Re Holpitt Pty Limited v Fredrick Swaab; Stephen Michael Larkin; Brent Roderick Potts and Theodore William Rigall-West [1992] FCA 1; 2 Corporations 10 ACLC 64; (1992) 6 Ascr 488 (1992) 105 ALR 421 (1992) 33 FCR 474 (3 January 1992)

FEDERAL COURT OF AUSTRALIA

Re: HOLPITT PTY LIMITED
And: FREDRICK SWAAB; STEPHEN MICHAEL LARKIN; BRENT RODERICK POTTS and THEODORE
WILLIAM RIGALL-WEST
No. N G519 of 1991
FED No. 2
Corporations
10 ACLC 64
(1992) 6 ASCR 488
(1992) 105 ALR 421
(1992) 33 FCR 474

COURT

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

CATCHWORDS

Corporations - application under s. 556 of the Companies Code alleging that the respondent "took part in the management of the company" at the time when a debt was incurred by entry into a contract to purchase land - whether the solicitor and secretary of the company was a person who took part in its management - construction of s. 556.

Companies (New South Wales) Code, s. 556

Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 5 ACLC 1027

Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; (1972) AC 153

Gibson v Barton (1875) 10 QB 329

HEARING

SYDNEY
3:1:1992

Counsel for the Applicant: Mr R.G. Forster

Solicitors for the Applicant: Messrs Bradfield and Scott

Counsel for the First Respondent: Mr P.M. Jacobson

Solicitors for the First Respondent: Messrs Blake Dawson Waldron

ORDER

The application be dismissed as against the First Respondent.

The applicant pay the First Respondent's costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

This is a motion for dismissal of an application, as against the First Respondent named in it, Mr Swaab.

2. In order to appreciate the points raised, it is necessary to refer to the statement of claim. The foundation of the statement of claim is the making of an agreement by a company, Varimu Pty Limited (Varimu), now in liquidation, on 22 March 1989 to purchase an hotel from the applicant for $4.6 million. The statement of claim, filed 13 September 1991, alleges that Varimu, in breach of its agreement, refused to proceed to completion and that the agreement was terminated by the applicant accordingly, the deposit of $500,000 being forfeited, on 24 January 1990. The applicant's cause of action against the first respondent is encapsulated, in the statement of claim, in the following paragraphs:

"15. As at 22 March 1989 and in particular as at the
time of the Agreement:
(a) The First Respondent was a person who took part
in the management of Varimu;
. . .
16. By entering into the Agreement, Varimu incurred a debt
to the Applicant upon the terms and subject to the
conditions therein contained.
17. Immediately before the time when Varimu entered into
the Agreement, there were reasonable grounds to expect
that if Varimu entered into the Agreement, it would
not be able to pay all its debts as and when they
became due.
18. In the premises, the Respondents are jointly and
severally liable to the Applicant for the payment of
the debt so incurred by Varimu and for the loss and
damage suffered by the Applicant by reason of the
matters hereinbefore alleged."

3. Mr Swaab challenges, by his motion, the allegation that he "was a person who took part in the management of Varimu", and also the allegation that "(b)y the entering into the Agreement, Varimu incurred a debt to the Applicant".

4. By letter dated 17 September 1991, Mr Swaab asserted that he played no part in the management of Varimu, and sought particulars of "all of the facts, matter (sic) and circumstances giving rise to the allegation that the first respondent took part in the management of Varimu Pty Limited." He also asked that all acts of management said to have been carried out by him be identified. The reply of the applicant's solicitors, dated 19 September 1991, was relevantly in the following terms:

"So far as the Applicant is presently aware (and it reserves
the right to furnish further particulars after discovery has
taken place), the First Respondent:
(a) was and acted as the solicitor for Varimu;
(b) was and acted as the secretary of Varimu;
(c) arranged for the deposit moneys to be available to Varimu;
(d) attended at the exchange of contracts;
(e) witnessed the affixing of the common seal of Varimu to
the contract as secretary of Varimu."

5. On 23 September 1991, a notice of motion was filed on behalf of the First Respondent seeking an order pursuant to Order 20 rule 2 that the proceedings be dismissed as against him. The relevant part of rule 2 is, of course, sub-rule 1(a), which deals with a case where "no reasonable cause of action is disclosed". Summary dismissal under such a rule is, it is accepted, available only in cases which are very plain.

6. The application and statement of claim are brought, as is expressly pleaded in para 21 of the statement of claim, in reliance upon s. 556 of the Companies (New South Wales) Code or alternatively s. 592 of the Corporations Law (NSW). The motion was argued on the footing that there is no practical difference between these provisions. Section 556 of the Companies Code relevantly provides:

"1. If -
(a) a company incurs a debt, whether within or outside the State;
(b) immediately before the time when the debt is incurred -
(i) there are reasonable grounds to expect
that the company will not be able to pay
all its debts as and when they become due;
or
(ii) there are reasonable grounds to expect
that, if the company incurs the debt, it
will not be able to pay all its debts as
and when they become due; and
(c) the company is, at the time when the debt is incurred,
or becomes at a later time, a company to which this
section applies,
any person who was a director of the company, or took part
in the management of the company, at the time when the debt
was incurred is guilty of an offence and the company and
that person or, if there are two or more such persons, those
persons are jointly and severally liable for the payment of the debt.
Penalty: $5,000 or imprisonment for 1 year, or both."

7. Counsel for Mr Swaab points out that article 37 of the Articles of Association of Varimu provides that "(t)he business of the Company shall be managed by the Directors". Mr Swaab was not a director. Nor, it is submitted, does the fact that a person is the secretary of a company mean that he takes part in its management. Section 5 of the Companies Code contains definitions of "officer" and "executive officer" which make it clear that the office of secretary does not, in itself, involve management. But the definition of "executive officer" does also make it clear that a person may be concerned in or take part in the management of a corporation, not only without being a director, but irrespective of the name by which he is called.

8. Mr Swaab placed particular reliance, as regards the possible effect of his having been secretary of the company, upon the decision of Needham J. in Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 5 ACLC 1027 at 1030 where, even in the case of a secretary in a rather special position, his Honour rejected a submission that the secretary had authority outside "the administrative side of the company's affairs". Needham J. referred to the decision of the Court of Appeal in Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711, which he held "does not take the authority of the secretary into the management of the company, the decisions associated with the activities of directors of normal companies." His Honour's comment seems to be applicable here, where the Articles expressly provide for management by the directors.

9. Section 556 is a section which imposes criminal liability, including imprisonment. It would be quite inappropriate to give to the statement of an ingredient of such an offence, "any person who was a director of the company, or took part in the management of the company", some loose meaning ignoring that context. Particularly is this so when the rationale must be that the person whom the section singles out is an offender because of the significance of his role in the company which incurred the debt. If his role is a junior one, giving him no real influence on the decision, or if his role is that of an outside professional, who might advise, but would certainly not be taking the decision, there is no reason to think that the language of the section should be stretched to include him. The only direct guidance, apart from these considerations arising out of the subject matter of the section, is the use of the word "director". An application of the maxim noscitur a sociis would suggest that the other persons embraced by the section are persons whose management role may be likened to that of a director.

10. In this context, the remarks of Lord Reid in Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; (1972) AC 153 at 171 have some relevance to s. 556.
Lord Reid said:

"Normally the board of directors, the managing director and
perhaps other superior officers of a company carry out the
functions of management and speak and act as the company.
Their subordinates do not. They carry out orders from above
and it can make no difference that they are given some
measure of discretion. But the board of directors may
delegate some part of their functions of management giving
to their delegate full discretion to act independently of
instructions from them. I see no difficulty in holding that
they have thereby put such a delegate in their place so that
within the scope of the delegation he can act as the company."

11. I do not think that a case such as Commissioner for Corporate Affairs (Vic.) v Bracht (1988) 14 ACLR 728 can determine the meaning of s. 556. That case was concerned with a provision excluding a bankrupt from being "concerned in ... the management" of a company. It is obvious that such a provision must be given a fairly wide scope if those affected by the way in which companies are managed are to be given the protection the provision is designed to give them. But a similarly wide understanding of s. 556 would simply have the effect of rendering persons, who had no control of decisions which were taken, liable personally to meet the debts of an insolvent company - to the benefit of its creditors, no doubt, but without there being any particular reason why the person concerned should have to meet those debts.

12. There is nothing new about the association, in a section creating an offence, of the word "director" with an expression extending the offence to another person who shares with directors the attribute of being involved in management. In Gibson v Barton (1875) 10 QB 329 at 336 Blackburn J. discussed the effect of s. 26 of the Companies Act 1862, which visited with liability for the default of the company in making an annual return "every director and manager of the company who shall knowingly and wilfully authorize or permit such default". Blackburn J. said (at 336):

"The first question raised is, whether there was evidence on
which we could find, as a fact, that the appellant was
`manager' of the company. That involves two things: whether
there was evidence that the appellant was a manager in any
sense, and whether the sense in which he is shewn to be a
manager is a sense that would make him liable to the penalty
under s. 27. ... In what sense are the words `director'
and `manager' used in that section? When the section says
`director,' it is plain enough a director is a director, but
the words are `and manager.' We have to say who is to be
considered a manager. A manager would be, in ordinary talk,
a person who has the management of the whole affairs of the
company; not an agent who is to do a particular thing, or a
servant who is to obey orders, but a person who is intrusted
with power to transact the whole of the affairs of the company."

Gibson v Barton was followed in The King v Lawson (1905) 1 KB 541, where Darling J. (at 549) understood it as embracing "the person who in fact really managed the affairs of the company". Of course, s. 556(1) is not limited to a manager; it includes a person who "took part in the management". But I think these cases indicate the nature of the function in which a person must take part if he is to fall within the section.

13. The particulars given in the present case indicate how far short of this the allegations made against Mr Swaab really fall. He was the company's solicitor, and he was also its secretary. In relation to the contract in question, he did things that a solicitor might well have done. In response to the request for particulars, nothing at all has been specified which could constitute a particular of a fact, matter or circumstance from which it could be said that he had taken part in the management of the company. No act of management at all on his part has been identified.

14. For the applicant, it was urged that there is a question of fact which should be allowed to go forward to a trial. It is pointed out that there has not yet been discovery, and it is said that the applicant "is not presently aware of all of the circumstances which prevailed in Varimu as at 22nd March, 1989." But while urging these general propositions, counsel for the applicant was unable to point to any particular basis which might exist for the allegation made in the statement of claim. It was not suggested that Mr Swaab holds records of the company, which is not a party to the action. The records most likely to throw light on the management of the company would be the records of the company. Advantage has not been taken of the Rules to obtain preliminary discovery from it, under Order 15A rule 8, or from Mr Swaab himself, by the utilization of Order 15A rule 6, if it is thought he may have any such documents, prior to the making of the presently entirely unfounded allegations against him. In my opinion, this case does fall within Order 20 rule 2.

15. Possibly, the applicant refrained from attempting to obtain discovery before action, lest it met with the answer that s. 556(1) is concerned with a criminal offence, the proof of which ought not to be launched by the process of discovery. Although sub-section (3) of the section expressly permits civil proceedings to be brought "whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence under sub-section (1)", it does not follow that the section is to be treated as if it were concerned with civil liability only. It is unnecessary to pursue this question, which was not the subject of separate submissions. Nor is it necessary to examine Mr Swaab's other ground, under which he points out that the applicant has chosen to rescind the contract and sue for damages; if the obligation to make payment under the contract was ever a debt, he contends it could only have been a contingent debt, contingent upon the delivery of a transfer, which has now disappeared. He relies on the statement of Dixon J. in McDonald v Dennys Lascelles Limited [1933] HCA 25; (1933) 48 CLR 457 at 475, citing Sir John Salmond:

"As a general rule, on the failure or refusal of a purchaser to
complete an executory contract for the purchase of land the vendor
is not entitled to sue for the purchase money as a debt. He is
entitled merely to sue for specific performance or for damages for
the loss of his bargain. It is only when the contract has been
completed by the execution and acceptance of a conveyance that
unpaid purchase money may become a debt and can be recovered
accordingly."

It seems to me that this question raises issues of the very kind which ought not to be determined upon a summary application. Large questions of law are involved in the determination of the ambit of "a debt" and the identification of when it is "incurred" for the purposes of s. 556. As they are neither suitable for an application of this kind nor necessary to be determine in order to decide the matter, I shall say no more about them.

16. For these reasons, the motion succeeds, and the application is dismissed with costs, as against the First Respondent.