University of Western Sydney Law Review
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University of Western Sydney Law Review |
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MARINA NEHME[∗] AND MARGARET HYLAND[†]
Modern Australian companies operate within a complex matrix of legislation, common law, business norms and policy considerations. The existing regulatory regime is difficult to navigate, given the interplay between the Corporations Act 2001 (Cth) (‘Corporations Act’) and other relevant legislation, such as the Trade Practices Act 1974 (Cth) (‘Trade Practices Act’) and the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’). In addition, corporate regulators need to consider common law rules that may clarify or complicate an already intricate legislative system. One of these rules was developed by the House of Lords in Houldsworth v City of Glasgow Bank and Liquidators (‘Houldsworth’).[1] In 1880, the Court in Houldsworth held that a member of a company could not claim damages for fraudulent misrepresentation against a company in the process of liquidation.[2] The Court further held that there was no right to rescission of the share subscription contract on the basis of fraudulent misrepresentation once the company went into liquidation, as this event renders restitution impossible.[3]
To some extent, the Houldsworth rule is still entrenched within the current corporate regime, despite there being difficulties in accommodating its principle within our system. Partly, this is because the rule in the case was developed when the concept of modern business corporations was in its infancy. For instance, when Houldsworth was decided, concepts such as a company’s having a separate legal entity to its members, the acceptance and development of limited liability companies as the norm,[4] and the recognition that companies are legal entities with full legal capacity,[5] had not yet evolved.
In the 21st century, corporations have acquired legal maturity and are readily perceived and treated as legal persons with full legal capacity. This can be illustrated by s 124 of the Corporations Act, which states that ‘a company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate’. This necessarily raises the question as to whether Houldsworth is the missing ‘piece’ that helps rationalise the legislative corporate puzzle,[6] or alternatively, are we trying to complete such a puzzle using the wrong piece altogether.
This article will briefly critically examine the reasoning behind the Houldsworth rule. The application and effect of this rule will then be assessed within the context of s 563A and Chapter 6D of the Corporations Act, together with the implications of the case on s 52 of the Trade Practices Act and s 12DA of the ASIC Act. An argument will be developed that this 19th century case is antiquated and serves only to complicate and confuse the application of the statutory regime. Accordingly, the principle in the case should be abolished by legislative intervention. It is only through parliamentary action that the real or illusory application of the Houldsworth rule can be erased once and for all from the corporate landscape.
II. BRIEF ANALYSIS OF THE MAIN ARGUMENTS IN HOULDSWORTH
The City of Glasgow Bank was an unlimited liability company, which was established in 1839.[7] The bank rapidly expanded. By 1857, it had 88 branches in Scotland and, one year later, it had acquired the status of the third largest branch network of any British Bank.[8] Consequently, the City of Glasgow Bank was considered as one of the most respectable banks of its time. The Times, for instance, noted that
among the various joint-Stock banks which are established in Scotland, none occupied a more favourable place in the estimation of the public than did the City of Glasgow ... it was regarded as the safest source of investment to be met with.[9]
In February 1877, Arthur Houldsworth purchased shares worth £4,000 from the City of Glasgow Bank. This purchase was induced by the company directors’ representations that the bank was solvent. The directors even provided Houldsworth’s agent access to the company’s financial reports. However, sometime later, it became apparent that these financial reports were incorrect. In October 1878, the City of Glasgow Bank issued the following telegram: ‘Bank has stopped payments. Close your doors at once and pay nothing whatever’.[10] These fateful words indicated the collapse of one of the most reliable and trustworthy banks of that era. The collapse of this unlimited liability company negatively impacted upon many of its investors. For instance, of the 1819 shareholders of the bank, only 254 remained solvent after the bank’s liquidation.[11]
When the City of Glasgow Bank became insolvent, Houldsworth, as a contributor, was required to financially contribute to help cover the company’s debts. In December 1878, he took action against the liquidator to recover damages from the company. The damages claimed equated to the money he had paid for the stock, the money he had already contributed towards the company’s debts and any future payments he would be called upon to pay. Houldsworth claimed that he was induced to buy the stock because of the fraudulent misrepresentations made to him by the company’s officers. Earl Cairns, Lord Selborne, Lord Hatherley and Lord Blackburn unanimously rejected Houldsworth’s claim for damages against the company because he had not renounced his shares.[12] Consequently, he was denied compensation for any losses caused by the fraudulent misrepresentations, which allegedly had induced his share subscription.
On a number of occasions in the judgment, the learned judges stated that no ‘case has been cited in which such a remedy as that sought by the Appellant in the present case has been allowed to take effect by any Court either in Scotland or in England’.[13] The question raised was whether such a claim for damages should be rejected because no other case could be cited to support the claim or alternatively because no previous case had considered this particular matter. To answer this question, their Lordships relied heavily on the judgement in Addie v The Western Bank of Scotland (‘Addie’).[14] Their Lordships considered the facts of Addie to be similar to those in Houldsworth. However, unlike Houldsworth, when Addie subscribed for his shares, the entity was an unincorporated company. It should be noted that the House of Lords in Houldsworth considered this difference insignificant.[15]
The main arguments relied upon by the House of Lords in Houldsworth were the following:[16]
• It is difficult to distinguish between a company and its members. Given this, if members are permitted to take action against the company, this then implies that members are in fact suing themselves. This argument was particularly relevant, as the City of Glasgow Bank was an unlimited liability company.[17]
An action for damages for fraudulent misrepresentation cannot be brought by a member against the company. The directors, on the other hand, may be personally liable.[18]
Damages in deceit against the company are not an option, while members retain their shares. This would be contrary to the implied contract that exists between members. To claim damages from the company, members must rescind their shares. This is needed to stop the shareholder from approbating and reprobating at the same time.[19]
In 1957, Professor Gower noted that Houldsworth was ‘an anomaly’.[20] Consequently, he attempted to rationalise the decision by noting that one possible justification for the case ‘depends on the recognition of share capital as a guarantee fund for creditors.’[21] Even though Re Addlestone Linoleum Company[22] and Webb Distributors (Aust) Pty Ltd v Victoria (‘Webb’)[23] used this argument to justify the Houldsworth rule, the judges in Houldsworth do not appear to have relied on the principle of capital maintenance, as the basis for their judgement. For this reason, this article will not consider this argument in its analyses of the case.
A. Difficulty of distinguishing between a shareholder and the company
In Houldsworth, Lord Hatherley observed that
the Appellant is trying to reconcile two inconsistent positions, namely, that of shareholder and that of creditor of the whole body of shareholders including himself.[24]
Similarly, Lord Selbourne observed that
it is impossible to separate the matter of the pursuer’s claim from his status as a corporator, unless the status can be put an end to by rescinding the contract which brought him into it.[25]
The argument that was proposed was that the company and its members are one and the same and that there is no separate legal entity that exists between them. Members cannot sue the company as creditors because if they do, they are ultimately taking action against themselves, especially where the company is insolvent.[26] This argument may be acceptable within the context of an unlimited liability company. However, the Houldsworth rule has not been confined to unlimited liability companies, but has also been considered and applied to limited liability companies.[27]
This position adopted by Houldsworth of blurring the distinction between companies and their members was no longer acceptable by the end of the 19th century, mainly because of the landmark decision in Salomon v Salomon & Co Ltd (‘Salomon’s Case’).[28] This case changed the way companies were viewed and became the authority for the principle that a company, once incorporated, became a separate legal entity.[29] Lord MacNaghten stated:
The Company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.[30]
When this principle of separate legal entity was entrenched into the system, greater emphasis was placed on the effect and consequences that flowed from company registration. Today there are major differences between incorporated and unincorporated companies. Statute law treats an incorporated company as an artificial legal person. The law recognises it as a legal entity, separate from its members. On the other hand, unincorporated companies are not considered separate legal entities and, therefore, no distinction is made between the unincorporated company and its members. As the rules for unincorporated companies no longer apply to incorporated companies, then with respect, Lord Blackburn’s heavy reliance on Addie[31] should now be rejected. Gummow J observed that such reasoning ‘bears the mark of its time’.[32]
Today, a person can simultaneously be a creditor and a member of the company. In Salomon’s Case,[33] the House of Lords noted that Salomon was not liable to indemnify the company because the company, being properly registered, was a legal entity separate from its members. Consequently, a person may be a member and a creditor of a company at the same time. If Houldsworth’s action for deceit against the company had succeeded, he would have been considered a creditor of the company and, as such, entitled to be treated like any other company creditor. Significantly, this would not have been contrary to the legislation that applied when Houldsworth was decided. The Winding-up Act 1862 (UK) contained provisions about the payment of creditors. However, it did not state that shareholders who purchased their shares in a company based on misleading and deceptive information could only take action against a company if they first renounced their shares. Further, the Act did not stipulate that shareholders may not be creditors of the company. Accordingly, if shareholders suffered a loss due to the misleading and deceptive conduct of the company, they could be classified as creditors.[34]
In summary, Houldsworth fails to take into account one of the founding principles of company law: this being the principle of separate legal entity. Once Salomon’s Case was decided, it appears somewhat confusing that Houldsworth was still raised and considered to have any effect. Further, what becomes even more confusing is that subsequent cases did not confine the Houldsworth rule to unlimited liability companies but instead also extended it to limited liability companies. Such a limitation may have provided some justification for the subsequent support given to Houldsworth after Salomon’s Case.
As a result, Houldsworth ignores the consequences that arise from the principle established in the Salomon’s Case. In the 19th century, the recognition and acceptance that a company had full capacity and can sue and be sued like any individual was hard to grasp, as there were limited circumstances where a company was considered to be a separate legal entity.[35] For example, in Ashbury Railway Carriage & Iron Co v Riche,[36] the House of Lords decided that a company could not enter into contracts that were outside its objects clause.[37] However, even though this may have been the perception of companies when Houldsworth was decided, it cannot be used as a justification for maintaining the rule within the current corporate landscape. From a policy perspective, given the significant changes that have taken place within the corporate context, the Houldsworth rule should be removed as an unnecessary obstacle to corporate clarity.
Houldsworth also highlighted another limitation, which related to a company’s capacity because a company was considered not liable to a member’s claim for damages for deceit, where that member retained their shares.
B. Action for deceit: Who is liable?
Houldsworth seems to accept two conflicting rules. On the one hand, it accepted the principle of agency, observing that the agency rules are ‘equally applicable whether the agency is for a corporation (in a matter within the scope of the corporate powers) or for an individual.’[38] This idea of agency would give the member the right to bring an action for rescission against the company in a case of deceit and it was irrelevant whether or not the company itself was privy to the wrongful act.[39] On the other hand, Houldsworth followed Addie[40] by deciding that a company itself cannot be sued as the principal wrongdoer for damages in an action for deceit by imputing to them the misconduct of their agents.[41] Therefore, the court recognised the principle of agency as being applicable to companies allowing an action for rescission but was unwilling to apply the same principle to enable a subscriber of shares, who retained their shares, to bring an action for damages in deceit against the company.
The company, its agents and members were really all seen as one and the same entity. Accordingly, an action for damages in deceit against the company, who was as ‘innocent’ of the deceit as the shareholder making the claim, did not sit well with their Lordships at the time.[42]
Such reasoning is no longer sound legal principle, as modern companies have been held liable for the acts of its agents in torts, contracts and even criminal law. A principal may be liable for the acts of its agent, even if the principal was unaware of the fraud and the information was passed to a third party through an innocent principal or another agent.[43] Companies have also been held liable to their own members for negligence, even though the injured person was the directing mind of the company and was responsible for the company’s fault.[44] Dawson J noted that
it does not seem to me that the duty of an employer and an employee in such regard [to provide a safe system of work] can ever be coextensive or coterminous. The duty is that of the employer and even if the employee is entrusted with its performance it remains an independent obligation of the employer of a more comprehensive kind to ensure that reasonable care is taken.[45]
Accordingly, today, corporate liability has extended beyond vicarious liability, treating companies as the principal tortfeasor in cases of libel,[46] manslaughter[47] and defamation.[48] These actions raise similar issues of morality as the tort of deceit.[49]
Consequently, the finding in Houldsworth, that a member had no claim for damages in deceit against the company, appears outdated and contrary to existing laws. The learned authors of Ford’s Principles of Corporations Law support the view that there is no justification for exempting companies from liability to compensate for ‘harm flowing from civil wrongs committed in the course of its activities, if a natural person in similar circumstances would have been liable.’[50] Therefore, this supports the argument that today there is no legal obstacle preventing a company from being held liable for damages in cases of deceit.[51]
The next argument used by the House of Lords to reject Houldsworth’s claim relates to the existence of a statutory contract between members, which was held to prohibit members claiming damages for the fraudulent misrepresentations of the company.
C. The existence of a statutory contract between members
The House of Lords, following Addie,[52] held that rescission was the only available remedy to Houldsworth. However, once the company went into liquidation, this remedy was no longer an option.[53] In Addie, the court considered that rescission, unlike a claim for damages in deceit, was not prejudicial to other innocent shareholders.[54]
In Houldsworth, shareholders were distinguished from purchasers of chattels or land, as shareholders were said to be subject to a statutory contract between themselves that the property they contributed would be used and applied in a particular way.[55] The Winding-up Act 1862 (UK) was referred to in Houldsworth as making no provision for a deferred or secondary right of action for damages in deceit by a shareholder against the company. Rather, it was said that it only provided for claims by creditors against the company and not contributories.[56] The argument was that the terms of the statutory contract between the members prohibited a claim for fraudulent misrepresentation by a subscriber of shares against a company in liquidation. Later courts have subsequently rationalised the principle in Houldsworth on this basis.[57]
In Houldsworth, their Lordships reasoned that without rescission of that contract, a claim for damages must be considered as both ‘approbating and reprobating’, which was not permitted by either Scottish or English law.[58] Their Lordships’ reasoning in Houldsworth with respect to the statutory contract relied heavily on drawing an analogy to partnership law. For example, Earl Cairns stated that the contract made ‘between him and his partners’[59] is such that a demand by the ‘new partner’ for damages for a fraud committed by ‘himself and his co-partners’ would be at ‘variance with the contract into which the new partner has entered.’[60] Similarly, Lord Hatherley refers to the ‘partnership contract’ as one leading to a never ending ‘interlacing of claims’.[61] Under partnership law, where a partnership becomes bankrupt, then a partner, who is a creditor, cannot claim in competition with the partnership’s external creditors. The rationale being that such a claim would diminish the available partnership assets, which are needed to meet the claims of the creditors of the firm, who also are the creditors of each partner.’[62] Gleeson CJ in Sons of Gwalia Ltd’[63] criticised their Lordships in Houldsworth for their misuse of partnership analogy within the context of corporations’ law.[64] Houldsworth was related to an unlimited liability company. Therefore, their Lordships’ consideration of insolvent partnerships within the context of unlimited liability companies may have some merit. However, as the rule in Houldsworth has not been confined to unlimited liability companies by subsequent courts, then the continued operation of this rule within the modern context can no longer be supported. Today partnerships and companies are regulated very differently. Also, most modern Australian companies are limited liability companies, which further separate companies from partnerships, as does the fact that partnerships, unlike corporations, are not considered separate legal entities. Consequently, with respect, their Lordships’ interpretation of the statutory contract in Houldsworth should be rejected, as being no longer legally relevant.
Further, s 140(1) of the Corporations Act refers to the statutory contract that exists between the company and its members and between the members themselves. Such a contract has been held to be only enforceable by a member in their ‘capacity as a member’ and not as an outsider.[65] Arguably, then, if a member has been fraudulently induced to enter into a share subscription contract with the company, then his claim for damages arises from the tort of deceit practised on him before he was a member. Consequently, the statutory contract should not preclude his claim, as it is being made by him in his capacity as a creditor, as when he entered into the share subscription contract he was not a member of the company. If this is not the case, the statutory contract would be granting relief from the ordinary consequences of fraud[66] and this is unacceptable. Hayne J, in Sons of Gwalia Ltd,[67] seemed to support such a position, as His Honour stated that the company’s obligation to pay damages for fraudulent misrepresentation (that induced the share subscription) is not an obligation precluded by the statutory contract.[68] Therefore, the argument that this contract would prohibit such a claim should not arise, as the misled shareholder is not asserting this claim as a member but as an outsider (a creditor of the company).
Commercial change and the current view of corporations often mean that corporate funds are used to compensate someone harmed by a wrong or to pay penalties to the government.[69] Consequently, courts today do not consider that there is an implied term in the statutory contract that would prevent the company’s funds being used to meet such liabilities.
As it can be seen, the arguments used to support the decision in Houldsworth are no longer of any consequence. Accordingly, the principle in Houldsworth appears archaic and outdated. Even so, it was not until the 1990s that the principle began to be questioned. One of the latest Australian cases, which to some extent did this, was the Federal Court[70] and High Court[71] judgments in the Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic. Consequently, the Corporations and Markets Advisory Committee (CAMAC) issued a discussion paper on this matter entitled Shareholder Claims Against Insolvent Companies: Implications of the Sons of Gwalia Decision.[72] One of the points raised by CAMAC was whether or not the ratio of Houldsworth should be maintained.
Accordingly, the principle in the case still influences the way Australian courts interpret certain legislative provisions. The next part of this paper discusses the problems of incorporating Houldsworth within the modern legislative landscape.
III. THE IMPACT OF HOULDSWORTH ON AUSTRALIAN LAW
It should be noted that very few judgements in the 19th and most of the 20th centuries critically assessed this case. Nevertheless, Houldsworth has been cited and considered on a number of occasions in Australia and also overseas. However, the case has only been once directly applied in England.[73] In Australia, Anderson J applied Houldsworth in Re Dividend Fund Incorporated (in liq)[74] but did so without any consideration of the reasons behind the judgment. His Honour considered Houldsworth as a principle of general application. By the end of the 20th century, Houldsworth had been applied on a number of different occasions in cases such as Victoria v Hodgson,[75] Re Pyramid Building Society (in liq),[76] Webb[77] and Crosbie Re Media World Communications Ltd (Administrator Appointed).[78]
The Houldsworth rule began to be increasingly criticised from the 1990s onwards, with certain judges noting that some of the justification made in the case ‘border on the bizarre’.[79] For example, Tadgell J noted that ‘the decision bears the stamp of its era.’[80] McHugh J considered the rule to be ‘misconceived and a source of injustice,’[81] while Finkelstein J said that ‘the precise basis for the rule is not altogether clear.’[82]
Nevertheless, this criticism did not affect the application of the case. Finkelstein J believed that ‘there can be no doubt that the rule in the Houldsworth case … applies in Australia.’[83] Even McHugh J, who heavily criticised the Houldsworth rule,[84] did not reject the application of the case, observing that the rule should be followed as it ‘is too deeply entrenched to be set aside by judicial decision’.[85] While the abovementioned cases applied Houldsworth, other judgments considered the Houldsworth rule and then distinguished the case. The most prominent Australian cases that refused to apply the Houldsworth rule were Cadence Asset Management Pty Ltd v Concept Sports Ltd[86] and the High Court in Sons of Gwalia Ltd.[87]
To assess the incorporation of Houldsworth within the Australian system, the following paragraphs consider the impact of the Houldsworth rule on Chapter 6D of the Corporations Act, certain sections of the Trade Practices Act and section 563A of the Corporations Act.
A. Houldsworth and Chapter 6D of the Corporations Act
The Corporate Law Economic Reform Program Act 1999 (Cth) introduced Chapter 6D into the Corporations Act. Chapter 6D replaced the fundraising provisions that existed before 1999 (Divisions 2, 3, 6 and 7 of Part 7.12, s 996 and Subdivision B of Division 4 and Division 5 of Part 7.11).[88] This new regime was introduced partly due to the need to clarify the rules relating to a company’s liability for misleading and deceptive conduct in a disclosure document.[89] Consequently, s 729 was introduced, which stipulates that:
(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.
When considering the interpretation and application of s 729, the issue arises as to whether the Houldsworth rule limits the application of s 729. In short, can subscribers sue the company based on s 729, if they have not renounced their shares?
The history of the section may provide the answer to this question. Finkelstein J noted that the origin of s 729 is found in s 3 of the Directors Liability Act 1890 (UK).[90] If this is the case, then the Houldsworth rule may today still be relevant. However, it is important to check whether the content of s 3 of the Directors Liability Act 1890 (UK) is similar to that of s 729. Section 3 of Directors Liability Act 1890 (UK) was incorporated into s 107 of the Companies Codes of the States and the provisions were worded very similarly. However, s 1006 of the Corporations Law (Cth), which dealt with the s 107 provision, was formulated differently from that of its predecessor. As a result, s 729, which is based on s 1006 of the Corporations Law (Cth),[91] is worded somewhat differently from s 3 of the Directors Liability Act 1890 (UK).[92]
Consequently, as the content of s 729 varies from its predecessor, the reasoning that applied in the 19th century in relation to s 3 of the Directors Liability Act 1890 (UK) may now be irrelevant when considering s 729. Further, the 1890 United Kingdom legislation would have been interpreted very differently from how it would be interpreted today, as the context within which the legislation was introduced and the economic environment were significantly dissimilar to modern Australia. As previously mentioned, in the 19th century, it was ‘doubtful whether a company could be made liable in damages for the fraudulent misrepresentation of its directors or promoters.’[93] However, s 729 allows subscribers, who have suffered a loss or damage due to a misleading and deceptive document, to recover this from the company. Accordingly, the rule in Houldsworth should be considered irrelevant when applying this section.
However, in Crosbie; Re Media World Communications Ltd (Administrator Appointed),[94] the Court held that Houldsworth applied to both ss 728 and 729, thereby barring any claims by share subscribers. Media World Communication Ltd (MWC) was a publicly listed company, which was placed under voluntary administration. The administrator sought guidance from the court under s 447D of the Corporations Act in relation to the treatment of subscribing shareholders, who may have purchased their shares based on a misleading and deceptive prospectus. These shareholders may also have had a claim in tort and a claim based on s 9 of the Fair Trading Act 1999 (Vic), s 12DA of the ASIC Act and ss 728 and 729 of the Corporations Act. Accordingly, the court had to decide whether or not these subscribing shareholders were the company’s creditors. Finkelstein J held that they were neither creditors nor contingent creditors, due to Houldsworth. Further, to claim damages in the tort of deceit, they must have renounced their shares, which they had not done. Consequently, they were now prevented from doing so because the company was under voluntary administration. Therefore, they could not claim damages against the company. Similarly any action based on the sections in other relevant legislation, as mentioned above, was precluded because these Statutes had not expressly excluded the application of Houldsworth. For a successful action, the shareholders must have renounced their shares. As a result, the Houldsworth rule applied and the members of MWC were not considered creditors for the purpose of voluntary administration. As a consequence of this case, the Houldsworth rule was held to apply to ss 728 and 729.
In a later case, Cadence Asset Management Pty Ltd v Concept Sports Ltd,[95] Concept Sports issued a misleading prospectus. The plaintiff, relying on this prospectus subscribed for shares in the company. Subsequently, he commenced proceedings against the company and its directors, claiming damages due to the prospectus being in breach of s 728. At first instance, Finkelstein J, after due consideration, observed that Houldsworth prevented shareholders claiming damages against the company for misleading and deceptive conduct, unless they had renounced the contract pursuant to which the shares had been acquired. Following Crosbie; Re Media World Communications Ltd (Administrator Appointed), it was held that the Houldsworth rule applied to s 729, as the statute has not expressly excluded its application. Finkelstein J noted that ‘Parliament is aware of the Houldsworth case and its consequence and when it wishes to do so it will overturn its effect and do so in clear language.’[96] Further, even if s 729 overturned the Houldsworth rule, this provision does so only for companies not subject to external administration, as s 563A, which precludes members’ claims when the company is being wound up,[97] remains in place.[98]
However, on appeal, the Full Federal Court noted that
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 s disclosure document contravenes s 728(1);
(b) the loss and damage sought to be recovered is one that the table in the subsection makes the person specified liable for;
(c) an action under the subsection is commenced within 6 years after the date on which the cause of action arose.[99]
Consequently, it was held that s 729(1) allows investors to sue the company for damages caused by the contravention of s 728(1), providing the above statutory conditions are met. This section does not stipulate that a renouncement of shares is a condition for subscribers to successfully claim damages. The terms of the section are unrestricted and to say otherwise would contradict its express terms.[100] Further, the explanatory memorandum of the Corporate Law Economic Reform Program Act 1999[101] noted that one of the aims of the Corporations Act was to clarify who may be liable for misleading and deceptive conduct. Section 729 does not specify any requirement to renounce ones shares in order to claim compensation and likewise the explanatory memorandum does not contain any such limitations.[102] The Full Federal Court also noted that the available defences to a claim under s 729(1) do not include a defence based on Houldsworth.[103] Additionally, s 563A, while confirming the Houldsworth rule,[104] precludes the application of Houldsworth to s 729, as it postpones the entitlements of subscribing shareholders in cases of insolvency. Further, there is no requirement to rescind their share subscription contracts.[105]
Therefore, it was decided that investors may claim damages for misleading and deceptive information in a disclosure document, even if they have not renounced the share contract. This was considered to be the case, even for insolvent companies. However, in a company’s winding up, the investor’s right to claim for any loss or damage would be subordinated to claims made by other creditors, due to s 563A of the Corporations Act.[106]
It therefore appears from Cadence Asset Management Pty Ltd v Concept Sports Ltd[107] that Houldsworth does not apply to Ch 6D of the Corporations Act. This case managed to reach a balance between protecting shareholders and creditors. On the one hand, shareholders are protected, as they can claim for damages for breach of s 728(1), irrespective of the company’s solvency. On the other hand, creditors are also protected, because in cases of insolvency, the shareholders’ claims will be subordinated to those made by outside creditors.[108]
However, this decision has not garnered universal support. As a result, there is no guarantee that later cases, (especially where the company is insolvent) will not apply Houldsworth to s 729. For example, in Sons of Gwalia (subject to deed of company arrangement) v Margaretic,[109] Finkelstein J observed that the correctness of the Full Court’s reasoning in Cadence Asset Management Pty Ltd v Concept Sports Ltd[110] on these and other aspects can await another day.[111] Accordingly, to eliminate any doubt on this topic, legislative change is necessary to reject once and for all the Houldsworth rule. Without changes to both policy and legislation within this context, investors may have doubts about the protection the current laws afford them. Such a situation could produce an undesirable effect because foreign investors may be deterred from investing in the Australian market.
B. Houldsworth and the Trade Practices Act
Houldsworth was applied by both the Supreme Court of Victoria in Victoria v Hodgson,[112] and the High Court in Webb.[113] These cases arose due to a scheme developed in 1986 by Pyramid, Geelong and Countrywide Building societies, which began marketing non-withdrawable shares to the public. In 1990, these three building societies collapsed leaving 10,000 people holding these non-withdrawable shares. These shareholders argued that the prospectus was misleading and had failed to explain to them clearly the nature of the system. These shareholders then applied to be recognised as unsecured creditors in an attempt to recoup some of their losses. The Courts were not asked to determine whether there had been misleading or deceptive conduct under s 52 of the Trade Practices Act, as they were asked to presume that s 52 was satisfied. Also the Court was not asked to decide whether Houldsworth could stand against the provisions of the Trade Practices Act. Nevertheless, the Court expressed its viewpoint on the interplay between Houldsworth and the Trade Practices Act.
Even though the decision in Webb related to building societies, nevertheless the Court still considered the application of Houldsworth to such entities, reasoning that building societies stand in a similar position to companies under the Corporations Act.[114] Therefore, the Court looked at the way specific sections relating to winding up in the Corporations legislation impacted upon more general provisions, such as s 52 of the Trade Practices Act. In the Supreme Court of Appeal, Tadgell J held that while s 360 (1) (k) of the Companies (Victoria) Code does not preclude a claim being made under s52 of the Trade Practices Act, nevertheless, it would not be treated as a debt owed by the company under the Code.[115] This view was supported by the majority of the High Court in Webb, who considered that a subscriber’s claim was precluded by the rule in Houldsworth, which was reinforced by the statutory provisions that preceded s 563A.
In obiter, the majority of the High Court in Webb stated that the Trade Practices Act, although innovative legislation, ‘should not eliminate “by a side wind” the detailed provisions established for more than a hundred years to govern the winding up of a company’[116] under the corporations law. Further, they considered that s 87(2)(a) of the Trade Practices Act cannot be construed to allow the court to declare void a contract ‘which was valid at its inception, other than through the operation of some other provision of the Trade Practices Act or by reason of some alteration in circumstances.’[117]
It is interesting to note that McHugh J in Webb, although the dissenting judge, stated that there was no justification for reading into the unambiguous words of ss 52 and 87 an implied limitation on their application to companies in liquidation because of the rule in Houldsworth.[118] The Trade Practices Act is a fundamental piece of remedial and protectionist legislation, which should be construed broadly. His Honour stated that the Full Federal Court has previously held that leave may be given to bring an action based on s 52 of the Trade Practices Act against a company in liquidation.[119] Therefore, s 87 of the Trade Practices Act would permit a shareholder to rescind his contract against a company in liquidation and s 52 would allow a claim for damages.[120] There is nothing in the Trade Practices Act to say that it must be read subject to Houldsworth.[121] When enacting ss 52 and 87, Parliament probably gave no thought to cases such as Houldsworth. It should be left to the court’s discretion, when exercising jurisdiction under such legislation, as to whether it will grant rescission or damages against a company, whether or not it is in liquidation.[122]
Further, the fact that the court considered that a claim under s 52 of the Trade Practices Act fell under s 563A of the Corporations Act can be strongly criticised. The High Court in the Webb observed that a member’s claim for damages under s 52 was made in his or her capacity as a member because the claim was related to the shareholder’s membership. Such an interpretation, with respect, is flawed because the question that should have been asked to determine the application of s 563A to s 52 in such a scenario is the following: Does the claim arise from rights attached to the shares? In this instance, as the claim was not a right attached to the shares, s 563A should be considered irrelevant to the application of s 52.[123]
A more recent case that dealt with this matter was Tenji v Henneberry & Associates Pty Ltd (‘Tenji’).[124] This case concerned misleading and deceptive conduct under s 52 of the Trade Practices Act pertaining to the sale of service station premises. One of the issues considered by the court was whether the criteria for relief under s 87(2) (a) of the Trade Practices Act was limited to declarations relating to contracts void by operation of some other rule of law. In Tenji, French J said that although the earliest provisions of s 87 may have been narrowly construed,[125] this may no longer be the case, as more than sixteen years have elapsed since the decisions in Webb and in Trade Practices Commission v Milreis Pty Ltd[126] took place. In Trade Practices Commission v Milreis Pty Ltd, s 87 was narrowly construed as not providing a stand-alone remedy but being conditional on the granting of primary relief under ss 79, 80 or 82.[127] This viewpoint was later endorsed in Webb.[128] However, French J stated that during the period after these cases were decided, there have been many legislative amendments to s 87, substantially strengthening its ‘importance as a remedial provision’[129] and therefore, the obiter in Webb is no longer relevant.[130]
Further, the court held that relief under the section relied entirely upon the operation of the statute. [131] When the court exercises its discretion under s 87, although equitable relief may be relevant, it was not necessarily determinative.[132] This issue was again raised very briefly in Crosbie, Re Media World Communications Ltd (Administrator Appointed)[133] where Finkelstein J noted that such a suggestion is ‘a rather bold judgement by the Full Court in Tenji v Henneberry & Associates Pty Ltd.’[134] The Federal Court in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic[135] held that a shareholder making a claim for misleading or deceptive conduct relating to a purchase of shares from a third party in a transaction with no connection to the company, potentially may claim for loss and damage under s 52 of the Trade Practices Act. Section 563A of the Corporations Act should not prohibit or postpone such a claim, as it does not arise in his ‘capacity’ as a member of the company but under the consumer protection provisions of the Trade Practices Act.[136] The High Court’s decision in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic has the effect that a claim for damages for misleading or deceptive conduct ‘under one of the legislative regimes may be made by a purchaser of shares, who has relied on the company’s misleading statement, without impediment from or postponement under any provision of the Corporations Act.’[137]
The problem with this situation is that even though judicial sentiment seems to favour sidestepping the Houldsworth rule, the major difficulty with this approach is that the claimant is reliant on judicial discretion, which mostly militates against the exercise of such discretion.[138] Evidently there may be some uncertainty as to the impact of the rule in Houldsworth on the Trade Practices Act and whether a members’ claim under that Act would be a provable debt against a company in liquidation, due to the heavy reliance on judicial discretion. Even though misleading conduct under s 52 of the Trade Practices Act may now be inapplicable to securities, the problems with its interpretation and possible link to the Houldsworth rule may still be relevant, as the wording of s 52 of the Trade Practices Act is almost identical to that used in s 12DA of the ASIC Act and s 1041H of the Corporations Act. These sections all deal with different liability regimes and may be referred to in litigation depending on the nature of the misleading conduct. The similarity in the wording of these provisions suggests that the courts would most likely interpret them in the same way. Accordingly, legislative intervention is required for clarity and consistency purposes. It is proposed that, in balancing the interests of both creditors and shareholders, a defrauded shareholder should have the right to claim damages against a company regardless of the fact that it is in liquidation. However, from a policy perspective, such debts should be deferred to claims made by other unsecured creditors. This would be consistent with the Federal Court’s findings in Cadence Asset Management Pty Ltd v Concept Sports Ltd[139] in relation to Ch 6D of the Corporations Act, which was discussed above. Further, it may also be useful to look at the impact of Houldsworth on s 563A of the Corporations Act.
C. The impact of Houldsworth on section 563A
Section 563A is a key provision dealing with debt subordination and it is one of the sections in the Corporations Act that has, for a long time, been linked to the Houldsworth rule. This section states the following:
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.
Accordingly, one of the key issues is to determine what is meant by ‘in the person’s capacity as a member of the company.’ If the person falls within this category, then Santow J noted that the member’s claim may fall within the scope of Houldsworth.[140] To be able to appreciate the meaning behind these words, a brief review of the history of the section may be relevant.
Section 563A of the Corporations Act emphasises priority more than its predecessor, s 360(1)(k) of the Companies Code (Vic), which itself was the basis of s 525 of the Corporations Law (Cth) (a provision almost identical to s 360(1)(k) of the Companies Code (Vic)). The difference between s 563A and s 360(1)(k), is of minor importance because, when enacted, section 563A was intended to have the same effect as the then current s 525 of the Corporations Law (Cth).[141] Accordingly, as s 525 of the Corporations Law (Cth) and s 360(1)(k) of the Companies Code (Vic) can be traced back to s 38(7) of the Companies Act 1862 (UK),[142] then arguably the interpretation of s 563A would take into consideration the Houldsworth case.[143]
Section 38 of the Companies Act 1862 (UK)[144] was enacted before the development of the principle of capital maintenance[145] and the rule that rescission is lost once a company is wound up, as at that point the company no longer exists.[146] In Webb, the majority did not consider the issue to be whether Houldsworth was right or wrong but whether the rule ‘distilled in the case from the provisions of the Companies Act 1862’ was incorporated into the provisions of the Code.[147] Tadgell J, with whom the majority in Webb agreed, held that Houldsworth had ‘received statutory recognition in s 360 (1) of the Code.’[148]
After Webb, one may have considered that the interpretation of s 563A took into account Houldsworth, due to the similarity between this section and s 360(1)(k) of the Code. However, a recent case once again raised this issue. In Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic,[149] Margaretic claimed that its share purchase in the mining company, Sons of Gwalia (through the ASX) was induced by misrepresentations and a breach of the listing rules. Margaretic lodged an informal proof of debt claiming damages for misrepresentation; the amount being the costs of its shares. The administrators of Sons of Gwalia applied to the court for a declaration as to whether Margaretic’s claim for damages was provable under the deed of arrangement, which incorporated s 563A of the Corporations Act as a term of the deed. The two legal issues considered in the case were whether Houldsworth applied to ‘claims in fraud or misrepresentation by on-market purchasers of shares and the effect of s563A (not as a statutory provision but as a term of the deed of company arrangement) on such claims.’[150] The trial judge decided the claim only on the basis of s563A being a term of a deed, declaring the debt to be provable and that it should not be postponed.[151] An appeal was then lodged against both those declarations.
The Federal Court considered the impact of Houldsworth on the issues before the court. Finkelstein J was critical of the decision in Webb. His Honour considered the decision was ambiguous, as it suggested that a claim by a defrauded shareholder falls within s 360(1)(k).[152] His Honour stated that there are three ways to resolve this ambiguity, given that the High Court held that Houldsworth applied to the provision. Firstly, that s563A ‘regulates’ claims by members qua members and these types of claims cannot be maintained against a solvent company nor are they provable in a winding up.[153] Secondly, Houldsworth does not apply to the section at all.[154] Lastly, the section only regulates claims by defrauded shareholders, who have denounced their shares before the liquidation. In the latter case, the section then operates to subordinate their claims for restitution.[155] Finkelstein J stated that s 563A cannot modify the rule in Houldsworth, as section 38(7) of the Companies Act 1862 (UK), which is the forerunner to this section, produced the rule itself. Therefore, a claim by a defrauded shareholder should not be determined by the maintenance of capital or some notion that members must come last, but rather as to whether it satisfies the statutory criteria of being made in his ’capacity as a member.’[156] This follows Finkelstein J’s reasoning in Cadence Asset Management Pty Ltd v Concept Sports Ltd[157] when he noted that ‘s563A will prevent a member from proving for damages for fraud or misrepresentation inducing his subscription in competition with other creditors’.[158]
As a consequence, the Federal Court limited the decision in Webb to subscribers of shares.[159] Further, claims for damages for fraudulent misrepresentation by subscribers of shares, were considered to be based on the statutory contract with the company. As such, they are made in their ‘capacity as a member’ and were therefore caught by s 360(1)(k).[160] On the other hand, claims by transferees were held to be made by members in their ‘capacity as outsiders’. Therefore, such members will stand on an equal footing with other creditors’ claims made against the company,[161] as these claims are outside the section.[162]
The Federal Court, therefore, rejected the suggestion that the rule in Houldsworth should extend to transferees, even though a transferee of partly paid shares is equally liable to pay calls under the statutory contract now found in s140(1) of the Corporations Act.[163] Houldsworth[164] was held to be limited to subscribers of shares.[165] This position was supported in England in Soden v British & Commonwealth Holdings Plc.[166] In that case, British & Commonwealth Holdings purchased the whole of the share capital in Atlantic Computers. Soon after, Atlantic went into liquidation. The purchasing company also went into administration. It then brought proceedings against Atlantic for negligent misrepresentations, which allegedly had induced British & Commonwealth Holdings to purchase its shares. The issue was whether these claims should be subordinated to external creditors under the equivalent of s 360(1)(k) of the Companies Code. The current law in the United Kingdom pertaining to share subscribers claiming damages for misrepresentation in breach of the share contract, was not considered by Lord Browne-Wilkinson as an issue before the court.[167] His Honour, however, stated that s 111A of Companies Act 1985 (UK) partly operates to override the Houldsworth principle, although ‘the extent and what consequential results are not yet clear.’[168] His Honour considered that Re Addlestone Linoleum Company[169] and Webb Distributors (Aust) Pty Ltd v Victoria[170] only applied to claims relating to shares issued by the company. Consequently, a transferee of shares was not claiming such damages in his ‘character’ as a member and therefore was outside the meaning of s 74(2)(f) of the Insolvency Act 1986 (UK).
The legislative puzzle became more complex, when the Federal Court decision of Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic was heard by the High Court.[171] The High Court, unlike the Federal Court, did not apply the distinction between claims by shareholders on the basis of subscription or transfer. Gummow J observed that it is ‘fruitless to pursue’ such a distinction.[172] By a majority of six to one, each of the six judges in the majority delivered separate judgements dismissing the appeal. The majority declined to apply Houldsworth to s 563A by observing that this section does not support the principle that shareholders always come last. Further, the section does not prohibit shareholders from taking action against the company for misleading and deceptive conduct. The majority based their reasoning on the construction of the statutory provisions. Hayne J emphasised that s 563A, unlike its predecessors, is about postponement of members claims, such that if it falls within the statutory description, it is admissible as proof but must be postponed to external creditors.[173] Gleeson CJ was very critical of the majority decision in Webb’s case where they said that Houldsworth had been given statutory recognition, given that the Act of 1862 was enacted prior to the Houldsworth.[174]
Since Houldsworth did not apply, the majority looked at the issue of whether Margaretic’s claim was made ‘in his capacity as a member’ to decide whether a shareholder’s claim should be subordinated or not. It was decided that Margaretic’s claim was not brought in his capacity as a member. Hayne J observed that Margaretic’s claim related to the company’s misleading and deceptive conduct and these types of claims are not obligations created by the Corporations Act in favour of company’s members.[175] His Honour specifically stated that where money was paid to create the relationship of membership through the subscription of shares, then the company’s obligation to pay damages for fraudulent misrepresentation is not based on the statutory contract.[176] Accordingly, shareholders’ claims may be placed on equal footing to those of unsecured creditors. Such a decision impacts on Cadence Asset Management Pty Ltd v Concept Sports Ltd[177] where the Federal Court noted that member’s claims in cases of misleading and deceptive conduct would be subordinated to the claims of external creditors. Accordingly, a later judgement in relation to s 729 of the Corporations Act may observe that in cases of insolvency misled investors would rank equally with the creditors of the company. Further, s 563A of the Corporations Act can be interpreted without taking into consideration Houldsworth in relation to shares transferees. However a future court, where the specific issue in question deals with share subscribers, may hold that Houldsworth is still relevant to s 563A. Such indecision on this matter is not good policy. A clear position needs to be made on the fate of the Houldsworth rule. The case should be abolished.
Even though the arguments that supported the Houldsworth rule are no longer of any consequence today, nevertheless, for over a century, Houldsworth still impacts on the Australian legal system. However, it is only recently that the courts have started moving away from the Houldsworth rule. Such a move is clearly not enough. It is important to acknowledge that even though Houldsworth was not applied in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic,[178] the High Court did not abolish the Houldsworth rule. This leaves us today in an unenviable situation because there is confusion as to when the Houldsworth rule will apply. For instance, the CAMAC discussion paper[179] observed that the Houldsworth rule applies to subscribing shareholder’s claims for damages against the company, except where the legislation has abrogated the rule.[180] Accordingly, the rule is still topical, unless the courts construe that parliament has conclusively and expressly abolished this rule. The inconsistent approach of randomly applying or rejecting Houldsworth’s rule may cause uncertainty in relation to the interpretation of the statute. Further, it may also generate a practical dilemma for liquidators, administrators and members because their position is not clearly defined and the outcome relies heavily on the Court’s discretion. There are no guarantees that in the future that the interpretation of s 563A, s 729 and provisions in other legislation may not once again be affected by Houldsworth.
Due to this confusion, the legislator needs to intervene and abolish Houldsworth. The case is a relic of the past; a past that is based on a very different legal and economic foundation. Such an abrogation needs to be made in express language eliminating any doubt that the Houldsworth rule is now inapplicable. Interestingly, this case is very resilient, for even though the English Parliament abolished the rule, Soden v British & Commonwealth Holdings Plc[181] nevertheless observed that the rule was only partially abolished. Accordingly, clearly expressed legislative change is essential to guarantee the absolute abolishment of Houldsworth from the corporate landscape. However, the authors believe that the legislator should not stop there but go one step further and from a policy perspective it should clearly subordinate the claims of shareholders to creditors to protect and balance the competing interests of the different parties that may be affected.
[∗] LLB, LLM (coursework), LLM (research), Lecturer, School of Law, University of Western Sydney. Any comments or feedback to m.nehme@uws.edu.au.
[†] BSW, LLB (Hons), LLM, Lecturer, School of Law, University of Western Sydney.
[2] Ibid 330.
[3] Ibid 322.
[4] Although limited liability companies could be incorporated from 1855, with the introduction of the Limited Liability Act 1855 (UK), initially banks were excluded from the provisions of the Act. It was the Joint Stock Bank Companies Act 1857 (UK) that removed this exclusion, allowing banks to acquire the status of limited liability. Despite this, limited liability companies in the banking sector initially remained the exception to the rule. See Charles Hickson, John Turner and Claire McCann, ‘Much Ado About Nothing: The Limitation of Liability and the Market for the 19th Century Irish Bank Stock’ (2005) 42 Explorations in Economic History 459, 462.
[5] For example, initially companies could not be sued for defamation. For a history of the evolution of defamation within the context of corporations, see: Fiona Patfield, ‘The Origins of a Company’s Right to Sue for Defamation’ (1994) 45 Northern Ireland Legal Quarterly 233.
[6] Corporations legislation in Australia has become increasingly more complex over the years and can be likened to a puzzle. For example, Ken Robson observed that: ‘We are now approaching some 10 years of Corporations Law simplification and economic reform. Yet the law is longer than ever and is beginning to mount a serious challenge to the ITAA for the most complex legislation award’; Similarly, Justice Kirby noted that ‘particular concerns have been voiced about the complexity, unintelligibility and inefficiency of Australia’s national regulation of corporations’. Also see Andrew Clarke, ‘Business Judgement Rule – Good Corporate Governance or not?’ (2000) 12 Australian Journal of Corporate Law 86-87.
[7] Ahraf A Mahate, ‘Contagion Effects of Three Late Nineteenth Century Bank Failures’ (1994) 23(1) Business and Economic History 102, 104.
[8] Graeme G Acheson and John Turner, ‘The Death Blow to Unlimited Liability in Victorian Britain: The City of Glasgow Failure’ (2008) 45 Explorations in Economic History 235, 235-6.
[9] ‘Money-market and city intelligence’, The Times, 3 October 1878.
[10] Graham Stewart, ‘Don’t Forget the Northern Rock of 1878’, The Times, 22 September 2007.
[11] Graeme G Acheson and John Turner, ‘The Death Blow to Unlimited Liability in Victorian Britain: The City of Glasgow Failure‘ (2008) 45 Explorations in Economic History 235, 236.
[12] This confirmed the principle in Oakes v Turquand (1867) LR 2 HL 325, where the House of Lords held that any contract induced by fraud is not void but voidable at the option of the defrauded party. Consequently, a contract whereby a shareholder acquired shares in a company based on fraudulent representations made in a prospectus, was valid, unless the shareholder rescinded such a contract. However, rescission was not possible, once the company went under liquidation.
[13] Houldsworth (1880) 5 App Cas 317, 332.
[14] Addie v The Western Bank of Scotland [1867] LR 1 Sc & Div 145.
[15] Houldsworth (1880) 5 App Cas 317, 332.
[16] All these arguments will be referred in the next paragraphs.
[17] Houldsworth (1880) 5 App Cas 317, 329.
[18] Ibid.
[19] Ibid 324.
[20] L C B Gower, The Principles of Modern Company Law (2nd ed, 1957), 295.
[21] Ibid.
[22] Re Addlestone Linoleum Company [1887] 37 ChD 191.
[23] Webb Distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15.
[24] Houldsworth (1880) 5 App Cas 317, 334.
[25] Ibid 329.
[26] Professor Gower criticised such reasoning by noting that ‘the House of Lords do not seem to have recognised fully the separation between the corporate entity and the member.’ L C B Gower, The Principles of Modern Company Law (2nd ed, 1957), 295.
[27] Re Addlestone Linoleum Company (1887) 37 ChD 191.
[28] [1896] UKHL 1; [1897] AC 22.
[29] However, it is important to note that the principle was already present before Salomon’s Case [1896] UKHL 1; [1897] AC 22. For instance, in R v Arnaud (1846) 9 QB 806, an English chartered corporation applied for the registration of one of its ships. However the registering authority refused to complete such registration, as some of the company’s members were foreigners. The court ordered the registering authority to register the ship because the ‘company’ owns the ship and not the members. The company is a separate legal entity from its members. Further, Tadgell J in State Of Victoria v Hodgson and Others [1992] VicRp 89; [1992] 2 VR 613, 626 noted that this justification in Houldsworth could ‘scarcely survive’ Salomon v Salomon and Co Ltd [1896] UKHL 1; [1897] AC 22.
[30] Salomon’s Case [1896] UKHL 1; [1897] AC 22, 51.
[31] Houldsworth (1880) 5 App Cas 317, 335-340.
[32] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160 (‘Sons of Gwalia Ltd’), 195-201 (Gummow J).
[33] [1896] UKHL 1; [1897] AC 22.
[34] The Winding-up Act 1862 (UK), ss 38(7), 131, 158.
[35] Murray Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31(5) The Modern Law Review 481, 509.
[37] This ultra vires doctrine has been abolished today with the introduction of ss 124 and 125 in the Corporations Act. Robert P Austin and Ian M Ramsay, Ford’s Principles of Corporations Law (13th ed, 2007), 745.
[38] Houldsworth (1880) 5 App Cas 317, 326.
[39] Ibid 327.
[40] [1867] LR 1 Sc & Div 145.
[41] Houldsworth (1880) 5 App Cas 317, 328.
[42] Ibid 329.
[43] Pearson & Son Ltd v Dublin Corporation [1907] AC 351; In Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, a ship owned by Lennard’s Carrying Co sank while transporting goods to Asia. The company, Lennard’s Carrying Co, was held primarily liable for the wrongful conduct of the company’s director, Mr Lennard, as he took an active part in the ship’s management on behalf of its owners. He was registered as the person designated for this purpose on the ship’s register. Accordingly, Mr Lennard represented the mind and will of the company. Consequently, the company was held to be primarily liable for his negligence.
[44] Nicol v Allyacht Spars Pty Ltd [1987] HCA 68; (1987) 75 ALR 1.
[45] Ibid 11.
[46] Standard Chartered Bank v Pakistan National Shipping Corp [2002] UKHL 43; [2003] 1 AC 959.
[47] R v ICR Haulage Ltd [1944] KB 551, 556; R v Denbo Pty Ltd (1994) 6 VIR 157.
[48] For a history of the evolution of defamation see Fiona Patfield, ‘The Origins of a Company’s Right to Sue for Defamation’ (1994) 45 Northern Ireland Legal Quarterly 233; West Australian Newspapers Ltd v Bridge [1979] HCA 10; (1979) 141 CLR 535.
[49] Further in Australia, companies have been held liable for crimes and torts. Similarly, the law may also impose liability on individuals for corporate breaches. For instance, s 49D of the Crimes Act1900 (ACT) creates an offence of industrial manslaughter for any senior officer of a corporation whose own conduct caused the death of a worker. For more information on derivative personal liability, see Corporations and Markets Advisory Committee, Personal Liability for Corporate Fault Report (2006)
[50] Austin and Ramsay, above n 37, 835.
[51] Sons of Gwalia Ltd (2007) 231 CLR 160, 198 (Gummow J).
[52] [1867] LR 1 Sc & Div 145.
[53] (1880) 5 App Cas 317, 330 (Lord Selborne); 334 (Lord Hatheley, followed Addie [1867] LR 1 Sc & Div 145 at 158 (Lord Chancellor); 159 (Lord Cramworth).
[54] [1867] LR 1 Sc & Div 145, 159.
[55] (1880) 5 App Cas 317, 324 (Earl Cairns, who followed Addie [1867] LR 1 Sc & Div 145 317, 323).
[56] (1880) 5 App Cas 317, 323; followed Addie [1867] LR 1 Sc & Div 145 317, 323.
[57] Webb Distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15.
[58] (1880) 5 App Cas 317, 325.
[59] Ibid.
[60] Ibid.
[61] Ibid 334.
[62] Justice Robert Austin, ‘Implications of the Sons of Gwalia Decision, A Commentary on the paper by Konrad de Kerloy’, (Corporations Workshop, Law Council of Australia Business Law Section, 2007), at 4.
[63] (2007) 231 CLR 160.
[64] Ibid 175.
[65] Eley v Positive Government Security Life Assurance Co Ltd (1875) LR 1 Ex D 20.
[66] Houldsworth v City of Glasgow Bank and Liquidators (1879) Court of Sess Cas, 4th series, vol vi, 1164, 1190.
[67] Sons of Gwalia Ltd (2007) 231 CLR 160, [2007] HCA 1.
[68] Ibid 234.
[69] Austin and Ramsay, above n 37, 834.
[70] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, (2006) 226 ALR 42.
[71] Sons of Gwalia Ltd (2007) 231 CLR 160, [2007] HCA 1.
[72] Corporations and Markets Advisory Committee, Shareholder Claims Against Insolvent Companies: Implications of the Sons of Gwalia Decision (2007): <http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFDiscussion+Papers/$file/Sons_of_Gwalia_DP_Sep07.pdf> at 13 June 2008.
[73] Re Addlestone Linoleum Co (1887) 37 ChD 191. Another case that relied on Houldsworth indirectly was the Soden v British & Commonwealth Holdings Plc [1997] UKHL 41; [1998] AC 298.
[74] [1974] VicRp 53; [1974] VR 451.
[76] [1992] VicRp 89; (1992) 8 ACSR 33.
[77] [1993] HCA 61; (1993) 179 CLR 15. It is important to note that the cases in footnote 75, 76 and 77 are all related.
[78] [2005] FCA 51; (2005) 216 ALR 105.
[79] Victoria v Hodgson [1992] VR 613, 626.
[80] Ibid 625.
[81] [1993] HCA 61; (1993) 179 CLR 15, 39.
[82] Crosbie, Re Media World Communications Ltd (Administrator Appointed) [2005] FCA 51; (2005) 216 ALR 105, 109.
[83] Ibid.
[84] Webb distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15, 39-40.
[85] Ibid 335.
[87] (2007) 231 CLR 160, [2007] HCA 1.
[88] House of Representatives, Explanatory Memorandum Corporate Law Economic Reform Program Bill 1998, [8.1].
[89] Ibid [2.14].
[90] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145, 148. The UK legislation was introduced into the system to remedy the problems that were caused by Derry v Peek [1889] UKHL 1; (1889) LR 14 App Cas 337.
[91] The difference between the sections is that the list of the persons, who may be liable for a misleading prospectus was longer under s 1006 than s 729.
[92] Greg Golding, The Reform of Misstatement Liability in Australia’s Prospectus Laws (University of Sydney, 2001), 115.
[93] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145, 149.
[94] [2005] FCA 51; (2005) 216 ALR 105.
[95] (2005) 55 ACSR 145.
[96] Ibid 151.
[97] Section 563A of the Corporations Act will be discussed in more detail later on in this paper.
[98] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145, 151; Allens Arthur Robinson, Finance and Banking Update – October 2005 (2005) <http://www.aar.com.au/pubs/baf/fabuoct05.htm#Subscribing%20Shareholders%20as%20Creditors> at 25 November 2008.
[99] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309, 318-319.
[100] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145, 151.
[101] Corporate Law Economic Reform Program Act 1999 (Cth) introduced Ch 6D to our system.
[102] House of Representatives, above n 88, [8.3]-[8.14].
[103] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309, 319.
[104] This position is no longer the case due to Sons of Gwalia (2007) 231 CLR 160, which will be discussed later in the paper.
[105] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309, 321.
[106] Ibid 322.
[108] Jason Harris and Anil Hargovan, ‘Sons of Gwalia: Navigating the Line Between Membership and Creditor Rights in Corporate Insolvencies’ (2007) 25 Companies and Securities Law Journal 7, 20.
[109] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227.
[111] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 238.
[112] [1992] VicRp 89; [1992] 2 VR 613.
[113] [1993] HCA 61; (1993) 179 CLR 15.
[114] Webb [1993] HCA 61; (1993) 179 CLR 15, 20-21.
[115] Ibid.
[116] Ibid 37.
[117] Ibid.
[118] Ibid 41.
[119] Ibid, citing Vagrand Pty Ltd (in liq) v Fielding (1993) 113 ALR 128.
[120] Webb [1993] HCA 61; (1993) 179 CLR 15, 41.
[121] Houldsworth (1880) 5 App Cas 317.
[122] Webb [1993] HCA 61; (1993) 179 CLR 15, 42 citing in support Knight v FP Special Assets Ltd (1992) 174 CLR 178, 205.
[123] Vicky Priskich, ‘Webb Distributors Revisited: The Interaction Between the Principle of Preservation of Share Capital in Winding Up to Claims for Misleading and Deceptive Conduct’ (1998) 16 Company and Securities Law Journal 35, 37.
[124] [2000] FCA 550; (2000) 172 ALR 679
[125] Ibid [13] (French J, who cited the Full Federal Court in Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144, 161 (Brennan J), 168 (Deane J).
[127] Tenji v Henneberry & Associates Pty Ltd [2000] FCA 550; (2000) 98 FCR 324, 328 (French J citing Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144, 155).
[128] [1993] HCA 61; (1993) 179 CLR 15.
[129] Tenji v Henneberry & Associates Pty Ltd [2000] FCA 550; (2000) 98 FCR 324, 330 (French J), 335 (Whitlam J).
[130] Ibid (French J, who relied upon dicta in Marks v GIO Holdings Ltd [1998] HCA 69; (1988) 196 CLR 494, which judicially considered the section and failed to mention either Webb’s case or Trade Practices Commission v Milreis Pty Ltd (1977) 29 FLR 144).
[131] Tenji v Henneberry & Associates Pty Ltd [2000] FCA 550; (2000) 98 FCR 324, 330.
[132] Ibid 14, 17, 19 (French J), 14 (Carr J).
[133] [2005] FCA 51; (2005) 216 ALR 105.
[134] Ibid 110 (Finkelstein J).
[135] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227.
[136] Ibid 248.
[137] Justice Robert Austin, ‘Implications of the Sons of Gwalia Decision, A Commentary on the paper by Konrad de Kerloy’, (Corporations Workshop, Law Council of Australia Business Law Section, 2007) 11.
[138] Luke Bentvelzen, Belinda Bible and Elisabeth McDermott, ’Media World: Using a Pocket Watch in the Digital Age‘ (2006) 24 Companies and Securities Law Journal 162, 174.
[139] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 56 ACSR 309.
[140] Re NIAA Corp Ltd (in liq) (1993) 33 NSWLR 244, 353-354.
[141] Webb [1993] HCA 61; (1993) 179 CLR 15, 16; Explanatory Memorandum to the Corporate Law Reform Bill 1992.
[142] Until the Corporate Law Reform Act 1992 (Cth), the provision was almost identical to s 38(7). The only difference was that the word ‘capacity’ was substituted for the word ‘character’; Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 226 ALR 42, 47 (Finkelstein J).
[143] Although s 563A is worded differently, it was, however, intended to have the same effect; Explanatory Memorandum to s 563A; The current equivalent provision in the UK is s74(2)(f) of the Insolvency Act 1986 (UK).
[144] As noted before, this section was the forerunner of s 360(1) of the Companies (Vic) Code.
[145] Trevor v Whitworth (1887) LR 12 App Cas 409; Ooergum Gold Mning Co of India v Roper [1892] AC 125.
[146] Webb Distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15, 28 citing Houldsworth (1880) 5 App Cas 317 and Jessel MR in Re Hull and County Bank v (Burgess’ case) (1880) 15 ChD 507.
[147] Webb Distributors (Aust) Pty Ltd v Victoria [1993] HCA 61; (1993) 179 CLR 15, 33.
[148] Ibid 16.
[149] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227.
[150] Ibid 46.
[151] Ibid.
[152] Ibid 51-52.
[153] Ibid 52.
[154] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 231 seems to be the approach of Kay J in Re Addlestone Linoleum Co (1887) 37 ChD 191 and McHugh J in Webb.
[155] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 231.
[156] Ibid 241.
[157] Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145.
[158] Ibid 148.
[159] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 237.
[160] Ibid 234, where Finkelstein J relied on Kay J in Re Addlestone Linoleum Co (1887) 37 ChD 191.
[161] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 237.
[162] Ibid 239, where Finkelstein J followed Soden v British & Commonwealth Holdings Plc [1996] 3 All ER 951.
[163] Ibid 253 (Jacobson J); also see Lindley LJ’s analysis of Houldsworth (1880) 5 App Cas 317 in Re Addlestone Linoleum Co (1887) 37 ChD 191.
[165] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic [2005] FCA 1305257; (2006) 149 FCR 227, 239 (Finkelstein J).
[167] Ibid 958.
[168] Ibid.
[170] [1993] HCA 61; (1993) 179 CLR 15.
[171] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160.
[172] Ibid 190.
[173] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160, 231 (Hayne J).
[174] Ibid 179 (Gleeson CJ).
[175] Ibid 234-5 (Hayne J).
[176] Ibid 234 (Hayne J).
[178] Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160.
[179] Corporations and Markets Advisory Committee, Shareholder Claims Against Insolvent Companies: Implications of the Sons of Gwalia Decision (2007) <http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFDiscussion+Papers/$file/Sons_of_Gwalia_DP_Sep07.pdf> at 13 June 2008.
[180] This is the case since ss 553A and 563A illustrate a legislative intention to exclude the rule in a winding up.
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