Theseus Exploration NL v Foyster [1972] HCA 41; (1972) 126 CLR 507 (28 July 1972)

HIGH COURT OF AUSTRALIA

THESEUS EXPLORATION N.L. v. FOYSTER [1972] HCA 41; (1972) 126 CLR 507

Companies - Practice (Q.) - High Court

High Court of Australia
Barwick C.J.(1), Gibbs(2) and Stephen(3) JJ.

CATCHWORDS

Companies - No-liability companies - Shares - Agreement to take new shares on allotment - Breach - Whether right to sue for outstanding moneys - The Companies Acts, 1961 to 1964 (Q.), s. 320.

Practice (Q.) - Applications for summary judgment - Leave to defend - Issue of law only - Rules of the Supreme Court (Q.), O. 18 r. 1.

High Court - Powers on appeal - Appeal from refusal of primary judge to grant leave to enter summary judgment - Issue of law only - Arguable case - Full argument on appeal - Decision to allow appeal.

HEARING

Brisbane, 1972, June 5;
Sydney, 1972, July 28. 28:7:1972
APPEAL from the Supreme Court of Queensland.

DECISION

July 28.
The following written judgments were delivered : -
Barwick C.J. In this appeal I have had the advantage of reading the reasons the matter are there fully recounted. I agree with my brother's conclusion that the appellant should succeed in its action for the recovery of the balance of the moneys agreed to be paid on allotment of 416,000 ordinary shares of twenty cents each in the capital of the appellant. I fully agree with the reasons which my brother Stephen gives for that conclusion. In that respect I have nothing I would wish to add. (at p513)

2. The appeal is from an order of a judge of the Supreme Court dismissing a summons for summary judgment. Although he gave no reasons for that dismissal, it is evident that the judge was satisfied that there was a question in dispute with respect to the appellant's claim which ought to be tried. Clearly enough the appellant's proof in support of its application for summary judgment made out all the ingredients of its cause of action. The respondent's suggested defence was that by reason of the memorandum and articles of the appellant and the terms of s. 320 of the Companies Acts, 1961-1964 (Q.), no action would lie against the respondent to recover the amount unpaid in respect of the said shares. There was no dispute as to any fact relating to the claim. The validity or otherwise of the suggested defence turned exclusively on the construction of the agreement, the memorandum and articles of association and the application of the Companies Acts. (at p513)

3. The ambit of O. 18, r. 1 of the Rules of the Supreme Court, of Queensland in relation to the present proceedings is not in doubt. The respondent, on the appellant's application for summary judgment, was "bound to shew" that he had "some reasonable ground of defence to the action" (Crump v. Cavendish (1880) 5 Ex D 211, at p 214 , per Bramwell L.J.) and the appellant was entitled to summary judgment if there is "no fairly arguable point" to be brought forward (Anglo-Italian Bank v. Wells (1878) 38 LT 197, at p 201 , per Jessel M.R.). The jurisdiction to give summary judgment should not be exercised "where a difficult question of law is raised" - see generally the Supreme Court Practice (1970) vol. 1, pp. 126-130. Perhaps the summary intervention to prevent the continuance of a plaintiff's action ought to be much rarer than the giving of summary judgment but there is sufficient correspondence in the two situations to make apposite to this case much of what I said in General Steel Industries Inc. v. Commissioner for Railways (N.S.W.) [1964] HCA 69; (1964) 112 CLR 125, at pp 129-130 . (at p514)

4. Although I have reached a clear conclusion as to the lack of validity in the respondent's submission that the appellant was unable to recover the amount claimed, I would not be prepared to hold that the judge erred in the course he took. Equally, however, I would not have thought him in error if he had granted the appellant's application for summary judgment. The case was one which, in my opinion, could have been disposed of upon legal argument upon the application. But it was for the judge to be satisfied that there was a matter to be tried. Whilst there were no facts to be decided, it was open to the judge, in my opinion, to take the view that the extent and complexity of the matters of law and of argument thereon warranted a hearing. (at p514)

5. However, we have now heard a full argument on the substance of the matter from both appellant and respondent. I am convinced that the suggested defence fails and that the appellant is entitled to judgment in the action. Thus, although I would not hold the dismissal of the summons for summary judgment to be erroneous, I would allow the appeal and now grant that application. I agree with my brother Stephen's reasons for that course. (at p514)

Gibbs J. I have had the advantage of reading the reasons for judgment prepared by my brother Stephen and I agree with those reasons and with his conclusion that the appellant is entitled to succeed in its action against the respondent. (at p514)

2. Nevertheless I am of opinion that the learned primary judge was completely justified in dismissing the appellant's application for summary judgment. Indeed, on one view of the law as stated in Bundock Bros. v. Bergl and Co. (1897) 8 QLJ 106 , he was bound to dismiss it. In that case Griffith C.J., speaking for the Full Court of the Supreme Court of Queensland in a case arising under an earlier rule corresponding to O. 18 of the Rules of the Supreme Court (Q.) said, (1897) 8 QLJ, at p 108 :

"It is settled that when there is a serious point of law raised
by a defendant, the Judge in Chambers ought not to decide
it, but ought to give unconditional leave to defend."

Similarly in Commonwealth Dairy Produce Equalisation Committee Ltd. v. Hansen (1944) QSR 95, at p 98 Mansfield J., as he then was, said that leave to defend should be given where there is a difficult question of law, and cited Electric and General Contract Corporation v. Thomson Houston Electric Co. (1893) 10 TLR 103 in support of this proposition. No doubt the remarks in these cases were not intended to preclude the exercise of some discretion by a judge to whom application for summary judgment is made in deciding whether the question of law raised is so difficult that it ought not to be decided summarily, and no doubt also sometimes some explanation or reference to authorities will be necessary to enable a judge to decide whether a question is really unarguable. However, in the present case the questions were serious and disputable and, assuming that the learned primary judge had a discretion, it was entirely proper for him to decline to dispose of them in chambers. (at p515)

3. Logically it should follow that the appeal should be dismissed. However, we have heard full argument on the questions upon which the fate of the action depends and have reached the conclusion that the defence raised by the respondent must fail. No fact is in dispute. It has not been suggested that there is any other matter on which argument could usefully be advanced. If the action is sent to trial the court will be bound to apply our statement of the law and the appellant must succeed. In these circumstances it would be absurd to give the respondent leave to defend the action. Justice therefore requires us to take the anomalous course of allowing an appeal from a judgment which was correct; but in the circumstances it would not in my opinion be right to allow the appellant the costs of the appeal. (at p515)

4. I would allow the appeal and grant the appellant's application for summary judgment. (at p515)

Stephen J. In August 1970 Theseus Exploration N.L., which was proposing to make a public issue of shares, entered into a written agreement with Mr. C. J. Foyster, one of its directors, for the issue to him, at the time of the public issue, of 416,000 ordinary shares of twenty cents each payable as to five cents per share upon application and as to fifteen cents per share within a period of twelve months after listing of the public issue. There was provision for what was described as a premium, also payable within that period, equivalent to eight per centum per annum on the unpaid balance from listing date until date of payment. (at p516)

2. Mr. Foyster duly made application in October 1970 for the issue to him of these shares partly paid to five cents, and paid his five cents per share, and the shares were issued shortly afterwards; the public share issue was also made and Stock Exchange listing was obtained on 12th Novemeber 1970. (at p516)

3. When the twelve months period expired in November 1971, Mr. Foyster had failed to pay any further moneys to the company, whereupon its solicitors made prompt demand for the balance due, amounting to over $67,000, and in default of the payment the company, in December 1971, sued him to recover that sum and, in February 1972, applied for summary judgment in its action against him. (at p516)

4. This application was heard in chambers and was dismissed by the learned primary judge; his reasons are not before this Court but it is clear that the respondent, in opposing summary judgment, relied upon the submission that his answer to the company's claim involved fairly triable issues of law and that it was upon that ground that the appellant's application for summary judgment was dismissed. From that order this appeal is brought by the company. (at p516)

5. The company has sued Mr. Foyster on the contract contained in the agreement of August 1970, which contains a distinct promise to pay, and the ultimate question, on which there has been full argument, is whether or not this promise to pay for shares to be issued to him in the capital of a no-liability company is to be construed as conferring no right of recovery by the company, the only sanction being forfeiture of the shares for non-payment. (at p516)

6. The appellant's case is a simple one; it is content to rely upon the express terms of the agreement which, it says, entitle it to summary judgment, the facts not being in issue and the respondent's arguments of law being of no substance. The respondent relies substantially upon that special characteristic of a no-liability company which makes forfeiture the only sanction for default in payment of calls and seeks, by reference to the respondent's application for shares, to the articles of association and to a clause of the memorandum of association, to assimilate his position to that of a shareholder who defaults in payment of a call, the only consequence of which will be forfeiture of the shares. (at p517)

7. In Tongkah Compound N.L. v. Meagher [1951] HCA 41; (1951) 83 CLR 489, at p 494 , Dixon J. said;

"The dominant and cardinal principle of the no-liability
system is that the investor shall incur no personal liability
at all and for default in paying calls upon his share shall suffer
no more than the forfeiture of his share."

This principle is enunciated in s. 320 of the Companies Act, 1961-1964 (Q.) which provides that the acceptance of a share in a no-liability company by allotment or transfer constitutes no contract to pay calls, the person accepting the shares not being liable to be sued therefor; it is this characteristic which is fixed upon as the identifying feature of no-liability companies in the definition section fo the Act, s. 5. Theseus Exploration N.L. being such a company its memorandum of association, in compliance with s. 18 (1) (g) of the Act, provides by cl. III that acceptance of shares shall not constitute a contract to pay calls in respect of the shares. (at p517)

8. However, the distinction has long been recognised between the position of a member on whose shares a call is made and that of an intending member who, in order to procure the issue to him of shares in a no-liability company, agrees to pay the issue price asked by the company. In the latter case the obligation to pay does not arise from any "acceptance of shares", the matter to which s. 320 and cl. III of the company's memorandum of association are directed, but rather from the agreement made with the company, which may ante date by weeks or months the acceptance of shares in the company. In New Good Hope Consolidated Gold Mines N.L. v. Stutterd (1916) VLR 580 , the defendant had contracted with the company to take up shares and pay for them by instalments and subsequently failed to pay these instalments. Hodges J., in his reasons for judgment (1916) VLR, at pp 592-593 , said, of the defendant's contention that absence of liability to contribute was inherent in the nature of membership of a no-liability company and extended beyond calls so as to include instalments of allotment moneys :

"I think a good deal of the argument was confusing two
things - namely, first, the liability of the shareholder to pay
further calls in consequence of his being a member, and,
secondly, the liability which he incurred in order to become a
member. The action here is simply to enforce the contract
by which the defendant became a member, and I think the
defendant is liable, and see no reason to say the contrary."

A'Beckett J. took a similar view, saying (1916) VLR, at p 590 :

" . . . the company sued him for what he had agreed to pay
for that which was regarded at the time of purchase as

something

worth paying for and getting. It is to be observed that
the company, when it comes upon the defendant for part of
that price, is not endeavouring to enforce any obligation which
the defendant incurred as a shareholder in respect of these
shares which he had purchased, but is suing him for what he
undertook to pay for the privilege, as it was then supposed, of
acquiring those shares on the terms agreed upon."

In the Tongkah Compound Case Fullagar J. recognised this distinction and said (1951) 83 CLR, at p 510 of the New Good Hope Case (1916) VLR 580 That :

"The decision that the balance of the amount payable on
allotment was recoverable because the provisions of the Act
as to 'calls' did not apply to it seems undoubtedly correct."

See also Lysnar v. Mammoth Molybdenite Mines (N.L.) (1918) NZLR 759 . (at p518)

9. The respondent sought to avoid the consequences of this distinction and put a number of alternative arguments, each, it was said, leading to the conclusion that he was under no liability to pay the moneys expressed by the agreement to be payable by him within twelve months of the listing of the public issue ; I shall refer to these amounts as deferred allotment moneys. To appreciate these arguments involves setting out portions of the relevant documents. Clauses 1 and 5 (iii) of the agreement of August 1970 are as follows :

"1. Subject as hereinafter set out the Shareholder agrees
to make application and payment for and Theseus agrees to
allot to the Shareholder Four hundred and sixteen thousand
(416,000) ordinary shares of 20 cents each in the capital of
Theseus (hereinafter called 'the Shares') for a consideration
of Eighty three thousand two hundred dollars ($83,200) plus
a premium calculated as set out in sub-paragraph (ii) of this
paragraph which consideration shall be payable by the
Shareholder to the Vendor as follows :
(i) upon application : five cents per share.
(ii) within twelve calendar months after listing date (as
hereinafter
defined) : fifteen cents per share, plus a premium
equivalent to eight per centum per annum on the unpaid
balance of fifteen cents per share from the listing date to
the date of payment.
5. Theseus shall allot the Shares and the Shareholder shall
accept allotment of the Shares subject to the following
conditions
:
. . .
. . .
(iii) That the balance of moneys owing on each share shall
be paid to Theseus no later than 4.00 p.m. on the day
which is twelve calendar months after listing date."

A form of application for shares appeared as a schedule to this agreement and was, by the agreement, identified as the application referred to in cl. 1. This form of application contained a paragraph, numbered 3, as follows :

"3. I agree to be bound by the Memorandum and Articles
of Association of the Company."

Paragraph 5 (b) of the form of application was as follows :

"5. I agree to accept allotment of the shares applied for
upon the following conditions : . . . (b) that the balance of

moneys owing on each share, being

Fifteen cents plus a premium equivalent to eight per
centum per annum on the unpaid balance of fifteen cents
per share from the listing date to the date of payment
shall be paid by me to the Company no later than 4 p.m.
on the day which is twelve calendar months after the date
upon which the shares in the Company issued to the
public have been granted Stock Exchange listing. The
term 'listing date' shall mean the date upon which the
shares of the public issue shall be granted official quotation
on an Australian Associated Stock Exchange." (at p519)

10. Articles 12 (b) and 13 of the company's articles of association are as follows :

"12. (b) Subject to Articles 13 and 16 fourteen days' notice
at least of any call shall be given specifying the time
and place of payment and to whom such call shall be
paid and if such call is not paid within fourteen days
of the date specified in such notice then the share
shall be absolutely forfeited and the company shall
thereafter comply with the provisions of sections
323 and 324 of the Act.
13. If by the terms of issue of any share or otherwise any
amount is made payable at any fixed time or by instalments
at fixed times whether on account of the amount of the share
or by way of premium every such amount or instalment shall
be payable as if it were a call duly made by the Directors and
of which due notice had been given and all the provisions herein
contained in respect of calls shall relate to such amount or
instalment accordingly and no notice of call shall be required." (at

p519)

11. The respondent's principal argument began by referring to the opening phrase of cl. 1 of the agreement, "Subject as hereinafter set out" ; this referred, inter alia, to the application form scheduled to the agreement. Similarly the words "agree to make application and payment for "in cl. 1 indicated that it was only upon allotment, following application, that a contract to pay came into being and that contract was one the terms of which were governed by the form of application scheduled to the agreement. The application in turn provided, by cl. 3, that the applicant should be bound by the company's memorandum and articles of association. The articles of association thus become applicable as definitive of the respondent's legal liability ; art. 13 then equated the deferred allotment moneys to call moneys because the former were within the description of amounts which "by the terms of issue or otherwise" were made payable at any fixed time ; accordingly "all the provisions herein contained in respect of calls" applied to deferred allotment moneys. Article 12 (b) then operated so as to forfeit the shares if deferred allotment moneys were not paid. (at p519)

12. To round off the argument it was, as I understood it, contended that for either of two reasons the forfeiture of the shares put an end to liability for deferred allotment moneys. First, it was said that it was well established that, unless the regulations of a company otherwise provided, forfeiture operated to put an end to liability - Stocken's Case (1868) 3 Ch App 412 . There had been no resolution forfeiting the respondent's shares but it was urged that none was needed because article 12 (b) worked an automatic forfeiture - King's Birthday Quartz Gold Mining Co. v. Jack (1885) 11 VLR 197, at p 202 . (at p520)

13. Alternatively the reference in art. 13 to "all the provisions herein contained in respect of calls" made applicable to deferred allotment moneys not only relevant articles but also cl. III of the company's memorandum, which, by expressly declaring that the acceptance of shares did not constitute a contract to pay calls, resulted in forfeiture being the only sanction for non-payment ; Cole v. Kelly (1920) 2 KB 106 was relied upon for this construction of "herein contained". (at p520)

14. This argument justified, it was said, the giving to "payment", "payable" and "paid" in cll. 1 and 5 (iii) of the agreement a quite restricted meaning ; those words no more involved an enforceable obligation to pay than did the words "shall pay" used in art. 12 (a) in relation to call moneys. In both cases all that was meant was that in default of payment forfeiture would ensue. (at p520)

15. I am not satisfied that each of the steps in this argument can be made good either as a matter of construction or, so far as reliance is placed upon authority, with the aid of the authorities cited. However there is, I believe, a more fundamental objection which strikes at the root of the respondent's argument. The contract on which the appellant sues is constituted by the agreement of August 1970. That was a contract whereby the two parties exchanged promises ; the respondent promised to make application for certain shares and to pay for them in a certain manner while the company promised to allot those shares to him. Clause 1 is cast in language imposing a clear obligation to pay, just as it imposes an obligation on the company to allot. The consideration was executory on both sides, and was executed by the company when shares were issued to the respondent and by him, in part, when he made the payment of five cents per share. That contract neither expressly nor by necessary implication incorporates terms dehors the written agreement and to be drawn from the articles of association ; it is entirely separate from those articles. It does contemplate that in the future, and as a result of the performance of its terms by the parties, a new and quite complex set of rights and obligations will arise between them governing their new relationship of company and shareholder ; the articles of association will play their part in defining those rights and obligations. But the creation of that future relationship is what is bargained for by the agreement ; only when, in the future, that relationship comes into existence will it bring with it its consequences for both parties, defined in the articles. To seek to import into the agreement the terms of the articles is to confuse the terms of the original bargain, which included the obligation to pay the whole of the deferred allotment moneys, with the rights and obligations flowing from the status bargained for, that of shareholder. The agreement does not expressly incorporate the terms of the articles and once the true nature of the agreement, entire within itself, is appreciated there can be no justification for seeking to qualify, by reference to the articles, the meaning of the clear promise to pay which it contains. It is this important distinction between rights and liabilities qua member and those arising under the agreement of August 1970 to which attention was directed in those passages from the judgments in the New Good Hope Case (1916) VLR 580 which I have already quoted. (at p521)

16. For these reasons I cannot accept the respondent's principal argument. So far as concerns the intended operation of article 13 it is perhaps unprofitable to speculate, particularly as that article was said by respondent's counsel not necessarily to be common form in the articles of association of no-liability companies. However an article identical in all respects with art. 13, save that it omits the last eight words, long appeared in the set of model articles for limited liability companies in Pt I of Palmer's Company Precedents (see 12th ed. (1922), p. 630 and 16th ed. (1951), p. 492) ; its purpose in that setting was simply to apply to the case of non-payment of moneys other than calls the forfeiture machinery applicable to calls. To my mind the present art. 13 aims at doing no more than this. (at p522)

17. As a quite distinct argument it was submitted that, aside altogether from any effect of art. 13, the moneys sued for were in fact call moneys to which the no-liability principle, given effect to by the Act and by the Company's memorandum and articles, applied. For this proposition some reliance was sought to be placed upon Cameron v. Federal Commissioner of Taxation [1941] HCA 10; (1941) 64 CLR 361 and Autoterms Ltd. v. Candy [1943] HCA 31; (1943) 68 CLR 344, at pp 352-353 ; Cameron's Case (1) is no authority for regarding as calls amounts which a prospective member agrees to pay on shares to be allotted to him, especially when, as in this case, no resolution is subsequently passed by the directors, as it was in Cameron's Case (1), calling up those amounts ; on the contrary Rich A.C.J. drew a clear distinction between calls and moneys agreed to be paid by a prospective member when he said, (1941) 64 CLR, at p 370 , ". . . the appellant's liability to calls is derived from his membership of the company and not from the agreement". The passages from the judgment of Williams J. in Autoterms Ltd. v. Candy (1943) 68 CLR, at pp 352-353 appear to me to be a rejection of, rather than any support for, the respondent's argument. (at p522)

18. It was said that there was here a call in the sense that the company's solicitors wrote a letter of demand; whether or not a resolution of directors is a pre-requisite to a call, a matter debated before us, it cannot be, I think, that a demand not purporting to be in exercise of any power to call moneys payable on shares but expressly stated to be for moneys "now due by you under the agreement" can amount to a call. The company's right to payment relied upon in the letter of demand is that arising from the agreement of August 1970 and not from the relationship between a company and one of its members holding partly paid shares. (at p522)

19. In my view this independent argument advanced on behalf of the respondent also fails. (at p522)

20. It was further contended that the appellant had wrongly sued upon the agreement whereas the effective obligation to pay arose from a contract created by the application for shares when accepted by the issue of shares in response to it. What I have already said sufficiently indicates my rejection of this argument. (at p523)

21. For these reasons I consider that the appellant should succeed in its action for the recovery of what I have called the deferred allotment moneys. The matters of law said by the respondent to entitle it to defend the action, rather than have it disposed of on an application for summary judgment, have been fully argued before this Court. It would, I think, in those circumstances be quite wrong to deal with the matter in the way suggested on behalf of the respondent, that is, by concluding that because substantial arguments of law were involved the action should now proceed to trial, the learned primary judge's order remaining undisturbed. While it may have been correct, on the original chamber application and after the nature of the respondent's intended defence was outlined, to have refused the application for summary judgment it would, in my view, be contrary both to good sense and to justice now, after full argument, to permit the action to go to trial in the Supreme Court,followed perhaps by an appeal. As was said by the Victorian Full Court in Australian Can Co. Pty. Ltd. v. Levin & Co. Pty. Ltd., (1947) VLR 332, at p 338 :

". . . We think this Court being clear as to the meaning of
the contract is not so helpless that it cannot prevent the
absurdity of remitting the case to a single judge for trial
because before full argument there might have been some
uncertainty as to the meaning of the document." (at p523)

22. Accordingly I would allow this appeal ; there should be judgment
for the appellant for the amount claimed by it against the respondent. (at p523)

ORDER

Appeal allowed and by majority with costs. Order of the Supreme Court of Queensland dismissing the plaintiff's application set aside and in lieu thereof order that judgment be entered for the plaintiff against the defendant for $62,400 plus interest thereon at the rate of eight per cent per annum from 12th November 1970 to the date of judgment and costs.