the Good Motel Company Pty Limited (In Liquidation) v Edward John Shepherd and Harold Spencer Cottee [1992] ACTSC 55 (5 June 1992)

SUPREME COURT OF THE ACT

THE GOOD MOTEL COMPANY PTY LIMITED (IN LIQUIDATION) v. EDWARD JOHN SHEPHERD
and HAROLD SPENCER COTTEE
No SC 771 of 1990
Pleading

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Master A. Hogan(1)

CATCHWORDS

Pleading - Amendment - New cause of action - Limitation period expired - Company directors - Company in liquidation - Negligence - Breach of fiduciary obligations - Breach of statutory obligations.

Companies Act 1981 Subs 229(1), (2), (4), (7)

Weldon v. Neal (1887) 19 QBD 394

Black v. City of South Melbourne (1964) 38 ALJR 309

Renowden v. McMullin [1970] HCA 24; (1970) 123 CLR 584

Golski v. Kirk (1987) 72 ALR 4343\

HEARING

CANBERRA
5:6:1992

Counsel for the Plaintiff: P. C. Comans

Instructing Solcitors: Abbott Tout Russell Kennedy

Counsel for Firstnamed Defendant: Mr P. L. Sheils QC

Instructing Solicitors: Scott Sheils and Glover

Counsel for Secondnamed Defendant:Mr N.J. Topfer

Instructing Solicitors: Mallesons Stephen Jaques

ORDER

1. The application be dismissed.

2. The plaintiff pay the defendants' costs.

3. Leave granted to the plaintiff to apply for amendment of the statement of claim, any amendment so proposed to be settled by counsel.

DECISION

This is an application to amend a statement of claim in an action by a company in liquidation against its two directors.

2. During the argument it became clear that in the form of the amendments proposed by the Notice of Motion, there were a number of matters that could not be supported, and I deal with the application on the basis of the proposed amendments finally put forward by Counsel for the plaintiff on the hearing.

3. The writ was issued on 10 December 1990. The general endorsement was:
"The plaintiff's claim is for payment by the defendants

to the plaintiff of the amount the plaintiff has lost as a
result of the fraud, negligence, default, breach of trust
and breach of duty of the defendants as directors of the
plaintiff in transferring assets of the plaintiff to
Rodeway Pacific International Limited (formerly known as
The-Tourist Group Limited) in early 1985. The above orders
are sought pursuant to S.542 of the Companies Act."

4. The defendants appeared on 5 December 1991 and a statement of claim was delivered on 12 December 1991.

5. The original statement of claim alleged in summary the following matters:

1. The plaintiff was wound up by order made on 7
October 1986.
2. The defendants were directors of the plaintiff and
of the company referred to in the endorsement (Rodeway).
3. Between 21 January 1985 and 30 June 1985 the
plaintiff lent to Rodeway the sum of $449,333.
4. The loan was made with the knowledge and consent of
the defendants.
5. In permitting the loan each of the defendants was
guilty of negligence, default and/or breach of duty in
relation to the plaintiff.

6. There then followed eight particulars of negligence, three additional particulars, said to be particulars of "default", and one particular of breach of duty.

6. As a consequence The Good Motel suffered loss and
damage. The damage is alleged to be the fact that Rodeway
was unable to pay to the plaintiff $776,391.60 representing
the principal and interest outstanding on the loan.

7. The claim for relief was, "and the plaintiff claims judgment for the amount assessed as representating the loss or damage suffered by Good Motel as a consequence of the negligence, default and/or breach of duty of the defendants, interest pursuant to Section 53A of the Supreme Court Act, and costs".

8. The proposed amendment substantially recast the statement of claim.

9. Paragraphs 1, 2 and 3 remained substantially the same, with only the immaterial addition of the names of the defendants in paragraph 2.

10. Paragraphs 4, 5 and 6 set out as separate material facts, and in a different order and with some changes of phraseology, much of the material that was contained in the particulars that followed paragraph 5 of the original statement of claim, with some additional material.

11. It would be tedious, and I do not think it is necessary for the purpose of this judgment, to set the amendments out in detail.

12. In summary, the new paragraph 4 repeated the allegations in the previous pleading that the loan made by the plaintiff to Rodeway ("the loan") was made without provision for the payment of interest or for security, and added that there was no provision for repayment and no loan agreement.

13. The new paragraph 5 sets out a number of circumstances said to exist at the time the loan was made. One that perhaps should be mentioned, and which was included in the previous pleading, was that a company named Chasewater Pty. Limited ("Chasewater") was a minority shareholder in the plaintiff, and at the time the loan to Rodeway was made, Chasewater had commenced proceedings to recover from the plaintiff a debt of over $191,000 alleged to be owing by the plaintiff to Chasewater.

14. The only material in the new paragraph 5 that was not in the old pleading in some form or another was the allegation that there was no record made in the plaintiff's records about the existence or terms of the loan to Rodeway.

15. The new paragraph 6 made a number of allegations about the defendants at the time the loan to Rodeway was made, such as that they knew or ought to have known the matters set out in paragraphs 4 and 5, and that their duty to the plaintiff conflicted with their interests as directors of, and beneficial owners of shares in, the plaintiff.

16. The new, or additional, allegations were that the defendants at the time of the loan:

1. Intended that, or were recklessly indifferent to
whether, the funds the subject of the loan would not be
available to the plaintiff to meet its liability to
Chasewater;
2. Knew or ought to have known that if Chasewater had
known the loan was to be made it would have opposed it; and,
3. Concealed from Chasewater the existence of the loan.

17. As recast during the argument the proposed new paragraph 7 alleges that by reason of the matters alleged in paragraphs 4 to 6 each defendant was guilty of:

(a) negligence; (b) breach of his fiduciary duty as a director of the
plaintiff;
(c) breach of duty to Chasewater as a creditor of and
shareholder in the plaintiff; and,
(d) breach of subsections 229(1), (2) and (4) of the
Companies Act.

18. Paragraph 8 then alleges that by reason of the matters alleged in paragraphs 4 to 6, the plaintiff had suffered loss and damage, the particulars of which set out that the plaintiff had recovered judgment against Rodeway for $776,391.60 and costs in respect of the principal and interest on the loan, which sum was unpaid and not recoverable because Rodeway was insolvent.

19. Paragraph 9 adds to the claim for relief in the original statement of claim orders, pursuant to Section 229(7) of the Companies Act, that the defendants pay to the plaintiff the amount of its loss.

20. Counsel for the first defendant objected to the proposed amendments on three bases.

21. The first was that within the proceedings pursuant to which the plaintiff was ordered to be wound up, SC708/1986, an application has been made by the Australian Securities Commission which duplicates the allegations made and the relief sought by the amended statement of claim so that these proceedings are merely a duplication. If that be the fact, it may be grounds for a stay either of these proceedings or that application, or for an order consolidating them, but I do not think that it is reason to refuse the application for amendment.

22. The second objection was that the defendants have made an application for security for costs which has not yet been dealt with. Again I do not think that that is relevant to the question whether the amendment should be granted. I do not know the terms upon which that application has not yet been determined, but if the defendants wish to proceed with it they may take the necessary steps, and the costs associated with this present application would be taken into account in fixing the amount of security, if it were ordered.

23. The essential objection, in which counsel for the second defendant joined, was that the amendments would raise a cause or causes of action which if sought in separate proceedings would be statute barred.

24. It is clear from Renowden v. McMullin [1970] HCA 24; (1970) 123 CLR 584 that the causes of action on which the proceedings were originally brought are to be ascertained by reference to the statement of claim without regard to the endorsement on the writ. It may be taken therefore that the allegations of fraud, breach of trust and Section 542 of the Companies Act were abandoned by the plaintiff by the filing of the original statement of claim, and if they would now be statute barred they may not be reintroduced by amendment.

25. It has been held by the Full Court of the Federal Court of Australia in Golski v. Kirk (1987) 72 ALR 443 that where proposed amendments do not change the cause of action but do no more than particularise the facts by which the party proposes to sustain it, even though the facts sought to be brought forward under the amendments are quite different from those originally alleged, an amendment may be allowed, despite the rule of practice referred to in Weldon v. Neal (1887) 19 QBD 394. See also Black v. City of South Melbourne (1964) 38 ALJR 309.

26. So far as the additional matters proposed to be added to the statement of claim constitute particulars of negligence, it would therefore be possible for them to be added, as they appear to me to do no more than add further specific items to the general allegation of breach of the duty to take care.

27. Similarly, insofar as the allegations are based upon the breaches by the defendants of their fiduciary duties, in the light of the conflict between their duties to the company and their interests in Rodeway, they also do not raise a fresh cause of action and it would be permissible to amend the statement of claim by adding them.

28. The allegations that the conduct of the defendants constitute breaches of Sections 229(1), 229(2) and 229(4) of the Companies Act raise greater difficulties. It is necessary to refer to the fact that each of those subsections creates a criminal offence, and Section 229(7) provides that where a person contravenes one of those provisions, the Corporation may recover from that person, as a debt, the amount of the profit that the person made, or the amount of the loss that the company suffered, as a result of the breach.

29. Subsection 229(1) requires that an officer of the Corporation shall at all times act honestly in the exercise of his powers or the discharge of the duties of his office.

30. In my opinion the allegations made in the original statement of claim, namely of negligence, default and breach of duty as directors, did not encompass a failure to act honestly. I think that to introduce that concept into the case is not merely to change the legal label or the foundation in law on which the case is based, but to introduce a completely new case or set of ideas. Counsel for the plaintiff did not seek to argue that the relevant limitation period had not expired. I would not therefore permit a reference to that subsection in any amendment.

31. Subsection 229(2) provides that an officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties.

32. It is difficult at first to see that this requirement adds anything to the duty of care and diligence imposed upon a director by the common law. If it in fact adds nothing, the plaintiff loses nothing by its absence from the pleading. If, as I think it does, it does add something different, then it raises a new and different cause of action. Subsection 229(7) provides that the relevant amount may be recovered as a debt. Negligence, on the other hand, sounds in damages. I think therefore that in this respect the proposed amendment should not be allowed.

33. Subsection 229(4) provides that an officer of the Corporation shall not make improper use of his position as such an officer to gain directly or indirectly an advantage for himself or for any other person or to cause detriment to the Corporation.

34. That Subsection operates in the same area of the law as breach of fiduciary duty. It would, I think, always be held that a director of a company who gained an advantage for himself by use of his position as a director without the fully informed consent of the company, would be held to be acting improperly. But I may be wrong in that. Also, it may not be true that the converse would always follow, namely that any act which would constitute the improper use of his position by a director, within the meaning of the Statute, would always found a right of action in the company against him based upon general equitable principle. It was probably to meet such doubts that the sections were included in the Statutes.

35. I think therefore that the attempt to base relief upon this Subsection also constitutes the introduction of a different cause of action which should not be allowed.

36. Counsel for the second defendant relied upon a further objection to the proposed amendments, namely that they were embarrassing in form, in that it did not appear clearly from the amended statement of claim what particular matters constituted breaches of which particular duty. I think this objection is obviously well founded and I propose therefore to dismiss the application as brought.

37. No counsel raised another difficulty that I have with the pleading, namely that it does not appear that the breach of any duties that the defendants owed to Chasewater gave rise to any right to relief at the suit of the plaintiff company. I would need to be persuaded that an allegation of a breach of that particular duty should be permitted to remain in the pleading.

38. If the plaintiff is advised to make another application seeking amendments that would comply with these reasons I grant leave to make that application, if leave is necessary. I direct however that any proposed amendment be settled by Counsel.

39. I order the plaintiff to pay the costs of this application.