Re Scarel Pty Limited and Ian Francis Yates v City Loan & Credit Corporation Pty Limited [1988] FCA 23 (10 February 1988)

FEDERAL COURT OF AUSTRALIA

Re: SCAREL PTY. LIMITED and IAN FRANCIS YATES
And: CITY LOAN & CREDIT CORPORATION PTY. LIMITED
Nos. G513 of 1986 and G277 & B371 of 1987
Company Law

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Company Law - liquidators - application of the Rule in Foss v Harbottle - decision by liquidator to discontinue action - motion to bring a derivative action - whether there is exception to the Rule so as to permit an action to be brought or continued by a contributory in name of company if this is in the interests of justice - whether such exception, if it existed, would apply to companies in liquidation - role of the Court having control of the liquidation.

Federal Court of Australia Act 1976 sub-s. 5 (2)

Companies (NSW) Code 1981 ss. 374, 377 and 574

HEARING

SYDNEY
10:2:1988

Counsel for the Applicant Mr. J.P. Hamilton QC with
on the motion: Mr. R.K. Eassie

instructed by Messrs.
Snelgrove Mucsnik & O'Brien

Solicitor for the Respondent Mr. R. Anderson of

on the motion: Messrs. Lane & Lane

ORDER

The motions filed on 11 December 1987 in each of matters Nos. G513 of 1986, G277 of 1987 and B371 of 1987 be dismissed.

The Applicant on the motion pay the Respondent's costs of the motion including the costs incurred on 17 December 1987.

NOTE: SETTLEMENT AND ENTRY OF ORDERS IS DEALT WITH IN ORDER 36 OF THE FEDERAL COURT RULES.

DECISION

In each of these matters, a motion is brought in the same terms. The applicant on the motions, Mr. Ian Francis Yates, is the applicant in matter No. G277 of 1987 and the debtor in matter No. B371 of 1987.

2. Mr. Yates is not at present a party to matter No. G513 of 1986. The applicant in those proceedings is Scarel Pty. Limited; they were instituted in November 1986. The evidence discloses that 90% of the shareholding in Scarel Pty. Limited is in the beneficial ownership of Mr. Yates. The balance is in the beneficial ownership of a Mr. Victor Leong. Mr. Leong has given evidence supporting the present application by Mr. Yates.

3. Scarel Pty. Limited is a company incorporated in the State of New South Wales. On 26 March 1987, in the Equity Division of the Supreme Court of New South Wales, McLelland J. made an order for the winding-up of Scarel Pty. Limited and appointed Mr. P.B. Allen to be liquidator of that company. The order for the winding-up of Scarel Pty. Limited was made on the application of City Loan & Credit Corporation Pty. Limited, the respondent in this Court in matters No. G513 of 1986 and G277 of 1987, and the petitioning creditor in matter B371 of 1987.

4. With respect to the present motion in matter G513 of 1986, the liquidator has indicated that he submits to any order the Court makes, except as to the question of costs.

5. Sub-s. 374 (1) of the Companies (NSW) Code 1981 ("the Code") provides that where a winding-up order has been made, the liquidator shall take into his custody or under his control all the property to which the company is or appears to be entitled. Sub-paras. 377 (2) (a) and (b) of the Code provide that the liquidator may bring any legal proceedings in the name and on behalf of the company and appoint a solicitor to assist him in his duties. Sub-s. 377 (5) provides that the exercise by the liquidator of the powers conferred by s.377 is subject to the control of the Supreme Court of New South Wales, and any creditor or contributory may apply to the Supreme Court in respect of any exercise or proposed exercise of any of those powers.

6. The liquidator, after obtaining legal advice, came to the conclusion that he should discontinue the proceedings in this Court, No. G513 of 1986. On 14 August 1987, he stated, by a letter to the solicitors for Mr. Yates, the reasons for that decision. In particular, the liquidator indicated that he was not satisfied that the proceedings in this Court had any more than a remote chance of success, whilst if the proceedings were continued, liabilities would be incurred for costs which the company would be unable to pay. Further, no satisfactory proposal had been received for indemnity of the liquidator for costs. Finally, the liquidator was not satisfied that if the proceedings in this Court were successful, the company and its creditors would be in a materially improved position.

7. Mr. Yates then applied by notice of motion to the Supreme Court seeking a direction from the Supreme Court to the liquidator to the effect that the liquidator be directed to carry on the Federal Court proceedings No. G513 of 1986. The jurisdiction of the Supreme Court was invoked pursuant to sub-s. 377 (5) of the Code, to which I have referred. The Supreme Court dismissed the application on 10 December 1987. In his Reasons for Judgment, Bryson J. emphasised that in his view the liquidator had acted in a reasonable manner, forming, on reasonable grounds, a clear view as to the proper course to be taken with the Federal Court proceedings.

8. In this Court, on 11 December 1987, an order was made that proceedings No. G513 of 1986 be dismissed with the proviso that the order not be entered before 4 pm on 17 December 1987. The present motions were filed on 11 December 1987 and, pending the decision on the motions, no steps have been taken to enter the order for dismissal which was made on 11 December 1987. It is common ground that if the present applications fail, then the respondent may proceed to have that order entered.

9. By his motions, Mr. Yates seeks an order that the Federal Court proceedings No. G513 of 1986, G277 of 1987 and B371 of 1987 be consolidated and heard together with evidence in the one to be evidence in the other.

10. For this objective to be achieved, it is, of course, necessary to keep proceedings No. G513 of 1986 alive, notwith- standing the attitude taken by the liquidator and the order for dismissal made on 11 December 1987.

11. To that end, Mr. Yates also seeks by his motions leave to him to continue proceedings No. G513 of 1986 "in the name of Scarel Pty. Limited for and on behalf of the shareholders of" Scarel Pty. Limited.

12. I should now outline the nature of the three proceedings, in each of which the present applications are made. In doing so, I refer to the account of the facts and contentions of the parties in the interlocutory judgment in matter G513 of 1986 by Fox J. (pages 1-6).

13. In proceedings in the Common Law Division of the New South Wales Supreme Court, City Loan & Credit Corporation Pty. Limited recovered judgment against Scarel Pty. Limited, Yates Property Corporation Pty. Limited and Ian Francis Yates for the sum of $1,073,025.15 with $19,500 costs, the judgment to take effect on 27 September 1984. On 22 January 1987, there was issued out of this Court a bankruptcy notice, No. B371 of 1987, addressed to Mr. Yates based on that judgment. Mr. Yates then asserted a counter-claim, set-off or cross-demand, and pursuant to directions made in this Court on 4 August 1987, the bankruptcy proceedings are presently stayed until the determination of proceedings No. G277 of 1987. Proceedings No. G277 of 1987 were commenced by application and statement of claim filed by Mr. Yates on 30 June 1987. The subject matter of those proceedings provides the counter-claim, set-off or cross-demand relied upon in response to the bankruptcy notice.

14. In these circumstances, it is, in my view, not appropriate that the bankruptcy proceedings be consolidated in the manner suggested by the present notice of motion with proceedings No. G277 of 1987 and G513 of 1986.

15. There remains the question whether proceedings No. G277 should be consolidated with matter No. G513 of 1986. That, as I have indicated, can only occur if matter No. G5l3 of 1986 is to be saved from dismissal by the means now urged on the Court by Mr. Yates for continuation of those proceedings by him in the name of the company.

16. It appears that on 6 November 1981, the respondent, City Loan & Credit Corporation Limited, advanced to Scarel Pty. Limited the sum of $489,750. As security the respondent took from Scarel Pty. Limited a first mortgage over two parcels of land at Normanhurst, together with an equitable charge over the undertaking of the company. In addition, Yates Property Corporation Pty. Limited and Mr. Yates personally entered into a deed of guarantee dated 6 November 1981 guaranteeing jointly and severally the performance by Scarel Pty. Limited under the terms of the securities I have mentioned. In 1984, the securities were rearranged in the manner described by Fox J. in his reasons for judgment. Yates Property Corporation gave a third mortgage to City Loan & Credit Corporation Pty. Limited over land at Darling Harbour. This was resumed in 1985 and there is a dispute as to the quantum of compensation payable. Yates Property Corporation Pty. Limited is in liquidation.

17. As I have said, proceedings No. G513 of 1986 were commenced in November 1986. Scarel Pty. Limited claims relief of various kinds including damages both under s.82 of the Trade Practices Act 1977 and in tort, together with orders pursuant to s.87 of that statute which would avoid (wholly or in part) or vary the arrangements between the parties relating to the loan transaction. In addition, in the same proceedings, Scarel Pty. Limited sought to restrain the then proposed sale of the Normanhurst land. Applications for interlocutory relief made to this Court were unsuccessful and the land at Normanhurst was sold at auction on 26 February 1987 for the sum of $160,000. Mr. Yates complains that this sale was effected at a significant undervalue, and points to the deficiency as an item of loss or damage claimed in the proceedings.

18. In proceedings No. G277 of 1987, Mr. Yates, in substance, agitates the same matters, but on his own behalf, his prejudice principally arising from the existence of the guarantee which I have mentioned.

19. A central element in the complaint in both proceedings concerns alleged conduct on the part of City Loan & Credit Corporation Pty. Limited which is said to be misleading or deceptive or likely to mislead or deceive. The conduct is said to include assurances that the Normanhurst securities would only be enforced in certain circumstances which had not occurred when that enforcement did take place. The circumstances, to put it broadly, included the prior settlement of the claim for compensation by Yates Property Corporation Pty. Limited (In Liquidation) in proceedings pending in the Land & Environment Court of New South Wales on a claim for compensation for resumption of the land of that company at Darling Harbour. Those proceedings are still not completed.

20. I turn now to consider the application to permit Mr. Yates to continue on behalf of the company the proceedings No. G513 of 1986.

21. The applicant described the application as, in substance, one for amendment pursuant to Order 13 Rule 2, and also, or alternatively, as one for the addition of a party pursuant to Order 6 Rule 8. In my view, the application is not correctly characterised as one for the addition of a party; it is an application that Mr. Yates continue the proceedings in the name of Scarel Pty. Ltd., which remains the party on the record.

22. However the application be characterised in terms of the Rules of Court, it is clear that it cannot succeed unless the applicant makes out a somewhat special case.

23. The general principle is that in an action to redress a wrong due to a company, or to recover money or damages alleged to be due to it, the company is the only proper plaintiff. The company's name should only be used as plaintiff by direction of the company or its directors or, where the company has been placed in liquidation, by the liquidator: Halsbury's "Laws of England", 4th Ed, Vol. 7, paras. 767, 1122, 1124.

24. This brought the applicant to make submissions as to the Rule in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461; 67 ER 189, and to the exceptions to that Rule, on the footing that the present case either fell outside the Rule or within an exception to it.

25. In Prudential Assurance Co. Ltd. v Newman Industries Ltd. (No. 2) (1982) Ch 204 at 210, the English Court of Appeal said:

A derivative action is an exception to the
elementary principle 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. This
is sometimes referred to as the rule in Foss
v Harbottle [1843] EngR 478; (1843) 2 Hare 461 when applied
to corporations, but it has a wider scope
and is fundamental to any rational system of
jurisprudence. The rule in Foss v
Harbottle also embraces a related principle,
that an individual shareholder cannot bring
an action in the courts to complain of an
irregularity (as distinct from an
illegality) in the conduct of the company's
internal affairs if the irregularity is one
which can be cured by a vote of the company
in general meeting.

The "related principle" described by the English Court of Appeal may be of diminished importance in Australia. S.574 of the Code gives standing to seek injunctive and pecuniary remedies in respect of contraventions of the Code to "any person whose interests have been, are or would be affected by the conduct" in question. In any event, the present case does not involve any alleged irregularity in the conduct of the affairs of the company as a going concern. Further, any grievance as to the decision of the liquidator not to continue the Federal Court proceedings has been ventilated, as I have described, in the Supreme Court.

26. The present case involves the Rule in Foss v Harbottle in the first (and wider) sense described above by the English Court of Appeal. The two senses of the Rule are also apparent in a classical formulation of it by Lord Davey, speaking for the Privy Council in Burland v Earle (1902) AC 83 at 93. His Lordship said:

It is an elementary principle of the law
relating to joint stock companies that the
Court will not interfere with the internal
management of companies acting within their
powers, and in fact has no jurisdiction to
do so. Again, it is clear law that in
order to redress a wrong done to the
company, or to recover moneys or damages
alleged to be due to the company, the action
should prima facie be brought by the company
itself.

As Professor Beck has indicated in "An Analysis of Foss v Harbottle" in Studies in Canadian Company Law, 545 at 548, there are involved in that statement several strands of thought. There is the principle that the courts will not interfere in the internal disputes of partnerships, joint stock companies or the modern corporation, the precept that the courts seek to avoid a multiplicity of actions, the principle that equity will not act in vain and that it would do so if the court were to rule on a matter that was within the competence of a majority of the shareholders and finally the principle that for a wrong done to a company, the company is the proper plaintiff in an action to seek redress. See also the articles by Lord Wedderburn "Shareholders' Rights and the Rule in Foss v Harbottle" (1957) Camb. Law J. 194 at 196-199, and by Mr. Boyle "The Minority Shareholder In The Nineteenth Century: A Study In Anglo-American Legal History" (1965) 28 Mod. L. Rev. 316 at 325-326.

27. More recently, Browne-Wilkinson LJ. (as he then was) said the following of the Rule (in Nurcombe v Nurcombe (1984) BCLC 557 at 565):

Since the wrong complained of is a wrong to
the company, not to the shareholder, in the
ordinary way the only competent plaintiff in
an action to redress the wrong would be the
company itself. But, where such a
technicality would lead to manifest
injustice, the courts of equity permitted a
person interested to bring an action to
enforce the company's claim. The case is
analogous to that in which equity permits a
beneficiary under a trust to sue as
plaintiff to enforce a legal right vested in
trustees (which right the trustees will not
themselves enforce), the trustees being
joined as defendants. Since the bringing of
such an action requires the exercise of the
equitable jurisdiction of the court on the
grounds that the interests of justice
require it, the court will not allow such an
action to be used in an inequitable manner
so as to produce an injustice.

28. Representative actions were the product of equity procedures and the Rule in Foss v Harbottle and its exceptions have generally been considered part of the powers and procedures of modern courts of equity of which this Court (in respect of matters otherwise within its jurisdiction) is one: Federal Court of Australia Act 1976, sub-s. 5 (2).

29. On the footing that the Rule would otherwise be applicable in the wider sense I have described, Senior Counsel for Mr. Yates sought to outflank Foss v Harbottle. He submitted that, notwithstanding the Rule, there was a general principle that an action may be brought or continued in the name of a company by a contributory (as Mr. Yates undoubtedly is in the case of Scarel Pty. Limited) where the company cannot or will not bring or continue the action and it is in the interests of justice that the action be brought or continued; this principle is said not to be limited to cases where there has been a fraud by directors, officers or other shareholders of the company in question. Senior Counsel then submitted that the interests of justice favoured the relief he sought.

30. There are at least four recognised "exceptions" to the Rule, which are set out by Professor Gower in his "Modern Company Law" 4th Ed, p. 644. Lord Wedderburn has questioned whether these exceptions are truly exceptions at all, stating that they appear to be situations in which there is no chance of confirmation by a majority of shareholders, so that the Rule does not apply in the first place ("Shareholders' Rights and the Rule in Foss v Harbottle" (1957) Camb. Law J. 194 at 203).

31. In any event, Mr. Yates does not rely upon any of these exceptions, rather, as I have indicated, seeking to rely upon the general proposition described above.

32. There is some support for the existence of such a principle.

33. In Foss v Harbottle itself, Wigram V-C stated that if a case of an injury to a corporation should arise for which no adequate remedy remained except that of a suit by individual corporators " . . . the claims of justice will be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue": [1843] EngR 478; (1843) 2 Hare 461 at 492; [1843] EngR 478; 67 ER 189 at 203. In Russell v Wakefield Waterworks Co. (1875) 20 LR Eq 474 at 482, Jessel MR spoke of cases " . . . where the interests of justice require the Rule to be dispensed with". Shortly thereafter, in Hawes v Oakland (1881) 104 US 450 at 460, the Supreme Court of the United States, after detailed consideration of the English decisions, spoke of cases that might arise in which "to prevent irremediable injury, or a total failure of justice, the court would be justified in exercising its powers . . ." (As to the subsequent development in the United States of the rules as to derivative suits, see Professor De Mott's article "Shareholder Litigation In Australia and the United States: Common Problems, Uncommon Solutions" (1987) 11 Syd. Law Rev. 259). Furthermore, in Hawkesbury Development Co. Ltd. v Landmark Finance Pty. Limited (1969) 2 NSWR 782 at 789-790, Street J. (as he then was) was prepared to accept the existence of an exception to the Rule in Foss v Harbottle where justice so requires.

34. Finally, I should refer to Campbell v Kitchen & Sons Ltd. and Brisbane Soap Company Ltd. [1910] HCA 23; (1910) 12 CLR 513. In that case, half of the shares of company B were owned by company A or its nominees. Company A brought an action against company B and recovered judgment in its favour. The directors of company B were equally divided in opinion on the question of whether an appeal should be brought to the High Court. The other half of the shares in company B were held by C or his nominees. In the High Court, leave was given to C to appeal on behalf of himself and all other members of company B, Griffith CJ saying (at 514)":

Under these circumstances there must be some
remedy, and I think we ought to apply the
analogy of the practice of the Court of
Chancery, which is now adopted by the
Supreme Court of Judicature, and give leave
to some person who is substantially
interested to come in and institute the
appeal.

Counsel had cited Foss v Harbottle and such decisions as Burland v Earle (supra). The case does not appear to fall clearly within any of the four recognised exceptions to the Rule in Foss v Harbottle.

35. However, in my view, it is essential in the present case to bear in mind that Scarel Pty. Limited is in liquidation and that pursuant to the provisions of the Code, the liquidator's decision as to the termination of the present proceedings has been tested in the Companies Court. The scheme of the statute is that it is the liquidator who is the appropriate party to decide whether to continue for the company litigation such as this, subject to the control of the Companies Court over the liquidator.

36. The cases dealing with Foss v Harbottle and the exceptions to it involve going concerns where, by reason of particular circumstances, the orderly exercise of the respective powers of the directors and shareholders did not produce a result whereby the company was taking action to enforce its rights, whether against directors, shareholders or third parties.

37. The situation is very different where the company is in liquidation. The ordinary rule there is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure other relief for an injury done to the company. In my view, this follows from the operation of the provisions of the Code to which I have referred. A special case arises where the directors institute proceedings to have the winding-up order set aside: Nationwide News Pty. Ltd. v Samalot Enterprises Pty. Ltd. (1986) 10 ACLR 741. But the general proposition is that with the liquidation, both the directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company: McPherson "The Law of Company Liquidation" 3rd Ed, 171-172, 179, 231-232.

38. A decision by the liquidator may be called into question by a contributory pursuant to the statutory provisions in that behalf. That has been attempted, without success. What is now sought in the present proceedings is, in substance, by way of collateral attack to reagitate the question by treating as applicable the Rule in Foss v Harbottle and relying upon an exception to that Rule in the terms asserted by the applicant.

39. General considerations as to the desirability of following equitable procedures do not operate to supplement the precise provisions laid down by the legislation dealing with liquidations. In Ferguson v Wallbridge (1935) 3 DLR 66 at 83, (a case of a voluntary liquidation), Lord Blanesburgh (speaking for the Privy Council) said:

(I)n the case of such a claim as was
successfully made by the plaintiff in Cook v
Deeks - and there is at least a family
likeness between that case and this -
justice would be denied to him if the mere
possession of the company's seal in the
hands of his opponents were to prevent the
assertion at his instance of the corporate
rights of the company as against them. But
even in the case of a going company a
minority shareholder is not entitled to
proceed in a representative action if he is
unable to show when challenged that he has
exhausted every effort to secure the joinder
of the company as plaintiff and has failed.
But cessante ratione legis, cessat lex ipsa.
So soon as the company goes into
liquidation, the necessity for any such
expedient in procedure disappears. Passing
over the superficial difficulty that a
company in compulsory liquidation cannot be
proceeded against without the leave of the
Court, the real complainants, the minority
shareholders, are now no longer at the mercy
of the majority, wrongly retaining the
property of the company by the strength of
their votes. If the liquidator, acting at
the behest of the majority, refuses when
requested to take action in the name of the
company against them, it is open to any
contributory to apply to the Court and under
s.234 of the Provincial Companies Act, which
corresponds to s.252 of the Imperial Statute
(Companies Act, 1929 (Imp.), c.23), it is
open to the Court, on cause shown, either to
direct the liquidator to proceed in the
company's name or on proper terms as to
indemnity, and otherwise to give to the
applicant leave to use the company's name as
plaintiff in any action necessary to be
brought for the vindication of the company's
rights . . . And it is the policy of the
Act that all claims competent to the company
should be brought within the scope and
control of the winding-up, and that not only
in a compulsory liquidation. Therefore,
such procedure is not to be discouraged.

40. I draw attention to the last two sentences in this passage. It was repeated in Fargro Ltd. v Godfroy (1986) 3 All ER 279 at 282.

41. Lord Blanesburgh referred to Cape Breton Co. v Fenn (1881) 17 Ch D 198. In that case (at 208) Cotton LJ had said:

There may be, no doubt, special cases where,
although the Court does not think fit to
remove the liquidator on the ground that his
conduct in not bringing an action is
improper, it may give power to other persons
to conduct the litigation upon their giving
proper indemnity against any consequences of
that litigation . . . (The creditors and
contributories) have a right in special
cases to ask the Court for leave to do that
which the liquidator is advised not to do,
or which, (and in practical terms this is
usually the reason) because he has no funds,
he does not do, viz., take proceedings in
the name of the company, but in my opinion
the power of the Court to give leave to use
the name of the company stops there, and is
confined to those who are parties to the
liquidation.

I may add that in a given case, rather than remove the liquidator, the Companies Court may appoint a receiver of the company's right of action to enforce it in the name of the company: Garden Mews-St. Leonards Pty. Ltd. v Butler Pollnow Pty. Ltd. (1984) 9 ACLR 91 at 95.

42. The point is that when the company went into liquidation, the question of the subsequent carriage of claims of the company was brought within the scope and control of the winding-up and of the Court having charge of that winding-up. In such a case, it is, in my view, not appropriate to speak of the Rule in Foss v Harbottle or exceptions to the Rule in Foss v Harbottle which have the effect of taking the carriage of such claims outside the winding-up. It has been said on more than one occasion that winding up is a process affecting rights in rem, and there is obviously much sense in the policy of the legislation in confining these questions to the one forum specially designated by the legislation to deal with the whole of the subject matter. That in fact was done in this case.

43. In any event, even if there were any such principle as that contended for by the applicant, it would, in my view, not be correct to say that it was in the interests of justice that the action be continued. Bryson J. commented upon the failure of Mr. Yates to propose any satisfactory form of indemnity for costs and observed that if any such indemnity were proposed, its value would require close scrutiny in view of the pending bankruptcy proceedings. No indemnity by Mr. Yates or any third party nor any other means of providing security for costs was propounded before me. Indeed, the applicant expressly disclaimed the need for any such provision. It would not be in the interests of justice, in the circumstances of this litigation, to accede to the present application without suitable provision of this character being made.

44. In my opinion, the application for a grant of leave to Mr. Yates to continue the proceedings No. G513 of 1986 on behalf of the company should be dismissed. It follows, as I have indicated, that the balance of the applications also fail. The result will be that the previous order of the Court for dismissal of proceedings No. G513 of 1986 should now proceed to entry.

45. The applicant should pay the costs of the respondent of the present application, including the costs of the proceedings before the Court on 17 December 1987, as well the costs of 2 and 3 February 1988.