FEDERAL COURT OF AUSTRALIA

Sons of Gwalia Limited (Administrator Appointed) (ACN 008 994 287)

v

Margaretic [2005] FCA 1305

CORPORATIONS –company in administration –whether member’s claim against company in connection with acquisition of shares in the company is a debt owed to member in capacity as a member –whether such claim would be provable under proposed deed of company arrangement –whether such claim should be postponed until all other debts not owed to members in capacity as members have been satisfied– whether for the purposes of administration member is entitled to be treated as a creditor of the company in respect of such claim

Australian Securities and Investments Commission Act 2001(Cth), ss12DA, 12GF and 12GM

Corporations Act 2001 (Cth), ss 435C, 436A, 436B, 436C, 437A, 437B, 437C, 439A, 439B, 439C, 478, 514, 515, 516, 553, 553A, 554, 555, 556, 558, 559, 560, 561, 562, 562A, 563, 563AA, 563A, 563AAA, 674, 1041H, 1041I

Corporations Regulations 2001 (Cth), r5.6.39, 5.6.47, 5.6.48, 5.6.50, 5.6.53, 5.6.53, 5.6.58, 5.6.60, 5.6.62, 5.6.63, 5.6.71, 5.6.72

Federal Court Rule, O 6 r13

Trade Practices Act 1974 (Cth), ss52, 58

Oakes v Turquand (1867) LR 2 HL 325- discussed

Webb Distributors (Aust) Pty Ltd v The State of Victoria (1993) 179 CLR 15- discussed

SONS OF GWALIA LIMITED (ADMINISTRATOR APPOINTED) (ACN 008 994 287) v MARGARETIC

NSD1099 of 2005

EMMETT J

15 SEPTEMBER 2005

SYDNEY

REASONS FOR JUDGMENT

1                     The first respondent, Luka Margaretic (‘the Shareholder’), is a member of the applicant, Sons of Gwalia Limited (‘the Company’).  The Shareholder says that he has a claim against the Company for loss and damage that he alleges he has suffered by conduct of the Company.  The loss and damage is that he paid the sum of $26,200, together with brokerage of $81.21 and GST of $7.38, to acquire 20,000 shares in the capital of the Company, which are now worthless.  The purchase was made on 18 August 2004, on the market conducted by Australian Stock Exchange Limited (‘ASX’) and the Shareholder’s name was entered in the Register of Members of the Company on 23 August 2004 as the holder of 20,000 shares.

2                     On 29 August 2004, Messrs Andrew John Love, Garry John Trevor and Darren Gordon Weaver (‘the Administrators’) were appointed as administrators of the Company pursuant to s 436A of the Corporations Act 2001 (Cth) (‘the Act’).  It now emerges that shares in the Company were worthless at the moment of the appointment of the Administrators.  Nevertheless, the Administrators say that the Shareholder is not entitled to be treated as a creditor of the Company in respect of the claim that he says he has in respect of the purchase of worthless shares in the Company. 

THE RELEVANT PROVISIONS OF THE ACT

3                     Part 5.3A of the Act deals with the administration of a company’s affairs with a view to executing a deed of company arrangement.  The object of the Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

• maximises the chances of the Company, or as much as possible of its business, continuing in existence; or
• if it is not possible for the Company or its business to continue in existence, results in a better return for the Company’s creditors and members than would result from an immediate winding up of the Company.

4                     Section 435C(2) provides that the normal outcome of such an administration of a company is that:

• a deed of company arrangement is executed; or
• the company’s creditors resolve that the administration should end; or
• the company’s creditors resolve that the company be wound up.

5                     Sections 436A, 436B and 436C provide for the appointment of administrators.  Under s 437A(1), while a company is under administration, the administrator:

• has control of the company’s business, property and affairs;
• carries on that business and manages that property and those affairs;

·        may perform any function, and exercise any power, that the company or any of its officers could perform or exercise, if the company were not under administration.

Under s 437B, when performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the Company’s agent.  Under s 437C(1), while a company is under administration, a person other than the administrator cannot perform or exercise a function or power as an officer of the Company.

6                     Division 5 of Part 5.3A of the Act deals with the convening of a meeting of a company’s creditors to decide the company’s future.  Under s 439A(1), the administrator must convene a meeting of the company’s creditors, relevantly, within 21 days after the commencement of the administration.  Such a meeting can, under s 439B(2), be adjourned from time to time.  Under s 439C, at the meeting convened pursuant to s 439A, the creditors may resolve:

• that the company execute a deed of company arrangement as specified in the resolution; or
• that the administration should end; or
• that the company be wound up.

7                     For reasons that will become apparent, it is desirable to say something about the provisions of the Act relating to winding up.  Part 5.6 of the Act deals with winding up generally and contains, relevantly, the following divisions:

Division 2         -           Contributories

Division 6         -           Proof and Ranking of Claims

8                     Under s 514(1), Division 2 applies where a company is wound up.  Sections 515 and 516 are in Division 2.  Section 515 provides that, subject to Division 2, a present or past member is liable to contribute to a company’s property to an amount sufficient:

• to pay the company’s debts and liabilities and the costs, charges and expenses of the winding up; and

·        to adjust the rights of the contributories among themselves.

However, under s 516, if a company being wound up is a company limited by shares, a member need not contribute more than the amount, if any, unpaid on the shares in respect of which the member is liable as a present or past member.

9                     Division 6 contains the following subdivisions:

Subdivision A       -      Admission to proof of debts and claims

Subdivision B        -      Computation of debts and claims

Subdivision C       -      Special provisions relating to secured creditors

Subdivision D       -      Priorities

Subdivision E        -      Miscellaneous

10                  Section 553(1), which is in Subdivision A of Division 6, provides that, subject to Division 6, in every winding up, all debts payable by, and all claims against, a company in liquidation (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims, the circumstances giving rise to which occurred before the date on which the winding up is taken to have begun, are admissible to proof against that company.  Section 554 provides for the date as at which the amount of a debt or claim of a company is to be computed. 

11                  Sections 553A and 563A of the Act deal with debts 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.  Under s 553A, no such debt is admissible to proof against the company unless the person has paid to the company, or the liquidator, all amounts that the person is liable to pay as a member of the company.  Under s 563A, payment of any such debt is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company, have been satisfied. 

12                  Section 555, which is within Subdivision D of Division 6, provides that, except as otherwise provided by the Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.  The succeeding provisions of Subdivision D deal with the following matters:

Section 556 – Priority payments

Section 558 – Debts to employees

Section 559 – Equal ranking of debts of a class

Section 560 –   Advances to enable a company to make priority payments in respect of

employees

Section 561 – Priority of employees claims over floating charges

Section 562 – Application of proceeds of contracts of insurance

Section 562A – Application of proceeds of contracts of reinsurance

Section 563 – Provisions relating to injury compensation

Section 563AA – Postponement of shareholders claims under buy-back agreements

Section 563A – Postponement of members’ debts

Section 563AAA – Redemption of debentures

13                  Part 5.4B of the Act deals with winding up ín insolvency or by the Court.  Division 2 of that Part deals with the duties of court appointed liquidators.  Section 478(1), which is in Division 2 of Part 5.4B, provides that, as soon as practicable after the Court orders that a company be wound up, a Court appointed liquidator must cause the company’s property to be collected and applied in discharging the company’s liabilities and must consider whether s 478(1A) requires the settlement of a list of contributories.  Section 478(1A) provides that a liquidator of a company that is being wound up in insolvency or by the Court must settle a list of contributories if it appears to the liquidator likely that:

• either there are persons liable as members, or past members, to contribute to the company’s property on the winding up or there will be a surplus available for distribution; and
• it would be necessary to make calls on contributories or to adjust the rights of the contributories among themselves.

14                  The Corporations Regulations 2001 (Cth) (‘the Regulations’) deal, inter alia, with certain procedures to be adopted in a winding up.  Under r 5.6.39, a liquidator may, from to time, fix a day on or before which a creditor may submit particulars of a debt or claim.  Under r 5.6.47, while the admission of a debt or claim need not be in writing, a liquidator must not reject a debt or claim without notifying the creditor of the grounds of rejection and requiring that a formal proof of debt or claim be submitted.  Regulation 5.6.48 provides for the liquidator to fix a day on or before which creditors whose debts or claims have not been admitted are formally to prove their debts or claims.  Regulation 5.6.50 specifies the required contents for a formal proof of debt or claim and r 5.6.53 provides time limits within which a liquidator must admit or reject a formal proof of debt or claim, or require further evidence in support of it.

15                  Regulation 5.6.58 provides that, if the liquidator of a company considers it necessary to make calls on, or adjust, the rights of contributories, the liquidator must make out a provisional list of contributories.  Under r 5.6.60, the liquidator must settle the list of contributories and certify it.  Regulation 5.6.62 then requires the liquidator to notify each person included in the list of such inclusion. 

16                  Regulation 5.6.63 provides that a dividend in the winding up of the affairs of a company may be paid only to a creditor whose debt or claim has been admitted by the liquidator.  Regulations 5.6.71 and 5.6.72 deal with distribution of surplus in a winding up. 

17                  Section 553 refers to ‘all debts payable by, and all claims against’ a company and s 554 refers to a ‘debt or claim’ of a company.  However, it is worth observing that, in other contexts, the Act and the Regulations appear to use the terms ‘claim’ and ‘debt’ indiscriminately to refer to the same thing.  Set out in the Schedule to these reasons is a table, prepared by counsel for the Shareholder, indicating some other places in the Act and Regulations where the terms are used.  That table suggests that no significance should be attached to the use of one term or the other in any particular context. 

DEED OF COMPANY ARRANGEMENT

18                  Pursuant to s 439A(4)(b) of the Act, the Administrators have given to the creditors of the Company a statement setting out the Administrators’ opinion that it would be in the interests of creditors for the Company to execute a deed of company arrangement.  The deed of company arrangement proposed by the Administrators contains the following provisions:

‘2.1      Purpose and objects

The purpose and objects of this Deed are to provide for the business, property and affairs of the Company to be administered in a way that:

(a)        provides the Creditors with the opportunity to consider and, if thought fit, to approve a subsequent arrangement for an orderly transition to take the Company out of administration under this Deed;

…

(d)        provides a moratorium on Creditors taking action against [the Company];

…

(i)         subject to clause 4.2, provides for the liabilities of the Company to be distributed in the same order of priority as if in a winding up.

…

3.1       Creditors bound

(a)        This Deed binds:

(1)        the Company;

(2)        the Administrator;

(3)        the Creditors;

(4)        the Officers; and

(5)        the Members.

…

3.6       Administrator’s Discretion

The Administrator may, in his absolute discretion:

(a)        admit Claims; and

(b)        pay any Claim in accordance with the provisions of this Deed if it is considered desirable to do so, having regard to, amongst other things, the interests of the Creditors.

3.7       Making Claims and proof of Claims

(a)       Sections 562, 562A and 563A, Division 2 of Part 5.6 of the Act and subdivisions A, B, C, and E of Division 6 of Part 5.6 of the Act and Regulations 5.6.37 and 5.6.39 to 5.6.63 (inclusive), 5.6.70 and 5.6.70A  apply to Claims under this Deed, and the adjudication and admission to proof thereon, as if the references to the liquidator were references to the Administrator.

…

4.2       Distribution of the Fund

(a)        Subject to clause 3.6 of this Deed, in the event that there is a distribution under this Deed, the Administrator shall distribute the Fund in the following order of priority…

(1)        first, subject to clause 4.2(b), to satisfy:

(A)       the Employee Entitlements; and

(B)       any costs, fees and expenses incurred by the Administrator in realising the assets, the proceeds of which make up the Fund;

…

(2)        next, to the Administrator in satisfaction of the fees, costs and expenses incurred as Administrator under this Deed…

…

(6)        next, except for Employee Entitlements which receive the priority referred to at clause 4.2(a)(1)(A), in the same order of priority as would apply if the Company was being wound up.

(b)        If the Fund is insufficient to satisfy the whole of the debts due under the categories of debt referred to in… clause 4.2(a)(1) in full, those categories of debts must be paid proportionately.

(c)        In the event that there is any balance in the Fund after all of the Creditors have been paid in full in relation to their Claims, such balance shall be paid in the same order of priority as would apply if the Company was being wound up.

(d)        For the avoidance of doubt, payment of any debts or liabilities owed by the Company to Members in the Members’ capacity as a member of the Company, whether by way of dividends, profits or otherwise are, to the extent contemplated by Section 563A of the Act and the general law, to be postponed until all debts owed to, or claims made by, Creditors have been satisfied.’  [Emphasis added]

Clause 1.1 defines ‘creditor’ as meaning ‘any person who has or asserts a Claim’.  The term ‘Claim’ is defined as meaning:

‘…a debt payable by, or a claim against, the Company (present or future, certain or contingent, ascertained or sounding only in damages) being debts or claims which arose on or before [29 August 2004] or out of events or circumstances which occurred before [29 August 2004], regardless of whether the debt or claim arose before or after [29 August 2004], and irrespective of whether the debt or claim arose by virtue of contract, at law (including by statute) in equity or otherwise, and regardless of whether such debt or claim has been or will be admitted or disputed in whole or in part;’

The language of the definition of ‘Claim’ in the proposed deed of company arrangement is thus reminiscent of, and is clearly based upon, the terms of s 553(1). 

19                  Clause 7 of the proposed deed of company arrangement provides for its termination.  Clause 7.3 provides for the convening of a meeting of ‘the Creditors’ by the Administrators.  Clause 7.5 provides that the Administrators must send ‘each Creditor’ a report as to the state of affairs of the Company, accompanied by such financial statements as the Administrators think fit.  Clause 8 of the proposed deed of company arrangement provides the mechanism for convening meetings of ‘the Creditors’ and for voting at meetings (quaere).

THE SHAREHOLDER’S CLAIM

20                  The Shareholder’s potential claim against the Company (‘the Shareholder’s Claim’) is that, at the time when he bought shares in the Company, the Company was in breach of its obligations under s 674 of the Act in that:

‘a)       [The Company] was then a disclosing entity listed on ASX;

 b)        The provisions of the listing rules of ASX in relation to [the Company] required [the Company] to notify ASX of information about specified events and matters as they arose for the purpose of ASX making that information available to participants in the market including [the Shareholder];

 c)        In particular, section 674 of the Corporations Act and ASX listing rule 3.1 required [the Company] to immediately tell ASX about any information concerning [the Company] that a reasonable person would expect to have a material effect on the price or value of [the Company’s] ordinary shares once it become aware of that information;

 d)        [The Company] had information that ASX listing rule 3.1 required [the Company] to notify to ASX being information in relation to the gold reserves and resources then held by [the Company] and the gold delivery commitments of [the Company] then owed by [the Company] to various other parties;

 e)        The information was that the gold reserves and resources then held by [the Company] were or were likely to be or may have been insufficient to satisfy the gold delivery commitments of [the Company] then owed to other parties to such an extent that [the Company] could not continue as a going concern without the voluntary support of those other parties (the ‘Information’);

 f)        The Information was not generally available to the market and was not known to [the Shareholder];

 g)        The Information was such that a reasonable person would expect, if it were generally available, to have a material affect on the price or value of the ordinary shares in [the Company];

 h)        [The Shareholder] would not have purchased the shares in [the Company] had he been aware of the Information.’

21                  Section 674(2) of the Act applies to a listed disclosing entity, which includes the Company, if provisions of the listing rules of a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise, for the purpose of the operator making that information available to participants in the market.  The listing rules of ASX in relation to the Company contain such a requirement.  Section 674(2) of the Act provides that, if an entity, to which the section applies, has information that those provisions require the entity to notify to the market operator and that information is not generally available and is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of the entity, the entity must notify the market operator of that information in accordance with those provisions.

22                  The Shareholder also claims that, by reason of those facts, the Company engaged in misleading and deceptive conduct:

• in contravention of s 52 of the Trade Practices Act 1974 (Cth), entitling him to compensation under s 82 of that Act;
• in contravention of s 1041H of the Act, entitling him to compensation under s 1041I of the Act;
• in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth), entitling him to compensation under ss 12GF and 12GM of that Act.

He says that, by that conduct, he suffered the loss and damage referred to above. 

THE PROCEEDING

23                  The Shareholder asserts that he is entitled to be treated as a creditor of the Company in relation to the Shareholder’s Claim in connection with the administration of the Company, pursuant to Part 5.3A of the Act.  In particular, the Shareholder claims that he should be treated as a creditor in connection with any meeting convened to consider a deed of company arrangement and that the Shareholder’s Claim should be not treated as a debt or claim due to the Shareholder in his capacity as a member of the Company.  Those assertions are disputed by the Administrators, and by other persons who are undisputedly creditors of the Company, one of whom is the second respondent, ING Investment Management LLC (‘the Creditor’). 

24                  The Company, through the Administrators, commenced this proceeding seeking a declaration that the Shareholder’s Claim would not be provable under the proposed deed of company arrangement or, alternatively, a declaration that payment of the Shareholder’s Claim under the proposed deed of company arrangement would be postponed until all debts owed to, or claims made by, persons otherwise than in their capacity as members of the Company, have been satisfied.  The Shareholder, on the other hand, has filed a cross-claim against the Company and the Creditor, seeking a declaration that he is a creditor of the Company within Part 5.3A of the Act and is entitled to all the rights of a creditor under Part 5.3A, including the right to:

• attend meetings of creditors of the Company;
• vote at meetings of creditors of the Company;
• receive information and circulars sent by the Company to its creditors.

THE ISSUES

25                  It is common ground that the Shareholder’s Claim falls within s 553 of the Act.  As indicated above, the provisions of s 553 would be imported into the proposed deed of company arrangement.  However, the Company and the Creditor contend that the effect of s 563A, which would also be imported, is that, in so far as the Shareholder’s Claim is a debt owed by the Company, it is owed to the Shareholder in his capacity as a member of the Company and, accordingly, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the Company have been satisfied. 

26                  The Shareholder, on the other hand, contends that the Shareholder’s Claim is not a debt owed by the Company to him in his capacity as a member of the Company.  The Shareholder also contends that, even if it is a debt owed by the Company to him in his capacity as a member of the Company, such that payment of it is postponed under s 563A, that has no effect on his entitlement to be treated as a creditor for other purposes of Part 5.3A and under the proposed deed of company arrangement.   

THE SHAREHOLDER’S CAPACITY AS A MEMBER

27                  The Company and the Creditor contend that the question of the effect of s 563A must be determined against the Shareholder, by reason of the decision of the High Court in Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 179 CLR 15 (Webb’s Case), because the loss claimed is the price paid to acquire shares in the Company.  The precise ratio decidendi of Webb’s Case is by no means clear and certain.  The general tenor of the observations made by the majority suggest that the High Court was concerned with the position of a member of a company who had become a member pursuant to a contract between the member and the company.  The Shareholder, on the other hand, contends that Webb’s Case can be distinguished because it was concerned with principles not applicable to a claim by a member based on misleading or deceptive conduct leading to the acquisition of already issued shares from a third party quite unconnected with the company that issued the shares. 

28                  Webb’s Case involved the question of whether a building society member, who had acquired shares in the building society in reliance upon misleading and deceptive conduct by the building society such as would grant an action in deceit or under s 52 of the Trade Practices Act 1974 (Cth), could prove in the liquidation of the building society.  Many of the holders of shares in the building society complained that they were misled as to the nature of the shares, in so far as they were led to believe that the shares were redeemable ‘like a deposit’.

29                  The building society in question was one of a group of three building societies, each of which was deemed to have been incorporated and registered under the Building Societies Act 1986 (Vic) (‘the Building Societies Act’).  The three building societies began to market non-withdrawable shares to the public in late 1986.  They instituted a system by which one building society would take a transfer of the shares in one of the other building societies from an investor wishing to ‘redeem’, in anticipation of making those shares available to a prospective investor.  That system depended upon the availability of potential new investors.  Pending the availability of such a potential investor, the shares were held by the transferee building society as ‘inter society holdings’ (Webb’s Case at 24). 

30                  Thus, although shares were not redeemable, where a member wanted to ‘redeem’ shares in one of the building societies, a sum would be paid to the member in exchange for the shares.  However, rather than the shares being redeemed, they would be transferred to one of the other building societies.  It seems that the first building society provided the sum paid to the ‘redeeming’ member.  So far as the member was concerned, it seems that he believed he was receiving the sum from the first building society as consideration for redemption.  The High Court appears to have proceeded on the basis that the contract that was entered into by the member was a contract with the building society in which he was a member.

31                  The liquidator of the building societies sought directions in the Supreme Court of Victoria in relation to two questions, as follows:

• whether unliquidated damages claimed by non-withdrawable shareholders are provable in the liquidation of the building societies;
• whether non withdrawable shareholders are precluded from prosecuting an action for damages against the building societies in relation to the acquisition of their shares.

At first instance, Vincent J held that the damages claimed were provable in the liquidation and that the shareholders were not precluded from maintaining an action for damages.  They were, therefore, in the same position as depositors and other unsecured creditors.

32                  On appeal, the Appeal Division of the Supreme Court of Victoria held that the shareholders could not prove in the liquidation because they were precluded both from rescinding the contracts, under which they acquired shares, and from maintaining an action for damages in respect of that acquisition.  The Appeal Division relevantly said:

‘The principal of limited liability leads inevitably to the conclusion that a member at the commencement of the winding up of a company limited by shares cannot prove in the winding up for damages designed to indemnify him for loss sustained in subscribing share capital to the company.  The member’s only title to such damages would depend on his having sustained loss through a subscription of share capital.  If he were to obtain indemnity from the Company in respect of that loss it would not logically be regarded as having subscribed the share capital for the subscription of which the company had indemnified him.’ (cited in Webb’s Case at 25)

33                  By reason of s 121(4) of the Building Societies Act, Part XII of the Companies (Victoria) Code (‘the Companies Code’) applied, with such modifications as were necessary, to the winding up of the building societies.  Section 360(1) of the Companies Code, which appears in Part XII, relevantly provided that, on the winding up of a company, members were liable to contribute to the company’s debt subject to certain qualifications including:

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

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

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

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

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

38                  All of the cases cited by the majority in Webb’s Case, subject to one qualification in relation to Oakes v Turquand, were concerned with attempts by members of companies in liquidation either to avoid liability in respect of partly paid shares, on the basis of rescission of the contract with the company for the allotment of the shares, or, it appears, to set off against that liability a claim for damages for deceit or misrepresentation by the company that induced the application for the partly paid shares.  At the same time as the appeal in Oakes v Turquand was heard, the House of Lords also dealt with another appeal arising out of the same winding up, Peek v Turquand.  Oakes was an original allottee of his shares, whereas Peek purchased his in the market, either from an allottee, or from a purchaser from an allottee.  The House of Lords appears to have approached the case on the basis that Oakes was the only relevant appellant because, if he failed to establish his right to be relieved from liability, Peek could not possibly succeed (Oakes v Turquand at 341). 

39                  The issue in the proceeding was whether Oakes and Peek were entitled to have their names removed from the list of contributories after the commencement of the winding up of their company.  The following proposition was advanced by the House of Lords:

‘it would be monstrous to say that the party against whom an application was made, having become a partner and a shareholder, and having held himself out to the world as such, and having so remained until the concerns stopped the payment, could, by repudiating the shares on the ground that he had been defrauded, make himself no longer liable.’ (Oakes v Turquand at 361)

That is to say, once a person had been entered on the register of members, as the holder of partly paid shares, outsiders are likely to change their positions in reliance on the register and, after a winding up commences, it would be unconscionable for the member to be excused from liability.

40                  A member, who was induced by the fraud of the company to be placed on the register of members of a company, may be able to rescind the contract for allotment before the company was wound up and have his name removed from the register.  However, a person who acquired shares from a third party and was placed on the register, would not, simply by reason of rescission of the contract with the third party, be entitled to have his name removed from the register.  In that sense, the appellant Peeks was in a worse position than the appellant Oakes.  That proposition, however, says nothing about the question in issue in this proceeding or in Webb’s Case or the question raised in the present case. 

41                  The observations made by the majority in Webb’s Case confirm that their Honours were addressing the principle of whether a member could claim damages against the building society as a consequence of breach of a contract between the member and the building society.  Thus, the majority said (Webb’s Case at 35):

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

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

42                  Those observations quite clearly indicate that the majority was dealing with the question on the assumption that there was an agreement between the member and the building society.  The formulation of the question before Vincent J confirms that the contract or agreement pursuant to which the members acquired their non withdrawable shares was made with the building society. 

43                  I do not regard Webb’s Case as authority for the principle that a claim by a person who, in reliance upon conduct of a company in a contravention of a prohibition on misleading or deceptive conduct, acts to the person’s detriment, albeit by buying shares in the company from a third party in a transaction that has no connection whatsoever in the company, is a claim by that person in his capacity as a member of the company.  I do not consider that the Shareholder’s Claim is a debt owed by the Company to the Shareholder in the Shareholder’s capacity as a member of the Company.  If it is a debt at all, it is a debt arising as a result of the operation of the consumer protection provisions referred to above, which prohibit misleading and deceptive conduct in various circumstances.  Section 563A would not require postponement of that debt until debts owed to, or claims made by, persons otherwise than as members have been satisfied.  It follows that the adoption of s 563A in the proposed deed of company arrangement would not require the postponement of the Shareholder’s Claim in the course of the administration.

VOTING RIGHTS

44                  It follows, a fortiori, from the conclusion that the Shareholder’s Claim is not a debt due to the Shareholder in his capacity as a member of the Company, that there would be no restriction on the Shareholder exercising incidental rights as a creditor of the Company under the proposed deed of company arrangements.  However, even if I am wrong in the conclusion that I have reached in that regard, I consider that the Shareholder would nonetheless be properly regarded as a creditor of the Company in respect of the Shareholder’s Claim. 

45                  Neither the Company nor the Creditor contends that the Shareholder’s Claim would be extinguished by the winding up of the Company.  Nor was it suggested that it would be extinguished by the administration of the Company or by the operation of the proposed deed of company arrangement.  Even if the Shareholder’s Claim were to be postponed until other debts and claims have been paid in full, it is nevertheless a debt or claim provable in the winding up of the Company.  There is nothing in s 563A, or in any of the principles enunciated in the English decisions of the 19^th Century, to suggest that the Shareholder should not be treated as a creditor under the proposed deed of company arrangement, even if he is a creditor whose claim is to be postponed.  There is no reason in principle or policy why the Shareholder should be deprived of a say, in respect of the Shareholder’s Claim, in the administration of the Company under the proposed deed of company arrangement.  The Shareholder’s Claim is clearly a claim, within the meaning of that term as defined in the proposed deed of company arrangement. 

46                  The provisions of s 478 and rr 5.6.58, 5.6.60, 5.6.62, 5.6.71 and 5.6.72 do not derogate from that conclusion.  Those provisions deal with adjustment between contributories of rights and obligations to contribute to the property of a company whose assets are insufficient to pay its liabilities in full.  Even if they deal with an adjustment necessary to allow a claim by a member of the nature of the Shareholder’s Claim, that would not be a basis for depriving the member of a say in relation to such a claim as a creditor.

47                  It follows that the Shareholder is a creditor as that term is defined in the proposed deed of company arrangement.  Accordingly, he is entitled to attend meetings of creditors of the Company, to vote at such meetings and to receive information and circulars sent by the Company to its creditors.

REPRESENTATIVE ORDER

48                  The parties have intimated that there are substantial numbers of shareholders of the Company who have foreshadowed claims against the Company similar to the Shareholder’s Claim.  In addition, there are many other general creditors of the Company whose interests are similar to that of the Creditor, in resisting the contentions advanced on behalf of the Shareholder.  Clearly, it would be undesirable for the questions litigated in this proceeding to be litigated again in a different proceeding involving different shareholders and different creditors. 

49                  The parties therefore proposed at the commencement of the hearing that orders be made under Order 6 Rule 13 for the Shareholder to represent all other members of the Company who were in a similar position and for the Creditor to represent all other creditors who are in a similar position.  Having regard to the diversity of the facts that might give rise to a claim by any other shareholder or a debt due to another creditor, I declined to make such an order at the commencement of the hearing.  However, I intimated to the parties that I would give consideration to that question once the questions raised by the Company’s application and the Shareholder’s cross-claim had been answered.

CONCLUSION

50                  It follows, from what I have said, that the application by the Company should be dismissed and that the cross-claim by the Shareholder should succeed.  However, before making any orders, and having regard to the possible effect of my conclusions on non-parties, I consider that it is appropriate to invite the parties, after consideration of my reasons, to bring in short minutes of orders that they contend are appropriate, including orders under Order 6 Rule 13.  To the extent that any party who wishes to contend that costs should not follow the event, I will hear submissions as to that matter at a time convenient to the parties.

SCHEDULE

“Debts” and “Claims”

Associate:

Dated:              15 September 2005