(2002) 42 ACSR 286 Reported Decision : (2002) 55 NSWLR 222 (2002) 20 ACLC 1314 New South Wales Supreme Court CITATION : Woodgate v Davis [2002] NSWSC 616 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 5401/01 HEARING DATE(S) : 01/07/02 JUDGMENT DATE : 12 July 2002 Giles Geoffrey Woodgate - Liquidator - First Plaintiff PARTIES : Chircan Holdings Pty Limited - Second Plaintiff Mahiya HoldingsPty Limited - Third Plaintiff Lessel George Davis - Defendant JUDGMENT OF : Barrett J COUNSEL : Mr M.R. Aldridge SC - Plaintiffs Mr J.T. Svehla - Defendant SOLICITORS : P.W. Turk & Associates - Plaintiffs Hugh & Associates - Defendant CATCHWORDS : CORPORATIONS - liability of directors for insolvent trading - companies carrying on business in partnership - common sole director - both companies subject to creditors voluntary winding up - whether director's liability for insolvent trading applies to incurring of partnership debts Bankruptcy Act 1966 (Cth) LEGISLATION CITED : Corporations Act 2001 (Cth) Partnership Act 1892 Supreme Court Act 1970 ANMI Pty Ltd v Williams (1981) 36 ALR 171 Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 Re Brisbane Meat Agencies Pty Ltd [1963] QdR 525 Re Budgett; Cooper v Adams [1894] 2 Ch 557 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1984) 155 CLR 541 Hawkins v Bank of China (1992) 26 NSWLR 562 CASES CITED : Re Hodgson; Beckett v Ramsdale (1885) 31 ChD 177 Kendall v Hamilton (1879) 4 App Cas 504 Re Owen; Ex p G James Pty Ltd (1987) 15 FCR 150 Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 Sumner v Powell (1816) 2 Mer 30 Tate v Barry (1928) 28 SR (NSW) 380 The Peninsular Group Ltd v Kintsu Co Ltd (1998) 28 ACSR 632 DECISION : Refer paragraph 37 - 14 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BARRETT J FRIDAY, 12 JULY 2002 5401/01 – WOODGATE & ORS v DAVIS JUDGMENT Background 1 These proceedings concern the affairs of two companies, Chircan Holdings Pty Limited and Mahiya Holdings Pty Limited (respectively the second and third plaintiffs), which are in liquidation following earlier steps by their sole director, Mr Davis (the defendant), to place them in voluntary administration. The winding up is, in each case, of the kind deemed by s.446A of the Corporations Act 2001 (Cth) to arise upon the passing of a resolution of creditors under s.439C(c) and is accordingly a creditors voluntary winding up. Mr Woodgate (the first plaintiff) became liquidator of each company and remains in office. 2 The two companies carried on business in partnership. At the centre of the present litigation are claims that the defendant who, as I have said, was the sole director of each company, failed to prevent the company from incurring certain debts at a time when the company was insolvent and thereby contravened s.588G of the Act in respect of each such debt. The plaintiffs seek, on this basis, to recover from the defendant pursuant to s.588M a total of $3,373,038.58. 3 The defendant has filed a defence paragraph 17 of which is in the following terms: "Further and in the alternative, in answer to all the matters alleged in the Claim, the defendant says that the claims made by the first plaintiff or alternatively, the second plaintiff and the third plaintiff, or alternatively the first plaintiff, the second plaintiff and the third plaintiff, respectively are not maintainable as, on their proper construction, sections 588G and 588M of the Act are not available where the debts sued upon are those incurred by a partnership where all or one or more of the partners is a company." 4 On 13 May 2002, I made by consent an order that the following questions be determined as separate and preliminary questions pursuant to Part 31 Rule 2 of the Supreme Court Rules: "1. Whether paragraph 17 of the Defence filed 14 February 2002 provides a complete defence to the Statement of Claim filed on 13 December 2001 (the 'Claim'). 2. If the answer to question 1 is yes, whether the Claim should be dismissed or struck out." 5 In accordance with directions, written submissions in relation to these separate questions were filed by the parties. I heard supplementary oral argument on 1 July 2002 when Mr Svehla of counsel appeared for the defendant to argue that the questions should be answered in the affirmative and Mr Aldridge SC appeared for the plaintiffs to make submissions to the contrary. 6 The basic position Mr Svehla took by reference to a number of submissions to which I shall turn in due course is that, where a company is a member of a partnership and debts are incurred in such circumstances as to be "debts and obligations of the firm" as referred to in s.9 of the Partnership Act 1892, s.588G and related provisions of the Corporations Act can never apply to or in relation to directors of that company by reference to those debts. For that position to be sustainable, one of two propositions must be made good. It must be shown either that it is incorrect to regard the company as having incurred the debt (that being the act upon which s.588G focuses) or that, for some other reason manifested on the face of the Corporations Act, s.588G and related provisions are not concerned with the incurring of a debt by a company which is a partner in a partnership. The "incurring" question 7 Section 9 of the Partnership Act is in the following terms: "Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and after the partner's death the partner's estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner's separate deeds." 8 When s.9 speaks of "debts and obligations of the firm", it is referring to debts and liabilities of the collection of persons who make up the partnership, the "firm" being no more than those persons collectively: see s.4. There are basically two ways in which the partners collectively may voluntarily undertake an obligation. They may act in concert or unison to bring about that result, for example, by all signing a loan agreement or some other engagement. Alternatively, they may acquiesce in arrangements of the usual kind under which, in the conduct of the partnership business, a particular partner or particular partners act for all (either personally or through agents such as employees) so that the actor or actors, both as principals and as agents for the remaining partners, enter into the relevant engagement. Partners are, after all, "associated for … a common end and are agents for one another in its accomplishment": Birtchnell v Equity Trustees Executors and Agency Co Ltd (1929) 42 CLR 384 per Dixon J. Each has "prima facie actual authority to act as an agent of the firm and his other partners for the purposes of the business of the partnership": Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1984) 155 CLR 541 per Mason, Wilson, Brennan, Deane and Dawson JJ. This is, in any event, the effect of s.5 of the Act: "Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which the partner is a member, binds the firm and the other partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner." 9 A central issue in this case is whether, when a partner becomes subject to the joint liability referred to in s.9 of the Partnership Act in respect of a partnership debt, it is correct to say that, for the purposes of s.588G of the Corporations Act, the partner thereby "incurs a debt". Mr Svehla submitted that the partner does not, and that the only "incurring" is an incurring by the partnership. 10 A pertinent factor is that the liability to which s.9 refers is a joint liability, as distinct from a several liability or a liability that is both joint and several. That, at all events, is the position at law recognised by the statute, with the result that only one claim can be asserted in a common law action and, subject to the effect of s.97 of the Supreme Court Act 1970 in the case of a judgment of this court, the single cause of action merges in the first judgment recovered. The rule historically applied in the Court of Chancery, however, was stated by Sir William Grant, Master of the Rolls, in Sumner v Powell (1816) 2 Mer 30 as follows: "A partnership debt has been treated in equity as the several debt of each partner, though at law it is only the joint debt of all. But, there, all have had a benefit from the money advanced or the credit given, and the obligation to pay exists independently of any instrument by which the debt may have been secured." 11 Later elaboration is to the effect that the rule just stated is not of general application and that to say that a partnership debt is, in equity, always a several debt of each partner is to state too radical a proposition. As Lord Cairns LC explained in Kendall v Hamilton (1879) 4 App Cas 504, equity's approach was confined to administration of the assets of a partnership or of a deceased partner and did not mean "… that a Court of Equity altered or changed a legal contract, but merely that the Court, in order, before distributing assets, to administer all the equities existing with regard to them, would go behind the legal doctrine that a partnership debt survived as a claim against the surviving partners only, and would give the creditor the benefit of the equity which the surviving partners might have insisted on." (See also Re Hodgson; Beckett v Ramsdale (1885) 31 ChD 177.) 12 Whether a partner's liability for partnership debts be regarded as joint or several (or, as Dr Fletcher suggests at p 173 of the eighth edition (2001) of Higgins and Fletcher, "The Law of Partnership in Australia and New Zealand", is within "a rule which falls between 'joint' and 'joint and several' liability"), the fact remains that the partner is exposed to action in respect of the whole amount of the debt and may suffer judgment accordingly, albeit in circumstances where contribution may be had from other partners. Each partner must accordingly be regarded as indebted for the full amount of a partnership debt. 13 The "incurring" concept must now be examined. That concept, as relevant to this context, has been considered in a number of cases. In Hawkins v Bank of China (1992) 26 NSWLR 562, Gleeson CJ regarded the word "incurs" in a predecessor provision of the companies legislation as "apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time …". Kirby P said: "The act of 'incurring' happens when the corporation so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt." 14 The concept was further elucidated by Hodgson J in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290, particularly in the following passage: "In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the Act or not; secondly, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and thirdly, as to whether the company would otherwise (in any event) have been liable for the debt." 15 These approaches, while they may present difficulties in particular cases, are clear. "Incurring" is the act or omission of the company through which exposure of it to a monetary obligation arises. 16 A company is, of course, incapable of performing an act except through human intermediation. The human actors may be persons such as corporators or directors whose collective actions amount to an act of the company itself. More commonly, the human actor is an agent acting with express or implied authority of the corporation. Employees fall into the latter category. Examination of the conduct of relevant agents of the company is thus necessary to decide, in a particular context, whether the company has acted in a particular way. 17 Acts arising in the course of carrying on the business of a partnership will generally be acts of an individual partner or acts of another person, such as an employee of the partners, having their authority. The effect of such an act, as among the partners, is stated in s.6 of the Partnership Act: "An act or instrument relating to the business of the firm, and done or executed in the firm-name, or in any other manner, showing an intention to bind the firm by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners: Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments." 18 As is observed at p 164 of Higgins and Fletcher (above), this provision, in so far as it relates to acts done and instruments executed by a partner, does not add much to s.5; and, in so far as it relates to the activities of a person who is not a partner, it is merely declaratory of the common law rules governing agency and the master and servant relationship. A corollary must be that, by becoming and remaining a partner, a person accepts that the legal consequences of acts of another partner and of employees and other agents engaged in the partnership business will, if performed within the scope of that business, be binding on the person by virtue of principles of agency. In the case of a partner which is a company, the consequences in terms of liability for acts giving rise to a debt will be the same as where an employee of the company acts directly in that capacity to incur the debt for the company, save that the liability will be, at law, of the joint nature described in s.9 of the Partnership Act. 19 On this basis, it seems to me impossible to conclude, by reference to principles of partnership law, that a partner which is a company never "incurs a debt" when a partner or someone else acting with the authority of the partners or of a partner acts within the scope of the partnership business in such a way as to give rise to a payment obligation which becomes one of the "debts and obligations of the firm" referred to in s.9 of the Partnership Act. The partnership itself not being a person, I do not accept Mr Svehla's submission that the only "incurring" is an incurring by the partnership. Supposed anomalies 20 The main submission on behalf of the defendant under this general heading was that to allow recovery, by reference to s.588G, from a director of a company which is a member of a partnership in respect of a debt which is a partnership debt involves, in effect, a subversion of the natural order of things in insolvency. This submission was advanced mainly by reference to the principle of bankruptcy law, enacted in s.110 of the Bankruptcy Act 1966 (Cth) and imported by s.553E of the Corporations Act, that partnership creditors can only partake in a distribution of the assets of the separate estate of a partner (corporate or otherwise) after all creditors of the separate estate have been satisfied – in other words, partnership creditors have an entitlement only to the surplus, if any, in the separate estate; and it is the joint estate which is to be applied in the first instance to meet the joint debts. 21 On this basis, it was said, it is wrong in principle to countenance accretion to the separate pool of assets in the hands of the liquidator of a corporate partner by order under a provision such as s.588J(1), s.588K(1) or s.588M(2) – and even more wrong if the accretion is, under s.588M(3), to the benefit of a single creditor to whom a partnership debt is due – out of the property of a director of the corporate partner. It is assumed here that the accretion, although referable to the partnership or joint debt, is to the separate estate administered in the insolvency of one partner only, whereas the fund to which resort ought principally be had in respect of the debt is the joint estate. 22 The first part of that assumption should be briefly examined. Characterisation of property as joint estate or separate estate for the purposes of s.110 of the Bankruptcy Act is a question of fact. In cases of partnership, joint estate is equated generally with partnership property and therefore includes property "acquired, whether by purchase or otherwise, on account of the firm": Partnership Act, s.20(1). Money recovered from a director of a corporate partner by the liquidator of that corporate partner on account of the director's wrongful conduct in allowing a partnership debt to be incurred bears a clear and close relationship to that partnership debt. It is quite conceivable, therefore, that the compensation recovered would properly be regarded as received by the corporate partner, in the person of its liquidator, "on account of the firm", the "firm" being, as already noted, no more than the collection of the partners. This question was not debated before me and I do not wish or need to express any final view on it. It can, however, be said that the possibility that the recovery, although coming home to the liquidator of the particular partner, nevertheless acquires the character of joint estate is a plausible one. If this is correct, that part of the defendant's submissions falls away. 23 But even if the recovery is properly regarded, for bankruptcy purposes, as falling within the separate estate of the partner in liquidation, it cannot be said that the consequences are so perverse and anomalous as to justify the conclusion that the Corporations Act could never have intended such recovery to be available. The rule now found in s.110 of the Bankruptcy Act began life as no more than a judge-made rule of convenience. It carries within itself elements of arbitrariness, to the extent that Professor Glanville Williams commented in "Joint Obligations" (1949): "The rule under consideration has perhaps some quality of symmetry which gives it an aesthetic appeal; but here one's approbation must end." 24 There is also the point that this apparent "symmetry" is compromised by at least three of the four exceptions which were identified in Re Budgett; Cooper v Adams[1894] 2 Ch 557 and referred to by Powell J in ANMI Pty Ltd v Williams (1981) 36 ALR 171 (the fourth, it has been held, does not apply under the Australian Act: Re Owen; Ex p G James Pty Ltd (1987) 15 FCR 150): "The first exists where there is no joint estate; the second where the property of the firm has been fraudulently converted; the third where there has been a distinct separate trade, in respect of which a separate debt has been contracted; the fourth is in favour of the petitioning creditor himself." 25 The principles embodied in s.110, as well as these exceptions, are concerned with the equities of the partners among themselves. They do not in any sense cause joint claims to be confined to joint estate and separate claims to be confined to separate estate. They deal with priority and sequencing of claims (including in cases where the partners are companies: Re Brisbane Meat Agencies Pty Ltd[1963] QdR 525): hence, on two occasions, the words "in the first instance". It cannot be said that there is some manifested legislative intention of insulating any part of a partner's separate estate and that it is in some way inconsistent with principle for the separate estate of one partner to be augmented by recovery from a director of that partner who has wrongfully permitted a joint debt to be incurred. It follows, in my view, that even if the proceeds of recovery from a director by reference to s.588G are, in the hands of the liquidator of a corporate partner, part of the separate estate, there is still some cogent operation left to s.110 of the Bankruptcy Act. 26 For the several reasons I have canvassed, the argument based on supposed departure from the natural order of things in the insolvency of joint debtors does not lead to any finding of a legislative intention that s.588G is not to apply in circumstances such as the present. 27 Counsel for the defendant also pointed to a number of anomalies supposedly arising from provisions of the Partnership Act relating to dissolution, as well as principles concerning the appointment of a receiver to effect winding up: cf Tate v Barry (1928) 28 SR (NSW) 380 and ANMI Pty Ltd v Williams (above). In the latter case (said in Higgins and Fletcher (above) at p.267 to "mingle partnership and company rules in an unjustified way"), it was recognised that winding up, as it relates to a partnership of which a company is a member, is distinguished from the company's winding up. But the coincidence of both processes, it was said, produced confusion between, on the one hand, the role of the company's liquidator and his powers and, on the other, his capacity to administer the winding up of the partnership. 28 I must say that I consider this suggested confusion to be more imagined than real. The concept of winding up under the Partnership Act is a concept of winding up "the business and affairs of the firm": s.39. That process operates only among the partners. Their liabilities and duties to outsiders continue until all claims are duly met or, in case of insolvency, duly proved in the relevant bankruptcies or company liquidations. The process of company winding up does not affect the ability of a company which is a partner to participate, through its liquidator, in the winding up of the business and affairs of the firm in order to enforce such claims against other partners as may be maintainable in the particular context. 29 The fact that difficulties and anomalies may arise and call for resolution in particular insolvency cases (including various instances identified on behalf of the defendant, such as where the director of the corporate partner is himself a partner or a partnership creditor) does not represent a valid reason for concluding that there existed an overriding legislative intention that the provisions producing them should simply be inapplicable to the particular case. 30 In the end, I think all the matters considered under this heading resolve themselves by reference to the submission made by Mr Aldridge SC for the plaintiffs that an unpaid partnership creditor may sue all or any of the partners and that the creditor's rights of recovery and enforcement are not limited to partnership property or by the ways in which partners may be called upon to contribute and account among themselves. While the bankruptcy provisions are concerned to see that joint estate is not applied to separate debts (except in so far as it is surplus to the needs of joint creditors), partnership entails no form of limited liability for any partner. Difficulties in applying rules applicable among the partners cannot be seen as imposing some implied limitation upon the operation of Corporations Act provisions which exist to provide a means of redress, in the interests of the general body of creditors, where directors engage in proscribed conduct. The Part 5.7 argument 31 Mr Svehla's final argument was based on Part 5.7 of the Corporations Act which confers on the court a power to order the winding up of a "Part 5.7 body". The expression "Part 5.7 body" is defined by s.9 as including "a partnership, association or other body (whether a body corporation or not) that consists of more than 5 members and is not a registrable body". 32 On any view, a partnership in the sense recognised by the Partnership Act is not a "registrable body", lacking, as it does, both the character of a body corporate and the characteristic that it may sue or be sued or hold property in the name of its secretary or another officer: see para (b) of the definitions of "foreign company" and "registrable Australian body" which supply the content of the definition of "registrable body". It follows that a partnership of more than five members is a "Part 5.7 body" and that the court has jurisdiction under s.583 to order that the partnership itself be wound up. 33 Where such winding up is ordered, Chapter 5 applies accordingly to the Part 5.7 body with such adaptations as are necessary including those specifically directed by paras (a) to (d) of s.583. Furthermore, paragraph (c) of the definition of "company" in s.9 says that, in Parts 5.7B and 5.8 (except ss.595 and 596), "company" includes a Part 5.7 body. It follows, on the argument advanced on behalf of the defendant, that the insolvent trading provisions in s.588G and related sections (contained, as they are, in Part 5.7B) apply to a partnership having more than five members. That being so, it is said, one may gather a general legislative intention that s.588G liability is to operate in the partnership context only in the cases contemplated by Part 5.7, with the result that it does not apply independently to or in relation to a company which is a partner, at least so far as its liability for partnership debts is concerned. 34 I do not consider these arguments advanced by reference to Part 5.7 to be sustainable. Part 5.7 and the special meaning of "company" derived, for the purposes of Part 5.7B (and thus s.588G), from paragraph (c) of the s.9 definition of "company" are not intended to deal comprehensively and exhaustively with the position under s.588G of companies which are members of partnerships. Part 5.7, like predecessor provisions concerned with what used to be known as "unregistered companies", is no more than a provision extending the Act's general mechanisms of winding up to a variety of bodies, both incorporated and unincorporated, in relation to which the court might think it appropriate to apply an appropriate winding up regime. This is made clear in the judgment of Sheppard A-JA (with whom Meagher and Sheller JJA agreed) in The Peninsular Group Ltd v Kintsu Co Ltd (1998) 28 ACSR 632: "Section 583 deals with the winding up of Part 5.7 bodies. Because of the definitions to which reference has been made it includes the winding up of foreign companies. But it needs to be borne in mind that it applies to a great many other types of association, using that expression broadly, some incorporated and some not. A wide range of undertakings is involved yet the same provisions apply to all notwithstanding that there may be substantial differences in their character and the nature of their activities." 35 The creation by the Corporations Act of a jurisdiction to make a winding up order in respect of various kinds of bodies (including certain, but not all, partnerships) which are not "companies" for the general purposes of the Act and the extension to such bodies, if so wound up, of the insolvent trading provisions indicates nothing relevant to the issues raised by the separate questions in this case. That is particularly so where, as here, Part 5.7 cannot possibly operate, there being only two partners. Conclusion 36 Section 588G and related provisions serve an important social purpose. They are intended to engender in directors of companies experiencing financial stress a proper sense of attentiveness and responsible conduct directed towards the avoidance of any increase in the company's debt burden. The provisions are based on a concern for the welfare of creditors exposed to the operation of the principle of limited liability at a time when the prospect of that principle resulting in loss to creditors has become real. Very clear words would be needed to justify the conclusion that the underlying policy was displaced by the circumstance that the company operated not as a sole trader but in partnership; or that the directors of any company could exempt themselves from the need to be attentive and to act responsibly, on pain of personal liability to compensate, by the simple expedient of causing their company to carry on business in partnership. The force of this last point is illustrated by the case where a single individual becomes the sole shareholder and sole director of each of two companies and causes those companies to trade as partners. 37 The questions the subject of the order for separate and preliminary determination are answered as follows: Question 1: No. Question 2: Does not arise. ********** Last Modified: 07/15/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.