Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCAFC 265 (16 December 2005)

Last Updated: 16 December 2005

FEDERAL COURT OF AUSTRALIA

Cadence Asset Management Pty Ltd v Concept Sports Limited

[2005] FCAFC 265

CORPORATIONS LAW – prospectus – disclosure – claim that the disclosures in a prospectus contravened s 728 of the Corporations Act 2001 (Cth) (‘the Act’) – whether a subscribing shareholder is entitled to commence a proceeding under s 729(1) of the Act to recover from the company that issued the prospectus the loss suffered as a result of the subscription without rescinding the contract to acquire the shares – whether s 729(1) is subject to the rule in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317


Corporations Act 2001 (Cth), ss 563A, 728, 729


Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCA 1280 - overruled
Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 - considered
Webb Distributors (Aust) Pty Ltd & Ors v The State of Victoria & Anor [1993] HCA 61; (1993) 179 CLR 15 - distinguished
State of Victoria v Hodgson & Ors [1992] 2 VR 613 - distinguished
Sons of Gwalia Limited (Administrator Appointed) (ACN 008 994 287) v Margaretic [2005] FCA 1305 - considered
Malika Holdings Pty Limited v Stretton [2001] HCA 14; (2001) 204 CLR 290 - cited
General Finance Corporation et al v Keystone Credit Corporation et al 50 F2d 872 (1981) - cited















CADENCE ASSET MANAGEMENT PTY LTD AS TRUSTEE FOR CADENCE CAPITAL v CONCEPT SPORTS LIMITED AND OTHERS
VID 1209 OF 2005

MERKEL, WEINBERG AND KENNY JJ
16 DECEMBER 2005
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 1209 OF 2005

On appeal from a single Judge of the Federal Court of Australia

BETWEEN:	CADENCE ASSET MANAGEMENT PTY LTD (ABN 68 106 551 062) as trustee for Cadence Capital APPELLANT
AND:	CONCEPT SPORTS LIMITED (ACN 108 042 593) FIRST RESPONDENT GARY MARCH SECOND RESPONDENT LEON DAPHNE THIRD RESPONDENT JEFFREY TAYLOR FOURTH RESPONDENT STEVEN ROLTON FIFTH RESPONDENT DAVID CARTER SIXTH RESPONDENT JOHN MOORE SEVENTH RESPONDENT
JUDGES:	MERKEL, WEINBERG AND KENNY JJ
DATE OF ORDER:	16 DECEMBER 2005
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.	The appeal be allowed.

2.	The orders of the primary judge made on 20 September 2005, dismissing the appellant’s claim for damages under s 729(1) of the Corporations Act 2001 (Cth) and requiring the appellant to pay the respondents’ costs of the Subscription Claims, be set aside.

3.	The respondents pay the appellant’s costs of and incidental to the hearing before the primary judge and the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 1209 OF 2005

On appeal from a single Judge of the Federal Court of Australia

BETWEEN:	CADENCE ASSET MANAGEMENT PTY LTD (ABN 68 106 551 062) as trustee for Cadence Capital APPELLANT
AND:	CONCEPT SPORTS LIMITED (ACN 108 042 593) FIRST RESPONDENT GARY MARCH SECOND RESPONDENT LEON DAPHNE THIRD RESPONDENT JEFFREY TAYLOR FOURTH RESPONDENT STEVEN ROLTON FIFTH RESPONDENT DAVID CARTER SIXTH RESPONDENT JOHN MOORE SEVENTH RESPONDENT

JUDGES:	MERKEL, WEINBERG AND KENNY JJ
DATE:	16 DECEMBER 2005
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

Introduction

1 The question in the present appeal is whether a subscriber for shares offered pursuant to a prospectus can recover from the company that issued the prospectus the loss suffered as a result of the subscription without the subscriber rescinding the contract to acquire the shares. The question is of some importance as a subscriber can no longer rescind the contract pursuant to which it acquired the shares if the shares have been sold by the subscriber, or if the company that issued the prospectus is in liquidation.

2 Section 729(1) of the Corporations Act 2001 (Cth) (‘the Act’) provides that ‘a person’ who suffers loss because an offer of securities in a prospectus contravenes s 728 of the Act may recover that loss from the person making the offer. In the usual course, that person will be the company issuing the prospectus. However, in Cadence Asset Management Pty Ltd v Concept Sports Limited [2005] FCA 1280 the primary judge decided that s 729(1) is subject to the rule in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 (‘Houldsworth’). The rule protects creditors as it maintains the capital of a company by preventing a shareholder, whether directly or indirectly, from receiving back any part of the shareholder’s contribution to the capital of the company.

3 Applying the rule in Houldsworth, the primary judge concluded that a shareholder wishing to rely on s 729(1) of the Act to sue a company to recover loss suffered in its capacity as a shareholder must first rescind the contract to acquire the shares, which it can no longer do if the company is in liquidation or if the shares have been sold by the shareholder to a third party. Accordingly, the primary judge ordered that the claim for loss under s 729(1) made by the appellant be dismissed, because the appellant was a subscribing shareholder that had sold its shares and had not rescinded its contract to acquire the shares. The order was made on the basis of the pleading of the appellant’s claim, made pursuant to s 729(1), against the company issuing the prospectus. The order was therefore an interlocutory order but the Full Court granted the appellant leave to appeal.

Background

4 The first respondent (‘Concept Sports’) issued a prospectus offering 24 million shares at an issue price of $0.50 each. Pursuant to the offer contained in the prospectus, a company acting as trustee for the appellant subscribed for 100 000 shares in Concept Sports at $0.50 each. The shares were issued to the trustee on or about 7 June 2004. On 21 and 22 September 2004 the appellant sold the shares to a third party at an average price of 11.5 cents.

5 Subsequently, the appellant commenced a group proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) against Concept Sports and its directors. The appellant claims that it, and certain other shareholders in Concept Sports, suffered loss and damage as a result of contraventions of the Act in relation to the prospectus and seeks to recover that loss and damage pursuant to, inter alia, s 729(1) of the Act.

6 The primary judge determined, as a preliminary issue, that the rule in Houldsworth barred the claims of the appellant as it was suing in its capacity as a subscribing shareholder. This is because it is suing for the recovery of its loss (being, in substance, the price paid on subscription less the price received on the sale of the shares) but has not rescinded, and can no longer rescind, the contract by which the shares were acquired. His Honour appears to have proceeded on the basis that the appellant’s beneficial interest in the shares was sufficient to make the rule in Houldsworth apply to it. In view of the conclusions we have reached, it is unnecessary for us to consider that aspect of his Honour’s decision.

7 Forty one other persons, who also subscribed for shares in Concept Sports, are in the same position as the appellant. That is, having sold the shares for which they subscribed, they can no longer rescind the contract by which the shares were acquired. Accordingly, the claims made on their behalf as group members under s 729(1) will also fail if the statutory right of recovery is qualified by the rule in Houldsworth.

8 Although the primary judge’s orders dismissed the appellant’s claims under s 729(1) and s 1317HA of the Act the appellant does not seek to appeal in relation to the dismissal of its claim under s 1317HA. Accordingly, the issue on the appeal is whether the statutory entitlement of a shareholder to recover compensation under s 729(1) of the Act in respect of the prospectus issued by Concept Sports is qualified by the rule in Houldsworth.

The rule in Houldsworth

9 The rule in Houldsworth was considered by the High Court in Webb Distributors (Aust) Pty Ltd & Ors v The State of Victoria & Anor [1993] HCA 61; (1993) 179 CLR 15 (‘Webb’), which concerned claims which would ground an action in deceit or under s 52 of the Trade Practices Act 1974 (Cth) (‘TPA’) for unliquidated damages by shareholders who acquired their shares in certain building societies in reliance upon misleading and deceptive conduct by the societies. The liquidator of the societies sought directions in relation to two questions:

(a) whether the unliquidated damages claimed by the shareholders against the societies were provable in the liquidation; and
(b) whether the shareholders were precluded from prosecuting an action for damages against the building societies in relation to the acquisition of their shares.

10 Webb was an appeal against the decision of the Appeal Division of the Supreme Court of Victoria in State of Victoria v Hodgson & Ors [1992] 2 VR 613 (‘Hodgson’). The Appeal Division found that the questions should be answered:

(a) No; and
(b) Yes.

11 In Webb, the High Court dismissed the appeal. In the majority judgment, Mason CJ, Deane, Dawson and Toohey JJ applied s 360(1) of the Companies (Victoria) Code (‘the Companies Code’) to the liquidation of the building societies. Section 360(1) provided that, on the winding up of a company, members are liable to contribute to the company’s debt subject to certain qualifications, including:

‘(e) in the case of a company limited by shares, no contribution is required from a member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member;

...

(k) a sum due to a member in his capacity as a member by way of dividends, profits or otherwise shall not be treated as a debt of the company payable to that member in a case of competition between himself and any other creditor who is not a member, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves.’

12 In Webb, the majority judgment made the following observations (at 33-35) in respect of s 360(1)(e) and (k), which are now substantially reflected in ss 516 and s 563A of the Act:

‘Section 360 imposes an obligation on members to contribute to the payment of all the liabilities of a company on its liquidation. Paragraph (e) limits that obligation to the amount unpaid on the members' shares. Paragraph (k) subordinates sums due to a member in his or her capacity as a member to sums due to non-members.

In In re Addlestone Linoleum Co some members sought leave to tender proofs on the winding up against the company for damages for breach of contract in relation to the issue of shares in respect of which they had become contributories. At first instance Kay J held that the sums claimed fell within s 38(7) of the Companies Act 1862, which is, in all material respects, identical to s 360(1)(k). Kay J said:

"Now, unquestionably the applicants -- retaining these shares and claiming damages because the shares are not exactly what they were represented to be -- are making such claims in the character of members of the company, and the only question is whether such claims are for sums due `by way of dividends, profits, or otherwise’."

His Lordship then went on to hold that that question should be answered in the affirmative because the applicants were seeking to recover a dividend in respect of the share capital which they were compelled to pay on the winding up. In practice, this would have meant recovery from the pockets of creditors of the share capital that they, as contributories, were liable to pay. The Court of Appeal dismissed an appeal from the decision of Kay J, principally by reference to the decision in Houldsworth. However, Lopes LJ agreed with the construction placed upon s 38(7) by Kay J. And Cotton LJ, with reference to the applicants, stated that "now they come here as shareholders, and in substance retain their shares, and seek to sue the company for breach of the contract under which they took them". In our view, s 360(1)(k) bears the same interpretation as that which Kay J held s 38(7) of the Companies Act 1862 to bear.

In so far as it is relevant, the subsequent legislative history has supported this interpretation of s 360(1)(k). Section 563A of the Corporations Law appears under the heading "Priorities" and differs from s 360(1)(k) of the Code in that it draws more strongly on the language of priority. However, in relation to s 563A the explanatory memorandum to the Corporate Law Reform Bill 1992 asserts that the section was intended to have the same effect as the then current s 525, a provision virtually identical in its terms to s 360(1)(k).

Paragraph (k) of s 360(1) will not prevent claims by members for damages flowing from a breach of a contract separate from the contract to subscribe for the shares. But, in the present case, the members seek to prove in the liquidation damages which amount to the purchase price of their shares, which is a sum directly related to their shareholding. Moreover, they sue as members, retaining the shares to which they were entitled by virtue of entry into the agreement and they seek to recover damages because the shares are not what they were represented to be. Accordingly, the claim falls within the area which s 360(1)(k) seeks to regulate: the protection of creditors by maintaining the capital of the company.

In that regard it should be noted that s 360(1)(k) provides that a sum due to a member in his or her capacity as a member may be taken into account for the purposes of the final adjustment of the rights of contributories among themselves. To that extent the member with a claim against the company occupies a preferred position to other members.’ (footnotes omitted)

13 Although the decision in Webb was based on s 360(1) of the Companies Code, the majority judgment considered the rule in Houldsworth, the basis for which was succinctly explained by Tadgell J (with whom Fullagar J and Gobbo J agreed) in Hodgson (at 627):

‘In my opinion the principle of limited liability leads inevitably to the conclusion that a member at the commencement of the winding up of a company limited by shares cannot prove in the winding up for damages designed to indemnify him for loss sustained in subscribing share capital to the company. The member's only title to such damages would depend on his having sustained loss through a subscription of share capital. If he were to obtain indemnity from the company in respect of that loss he could not logically be regarded as having subscribed the share capital for the subscription of which the company had indemnified him.’

14 As we later explain, the majority judgment (at 33) rejected the appellant’s challenge to the conclusion reached by Tadgell J.

15 In Sons of Gwalia Limited (Administrator Appointed) (ACN 008 994 287) v Margaretic [2005] FCA 1305 (‘Sons of Gwalia’), Emmett J helpfully summarised the decision in Webb at [34]-[37]:

‘34. The High Court, by majority, dismissed the appeal from the decision of the Appeal Division of the Supreme Court of Victoria. It did so on the basis of what it considered to be well established principles based on English decisions of the 19^th Century. In particular, two related streams of authority were relied upon.

35. The first line was regarded as establishing the principle that a company incorporated under the Companies Act 1862 (UK) had no power to purchase its own shares. The restriction in companies legislation on the power of limited companies to reduce the amount of their capital had the effect of prohibiting every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of shares was returned to the shareholder, unless the Court had sanctioned the transaction as a return of capital. A company could not, by any expedient, arrange with its shareholders that they would not be liable for the amount unpaid on shares held by them. A shareholder in a limited liability company purchased immunity from liability beyond a certain limit on terms that there would be, and there would remain, a liability up to that limit (Webb’s Case at 28, citing Trevor v Whitworth (1887) 12 App Cas 409 and Ooregum Gold Mining Co of India v Roper [1892] AC 125).

36. The second line established the principle that, once the winding up of a company had begun, a shareholder could not, on the ground of fraud, rescind a contract for the purchase of shares from the company, since innocent third parties had acquired rights that would be defeated by such a rescission. A shareholder could not rescind a purchase of shares induced by fraudulent misrepresentation, once the company from which the shares had been purchased had gone into liquidation, even though he might have been entitled to do so had the company been a going concern. In addition, the shareholder also lost any right to claim damages upon the liquidation. After a company is wound up, it ceases to exist, and rescission is impossible. Upon winding up, there are only creditors and contributories, and no company. The liabilities are no longer the liabilities of the company, except to the extent of the assets realised. They become liabilities of the contributories, being the persons who are shareholders at the time of the winding up, to the extent of the unpaid capital on their shares (Webb’s Case at 28 to 30, citing Oakes v Turquand (1867) LR 2 HL 325, Tennent v City of Glasgow Bank (1879) 4 App Cas 615 and Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317).

37. The majority in Webb’s Case observed that the principle in Oakes v Turquand was not in issue and said that it was common ground in the appeal that the holder of shares ordinarily loses any right to [rescission] on winding up. That must be taken to be a reference to rescission of the contract between the holder of the shares and the company that issued them. However, the majority considered that the decision in Houldsworth also precluded any claim for damages against the company. The principle on which Houldsworth was decided was that a shareholder contracts to contribute a certain amount, which is to be applied in payment of the debts and liabilities of the company, and it is inconsistent with his position as a shareholder, while he remains such, to claim back any of that money: he must not directly or indirectly receive back any part of it (at 31, citing In re Addleston Linoleum Co (1887) 37 ChD 191).’

16 In Sons of Gwalia, Emmett J at [43] rejected the contention that Webb precludes a claim by a shareholder against the company even where the shareholder acquires the shares from a third party, rather than from the company. The reason for that conclusion was that s 563A (and its predecessor s 360(1)(k) of the Companies Code) only applies to a debt of the company to a shareholder, or a claim against the company by a shareholder, in the shareholder’s capacity as a member of the company. That is not the situation when the shares are acquired by the shareholder from a third party.

17 A further aspect of the conclusion in Webb which prevented the claims of members of the societies from prevailing over the claims of creditors, was the rejection by the majority of the appellant’s contention that its claims arose independently under the TPA and were therefore not fettered by s 360(1)(k) of the Companies Code. In the majority judgment, their Honours stated (at 37):

‘Whether the actual decision in Houldsworth can stand against the provisions of the Trade Practices Act is a question which does not arise.
...
It was the appellant’s contention that the Trade Practices Act provided its "own code of remedies, unfettered".

The Trade Practices Act is unquestionably a piece of innovative legislation. But it is not to be seen as eliminating, "by a side-wind", the detailed provisions established for more than a hundred years to govern the winding up of a company.’

McHugh J (at 40-42) dissented on this issue.

18 In summary, the rule in Houldsworth prevents a person who is a shareholder from claiming a debt, or making a claim, against the company in that person’s capacity as a shareholder of the company if payment of the debt or claim will directly or indirectly recoup the money subscribed by the shareholder for the shares acquired by it. The rule was usually applied when the company in question was in liquidation. The rule received statutory recognition and, as we later explain, modification in s 360(1)(k) of the Companies Code and in that section’s statutory successors, which include s 563A of the Act. It was also clear from the majority judgment in Webb that the longstanding rule, as embodied in its statutory form, is not able to be eliminated ‘by a sidewind’, such as ss 52, 82 and 87 of the TPA.

19 Although the primary judge applied the reasoning in Webb and Hodgson to the appellant’s claims under s 729(1) of the Act, as was explained by the primary judge, the statutory regime under the Act differs in significant respects from the regime that applied in those cases. We will shortly turn to consider the present regime but the most significant change was the specific conferral in s 729(1) of a statutory cause of action in favour of shareholders, including subscribing shareholders, against a company that has failed to meet the Act’s requirements in respect of a prospectus.

The primary judge’s decision

20 The primary judge considered the legislative history of s 729 starting with s 3 of the Directors Liability Act 1890, 53 & 54 Vict c 64 which provided that, subject to certain exceptions, every director, promoter and other person who authorised the issue of a prospectus should be liable to pay damages that a subscriber has suffered ‘by reason of any untrue statement in the prospectus’.

21 His Honour then noted the legislative changes that occurred in the early 1990s that led to legislatures in Australia expanding the persons who could be held accountable for false statements in a prospectus to include the company issuing the prospectus. His Honour stated at [17]:

‘17. ... Prior to 1991 the position in relation to prospectuses was covered by s 107 of the Companies Codes of the States. In all relevant respects s 107 was to the same effect as s 3 of the Directors Liability Act upon which it was based. In 1989 there was an unsuccessful attempt to expand the range of persons who could be held liable in damages for false statements in a prospectus. In that year the Commonwealth enacted a statute entitled the Corporations Act 1989 (Cth). By s 1006 of that Act, the persons who could be held accountable for false statements in a prospectus included not only, as in the past, the directors, promoters and those who had authorised the prospectus, but also those named in the prospectus as stockbrokers, sharebrokers or underwriters, auditors, bankers or solicitors, as well as the corporation itself. According to the Explanatory Memorandum to the Bill, the new provision "aim[ed] to make all persons involved in the preparation of a prospectus responsible for the prospectus" (at [2996]). However, many provisions in the Corporations Act were struck down for constitutional reasons: see New South Wales v Commonwealth [1990] HCA 2; (1990) 169 CLR 482. In due course the Act was replaced by the Corporations Law which came into operation on 1 January 1991. Section 1006 of the Corporations Law reproduced s 1006 of the Corporations Act. Section 729 of the current legislation is in similar terms.’

22 His Honour then said at [18]-[21]:

‘18. The question then comes down to this. Did the introduction of the company that issued the prospectus as a possible defendant to a claim for damages under s 729 overturn the rule in Houldsworth’s case?

19. There are factors pointing both ways. Those that point in favour of overturning Houldsworth’s case are these. First, the cause of action conferred by s 729 against the company is remedial in nature and should therefore be given broad effect. Second, s 729 is in terms unrestricted, and to impose a limitation (that is the limitation set by Houldsworth’s case) would be inconsistent with the terms. Third, if the section has not overturned Houldsworth’s case, it would have a somewhat reduced scope. That is to say, if rescission is a necessary precondition to an action, a subscribing shareholder could only recover consequential or indirect damages in an action under s 729.

20. The factors that point the other way are these. First, Parliament could have but did not in terms overturn Houldsworth’s case. That is, Parliament could have but did not enact a provision similar to s 111A of the English Companies Act. Second, it is apparent that Parliament is aware of Houldsworth’s case and its consequence and when it wishes to do so it will overturn its effect and do so in clear language. Here I have in mind s 737 of the Corporations Act which was introduced into the Corporations Law by the Corporate Law Economic Reform Program Act 1999 (Cth). The purpose of the new section was to provide additional remedies for a contravention of s 724 (the predecessor to s 728). One additional remedy was "the right to return the securities and have their application money repaid". According to s 737(1) the right is available "even if the company that issued the securities is being wound up". The only purpose for including these words is to reverse the combined effect of Houldsworth’s case and Oakes v Turquand namely that there can be no rescission after a winding up. Third, a similar argument made in relation to the operation of s 52 of the Trade Practices Act 1974 (Cth), a "fundamental piece of remedial and protectionist legislation" (so described by McHugh J in Webb Distributors (Aust) Pty Ltd v State of Victoria [1993] HCA 61; (1993) 179 CLR 15, 41) was rejected by the Full Court of the Supreme Court of Victoria in State of Victoria v Hodgson [1992] 2 VR 613. Justice Tadgell who delivered the leading judgment stated (at 631) that: "To hold otherwise would be to regard the Trade Practices Act as intending to overturn by implication a cardinal tenet of limited liability which has prevailed for 130 years. It would be surprising indeed if the Trade Practices Act had that intention or effect". Fourth, if the submission were accepted it would produce an anomalous situation. I mentioned earlier that the rule in Houldsworth’s case has been given statutory effect when a company is in liquidation. If s 729 has overturned Houldsworth’s case, it could only have done so for an action against a company that is not in liquidation. Section 563A, which would preclude proof of claims when the company is being wound up, remains in place: Webb Distributors (Aust) Pty Ltd v State of Victoria [1993] HCA 61; (1993) 179 CLR 15. It would require a good reason indeed to impute to Parliament an intention to overturn Houldsworth’s case when the company is a going concern but not when it is being wound up.

21. It seems to me that the reasons for denying the plaintiff the relief that it seeks are to be preferred. Moreover, to hold otherwise would conflict with State of Victoria v Hodgson, a decision of an appellate court which I am required to follow. In any event, State of Victoria v Hodgson is correct, in my opinion.’

The Corporations Act

23 Consideration of the applicability of the rule in Houldsworth to the appellant’s claim under s 729 must commence with the terms of the Act.

24 Section 140 of the Act provides for a company’s constitution to have effect as a contract between the company and each member as well as between a member and each other member.

25 The successors to ss 360(1)(e) and (k) of the Companies Code are to be found in ss 516 and 563A respectively. The sections are in Pt 5.6 of the Act, which applies to the winding up of a company.

26 Section 516 relevantly provides:

‘... if the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member.’

27 Section 563A provides:

‘Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.’

28 Ch 6D of the Act (ss 700-742) contains a highly prescriptive scheme in respect of the disclosures that are, and are not, to be made in respect of the corporate fundraising governed by the chapter. Section 703 ensures that there can be no contracting out of the requirements of the chapter.

29 Sections 704 to 725 provide for the circumstances in which the disclosures required by Ch 6D are to be made and also set out the requirements that are to be met in respect of those disclosures. Part 6D.3 sets out the prohibitions, liabilities and remedies in respect of corporate fundraising governed by Ch 6D. The provisions that create the statutory right to compensation that are relevant for present purposes are ss 728(1) and 729:

‘Misleading or deceptive statements, omissions and new matters

728(1) A person must not offer securities under a disclosure document if there is:

(a) a misleading or deceptive statement in:

(i) the disclosure document; or

(ii) any application form that accompanies the disclosure document; or

(iii) any document that contains the offer if the offer is not in the disclosure document or the application form; or

(b) an omission from the disclosure document of material required by section 710 , 711, 712, 713, 714 or 715; or
(c) a new circumstance that:

(i) has arisen since the disclosure document was lodged; and

(ii) would have been required by section 710, 711, 712, 713, 714 or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged.

Right to recover for loss of damage resulting from contravention
729. Right to compensation

(1) A person who suffers loss or damage because an offer of securities under a disclosure document contravenes subsection 728(1) may recover the amount of the loss or damage from a person referred to in the following table if the loss or damage is one that the table makes the person liable for. This is so even if the person did not commit, and was not involved in, the contravention.

People liable on disclosure document

[operative]

	These people...	are liable for loss or damage caused by...
1	the person making the offer	any contravention of subsection 728(1) in relation to the disclosure document
2	each director of the body making the offer if the offer is made by a body	any contravention of subsection 728(1) in relation to the disclosure document
3	a person named in the disclosure document with their consent as a proposed director of the body whose securities are being offered	any contravention of subsection 728(1) in relation to the disclosure document
4	an underwriter (but not a sub-underwriter) to the issue or sale named in the disclosure document with their consent	any contravention of subsection 728(1) in relation to the disclosure document
5	a person named in the disclosure document with their consent as having made a statement: (a) that is included in the disclosure document; or (b) on which a statement made in the disclosure document is based	the inclusion of the statement in the disclosure document
6	a person who contravenes, or is involved in the contravention of, subsection 728(1)	that contravention

(2) A person who acquires securities as a result of an offer that was accompanied by a profile statement is taken to have acquired the securities in reliance on both the profile statement and the prospectus for the offer.
(3) An action under subsection (1) may begin at any time within 6 years after the day on which the cause of action arose.
(4) This Part does not affect any liability that a person has under any other law.’

30 When ss 728 and 729 were recast into their present form by the Corporate Law Economic Reform Program Act 1999 (Cth), par 8.1 of the Explanatory Memorandum accompanying the bill stated that a purpose of the sections was as follows:

‘to ensure that issuers continue to provide full disclosure in the associated prospectus, issuers will be liable to investors in relation to the prospectus.’

31 Securities are broadly defined in s 92 of the Act but, relevantly for present purposes, the applicable definition in s 92(3) includes ‘shares in a body’ and ‘legal or equitable interests’ in shares (s 92(3)(a) and (d)). A ‘disclosure document’ for an offer of securities is defined in s 9 as including, inter alia, a ‘prospectus for the offer’.

32 Sections 731, 732 and 733 set out a number of the defences, such as due diligence, lack of knowledge and reasonable reliance, that are available in respect of contraventions of s 728 and claims under s 729.

33 Sections 737 and 738 establish a limited right to return securities and to recover the money paid. Relevantly, the sections provide:

‘Remedies for investors
737. Right to withdraw and have money returned

(1) If securities are issued to a person in contravention of section 724 (situation calling for a supplementary or replacement document), the person has the right to return the securities and to have their application money repaid. This is so even if the company that issued the securities is being wound up.
(2) A right referred to in subsection (1) is exercisable by written notice given to the company within 1 month after the date of the issue.
(3) If the body or the seller does not repay the money as required by subsection (1), the directors of the body or seller are personally liable to repay the money.

738. Securities may be returned and refund obtained
If securities are issued or transferred to a person as a result of an offer that contravenes section 736, the person may return the securities within 1 month after the issue or transfer. If they do so, they are entitled to be repaid the amount they paid for the securities.’

34 Finally, ss 741 and 742 provide for exemptions from, and modifications to, Ch 6D by the Australian Securities and Investments Commission or by regulations.

35 Several features of the statutory scheme in respect of disclosure documents, which include prospectuses, should be noted. First, there are no qualifications upon a person’s right to compensation under s 729(1) other than that:

(a) the person suffers loss and damage because an offer of securities under a disclosure document contravenes s 728(1);
(b) the loss and damage sought to be recovered is one that the table in the sub-section makes the person specified liable for; and
(c) an action under the sub-section is commenced within 6 years after the date on which the cause of action arose.

36 The table in s 729(1) makes ‘the person making the offer’ and, where the person is a body, each director of that body, liable for loss and damage caused by any contravention of s 728(1). Thus, in contrast to the statutory regime considered in Webb and the limited rights available at common law (which were described by the primary judge at [10]-[14]), s 729(1) provides for a company issuing a prospectus to be liable to any person who suffers loss if the prospectus contravenes s 728(1). One of the objects of conferring an entitlement on investors to recover the loss they suffered from the company that issued the prospectus is to ensure full disclosure in offer documents or prospectuses. There is nothing in the terms of ss 728 and 729 that suggests that the entitlement to compensation is qualified by any requirement that is not set out in those sections. Also, there is plainly a tension between applying the rule in Houldsworth to s 729(1) to limit a company’s liability for contraventions of s 728 in the case of subscribing shareholders to those who have rescinded their contract of acquisition, and the objective of making a company liable for all such contraventions to ensure full disclosure.

37 Secondly, the scheme of Ch 6D clearly and precisely prescribes the circumstances in which liability under s 729(1) arises and separately provides for the specific defences that are available in respect of a claim made under s 729(1). The defences do not include a defence based on the rule in Houldsworth, which would require a subscribing shareholder to rescind the contract by which the securities are acquired.

38 Thirdly, a remedy equivalent to rescission is provided for in ss 737 and 738 in respect of breaches of ss 724 and 736 respectively. Thus, the legislature has considered the remedy of rescission and specifically provided for its equivalent for breaches of ss 724 and 726, but not for a breach of s 728. It is correct that s 729(4), which provides that Part 6D.3 does not affect any liability a person has under any other law, ensures that a subscribing shareholder who is entitled in law to rescind the contract to acquire the shares can do so. Nonetheless, in a legislative scheme that is specifically designed to protect investors, it would be an odd result that any right to compensation under s 729 is qualified by a requirement that a subscribing shareholder rescind the contract by which the shares were acquired without the statutory scheme providing for a right of rescission in that situation. A likely explanation is that any such requirement was unnecessary because s 729(1) confers a general right to recover losses from the company that issued the prospectus without rescission being required.

39 Finally, as was explained in Hodgson and Webb, the rule in Houldsworth is usually applied when the company being sued for the recovery of loss and damage in relation to a prospectus is in liquidation. This is not a situation with which ss 728 or 729 are concerned, but is the situation with which s 563A is concerned. Although s 563A is a statutory recognition of the rule in Houldsworth, it also modifies the rule because the section does not require a subscribing shareholder to rescind before being entitled to be a debtor, albeit a debtor whose debts are postponed. Yet, if the rule in Houldsworth qualified s 729(1), the subscribing shareholder wishing to become a ‘debtor’ under s 563A by suing under s 729(1) would effectively be precluded from doing so until it rescinds the share acquisition contract, which it cannot do if the shares have been sold or the company is in liquidation. The simple answer to that anomaly would appear to be that the legislature has modified the rule in Houldsworth by providing for the vice the rule was designed to avoid by enacting s 563A, thereby rendering it unnecessary for the legislature to provide for the rule to be applied in relation to claims under s 729(1).

Reasoning on the appeal

40 It is clear from our discussion of Ch 6D of the Act and, in particular, of s 729 that there are no contextual or textual considerations that would suggest that the legislature intended to qualify the entitlement conferred by s 729 by reference to the rule in Houldsworth. Rather, such considerations point strongly away from any such qualification.

41 There is, in any event, an explanation of why s 729 is not qualified by the rule. As was explained in Hodgson and Webb, the rationale for the rule was to prevent shareholders, directly or indirectly, receiving back any part of their contribution to the capital of the company, thereby defeating the interests of creditors. However, as was also explained in Webb (at 33), the rule has been modified by statute in so far as a direct return of capital may be effected with the approval of the court having regard to, inter alia, the interests of creditors (see for example, Ch 2J of the Act).

42 More important, however, is the further modification of the rule which is to be found in s 563A. Under that section, a subscribing shareholder can become entitled to an indirect return of capital by reason of a claim on the company in respect of the initial subscription. As was pointed out in the majority judgment in Webb (at 35 and 39), creditors were protected against such a claim, and the capital of the company was maintained in so far as the interests of the creditors were concerned, by s 360(1)(k) of the Companies Code (and now by s 563A) postponing the sum that may be due to a shareholder in his or her capacity as a shareholder, until the debts and claims of other creditors are satisfied. Although a shareholder’s debt or claim in his or her capacity as a shareholder cannot prevail against the claims of other creditors it will be ‘taken into account for the purposes of the final adjustment of the rights of contributors among themselves’ and to that extent such members occupy a preferred position to other members.

43 Put simply, the protection the rule in Houldsworth was to afford has now been enshrined in s 563A and there is no reason therefore to qualify any entitlement under s 729 by reference to that rule. In arriving at our conclusion we are cognisant of the answers given to the two questions in Hodgson and Webb, which were to the effect that the shareholders’ damages claims were not provable in the liquidation and were precluded because of the liquidation. However, it is clear from Webb that the questions were asked and answered in the context of the shareholders seeking to prove in the liquidation as creditors, and not as shareholders whose rights were postponed to the rights of creditors. As explained above, the reasoning of the majority in Webb accepted that the shareholders could still maintain their claims, but, contrary to the appellant’s case in Webb, they had to do so consistently with s 360(1)(k) of the Code. In any event, the present statutory regime differs from that considered in Webb because s 729(1) specifically provides for a subscribing shareholder to recover damages from the company issuing a prospectus in the shareholder’s capacity as a member.

44 Under the present statutory regime all of the shareholders in Concept Sports are entitled to bring and prosecute their claims under s 729(1) but, in the event of a liquidation, the rights of subscribing shareholders (other than those who may have rescinded their contract prior to liquidation) are to be governed by s 563A. Accordingly, there is no reason for qualifying any entitlement to claim under s 729 by the rule in Houldsworth. Indeed, to do so is inconsistent with s 563A as the qualification would preclude a subscribing shareholder from obtaining a judgment that would give that shareholder the postponed entitlement provided by s 563A if the company was later placed in liquidation.

45 We would add that, in the above context, s 729 could hardly be said to abrogating the rule in Houldsworth by a ‘side-wind’. In so far as the rule might have any contemporary application that application must be in the context of the Act, including ss 563A and 729. That is a quite different situation to the appellant’s claim in Hodgson and Webb, which was to have the TPA claims of subscribing shareholders prevail over, or be treated equally with, the claims of creditors, notwithstanding s 360(1)(e) and (k) of the Code.

46 It follows from the foregoing that we do not agree with the reasons given by the primary judge for qualifying the appellant’s entitlement to bring its claim under s 729(1) of the Act by the rule in Houldsworth. In particular, we are of the view that the legislature has made clear its intention that a subscribing shareholder is entitled to recover damages under s 729(1) against a company issuing a prospectus, provided that the statutory conditions set out in the section, which do not include the rule in Houldsworth, are satisfied. Further, there was no need for the legislature to state it was overturning the effect of the rule because it had already both recognised and modified the rule by enacting s 563A of the Act (and earlier by enacting ss 360(1)(e) and (k) of the Companies Code). As we have explained, s 563A makes it unnecessary for the rule to be applied to a claim under s 729(1). Indeed, to do so would be inconsistent with the entitlement given to subscribing shareholders under s 563A to prove in the liquidation, but behind other creditors, without having rescinded their contracts of acquisition. In the above circumstances, it cannot be said that to construe s 729(1), as we have done, is to depart from any fundamental principles of law: see Malika Holdings Pty Limited v Stretton [2001] HCA 14; (2001) 204 CLR 290 at 298-299 per McHugh J. Rather, as suggested by McHugh J (at 299) we have construed the language of s 729(1) ‘in its natural and ordinary meaning, having regard to its context -- which will include other provisions of the enactment, its history and the state of the law -- as well as the purpose which the enactment seeks to achieve’.

47 Finally, to find that s 729(1) is not subject to the rule in Houldsworth is not inconsistent with the reasoning in Webb and Hodgson. Rather, we have applied that reasoning to explain, in the context of the subsequent statutory regime which, for the first time, conferred a right in a subscribing shareholder to sue the company issuing the prospectus, why s 563A deals with the vice with which the rule in Houldsworth was concerned therefore making it unnecessary for the rule to be applied to claims under s 729(1).

48 There is one remaining matter. The Australian Securities and Investment Commission (‘ASIC’), which was granted leave to intervene to argue the question of construction, contended that the rule in Houldsworth has only been applied where the company against whom the claim is being made is in liquidation: see for example General Finance Corporation v Keystone Credit Corporation 50 F2d 872 (1981) at 881. Accordingly, so it was argued, the rule has no application to a claim under s 729(1) where the company against whom the claim is being made is not in liquidation. In view of the conclusion at which we have arrived it is unnecessary for us to determine whether ASIC’s argument, which was disputed by the respondents, is correct.

Conclusion

49 For the above reasons we have concluded that the question we posed at the commencement of these reasons is to be answered in the affirmative. In other words, under s 729(1) of the Act, a subscribing shareholder can recover from the company issuing a prospectus the loss suffered as a result of the subscription without rescinding the contract to acquire the shares. However, by reason of s 563A of the Act, if the company is in liquidation the subscriber’s right to be paid the loss is postponed until the claims of persons made otherwise than as members have been satisfied.

50 It follows that the appeal is to be allowed and the order of the primary judge dismissing the appellant’s claim for damages under s 729(1), and the consequential costs order, are to be set aside. As the appellant has succeeded the respondents, but not ASIC, should pay the appellant’s costs of the hearing before the primary judge and of the appeal.

I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Merkel, Weinberg and Kenny.

Associate:

Dated: 16 December 2005

Counsel for the Appellant:	K Hanscombe SC with A Watson
Solicitor for the Appellant:	Maurice Blackburn Cashman
Counsel for the First Respondent:	GP Harris
Solicitor for the First Respondent:	Lander and Rogers
For the Second, Fourth and Fifth Respondents:	No appearance
Counsel for the Third, Sixth and Seventh Respondents:	JL Evans
Solicitor for the Third, Sixth and Seventh Respondents:	Madgwicks
For Australian Securities and Investments Commission appearing amicus curiae:	M Pearce
Date of Hearing:	4 November 2005
Date of Judgment:	16 December 2005