt". Mr Svehla submitted that the partner does not, and that the only "incurring" is an incurring by the partnership. 10 A pertinent factor is that the liability to which s.9 refers is a joint liability, as distinct from a several liability or a liability that is both joint and several. That, at all events, is the position at law recognised by the statute, with the result that only one claim can be asserted in a common law action and, subject to the effect of s.97 of the Supreme Court Act 1970 in the case of a judgment of this court, the single cause of action merges in the first judgment recovered. The rule historically applied in the Court of Chancery, however, was stated by Sir William Grant, Master of the Rolls, in Sumner v Powell (1816) 2 Mer 30 as follows: "A partnership debt has been treated in equity as the several debt of each partner, though at law it is only the joint debt of all. But, there, all have had a benefit from the money advanced or the credit given, and the obligation to pay exists independently of any instrument by which the debt may have been secured." 11 Later elaboration is to the effect that the rule just stated is not of general application and that to say that a partnership debt is, in equity, always a several debt of each partner is to state too radical a proposition. As Lord Cairns LC explained in Kendall v Hamilton (1879) 4 App Cas 504, equity's approach was confined to administration of the assets of a partnership or of a deceased partner and did not mean "… that a Court of Equity altered or changed a legal contract, but merely that the Court, in order, before distributing assets, to administer all the equities existing with regard to them, would go behind the legal doctrine that a partnership debt survived as a claim against the surviving partners only, and would give the creditor the benefit of the equity which the surviving partners might have insisted on."