New South Wales Supreme Court CITATION : James & Anor v Andrews & Ors [2001] NSWSC 716 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 3431/00 HEARING DATE(S) : 16 August 2001 JUDGMENT DATE : 23 August 2001 Geoffrey James (First Plaintiff) Cowra Processors Pty Limited (In Liquidation) (Second Plaintiff) v PARTIES : Denis Andrews (First Defendant) Brian Kelly (Second Defendant) Mt Erin Pacific (NZ) Limited (Third Defendant) JUDGMENT OF : Acting Master Berecry COUNSEL : Ps: Mr D J Durston 2D: Mr G O Blake SOLICITORS : Ps: The Argyle Partnership, Lawyers 2D: Addisons, Solicitors CATCHWORDS : Corporations Law - statutory cause of action - duty of directors - Corporations Act - transitional provisions - external powers of the Commonwealth Supreme Court Rules 1970, Pt 10 r 1A & 2, Pt 11 r 8 Corporations Law, ss 95A, 588G, 588M, 588W LEGISLATION CITED : Corporations Act 2001, Pt 10.1, ss 4, 5, 1383, 1399, 1404 The Constitution, s 51(xxix) & (xxxvii) Corporate Law Reform Bill 1992 Corporations (Commonwealth Powers) Act 2001 John Pfeiffer Pty Ltd v Rogerson (2000) 74 ALJR 1109 Agar v Hyde (2000) 74 ALJR 1219 Hyde v Agar (1998) 45 NSWLR 487 CASES CITED : Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 Jackson v Spittall (1870) LR 5 CP 542 Distillers Co. v Thompson [1971] AC 458 Polyukhovich v The Commonwealth (1990) 172 CLR 501 Pearce v Florenca (1976) 135 CLR 507 DECISION : See paragraph 24 for orders. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ACTING MASTER BERECRY THURSDAY, 23 AUGUST 2001 3431/00 - Geoffrey JAMES & ANOR v Denis ANDREWS & ORS JUDGMENT 1 MASTER: There are two applications before the Court. The first application is a Notice of Motion filed on 13 October 2000 by the second defendant. The orders sought in the Notice of Motion include the setting aside of the proceedings as against the second defendant; or, alternatively, that service of the originating process on the second defendant be set aside; or, alternatively, a declaration by the Court that it has no jurisdiction over the second defendant in respect of the subject matter of the proceedings; or, in the alternative, that the Court decline to exercise its jurisdiction over the second defendant in respect of the proceedings. The second application is a Notice of Motion filed by the plaintiffs on 25 January 2001 seeking leave to proceed against the second defendant pursuant to Part 10 rule 2 of the Supreme Court Rules, 1970 ("the Rules"). 2 The proceedings were commenced by way of Originating Process filed on 2 August 2000. The first plaintiff is the liquidator of the second plaintiff, Cowra Processors Pty Limited (In Liquidation) ("the Company"). The first and second defendants were directors of the Company. The second defendant (Brian Kelly) was also a director of the third defendant (Mt Erin Pacific (NZ) Limited). The plaintiffs seek compensation and damages pursuant to ss 588M and 588W of the Corporations Law. The second defendant resides in New Zealand. The third defendant is a New Zealand registered company. The Company was incorporated in New South Wales on 4 August 1993. The first and second defendants were the directors of that Company. The first defendant was the managing director of the company up until 10 June 1994. The second defendant was a director of the company who, at all material times between 28 February 1994 and 13 October 1994, according to ASIC's records, was listed as the principal executive officer of the Company. His appointment commenced on 4 August 1993 and ceased on 8 December 1995. It is asserted by the plaintiffs that the Company was insolvent within the meaning of s 95A of the Corporations Law throughout the period from 28 February 1994 to the date of the commencement of the winding up, that is, 13 October 1994. 3 An Amended Statement of Claim was filed on 1 February 2001. The first defendant has filed a Defence to the Amended Statement of Claim. In the Defence, it is asserted, in paragraph 11, that it was the second defendant's responsibility for providing the first defendant with adequate information about whether or not the Company was solvent. 4 The basis for the orders sought by the second defendant is, firstly, that none of the cases in Pt 10 r 1A of the Rules apply and, secondly, that the New South Wales Parliament does not have the legislative competence to legislate extraterritorially. 5 The plaintiffs rely on three provisions of Pt 10 r 1A of the Rules, namely:- 1A (1) Subject to rule 2 and rule 2A, originating process may be served outside Australia in the following cases- (a) where the proceedings are founded on a cause of action arising in the State; … (i) where the proceedings are properly brought against a person served or to be served in the State and the person to be served outside the State is properly joined as a party to the proceedings; … (s) where the proceedings concern the construction, effect or enforcement of an Act or a regulation or other instrument having or purporting to have effect under an Act; … 6 Counsel for the second defendant has prepared extensive written submissions. The second defendant has not submitted to the jurisdiction of the Court and the making of this application does not, because of the provisions of Pt 11 r 8, change that position. 7 The plaintiffs submit that Pt 10 r 1A(1)(a) applies because the cause of action arises in New South Wales for the following reasons:- (a) the plaintiffs rely on the insolvent trading positions of the Corporations Law ; (b) the Company is registered in New South Wales; (c) the second defendant consented to becoming a director of the Company; and (d) it would be against public policy not to permit leave thus forcing the liquidator to pursue any rights and remedies he may have against the second defendant in New Zealand which would cause unnecessary costs and expenses which may reduce any amount that the liquidator may ultimately recover on behalf of the creditors. 8 The second defendant submits that the omission set out in s 588G should be treated as a tort. He relies on John Pfeiffer Pty Ltd v Rogerson (2000) 74 ALJR 1109, where the majority of the High Court noted that the term "tort" is used in this context to denote not merely civil wrongs known to the common law but also acts or omissions which, by statute, are rendered wrongful in a sense that a civil action lies to recover damages occasioned thereby. Kirby J at p 1130E (first column) noted that "'Tort-like' claims, although arising under statute, are sometimes treated as within the broad definition of tort". The submission is advanced by reliance on the High Court's comments in Agar v Hyde (2000) 74 ALJR 1219 where Callinan J considered the place where the tort occurred. He rejected a statement by the majority of the Court of Appeal of New South Wales. In Hyde v Agar (1998) 45 NSWLR 487 at 515E, the Court of Appeal said, "The cause of action should be regarded as having arisen where the relevant conduct had its natural and intended effects". However, Callinan J said that this placed too much emphasis on the consequences of conduct. In Hyde v Agar, the President, at pp 515F to 516A, disagreed with the majority. He considered that torts occurred exclusively at the place or places where the identified meetings occurred at which the laws of the game have been changed. 9 The submission on behalf of the second defendant is that the omission took place, not in New South Wales, but in New Zealand. Most of the directors' meetings of the Company were held in New Zealand. Decisions were made in New Zealand. Therefore, the cause of action arose at those meetings when no steps were taken by the directors to ensure that the Company was not trading whilst it was insolvent. 10 In my view, that argument cannot be sustained. The facts in Agar v Hyde (supra) and the present case are quite different. In Agar v Hyde, the body against whom the complaint was made was an unincorporated organisation. In the present matter, the Company was, at all relevant times, duly incorporated in New South Wales. The liquidator is relying on a breach created by statute, namely, the provisions of s 588G, which, relevantly, are as follows:- 588G (1) [A director when debt occurred] This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Act … (2) [Failure to prevent incurring of debt] By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. … 11 If the first plaintiff is able to establish the elements that are set out in both these subsections, then, subject to any statutory defence raised by the second defendant, the first plaintiff may obtain orders pursuant to s 588M(2). 12 In Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 at 567, the Court made the following comments:- "It was held in Jackson v Spittall (1870) LR 5 CP 542, at p 552, that the question whether a cause of action is to be classified as local or foreign is to be answered by ascertaining the place of 'the act on the part of the defendant which gives the plaintiff his cause of complaint'. It may sometimes be that the 'cause of complaint' is the failure or refusal of the defendant to do some particular thing - in other words, an omission. It makes no sense to speak of the place of an omission. However, it is possible to speak of the place of the act or acts of the defendant in the context of which the omission assumes significance and to identify that place as the place of the 'cause of complaint'. That is what was done by Goddard LJ in George Monro Ltd v American Cyanamid and Chemical Corp [1944] KB 432, where the failure to warn as to the nature of goods was treated as an aspect of their sale. Sale took place outside the jurisdiction and accordingly, in the view of his Lordship, the tort was committed outside the jurisdiction. The authority of Jackson v Spittall was expressly affirmed in Distillers [Co. v Thompson] [1971] AC [458] at p 467. In the latter case Lord Pearson said (at p 468) that '(t)he right approach is … to look back over the series of events … and ask … where in substance did this cause of action arise?' … The approach formulated in Distillers does no more than lay down an approach by which there is to be ascertained, in a commonsense way, that which is required by Jackson v Spittall , namely, the place of 'the act on the part of the defendant which gives the plaintiff his cause of complaint'. That approach has particular point if, as was the case in Distillers , it is necessary to ascribe a place to an omission for the purpose of determining where, if at all, a tort was committed. One thing that is clear from Jackson v Spittall and from Distillers is that it is some act of the defendant, and not its consequences, that must be the focus of attention." 13 In determining where the cause of action arose, the Court in Voth made reference to the ascertainment of that in a commonsense way. 14 In the Explanatory Memorandum to the Corporate Law Reform Bill, 1992 at para 1089, the following reference is made to the Harmer Report:- "The Harmer Report stated that it is the directors who have a duty to oversee the whole management of the company and that only they should owe the duty to prevent insolvent trading by the company." 15 In my view, it would be manifestly absurd and unreasonable to constrain interpretation of the Corporations Law so as to prevent a liquidator from suing a director who is out of the jurisdiction simply because board meetings were conducted in another country. The Company was incorporated in New South Wales. The second defendant was, at all relevant times, a director of the Company. Both he and the Company had obligations and duties and received benefits by the Company being registered in New South Wales. The evidence is that he was, during at least part of the period set out in the Amended Statement of Claim, the managing director of the Company. Therefore, in that role, he had a duty to monitor the position of the Company and to ensure that it was, at all times, able to continue trading without putting itself in a position where it was insolvent. It is unrealistic and lacking in commonsense to agree with the proposition that the directors must be looked at in isolation and that it is only when they make decisions at board meetings that it could be said that there had been acts of the kind by them which are contemplated in s 588G. In my view, the cause of action arose in New South Wales for not only the reasons above, but also because the Company traded in New South Wales and the evidence has been that the majority of its creditors were Australian companies and the debts owed to those companies were incurred in New South Wales. 16 Therefore, the plaintiffs must succeed on their Notice of Motion. 17 The second limb of the second defendant's submissions concern the extraterritorial operation of s 588G of the Corporations Law. The submissions on behalf of the second defendant were made on the basis that the relevant legislation is the Corporations Law which has been adopted by a New South Wales Act. However, on 15 July 2001, the Corporations Law was replaced by a Commonwealth Act, namely, the Corporations Act, 2001 ("the Act"). Under that Act, s 5(7) makes the following provision:- (7) This Act applies according to its tenor to: (a) natural persons whether: (i) resident in this jurisdiction or not; and (ii) resident in Australia or not; and (iii) Australian citizens or not; and (b) all bodies corporate and unincorporated bodies whether: (i) formed or carrying on business in this jurisdiction or not; and (ii) formed or carrying on business in Australia or not. 18 Under the Act, s 1383 provides that, where court proceedings began under the old law, a new proceeding equivalent to the old proceeding is taken to have been brought under the provision of the Act that corresponds with the relevant old provision. Section 1399 states that things done before the commencement of the Act which have ongoing significance have effect for the purposes of the Act as if they were done under the corresponding provision of the new legislation. 19 The transitional arrangements under the Act are dealt with in Pt 10.1. That Part adopts a strategy which is quite different from a typical strategy. The general approach in Pt 10.1 is that the new law entirely has replaced the old law as from its commencement and transitional events and proceedings have been dealt with, generally speaking, by deeming the new law to apply to them, thus, a reference in the new corporations legislation, to an event, circumstance or thing, is taken to include a reference to an event, circumstance or thing that has happened before the commencement of the new law (see s 1404(1)). The Act applies to New South Wales as the State Parliament enacted the Corporations (Commonwealth Powers) Act, 2001, referring corporations law matters to the Commonwealth Parliament to enable that Parliament to pass legislation. Pursuant to s 51(xxxvii) of the Constitution, the Commonwealth Parliament is empowered to make laws for the peace, order and good government of the Commonwealth with respect to "matters referred to the Parliament of the Commonwealth by the Parliament or Parliaments of any State or States, but so that the law shall extend only to States by whose Parliaments the matter is referred, or which afterwards adopt the law". Under s 4 of the Act, the definition "referring State" applies to those States that have passed referral Acts giving the Parliament of the Commonwealth the power to legislate. All States have passed such Acts. 20 The operation of the Act outside Australia is based on the legislative powers of the Commonwealth and the external affairs power (the Constitution, s 51(xxix)). In Polyukhovich v The Commonwealth (1990) 172 CLR 501 at 530, Mason CJ commented that the Commonwealth power, when legislating in the exercise of the external affairs powers, is "not less in scope than the power of the Parliament of the United Kingdom with respect to such matters". Hence, the Commonwealth can constitutionally legislate to apply to any acts, matters and things outside Australia regardless of whether they are connected with Australia. 21 Since the Corporations Law operated in each State as a law of that State, the validity of this extraterritorial operation depends upon the constitutional power of the State legislatures. In contrast to the Commonwealth Parliament, the Parliaments of States have power to legislate only where there is a connection between the subject matter and the State. This connection has been liberally applied (see Pearce v Florenca (1976) 135 CLR 507 at 518). The replacement of the Corporations Law of the States and Territories with the Commonwealth Corporations Act practically eliminates the risk that provisions of legislation will be held unconstitutional on the ground that the enacting Parliament was not competent to legislate extraterritorially. Unlike the States Acts, given the plenary legislative power of the Commonwealth Parliament, there appears to be no reason to read down an enactment in order to validate it. 22 In my view, the plaintiffs only have to establish one of the grounds set out in Pt 10 r 1A, although the plaintiffs rely on three cases set out under that rule. They have established a basis for these proceedings under subrule (1)(a). There is no reason for me to go on and consider the other two cases. 23 Counsel for both parties asked for the question of costs to be stood over until the determination of the two applications. Therefore, I make no order for costs at this stage but invite both counsel to makes submissions on the delivery of these reasons. 24 The formal orders I make, therefore, are on the plaintiffs' Notice of Motion, that leave be granted to the plaintiffs to proceed against the second defendant pursuant to Pt 10 r 2 of the Rules. On the second defendant's Notice of Motion, the application be dismissed. ********** Last Modified: 09/03/2001 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.