FEDERAL COURT OF AUSTRALIA

Cambridge Gulf Investments Pty Ltd (In Liq) v Dandoe Pty Ltd

 [1999] FCA 1142

COURTS AND JUDICIAL SYSTEM – cross vesting – accrued jurisdiction – claim under Corporations Law and at common law – claim raising no federal matter – defence raising no federal matter – cross-claims apparently intended to raise federal matters – motion by respondents for stay of proceedings – whether accrued jurisdiction exists – discretionary character of accrued jurisdiction – deficient plea on cross-claim not properly raising federal matter – other discretionary considerations – proceedings stayed.

Corporations Law  s 232,  s 588FB, s 1317HD, s 588FF

Trade Practices Act 1974 (Cth)

Fair Trading Act 1987 (WA)

Judiciary Act 1903 s 39B(1A)(c)

Federal Courts (State Jurisdiction) Act 1999

Re Wakim; Ex parte McNally and Anor (1999) 163 ALR 270 followed

National Union of Workers and Belan v Davids Distribution Pty Limited [1999] FCA 1109 considered

Fencott v Muller (1983) 152 CLR 570 followed

Philip Morris Inc v Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457 followed

Stack v Coast Securities (No 9 ) Pty Ltd (1984) 154 CLR 261 followed

Gould v Brown (1998) 193 CLR 346 cited

CAMBRIDGE GULF INVESTMENTS PTY LTD (In Liquidation) (ACN 009 274 122) and CHRISTOPHER MICHAEL WILLIAMSON (AS LIQUIDATOR OF CAMBRIDGE GULF INVESTMENTS PTY LTD) (ACN 009 274 122) v DANDOE PTY LTD (ACN 054 956 759) AND OTHERS

WG 3039 of 1998

FRENCH J

18 AUGUST 1999

PERTH

THE COURT ORDERS THAT:

1.         The proceedings are stayed for want of jurisdiction.

2.         The costs of the motions are reserved.

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

REASONS FOR RULING ON MOTION TO STAY PROCEEDINGS

1                     These proceedings were commenced on 7 December 1998.  Leave to reamend the statement of claim was granted by Nicholson J on 27 May 1999.  The applicants are Cambridge Gulf Investments Pty Ltd (In Liquidation) (CGI) and its liquidator, Christopher Williamson.  The first eight respondents were shareholders of the company prior to 23 December 1996.  The six individuals named as ninth respondents are said to have been directors of CGI at all material times.

2                     It is alleged, in the re-amended statement of claim,  that CGI made agreements with the shareholders on or about 2 December 1996 under which each of them agreed to take a transfer from CGI of fully paid and partly paid shares in Cambridge Gulf Exploration (CGE) for no consideration.  The shareholders also agreed to transfer all their shares in CGI to Cambridge Gold NL and Penale Limited for no consideration.  The shares were allegedly transferred pursuant to the agreements on or about 18 December 1996. 

3                     At the time of the agreements and the transfer it is said CGI was “insolvent, nearly insolvent or of doubtful solvency”.  Alternatively it is said to have become insolvent, nearly insolvent or of doubtful solvency by entering and carrying out the agreements.  The particulars of this allegation refer to then pending litigation by CLC Corporation against CGI for breach of contract and damages in the order of $5.6 million.  At the time, it is said, and immediately prior to 18 December 1996 CGI’s net assets were $3.8 million.  By virtue of the pleaded agreements and like agreements with other parties CGI transferred its shares in CGE with a total value of some $4.5 million to the shareholders and the other parties without receiving any consideration.  In the premises as at the date of the agreements and the date of their implementation there was said to be a real chance that CGI would be unable to satisfy a judgment in favour of CLC Corporation in the action.  The Court ordered CGI to pay CLC Corporation $5,600,000 damages on 24 October 1997 and a further sum of $1,436,452.46 in interest on 7 November 1997 plus costs.  CGI has been unable to satisfy the judgment and has been wound up by the Court. 

4                     It is alleged that CGI’s directors knew that if the company made and carried out the agreements and CLC Corporation recovered damages in the action, CGI would or might be unable to satisfy the judgment.  By causing CGI to make and settle the agreements, by  transferring CGE shares to other parties and having the shareholders transfer their shares in CGI to Cambridge Gold and Penale, the directors are said to have breached their fiduciary duties to CGI.  Each of the shareholders, knowing the relevant facts and continuing with the agreements and the transfer notwithstanding such knowledge, is said to have acted dishonestly.  On this basis each of the agreements is said to be voidable and to have been avoided by the commencement of these proceedings.  An additional and alternative plea asserts that the agreements and the transfer were in effect a transfer by CGI of certain of its assets to shareholders for no adequate consideration amounting to a return of capital by CGI to those shareholders. They were therefore not permitted by the Corporations Law or the general law, were in excess of the powers of CGI, its directors and shareholders and in the premises were void.  Reliance is also placed upon the duties imposed upon directors by s 232 of the Corporations Law to act honestly, to exercise care and diligence and not to make improper use of their positions as officers to gain advantage for themselves or any other person or to cause detriment to the corporation.  Each of the directors is said to have breached various subsections of s 232 as a consequence of which CGI is said to have suffered loss and damage.  The making and settlement of the agreements are also said to have constituted “uncommercial transactions” within the meaning of s 588FB(1) of the Corporations Law and on that basis to have been voidable transactions within the meaning of s 588FE.  The relief claimed by the applicants includes declarations that each of the agreements has been set aside and, alternatively, declarations that each of the agreements and the transfer is void.  Other relief sought is in the form of consequential orders and directions, equitable compensation, orders under ss 1317HD and 588FF of the Corporations Law and interest pursuant to s 51A of the Federal Court Act.

5                     Defences to the re-amended statement of claim have been filed by all respondents and  have raised various questions of fact and law.  In addition, cross-claims have been raised by the first respondent, the shareholder, Dandoe Pty Ltd (Dandoe),  against CGI and Igor Prosin one of the directors who is the first-named ninth respondent.  The fifth shareholder respondent, Australia Wide Industries Ltd, has made a cross-claim against CGI and also against the directors.  Certain of the directors, the second, third and fifth-named ninth respondents, have  cross-claimed against certain of the shareholders, the first, fifth, sixth, seventh and eighth respondents.  It does not seem that leave was granted to bring the cross-claims against CGI and that is a matter which will no doubt have to be addressed.  It is, however, not raised or directly material to the present debate.

6                     Dandoe referred in its cross-claim to the making of the agreements pleaded in the statement of claim and asserted that CGI had breached its agreement with Dandoe as a result of which Dandoe had suffered damages.  The cross-claim then went on to assert a number of representations made by Michele Lombardo, the third-named ninth respondent, acting as a duly authorised director of CGI and acting for the other directors.  The representations said to have been made expressly and “by inference” in a letter to Dandoe were in the following terms:

“(a)     litigation being conducted against the First Applicant by CLC Corporation would be resolved;

 (b)      the said litigation would be settled in such a way that the resolution or settlement would not affect the solvency of the First Applicant;

 (c)       by inference, other litigation being conducted by the First Applicant would also be settled in such a way that any proposed resolution or settlement would not affect the solvency of the First Applicant;

 (d)      there were reasonable and honestly held grounds for the belief that the solvency of the First Applicant would not be so affected;

 (e)       the offer made on or about 4 April 1996, and suspended on or about 17 June 1996, by the First Applicant to the shareholders of the First Applicant to acquire CGE shares had been varied to take account of the current and contingent liabilities of the First Applicant;

 (f)       as a result of the variation of the offer and as a result of the belief that all litigation against the First Applicant would be settled satisfactorily the Directors believed that the Agreement would not affect the solvency of the First Applicant; and

 (g)      there were reasonable and honestly held grounds  for the belief that the solvency of the First Applicant would not be so affected.”

7                     Dandoe’s position is that if it were the case (contrary to its defence) that at the time of the agreement CGI was insolvent, nearly insolvent or of doubtful solvency, or that it became so by entering and settling the agreement then the representations were and each of them was false and untrue.  The representations are said to have induced Dandoe to enter into the agreements as a consequence of which it had suffered loss and damage including the legal costs of defending this action.  The cross-claim then concludes with two paragraphs asserting:

“33.     Further and in the alternative, by virtue of the matters set out in paragraphs 14, 15 and 16 above the Ninth Respondent has engaged in conduct which was misleading and deceptive or which was likely to mislead or deceive in breach of Section 52 of Part V of the Trade Practices Act.  Alternatively, in so far as the said Representations related to future matter the Ninth Respondent had no reasonable grounds for making the Representations which are in terms of Section 51A(1) taken to be misleading.

34.       As a consequence of the conduct of the Ninth Respondent that was in breach of Part V of the Trade Practices Act the First Respondent has suffered loss and damage, and in particular the First Respondent has had to bear the legal costs of defending the present action.”

8                     It is to be noted that the ninth respondent is in fact a group of individuals, the former directors of CPI.  There is nothing pleaded to attract the extended application of the Trade Practices Act 1974 to impose liability for contravention of s 52 on any of the directors.  That is not to say that such a plea could not be made and sustained under the Fair Trading Act 1987 (WA), but that is a law of the State of Western Australia.  It seems likely however, having regard to the relief claimed against both CGI and the directors, that it may have been intended to raise a cause of action under the Act against CGI.

9                     Australia Wide Industries’ cross-claim directed to the conduct of the former director, Lombardo, and the other directors, is in almost identical terms to the cross-claim of the first respondent and faces the same difficulty to the extent that it relies upon the Trade Practices Act. 

10                  Certain of the directors, namely Messrs. Roughan, Lombardo and Mulroney,  have brought their own cross-claim against the first, fifth, sixth, seventh and eighth respondents.  They assert that if any of them is liable to CGI and its liquidator then they claim against the former shareholders the same relief as that claimed against the former shareholders by CGI and the liquidator.  Relief based on prospective unjust enrichment of the shareholders is also claimed. 

11                  By a motion filed on 5 August 1999 the first and fifth respondents move for orders that the proceedings be stayed.  Similar orders were sought in a motion filed by the second, third, and fourth respondents and the second, third and fifth-named ninth respondents.  The basis of the motions was that the Court lacks jurisdiction to hear the causes of action raised by CGI and its liquidator.  The jurisdiction relied upon in instituting the proceedings was that conferred by State law pursuant to the cross-vesting elements of the corporations scheme since found to have been invalid in Re Wakim; Ex parte McNally and Anor (1999) 163 ALR 270.

12                  Submissions were made on behalf of the respondents to the effect that, in the light of the decision of the High Court in Wakim, the only basis upon which the principal proceedings are justiciable in the Federal Court is if they fall within the accrued jurisdiction of the Court.  The application could not be seen of itself as invoking any federal jurisdiction.  It was  submitted that there must be some issue raised in the statement of claim within the jurisdiction of the Federal Court before the accrued jurisdiction could be invoked.  The submission was put thus:

“If the Applicants’ claims confer no jurisdiction at all on this Court, there is nothing upon which a non-federal jurisdiction can accrue.  There is no federal claim capable of attracting accrued jurisdiction.”

I do not accept that submission.  The question was most recently considered by the Full Court in National Union of Workers and Belan v Davids Distribution Pty Limited [1999] FCA 1109, a judgment delivered on 13 August 1999.  The Court was there considering proceedings in which Davids sought orders restraining NUW and other persons from acts incidental to picketing which were said to constitute various common law torts.  The claim did not arise under any federal law.  In particular it did not arise under the Workplace Relations Act.

13                  On the jurisdictional question the Full Court said:

“However, it is well settled that the term “a matter arising under” an Act is not confined to a case in which a cause of action depends on a right conferred by the relevant Act.  The word “matter” has been described as referring to a “justiciable controversy” between parties: see per Gummow and Hayne JJ in Abebe v Commonwealth of Australia (1999) 162 ALR 1 at para [140].  As Callinan J said in the same case at [276], the word “means the subject matter for determination in a legal proceeding, and not necessarily the legal proceeding itself in exactly the form in which it was first presented”.  A matter arises under an Act if it turns on the construction and operation of that Act: see per Windeyer J in Felton v Mulligan (1971) 124 CLR 367 at 391.  A justiciable controversy that involves a defence based on an Act is a “matter arising under” the Act: see per Menzies J at 382.”

14                  In that case counsel for the respondents contended that the principal proceeding, which was initiated in the Supreme Court, was a matter arising under the Commonwealth Workplace Relations Act because their clients had raised a defence based on s 170MT(2) of that Act.  The argument was that the activities the subject of the Davids’ action were protected by the Act and thereby immunised from action under State law.

15                  The Full Court observed that a matter does not arise under an Act simply because a defence is available under that Act.  Unless and until the defence is raised by a defendant the defence is not an issue in the case, it is not part of the subject matter for determination.  Their Honours referred to the observation of Menzies J in Felton v Mulligan at 382:

“A matter arises under a law when it is necessary in litigation to determine whether that law confers a right or affords a defence which is an issue in the litigation.”

The Full Court said that once a defence based on a provision of a Commonwealth statute is raised by a defendant the relevant proceeding becomes a matter arising under a law of the Commonwealth and pursuant to s 39B(1A)(c) of the Judiciary Act 1903 non-exclusive jurisdiction is conferred on the Court to deal with it.

16                  It is not contended that the defences filed in this case raise any federal matter.  The jurisdiction of this Court is said to be attracted by virtue of the cross-claims which invoke the Trade Practices Act.  As presently pleaded it seems to me that the invocation of the Trade Practices Act in the cross-claims is misconceived, contraventions of the Act being attributed to individuals rather than to the relevant corporation.  If it be the case that this is a slip in the pleading, then no doubt that can be cured although the cross-claimants probably have no interest in curing it as it might undermine their submissions as to jurisdiction.  Assuming that it can be cured and that the cross-claims allege and are intended to allege contraventions of the Trade Practices Act by CGI, then given the extent to which it seems those contraventions rely upon at least some factual issues common to the principal proceedings, the application of the accrued jurisdiction is at least arguable.

17                  The issues raised by the statement of claim include alleged breaches of fiduciary and statutory duties by the directors, dishonesty on the part of the shareholders, the validity of the agreements and the transfers which gave effect to them, and the characterisation of the agreements and their implementation as uncommercial transactions.  Underlying all of this is the financial status of the company at the time the agreements were made and settled.  The cross-claims raise factual issues which lie at the heart of the claim on the basis that the directors, in persuading the shareholders to enter into the agreements, made various representations about the solvency of the company and the pending litigation brought by CLC Corporation.  The cross-claims properly pleaded would give rise to a matter arising under Part 5 of the Trade Practices Act.  There is moreover a common substratum of fact and claims inseverable from those raised in the principal proceedings to support the characterisation of the principal proceedings as part of the matter raised by the cross-claims.  On that basis it could be said the principal proceedings lie within the accrued jurisdiction of the Court. On the other hand the cross-claims are entirely dependent upon the principal proceedings succeeding in establishing entitlements to relief and factual matters which are denied by the cross-claimants in their defences.

18                  The scope of the accrued jurisdiction was discussed in the majority judgment in Fencott v Muller (1983) 152 CLR 570 at 608 where it was said:

“In identifying a s 76(ii) matter, it would be erroneous to exclude a substantial part of what is in truth a single justiciable controversy and thereby to preclude the exercise of judicial power to determine the whole of that controversy.  What is and what is not part of the one controversy depends on what the parties have done, the relationships between or among them and the laws which attach rights or liabilities to their conduct and relationships.  The scope of a controversy which constitutes a matter is not ascertained merely by reference to the proceedings which a party may institute, but may be illuminated by the conduct of those proceedings and especially by the pleadings in which the issues in controversy are defined and the claims for relief are set out.  But in the end, it is a matter of impression and of practical judgment whether a non-federal claim and a federal claim joined in a proceeding are within the scope of one controversy and thus within the ambit of a matter.”

19                  Their Honours qualified the judgment that has to be made about the scope of accrued jurisdiction by the further observation at 609-610 that federal judicial power is attracted to the whole of the controversy only if the federal claim is a substantial part of that controversy:

“A federal claim which is a trivial or insubstantial aspect of the controversy must, of course, itself be resolved in federal jurisdiction, but it would be neither appropriate nor convenient in such a case to translate to federal jurisdiction the determination of the substantial aspects of the controversy from the jurisdiction to which they are subject in order to determine the trivial or insubstantial federal aspect.  Again, impression and practical judgment must determine whether it is appropriate and convenient that the whole controversy be determined by the exercise of federal judicial power.”

20                  It is also important to note that although the facts upon which a non-federal claim arises may not wholly coincide with the facts upon which a federal claim arises, it is nevertheless possible that both may be aspects of a single matter arising under a federal law (at 607).

21                  The assumption of accrued jurisdiction is discretionary – Philip Morris Inc v Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 475 (Barwick CJ) and Stack v Coast Securities (No 9 ) Pty Ltd (1984) 154 CLR 261 at 294-295. As may be seen from the passages cited from Fencott v Muller above, enunciating the principles in forming the exercise of judgment about the scope of accrued jurisdiction, there is likely to be an overlap between those judgments and the judgments involved in the exercise of the discretion whether to assume the jurisdiction.  In my opinion, even assuming cross-claims which properly raise the question of corporate liability under the Trade Practices Act these proceedings primarily involve matters arising under the law of the State.  The federal matter is entirely derivative.  In the ordinary course it might not be considered appropriate to exercise the discretion of the Court to deal with a federal matter so clearly incidental to the State law issue.  There is, of course, a special circumstance in this case that the proceedings were instituted in this Court in December 1998 at a time when the state of the law was that this Court had the relevant jurisdiction to deal with the matters raised under the Corporations Law and the associated cross-vesting scheme – Gould v Brown (1998) 193 CLR 346.  That is a circumstance which could, apart from one other factor, have weighed in favour of a decision that the matter should be allowed to continue in this Court notwithstanding that in the ordinary course in the exercise of a discretionary judgment it might not be regarded as an appropriate exercise of accrued jurisdiction to deal with the principal proceedings. 

22                  The other matter which is of relevance is that in order for the federal matter to be properly invoked it would be necessary for the cross-claiming respondents to amend their claims to properly plead the federal matter.  They are, of course, those who are seeking a stay of proceedings on the basis of objection to the jurisdiction.  I could not impose on the cross-claimants a requirement to plead the Trade Practices Act against CGI when they have, at this stage, only done so against the directors.  It may be that they had intended only to proceed by way of the Fair Trading Act against the directors and not to proceed with a claim under the Trade Practices Act against CGI, although that seems unlikely.  In the circumstances, therefore, I think that the appropriate order is to stay the proceedings for want of jurisdiction.

23                  I come to this conclusion with some regret.  It is a sad reality that the courts and commercial and other litigants are now required to dust off old arguments and invoke old learning that could be more usefully applied as doorstop material than to the workings of a modern national judicial system. 

24                  The proceedings will be stayed for want of jurisdiction.  An application can then be made by the parties for the matter to be dealt with in the Supreme Court of Western Australia under the Federal Courts (State Jurisdiction) Act 1999.

Associate:

Dated:              18 August 1999