Robert William Morton v Robert Baron Pendlebury [1988] ACTSC 56 (19 October 1988)

SUPREME COURT OF THE ACT

ROBERT WILLIAM MORTON V. ROBERT BARON PENDLEBURY
S.C. No. 888 of 1986
Partnership

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Kelly J.(1)

CATCHWORDS

Partnership - Indemnity - Plaintiff partner secretary of company - Statutory declaration made by secretary warranting good title in company of chattels mortgaged by (charge) bill of sale - Declaration incorrect - Plaintiff sued by mortgagee - Action by mortgagee compromised - Plaintiff seeking indemnity from defendant partner as to one-half of amount paid under compromise - Role of company secretary considered - Whether negligence by plaintiff a defence to his action - Construction of partnership deed - Whether notice to defendant of proposed compromise a condition precedent to plaintiff's action.

Bury v. Allen (1845) 1 Coll 589: 63 ER 556

Thomas v. Atherton (1878) 10 ChD 185

Newlands v. National Employers Accident Association (1885) 54 LJQB 428

Ruben v. Great Fingall Consolidated (1906) AC 439

Donato v. Legion Cabs (Australian) Co-Operative Society Ltd (1966) 85 WN (Pt.1) (N.S.W.) 242

Panorama Developments (Guilford) Ltd v. Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711

Lord Newborough v. Schroder (1849) 7 CB 342: 137 ER 136

Pettman v. Keble (1850) 9 CB 701: 137 ER 1067

Duffield v. Scott (1789) 3 TR 374: 100 ER 628

Smith v. Compton (1832) 3 B & Ad 407: 110 ER 146

Rules of Supreme Court, A.C.T. - O.23, r.14

Development of the Power of the Modern Company Secretary to Bind his Company by K.E. Lindgren, 46 ALJ 385.

HEARING

CANBERRA
19:10:1988

ORDER

There be judgment for the defendant.

The plaintiff pay the defendant's costs of and incidental to the action, those costs to be taxed.

DECISION

Following the making of an agreement in writing between them on 12 October 1979 the plaintiff and defendant carried on in partnership the practice of accountants until 1 August 1983. I will refer to the partnership as the firm.

2. Subparagraph (i) of clause 14 of that agreement was as follows:-
"Except as otherwise herein specifically

provided no partner shall
(i) carry on or be concerned or interested
directly or indirectly in the practice
of accountant except on account and for
the benefit of the partnership nor
engage in or undertake any other
business or occupation PROVIDED ALWAYS
that nothing herein contained shall
prohibit any partner from acting and
performing his duties as a director or
other officer of any company or
unincorporated body if he shall have
been appointed as such director or other
officer before the commencement of the
partnership or shall have accepted such
appointment with the consent of the
other partner after that date."

3. On 30 June 1980 the plaintiff was appointed secretary of a company known as Staircases (ACT) Pty Ltd (Staircases). Staircases was a shelf company which was acquired so that it might carry on the business of joiners. The moving force behind the acquisition of the company was one Klaus Kalejs. He was not nominally a director of the company although it appeared that those appointed as directors were accustomed to act in and about the affairs of the company at his direction or in accordance with his requests.

4. I am satisfied that the defendant knew of the plaintiff's appointment as secretary of Staircases and acquiesced in it. He himself was secretary of three or four companies which were clients of the firm as Staircases was. Acceptance of the office of secretary of the company which was a client of the firm was seen as facilitating the work of the partnership in connection with the financial affairs of such a company.

5. On the morning of 20 May 1982 Staircases purported to execute a bill of sale in favour of Hancock Bros. Pty Limited (Hancock) to secure payment of a debt of $21,370.83 which Staircases had incurred before that date. The goods over which the bill of sale was given were listed in a schedule to it. The common seal of Staircases appears twice in the copy of the bill of sale which was tendered and became Exhibit B, once against an inapposite attestation clause and once against a clause which read as follows:-

"THE COMMON SEAL of was hereunto
affixed by authority of its Board of
Directors in the presence of:"

6. In Exhibit B, the word "Secretary" appears under the attestation clause just referred to and the word "Director" appears opposite it. The seal affixed opposite the inapposite attestation clause has no signature near it and was obviously impressed by mistake. The other impression of the seal has written over it the signatures "K. Kalejs" and "Robert W. Morton". Mr Morton's signature appears very close to the word "Director". Under the attestation clause and adjacent to the word "Secretary" appears the signature of Lyndell Anne Watson, a secretary employed by the firm.

7. Kalejs was not on 20 May 1982 a director of Staircases and it would seem much more likely than not that the bill of sale was invalidly executed. But Staircases' articles of association were not put in evidence and I am therefore unable to make an absolutely positive finding as to whether it was validly executed or not.

8. The plaintiff gave evidence that when he affixed his signature to the bill of sale the words "Director" and "Secretary" did not appear near the appropriate attestation clause. That evidence necessarily asked that the inference be drawn that the words were added to the bill of sale after its execution. It is not necessary, nor am I prepared, to draw any such inference.

9. On the back page of the bill of sale there appeared two forms of statutory declaration, the first intended to be made by the mortgagor and the second intended to be made by a witness to the execution of the bill of sale.

10. The plaintiff completed the first of these statutory declarations by inserting his name and address, striking out a clause which would have been applicable had a natural person executed the bill of sale as mortgagor and inserting in the blank space in the first clause of the statutory declaration which read:-

"I am of the within named
Mortgagor company and I am duly authorised
under the seal of that Company to make this
declaration on its behalf."

the words "the Secretary". The next clause in the statutory declaration read:-

"The matters warranted in clause 9C(9) of the
within Bill of Sale are at the date hereof
true."

while the last clause read:-

"It is upon the faith, truth and basis of the
said matters that the Mortgagor is now
obtaining from the Mortgagee the withinnamed
advance."

The attestation clause was completed by the plaintiff and the making of his statutory declaration was attested to by the defendant as a Justice of the Peace.

11. The form of statutory declaration to be completed by the witness contained a number of blanks which had to be filled in. This the defendant did in his own handwriting. He then witnessed the signature of the declarant, Lyndell Anne Watson, referred to above. She had nothing to do with nor was she employed by Staircases. The relevant part of clause 9 of the bill of sale in its final form read:-

"AND the Mortgagor warrants that at the date
hereof
(i) the property hereby assigned is the sole
and absolute property of the Mortgagor
and the Mortgagor has good right and
full power and authority to assign the
same free from all liens, charges and
encumbrances and liability to attachment
whatsoever except as disclosed in item
10 of the schedule.
(ii) there is no writ of execution levy or
attachment levied against the Mortgagor
(or any of them) or against any of the
property hereby assigned in or out of
any Court whether against the Mortgagor
solely or in any way jointly with any
other person or company.
. . .
(iv) if the Mortgagor is or includes a
company there is not presently occurring
in relation to that company or a related
corporation any of the events referred
to in Clause 28 hereof.

12. Clause 28 of the bill of sale was a common form provision setting out a series of contingencies upon the happening of any of which the Mortgagor, if a company, would have been considered to be in default under the bill of sale.

13. Before he signed the declaration the plaintiff sought advice from Klaus Kalejs as to whether Staircases was solvent and would be trading profitably for the foreseeable future. He was assured that it was and was expected to do so. He said that Kalejs also informed him that the goods listed in the schedule to the bill of sale were Staircases' assets in respect of which the security was being given.

14. The plaintiff gave evidence that the defendant and he, as he put it, worked out how to fill out the document. I understood the thrust of evidence on this point to be that he sought the approval of the defendant to his signing the declaration on the bill of sale. He was asked whether he sought that approval and answered, "Oh, yes". He was then asked the following questions and gave the answers recorded:-

"You did ask him, did you, for his approval
for you signing that declaration, did you? ---
He witnessed it, he obviously approved.
Let us just cast our minds back to that very
very simple question. Did you ask him for
approval for your signature of that
declaration? --- If you are saying - Barry, do
you approve of me signing that document -
signing this document - I would have to say
no."

15. The plaintiff agreed that it was not the defendant's procedure to read through a document to familiarise himself with its contents before he witnessed a signature to it.

16. I am satisfied that when the defendant witnessed the declaration signed by the plaintiff he did not do so on the basis that he had been told of the effect of the declaration completed by the plaintiff and that he thereby approved the making of the declaration. I think he did no more than follow his usual practice in witnessing a statutory declaration and that he did not, nor did the plaintiff require him to or suggest that he should, acquaint himself with the contents of the document. I have no doubt that he did fill in the blanks in the statutory declaration signed by Ms Watson but, again, I see that as doing no more than assist a person to complete a statutory declaration, although in doing so he must, I think, necessarily have become aware that her declaration was as to the execution of the bill of sale. The defendant must therefore have been aware that the document with which he was concerned was a bill of sale. I am satisfied that at most the defendant was asked to take part in the formalities of verifying the execution of a bill of sale by witnessing a declaration as to its execution and that he considered the statutory declaration made by the plaintiff to be one of those formalities. He did not know what the statutory declaration signed by the plaintiff was all about. Neither, I am satisfied, did the plaintiff.

17. I am also satisfied that when the plaintiff made the statutory declaration in question he did it because Kalejs was a client of the firm. He said, and I accept, that "there could be no other reason why I was involved in this particular situation other than him being a client of the firm".

18. The plaintiff also sought advice from solicitors who were apparently acting for Mr Kalejs and Staircases. Unexceptionable advice was tendered and it would seem that some amendments to clauses 9 and 28 of the bill of sale were made.

19. On 10 November 1982 Kalejs told the plaintiff that both Staircases and Abode Pty Limited (Abode), another company with which Kalejs was concerned and which was also a client of the firm, were going into liquidation. He discussed the matter with the solicitors who were then acting for Kalejs. During that discussion he learnt that the words "Director" and "Secretary" had, as he claimed, been inserted in the execution clause of the bill of sale after its execution. He wrote promptly to Hancock's secretary on 11 November 1982 to protest what he said had happened. The letter was apparently written by the plaintiff purportedly on behalf of the firm because the reply from Hancock's solicitors was addressed to the firm. That reply, dated 10 February 1983, included the following:-

". . . we advise as follows:-
1. The Bill of Sale sent by us to the
solicitors for Staircases (ACT) Pty
Limited for execution was a pre-printed
form with the words "Director" and
"Secretary" already printed on the form.
. . .
3. You may be aware that the Official
Liquidator for Abode Pty Limited has
made allegations that the goods the
subject of the Bill of Sale was (sic)
the property of Abode Pty Limited and
not Staircases (ACT) Pty Limited.
Accordingly you may wish to raise this
matter with your solicitors."

20. The plaintiff subsequently sought advice from another firm of solicitors whose account, dated 13 December 1982, was paid initially by the defendant, using his Bankcard. That use is equivocal because it was seen to confer a financial advantage and in any event the payment was reimbursed by the firm.

21. On 18 November 1982, both the plaintiff and the defendant attended at the Fyshwick premises which both Staircases and Abode occupied to deal with matters concerned with the liquidation of the companies including, it would seem, the taking of inventory and the checking of assets of each. It is difficult not to conclude that by that date both were aware of Hancock's solicitors' claim that Abode owned the chattels in question.

22. It is relevant to note that the partnership between the plaintiff and defendant was dissolved as from 31 July 1983. The defendant sold his interest in the firm to a number of people with whom the plaintiff continued to practice under the name of "Morton Pendlebury practising in conjunction with C.W. Stirling & Co." I will call it the new partnership.

23. On 2 August 1983 the defendant wrote to the firm's professional indemnity insurers to advise of his retirement from the firm and that the plaintiff was continuing "to practise within the umbrella of a national organisation". He referred to the firm's professional indemnity policy which was due to expire on 14 November 1983 and went on to say:-

"We have considered the comments made by you
verbally and will continue to leave the
aforementioned policy in force provided that
it is in agreement with your company. At the
time that the policy would be due for renewal
Mr Pendlebury considers that he would
probably need to continue cover by virtue
that he must remain covered in the event that
some past event is the subject of some
litigation at some time. Would you please
clarify if our understanding here is
incorrect.
Would you also please advise whether there is
anything incorrect in continuing this policy
from 1 August 1983 to expiry date 14 November
1983 whilst Mr Morton will also be covered
within the indemnity insurance taken out by
the national organisation with which he will
also be insured."

It is to be noted that no reference to any particular past event was made in the letter.

24. On 3 April 1984 the solicitors for Hancock wrote to the plaintiff a letter which included the following:-

"On 20 May 1982 our client took as security
for a debt of $21,370.83 a Bill of Sale from
Staircases (ACT) Pty Limited over certain
equipment alleged to be the property of
Staircases (ACT) Pty Limited. This Bill of
Sale was taken by our client based on the
representation made by you in signing the
Statutory Declaration warranting that the
equipment was the property of Staircases
(ACT) Pty Limited. As you are aware, in
subsequent proceedings before the Supreme
Court of the A.C.T., it was held that the
equipment the subject of the Bill of Sale was
not in fact the property of Staircases (ACT)
Pty Limited."

25. That letter was tendered on behalf of the plaintiff. There was no evidence to the contrary and I accept, therefore, that the chattels mortgaged under the bill of sale were not the property of Staircases and that the warranty contained in the statutory declaration made by the plaintiff on 20 May 1982 was incorrect.

26. The letter went on to claim that Hancock had lost all the debt owed to it by Staircases as a result of the plaintiff's negligence in signing the statutory declaration and that Hancock had incurred additional legal expenses in attempting to establish the true ownership of the equipment and to seek payment of the sum of $21,370.83 plus accruing interest and the legal costs said to have been incurred by Hancock. The writer of the letter also suggested that the plaintiff should contact his professional indemnity insurers to advise them of Hancock's claim.

27. In April 1984 Hancock commenced action against the plaintiff seeking recovery of the amount of $21,370.83, interest under the bill of sale to the date of the writ totalling $5,234.07 and legal costs amounting to $6,124.00. Credit was given for an amount of $3,000.00 said to have been paid, presumably in accordance with the proviso to clause 40 of the bill of sale.

28. The plaintiff was represented in the action brought by Hancock by a firm of Sydney solicitors, Messrs Smithers Warren Davenport Mant, who were acting for the professional indemnity insurers of the new partnership.

29. It would seem that some little time after Hancock issued its writ advice from counsel was sought on behalf of the plaintiff. Apparently counsel wrote a memorandum on the drafting of a defence on 30 July 1984. Subsequently, on 28 August 1984, he wrote a further memorandum, having in the meantime seen for the first time a number of documents. He perceived that the bill of sale appeared not to have been properly executed and that it therefore did not confer any security on Hancock. He said:-

". . . the plaintiff's losses have a further
cause apart from reliance on any
misrepresentation made by Mr Morton as to
ownership of the goods subject to the Bill of
Sale. If Mr Morton had stated the true
position, the Bill of Sale would still not
have been any use. Further, no matter what
Mr Morton stated, and no matter who had
attested the seal, the plaintiff would not
have obtained good security over the goods,
because they were not owned by the company.
The plaintiff's losses then are whatever
losses can be shown to have been caused by
being put off and deferred in seeking
remedies; the plaintiff's losses are not
measured by simple absence of a security
interest in the goods.
I still feel that Mr Morton's interests in a
broad sense might suffer from the ventilation
of facts which it is necessary to the
insurers to bring out while conducting the
litigation in his name, for the benefit of
the insurers themselves."

30. On 2 May 1986, Hancock's claim against the plaintiff was settled by the entry by consent of judgment against him in the sum of $20,000 with no order as to costs. He paid that amount on 12 June 1986.

31. I accept the plaintiff's evidence that the settlement between Hancock and him was left very much in the hands of the professional indemnity insurers and their legal advisers and that he accepted, albeit very reluctantly, advice that he should pay the $20,000 rather than have the matter proceed and be at risk in respect of the sum of $35,000 plus costs. He would have preferred that the case be heard but consented because $20,000 was the excess under the policy which the new partnership had in force and he thought that the liability would be spread equally among his new partners so that he would be responsible for only one eighth of the amount paid.

32. In the result I am satisfied that he did not, before the compromise was effected, approach the defendant concerning it. I prefer the evidence of the defendant as to this aspect of the case.

33. It was suggested during the course of the hearing that there should be a finding that the plaintiff had been negligent in making the statutory declaration and that therefore he was not entitled to indemnity from his partner, the defendant. It was said in Bury v. Allen (1845) 1 Coll 589 at p 604: 63 ER 556 at p 563:-

"Suppose the case of an act of fraud, or
culpable negligence, or wilful default, by a
partner during the partnership, to the damage
of its property or interests, in breach of
his duty to the partnership; whether at law
compellable, or not compellable, he is
certainly in equity compellable to compensate
or indemnify the partnership in this
respect."

In Thomas v. Atherton (1878) 10 ChD 185 at p 199, the Court of Appeal said:-

"Prima facie, damages given against one
partner for a partnership act are to be paid
like any other partnership debt, but with
this exception, that if the damages were
occasioned by the personal misconduct or
culpable negligence of one partner, he alone
must bear the consequences."

34. It follows, I think, that the negligence which would deprive the plaintiff of his right to indemnity could only be culpable negligence. Some force must be attributed to the epithet "culpable". I am not prepared to find that the plaintiff was culpably negligent in making the statutory declaration. Negligent he may have been (I think he was for he signed the statutory declaration without making any attempt to understand its contents, meaning or effect) but not culpably. The amendments made to the bill of sale and the assurance he had received from Mr Kalejs were such as to deprive any negligence of which he might have been guilty of the quality of culpability.

35. The plaintiff believed that a company's secretary was responsible only for the preparation of minutes and, perhaps, for statutory returns, but he saw his role as an accountant and his role as company secretary very much intertwined.

36. The role of a company secretary has been the matter of debate for more than a century. The debate continues. In Newlands v. National Employers Accident Association (1885) 54 LJQB 428, Brett MR (as he then was) said at p 430:

"A secretary is a mere servant; his position
is that he is to do what he is told, and no
persons can assume that he has any authority
to represent anything at all."

37. In Ruben v. Great Fingall Consolidated (1906) AC 439, Lord MacNaghten said at p 444:-

"The secretary of the company, who is a mere
servant, may be the proper person to deliver
out certificates which the company issues in
due course, but he can have no authority to
guarantee the genuineness or validity of a
document which is not the deed of the
company."

38. In Donato v. Legion Cabs (Australian) Co-Operative Society Ltd (1966) 85 WN (Pt.1) (N.S.W.) 242, Wallace P said at p 248:-

"The secretary of an incorporated legal
entity is its natural mouthpiece and may be
understood as having very general authority
on ordinary matters relating to the company's
affairs and administration although not
usually of course in such fields as those of
contract or representation."

39. In Panorama Developments (Guilford) Ltd v. Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711, Lord Denning MR stated at pp 716-7:-

"A company's secretary is a much more
important person nowadays than he was in
1887. He is an officer of the company with
extensive duties and responsibilities. This
appears not only in the modern Companies
Acts, but also by the role which he plays in
the day-to-day business of companies. He is
no longer a mere clerk. He regularly makes
representations on behalf of the company and
enters into contracts on its behalf which
come within the day-to-day running of the
company's business. So much so that he may
be regarded as held out as having authority
to do such things on behalf of the company."

See also an article entitled Development of the Power of the Modern Company Secretary to Bind his Company by K.E. Lindgren, 46 ALJ 385.

40. On the whole I think the better view today to be that espoused by Lord Denning, a view for which Mr Lindgren argues persuasively.

41. I am satisfied when the plaintiff undertook the office of Staircases' secretary he expected to do no more in connection with that office than lodge documents which the company might be required to lodge under the relevant legislation and, perhaps, take the minutes of its meetings. In fact, he never did any of these things. The only action he appears to have taken on behalf of the company was to join in the execution of the bill of sale and to make the statutory declaration. It was the only bill of sale with the execution of which he had anything to do during the life of the firm.

42. I am satisfied that it was never within the contemplation of the plaintiff or the defendant that either of them should so involve himself in the affairs of a company of which he was secretary as to assume liabilities in connection with the operations of that company. Whatever may have been the practice of the firm in respect of charging for work actually done by either partner as secretary of a company, no charge appears to have been made for any secretarial work carried out by the plaintiff on behalf of Staircases. I think it more probable than not that the plaintiff and the defendant would have considered it appropriate to make a charge on behalf of the firm in respect of routine secretarial work of the type indicated above carried out on behalf of a company by either of them as its secretary. But I do not think that, upon the true construction of the partnership agreement, the intention of the parties was that they should treat work done outside such routine work by either of them as secretary of a company or work done as a director as being part of the business of the firm. It seems clear that clause 14 of the partnership deed envisaged two kinds of work which would not be work carried out on behalf of the firm or in the course of its business. One kind was work completely outside the scope of the firm, the other was work carried on by either of the partners in the performance of his office as an officer of a company.

43. I think the performance of routine company secretarial duties was tacitly agreed to by the plaintiff and defendant as an addition to the work or course of business of the firm notwithstanding what seems to me to have been the plain intendment of clause 14 of their agreement.

44. As a matter of construction, therefore, I am satisfied that the agreement between the partners did not envisage that it would be within the scope or course of the firm's business that the plaintiff might make a warranty of the kind which he did in making the statutory declaration in respect of the affairs of a company.

45. I do not doubt that, had the plaintiff been acting in the course of the business of the firm when he made the statutory declaration, the defendant would have been liable to indemnify him for half the amount of the loss properly attributable to the plaintiff's actions. But, for the reasons I have given, I do not think the plaintiff was acting in the course of the firm's business when he signed the declaration. The action must therefore fail.

46. The plaintiff in his statement of claim as amended by order made during the hearing of the suit alleged that he had been sued by Hancock in proceedings No.383 of 1984 and that judgment had been entered against him in the sum of $20,000 in that matter. He went on to plead that the action arose out of the plaintiff's alleged negligence to Hancock in respect of the execution of the bill of sale given by Staircases on 20 May 1982 and the execution by the plaintiff of the declaration as to the ownership of the goods the subject of the bill and that at all material times Staircases was a client of the firm and the plaintiff's execution of the declaration was performed as part of their practice of accountants. During the hearing there was a suggestion that the compromise ought not to have been entered into because the plaintiff was not liable to Hancock at least for the loss claimed in respect of the past debt owed it by Staircases.

47. A surety is not bound to resist the creditor's claim against him if he has no good defence to it and may make the best compromise he can in such circumstances and then recover from the principal debtor indemnification in respect of the loss incurred. Halsbury, 4th edn. para 215 citing Lord Newborough v. Schroder (1849) 7 CB 342 at p 399: 137 ER 136 at pp 158-9. See also Pettman v. Keble (1850) 9 CB 701: 137 ER 1067.

48. I apprehend that the same rule is applicable when a partner in a firm seeks indemnity from another partner or partners of the firm in respect of a debt which he is required to pay and which was incurred in the course of the conduct of the partnership business. It follows, therefore, that if the compromise was validly entered into the plaintiff would, assuming he were entitled to indemnity at all, be entitled to recover half the amount of the compromise from the defendant.

49. The plaintiff was not required to give notice to the defendant that Hancock had begun or continued proceedings against him in order that he might bring this action against the defendant but, notice not having been given, it would have been open to the defendant to impugn the compromise. Duffield v. Scott (1789) 3 TR 374 at p 377: 100 ER 628 at p 630. See also Smith v. Compton (1832) 3 B & Ad 407 at pp 408-9: 110 ER 146 at p 147.

50. I am satisfied that the plaintiff did not give notice of Hancock's action to the defendant. Indeed, he did not for a long time think that the defendant might be required to indemnify him at all. As to this aspect I prefer, as I have already indicated, the evidence of the defendant.

51. But it seems to me that such notice was a condition precedent to the plaintiff's claim. No reference was made to it in the plaintiff's statement of claim and there was no challenge to its performance or occurrence by the defendant in his amended defence. Under O.23, r.14 of the rules of Court, an averment of that performance or occurrence was implied in the statement of claim.

52. The defendant also pleaded certain breaches of the agreement between the parties. It is not strictly necessary that I rule on those allegations and I say merely that, had it been necessary to do so, I would have had much difficulty in seeing how the alleged breaches assisted the defendant.

53. There will be judgment for the defendant.