\AeF of CATCHWORDS ca ny Trade Practices Act 1974 - motion to strike out Statement of Claim as no reasonable cause of action disclosed - contract to purchase and sell hotel premises - applicant to proceedings a "shelf company" - meaning of "in trade or commerce" - relevance of obiects in memorandum of association when "activities test" fails Fencott and Ors. v. Muller and Anor. (1983) 57 A.L.J.R. 317 - application for security for costs - width of discretion Caruso Australia Ptv. Limited v. Portec (Australia) Pty. Limited (unreported Toohey, J. 30 March 1984). TRADE PRACTICES ACT 1974 Sections 52 and 82 N.S.W. G. 102 OF 1984 SATNA HOLDINGS PTY. LIMITED v. JOKADE PTY. LIMITED AND ORS. St. John. J. Sydney spe New 3 October 1984 Med fa pv anced Akash. {Aw THE COURT ORDERS THAT: l. The application bv the first and second respondents to strike out the Statement of Claim is dismissed. 2. The first and second respondents to pay the costs of the applicant. 3. The applicant is to provide securitv for costs of the first -=nd second respondents in the sum of three thousand dollars ($3,000) and three thousand dollars ($3,000) in respect of the third respondent's costs; both sums pavable at least twenty-eight (28) davs before the date fixed for hearing. 4. The costs of the motion for securitv of costs are reserved. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. 102 of 1984 GENERAL DIVISION BETWEEN: SATNA HOLDINGS PTY. LIMITED Applicant AND: JOKADE PTY. LIMITED D: GARY OWEN CROCKETT Second Respondent AND: COUNCIL OF THE CITY OF THE BLUE MOUNTAINS Third Respondent AND: EDWARD McGUCKIN Fourth Respondent REASONS FOR JUDGMENT CORAM: ST. JOHN, J. DATE: WEDNESDAY 3 OCTOBER 1984 PLACE: SYDNEY There are two motions before me. I will deal first with the motion to strike out the Statement of Claim on the arounds that no resonable cause of action is disclosed therein. In that pleading, the applicant, Satna Holdinas Ptv. Limited ("Satna") seeks damages pursuant to S.82 of the Trade Practices Act 1974 ("the Act") for alleged breach of $8.52 of that Act and also for the common law causes of action of deceit and nealigent misrepresentation. The substance of the alleqed breach of S$.52 18 that the first respondent. Jokade Ptv. Limited ("Jokade"). by its aqent Garv Owen Crockett ("Crockett"), enagaqed in misleading conduct bv failing to fullv disclose a report of the Board of Fire Commissioners relating to the hotel premises which Satna entered into a contract to purchase from Jockade. It 18s aaqreed by counsel that the Statement of Claim snould be read as if it was alleaed that the misleading conduct was "in trade or commerce'. In support of the application, Mr. Youna of Queens Counsel for Jokade and Crockett. has submitted that the sale of the hotel premises was not, on the evidence. as to which there is no dispute, in trade or commerce for a number of reasons. The facts that he relies upon are that Satna was a "shelf company" which. so far as trading was concerned, entered into a contract to purchase the California Hotel at Katoomba for seven hundred thousand dollars :($700,000). A deposit of fiftv thousand dollars ($50,000) was paid pursuant to that contract but before completion. that contract was terminated and Satna removed from possession after another company had run the hotel business for some months. Jokade. the vendor companv. ran the hotel business on the subitect premises, it oriainallv having been a "shelf companv" and of which the memorandum of association contained obiects of aqreat width and included the purchase and sale of real estate. Jokade contends that. because its onlv dealing in land was the contract to purchase and sell to Satna the hotel premises, that contract could not be reaarded as being "in trade or commerce" within the meaning of §.52 of the Act. Mr. Young reminded me that. in Westham Dredaing Company Pty. Limited v. Woodside Petroleum Development Ptv. Limited (1983) 46 A.L.R. 287. I had expressed the view that that phrase "in trade or commerce" imported some continuitv of activitv and he referred to other authorities in which similar expressions had been made. The case cited. of course, was decided before Fencott and Ors. v. Muller and Anor. '1983) 57 A.L.J.R. 317 where. on appeal from a decision of Toohev, J. of this court, the Full High Court of Australia considered the meaning of "trading corporation" in $.51(XX) of the Constitution and as defined bv S.4 of the Act. In the maiorityv ludament, Mason, Murphv, Brennan and Deane JJ. at p. 328 considered the character of one of the parties desianated Oakland. Their Honours firstlv expressed the opinion that the "activities test" adopted bv the mafority of that court in ira 4. Req. v. Federal Court of Australia: Ex parte W. A. National Football Leaque (Adamson's Case) (1979) 143 C.L.R. 190 did not by itself establish that Oakland was a tradina or financial corporation. Their Honours went on:- "The activities in which Oakland had enaaged were limited to suing for the balance of the purchase price and negotiating with the unpaid trade creditors of the business. Prior to the sale of the business to Mr. Muller. Oakland was a "shelf company", awaiting acquisition by owners' who might cause it to enaaqe in activities of their choosing. When 1t became trustee of the O'Connors Unit Trust it came under the control of Mr. and Mrs. Fencott and their accountant. Mr. Fencott described in evidence the functions Oakland was to perform: to receive the balance of the purchase price, to pav off creditors and to distribute anv surplus to the unit holders of O'Connors Unit Trust. No decision had been made as to 1ts enaaging in anv further activitv." After setting out some other details of the facts before the High Court. their Honours went on, at vp. 328:- "It follows that Oakland has not enaaqed in tradina activities. Nor has 1t engaged in anv financial activitv, for it has not hitherto enaaged in anv financial transactions. And so the question arises whether a corporation with obiects and powers appropriate for a trading or financial corporation can bear that character before it engaged in anv trading or financial activitv. That question didnot arise for consideration in Adamson s Case. The maioritv judgments in that case which held that the established activities of the football leaque concluded its character as a tradina corporation did not suagest that trading activities are the sole criterion of character. Absent those activities. the character of a corporation must be found in other indicia. While its constitution will never be completelv irrelevant, 1t 18 ina case such as the present where a corporation has not beaun. or has barely beaqun, to carry on business that its constitution, including its obiects. assumes 5. particular sianificance as a aquide (see State Superannuation Board v. Trade Practices Commission (1982), 44 A.L.R. 1 at p.15). Oakland's memorandum and articles of association reveal that the obiects for which it was established include enaaginag in financial activities and carrvina on a larae variety of businesses. thouah it lav dormant -- "on the shelf" -- after ats incorporation. In the circumstances of the present case. there is no better qauide to its character than its constitution and its constitution establishes its character as a trading or financial corporation. It is immaterial whether it is a trading corporation or a financial corporation or which of those characters 1ts future activities mav give it." Mr, Roife of Queens Counsel for Satna relies stronalyv upon this quotation to arque that Jokade s memocindum of association places it in the cateqorv of a tradina corporation and further as characterising the contract to sell the hotel premises as being "in trade or commerce". Mr. Youna also sought to relv upon an analoav with the distinction between capital and revenue concepts in taxation law, quoting a United States of America case which likened that concept to the distinction between the fruit and the tree which bore ut. That the phrase "trade cr commerce" in the context of the Act 1s elusive of comprehensive definition need not be repeated. As to the status of the companv's memorandum in determining the question, Mr. Young submitted that obiects enumerated therein have no relevance and. until a course of c 6. similar dealina is undertaken. those obtects are to be reaarded only as options to be exercised. The result of acceptance of this proposition would be that the first dealina, and perhaps the second and third dealings, by a company would not be cauaqht bv the relevant provisions of the Trade Practices Act. but the fourth and subsequent such dealinas would be. If this view were accepted. the formation of a new company for each transaction could be used to avoid the provisions of the Act in manv circumstances. It seems to me that when the Hiah Court in Fencott v. Muller (supra) stated that "...there 1s no better quide to its character than its constitution and 1ts constitution establishes its character as a trading or financial corporation.". their Honours were in effect saving, bv use of the word "character", that activitv pursuant to that character in the case of a tradina corporation would be "in trade or commerce". Except for charitable purposes. corporations are not formed except in rare instances other than for the purpose of trading in some manner and the first exercise of anv of its obiects should. in mv view. be regarded as being in trade or commerce. I would therefore dismiss the application to strike out the Statement of Claim with costs. I proceed now to the application for securitv of costs which is made by the first. second and third respondents. Satna concedes that ait is impecunious, but at mv suagestion, the means of the two persons who would be likely to benefit from the successful pursuit of the action. namelv Paul Barry Freeman and Linda Maraaret Freeman, were investidaated, but not satisfactorily so because cross-examination revealed that Mrs. Freeman had an interest in her father's property, probablv contingent on his death, detaiis of which she was unable to provide. Both counsel properly emphasised the width of discretion 1n ordering securitv of costs and referred me to the relevant authorities. many of which are collected bv Toohev. J. in Caruso Australia Pty. Limited v. Portec (Australia) Ptv. Limited 'unreported 30 March 1984). Mr. Rolfe relied upon a number of sianificant admissions (to alleaations) made in the Statement of Defence of Jokade and Crockett to emphasize that Satna s case was not lacking in substance. It is unnecessarv for me to set them out in detail. but I refer to one such alleqation in paraqraph 18 where Satna alleqed that Jokade and Crockett "were at all Material times in the possession of a report dated 14th Januarv, 1980. bv the Board of Fire Commissioners addressed to the Third Respondent which recommended large and extensive alterations and additions to the said Hotel for the purpose of fire prevention and prevention of fire hazards." Bv paraqraph 12 of the Defence. Jokade and Crockett admitted that at all < material times thev were in possession of the relevant document, but aoon to alleae that thev did not consider or believe that the letter reflected the requirements in relation to the hotel of the third respondent or of the Board of Fire Commissioners. I aqree with the submission that such an admission adds strenath to Satna's case and that should be reflected in anv order for security of costs. Having reaard to the impecuniositv of Satna. the financial position of Mr. and Mrs. Freeman and the other considerations which I am bound to take into account, I propose to order that Satna. the applicant. provide securitv for the costs of the first and second respondents in the sum of three thousand dollars ($3,000) and three thousand dollars ($3,000) 1m respect of the third respondent s costs. both sums pavable at least twentv-eiqght (28) davs before the date fixed for hearina. I certifv that this and the seven (7) preceding pages are a true copv of the Reasons for Judament herein of his Honour Mr. Justice St. John. Associate: Browk — Date: 3 October 1984