Sons of Gwalia Ltd v Margaretic

• Jurisdiction: Australia Federal only
• Court: High Court
• Judge: Gleeson CJ
• Judgment Date: 31 January 2007
• Neutral Citation: [2007] HCA 1,2007-0131 HCA A
• Docket Number: Matter No S208/2006
• Date: 31 January 2007

[2007] HCA 1

HIGH COURT OF AUSTRALIA

Gleeson CJ, Gummow, Kirby, Hayne, Callinana, Heydon, Crennan JJ

Matter No S208/2006

Matter No S209/2006

Sons Of Gwalia Ltd (Subject To Deed Of Company Arrangement)

Appellant

and

Luka Margaretic & Anor

Respondents

Ing Investment Management Llc

Appellant

and

Luka Margaretic & Anor

Respondents

Representation

B W Walker SC with K J Mony De Kerloy for the appellant in Matter No S208/2006 and the second respondent in Matter No S209/2006 (instructed by Freehills)

T F Bathurst QC with P D Crutchfield for the appellant in Matter No S209/2006 and for the second respondent in Matter No S208/2006 (instructed by Arnold Bloch Liebler)

B A J Coles QC with K M Richardson for the first respondent in both matters (instructed by Jackson McDonald)

Corporations Act 2001 (Cth), ss 553(1), 563A.

Sons of Gwalia Ltd v Margaretic

ING Investment Management LLC v Margaretic

Companies — Winding-up — Proof and ranking of claims — Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares — Relevance of Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 (‘ houldsworth’) — Whether Houldsworth established a principle of common law precluding a member from proving in the winding-up of a company for damages for misrepresentation inducing the acquisition of shares where the member has not rescinded the contract pursuant to which the shares were purchased and where rescission is no longer available by reason of the company's insolvency — Whether any such common law principle is part of Australian law.

Companies — Winding-up — Proof and ranking of claims — Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares — Whether claim admissible to proof under s 553(1) of the Corporations Act 2001 (Cth) (‘the Act’) — Whether circumstances giving rise to claim occurred before the ‘relevant date’.

Companies — Winding-up — Proof and ranking of claims — Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares — Whether claim postponed by s 563A of the Act as a debt owed by the company to the member in that person's ‘capacity as a member’.

Statutes — Construction — Section 563A of the Act — Whether claim postponed as a debt owed by the company to a member in that person's ‘capacity as a member’ — Relevance of history of previous statutory provisions — Relevance of apparent purpose and policy of the Act — Relevance of context of contested provision — Relevance of alternative and foreign statutory provisions — Relevance of coherent approach to construction of corporate insolvency provisions.

Words and phrases — ‘capacity as a member’.

ORDER

In each matter, the appeal is dismissed with costs.

1 Gleeson CJ. These appeals raise an issue concerning the subordination of what are sometimes called ‘shareholder claims’ to claims of other creditors in the application of the insolvency provisions of the Corporations Act 2001 (Cth) (‘the Act’). The resolution of the issue turns upon the meaning and effect of s 563A of the Act, which is in Div 6 (concerning proof and ranking of claims) of Pt 5.6 (concerning winding-up). That section provides:

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

2 Section 553, which is also contained in Div 6 of Pt 5.6, provides that, subject to the Division, in every winding-up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company. It is obvious that there are debts that may be owed by a company to a person who is a member of the company which are not owed to the person in the person's capacity as a member. It is equally obvious that, whatever be the precise test according to which the distinction is to be drawn, the subordination effected by s 563A is limited to debts owed to a member as a member, and does not apply to debts owed to a person otherwise than as a member. Debts owed by way of dividends, profits or otherwise to a person in the person's capacity as a member are contrasted with debts owed to, or claims made by, a person otherwise than as a member.

3 The language of s 563A has a long history; a history that goes back before the decision in Salomon v Salomon & Co Ltd1, to a time when the separateness of a corporation from its members had not been fully recognised, and when the difference between corporations and partnerships was not as distinct as it later became. Subject to certain exceptions, it was an established rule of partnership law that a partner in a bankrupt firm could not prove in competition with the debts of outside creditors upon a dissolution 2. Lord Lindley explained the rule as follows 3:

‘[The creditors of the firm] are, in fact, his own creditors, and he cannot be permitted to diminish the partnership assets to the prejudice of those who are not only creditors of the firm, but also of himself. If, therefore, a

partner is a creditor of the firm, neither he nor his separate creditors (for they are in no better position than himself) can compete with the joint creditors as against the joint estate.’

4 Once it became accepted that a company formed under the applicable companies legislation is a corporate entity with a legal existence distinct from that of its members, it followed that the creditors of a company were not also creditors of the members either collectively or individually. That is an essential aspect of the difference between an ordinary trading company formed with limited liability, and a partnership.

5 There was another, more enduring, influence in company law, reflected in certain decisions said to apply to the present case. It concerns the law relating to the raising and maintenance of share capital. Companies Acts, in a variety of ways, have given effect to the principle, also established before Salomon v Salomon & Co Ltd, that the creditors of a company which is being wound up have a right to look to the paid-up capital as the fund out of which their debts are to be discharged 4. Statutory manifestations of that principle have been modified over the years, and it may be doubted that it reflects the reality of modern commercial conditions, where assets and liabilities usually are more significant for creditors than paid-up capital. As Lord Browne-Wilkinson said in Soden v British & Commonwealth Holdings Plc5, it is ‘wholly irrelevant’ to the position of a member who has acquired fully paid shares on the market.

6 To return to s 563A, it assumes that a person's claim, constituting a debt, is admissible to proof against the company. The existence of a liability is the hypothesis upon which the section proceeds. It subordinates that claim if, but only if, the debt is owed to the person in the person's capacity as a member of the company.

7 The principal issue in these appeals is whether the (assumed) liability of the appellant in the first appeal (‘the first appellant’) to the first respondent in both matters, Mr Margaretic (‘the respondent’), is a liability to him in his capacity as a member of that appellant. The appellant in the second appeal (‘the second appellant’) is a general creditor of the first appellant. Both appellants argued that the liability to the respondent is a liability to him in his capacity as a member of the first appellant. That issue was resolved adversely to the appellants by Emmett J at first instance in the Federal Court of Australia 6, and by the Full Court of the Federal Court (Finkelstein, Gyles and Jacobson JJ) on

appeal 7. Substantially the same issue, arising under a similar statutory provision, was resolved in the same way in the United Kingdom by Robert Walker J 8, the Court of Appeal, and the House of Lords 9, in Soden.

The respondent's claim

8 Sons of Gwalia Ltd, the first appellant, was a publicly listed gold mining company. On 29 August 2004, administrators were appointed pursuant to s 436A of the Act. It now appears that, at the time, the shares in the company were worthless. On 18 August 2004, the respondent had bought 20,000 shares in the first appellant at a cost of $26,200. The respondent alleges that, in breach of the stock exchange listing rules, the first appellant had failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its gold delivery contracts and that it could not continue as a going concern. The respondent says that he was a victim of misleading and deceptive conduct and that the first appellant contravened s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). He claims to be entitled to compensation, his claim being for the difference between the cost of his shares and their value (nil). There are many other shareholders with similar claims.

9 The proceedings have been brought to test the entitlement of shareholders in the position of the respondent to claim, in competition with other creditors, under a deed of arrangement under Div 10 of Pt 5.3A of the Act which includes a provision which, by reference, incorporates s 563A. The case has been argued on the assumption that the respondent can show one or more of the alleged contraventions of statute, and the consequential damage asserted.

10 Section 563A, like some other provisions of the Act, uses the expressions ‘debt’ and ‘claim’ interchangeably, and argument proceeded upon the basis that a liability for unliquidated damages may be a debt within the meaning of...