BINTAI KINDENKO PTE LTD V SANWA BANK LTD & ANOR July 11, 2008
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BINTAI KINDENKO PTE LTD V SANWA BANK LTD & ANOR
[1994] 3 SLR 459
SUIT NO 463 OF 1991
HIGH COURT
DECIDED-DATE-1: 24 JUNE 1994
GOH JOON SENG J
CATCHWORDS:
Banking – Customer’s duty – Duty of customer not to facilitate fraud in drawing cheques – Whether duty breached – Material and apparent alterations in cheque drawn by customer – Whether customer estopped from claiming against bank even if fraud could have been discovered with reasonable care by bankBanking – Cheques – Material alterations to crossed cheque – Payment by bank to the wrong person because of alterations – Bank not entitled to protection under s 80 of the Bills of Exchange Act – Bills of Exchange Act (Cap 23) ss 64 & 80
Banking – Collecting bank – Liability to owner of materially altered cheque – Not liable for money had and received when proceeds of cheque had been paid over to drawee – Only liable in conversion – Section 85 of Bills of Exchange Act does not apply – Bills of Exchange Act (Cap 23) s 85
Contract – Construction – Exclusion clause – Proper approach to be taken – Whether defendant bank excluded from liability in negligence
HEADNOTES:
The plaintiffs issued a cheque for $ 260 in favour of GDS and drawn on the first defendant bank. The cheque was altered by a third party to a cheque in favour of X for $ 126,260. X subsequently paid the cheque into her account with the second defendant bank. The first defendants then paid the second defendants the full amount and debited the plaintiffs’ account with it. The plaintiffs brought this action against the first defendants for a declaration that the debit was without authority and of no effect, alternatively for payment of $ 126,260. The plaintiffs also sued the second defendants for conversion of $ 126,260, alternatively for payment of the same as money had and received.
Held, allowing the plaintiffs’ claims against both defendants:
(1) The cheque had been materially altered and was a null and void
document by virtue of s 64 of the Bills of Exchange Act (Cap 23) (the Act).
Accordingly, the first defendants was not entitled to rely on s 80 of the Act
to avoid liability.
(2) A customer owes a duty to his banker to exercise reasonable care and
take reasonable precaution against fraud in drawing a cheque. Whether he has
done this is a question of fact taking into account the course of dealings
between the customer and the bank. On the evidence, the plaintiffs had
exercised reasonable care and taken reasonable precaution in drawing up the
said cheque, and had not acted in breach of its duty to its banker, the first
defendants. It was therefore not estopped from claiming against the first
defendants.
(3) Even if the said cheque had been drawn up leaving spaces facilitating
fraud, the alterations were apparent. Where the alterations are apparent,
[*460] the bank is not relieved from liability by virtue of the
customer’s breach of duty.
(4) To exclude liability for negligence, the clause relied on must clearly
say this without ambiguity. The first defendants could not rely on the
exclusion clause in its contract with the plaintiff because the clause was
not sufficiently clear to exclude the first defendants’ liability for
negligent failure to detect material alterations.
(5) The second defendants were liable to the plaintiff in conversion for
the full amount of the cheque for disposing of the cheque even though the
cheque had been materially altered.
(6) The second defendants were not entitled to rely on s 85 of the Act as
the section does not apply to a materially altered cheque which is null and
void.
(7) An agent who in good faith has paid over to his principal money to
which it is subsequently discovered that the principal has no right cannot be
required to return the money to the payor. This doctrine applies to a
collecting bank that has received the proceeds of cheques collected by it on
behalf of a customer. Once the money is paid to the customer, the bank has
changed its position and, being a mere agent, is no longer answerable in an
action in money had and received. The second defendants were therefore not
liable for money had and received as they had, as collecting bank for X,
received and paid over the proceeds of the cheque to X.
(8) As both defendants were liable for the same loss and they were both
equally to blame, liability would be apportioned equally between them.
Cases referred to
Hall v Fuller [1826] 5 B & C 750
Slingsby v District Bank [1932] 1 KB 544
London Joint Stock Bank v Macmillan & Arthur [1918] AC 777
Leeds and County Bank v Walker (1883) 11 QBD 84
Moran v Lipscombe [1929] VLR 10
Marfani & Co v Midland Bank [1968] 2 All ER 573
Slingsby v Westminster Bank [1931] 2 KB 583
Midland Bank v Reckitt [1932] 48 TLR 271
Bank of Ceylon v Kulatilleke [1957] NLK 188
Legislation referred to
Bills of Exchange Act (Cap 23) ss 64, 80, 85
Low Chai Chong and Tan Joo Thye (Rodyk & Davidson) for the plaintiffs.
NM Mahtani and L Kuppanchetti (Arthur Loke & Pnrs) for the first defendants.
Chee Wei Lin (PK Wong & Advani) for the second defendants.
JUDGMENTBY: GOH JOON SENG J
The plaintiffs are a trading company. On 4 September 1979 they applied to the first defendants for the opening of a current account. By the [*461] said application which was accepted, the plaintiffs agreed ‘to observe the clauses of the agreement on the back hereof and undertake to hold your bank free from any loss whatsoever resulting through my/our failure to abide by such clauses’ (the opening clause). Among the clauses on the reverse side are:
(i) Clause 2(a): ‘I/we am/are to comply with the requests printed on
the cover of the cheque book.’
(ii) Clause 13: ‘I/we will not hold the bank liable in any way for any
loss whatsoever incurred by me/us as a result of the operation of
any account opened by me/us with the bank save where such loss is
directly attributable to the bank acting otherwise than in good
faith.’
The requests so far as relevant and referred to as ‘caution’ on the cover of the cheque book (AB14) read:
All cheques to be filled up in ink. Any alteration to be confirmed by
the full signature of the drawer in filling up a cheque the amount to
be written in words, commencing on the left hand side close to the word
‘Dollars’ without any space between the words, and the figures made
close to the ‘$’ and as plainly as possible.
For your security in sending cheques through the post, or otherwise paying them away, you should ‘cross’ them thus:
& Co
They can then only be paid through some bank, and when you are
acquainted with the name of the bank of the person to whom you send or
pay a cheque, you should write the name of that bank in the crossing
before the words ‘& Co’ and the cheque will then be paid only to that
particular bank.
This book to be kept in a place of security, and when a new book is
required the printed request form to be filled up and signed and
presented or sent to the bank.
Do not write anything in the 5/8″ band at the bottom-edge of the check
[sic]. Do not mutilate your checks [sic]. It is also advisable not
to fold your checks [sic]. Do not leave staples or pins attached to
your checks [sic].
On or about 10 May 1990, the plaintiffs issued a cheque crossed ‘Not Negotiable. A/C Payee Only’ No 391542 (the said cheque) in the sum of $ 260 payable to GD Printing Services. The said cheque drawn on the first defendants was handed to the receptionist for posting to GD Printing Services on 11 May 1990. It never arrived. The amount was eventually altered to $ 126,260 and the payee to one ‘Chong Sau Kam IC No 7494646′.
On or about 14 May 1990, a female purporting to be ‘Chong Sau Kam’ opened a savings account at the Bukit Timah branch of the second defendants.
On 15 May 1990, the said cheque was deposited into the account of ‘Chong Sau Kam’ at the second defendants’ Robinson Road branch for collection. The second defendants as collecting bank cleared the cheque for collection. On 16 May 1990 the first defendants paid over to the second defendants the sum of $ 126,260 and debited the plaintiffs accordingly.
On 17 May 1990 ‘Chong Sau Kam’ made a withdrawal of $ 900 at the second defendants’ Bukit Panjang branch followed by a further withdrawal of $ 95,000 at the second defendants’ Bukit Timah branch, thus leaving a balance of $ 30,360 in that account.
[*462]
Upon receiving from the first defendants the statement of account for the relevant period, this matter came to light and the plaintiff notified the first defendants that they did not authorize the debit. A report was then made to the police. Pending direction of the court or disposal enquiry, the$ 30,360, under an order of seizure by the police, now remains ‘frozen’ in the account of ‘Chong Sau Kam’.
On 7 March 1991, the plaintiffs commenced these proceedings claiming:
(i) against the first defendants, a declaration that the purported
debit to the plaintiffs’ account of$ 126,260 and interest
thereon was without authority and of no effect and,
alternatively, payment of the sum of $ 126,260, interest and
costs;
(ii) against the second defendants, damages for conversion in the said
sum of $ 126,260 and alternatively payment of the same as money
had and received. The plaintiffs also claimed interest and costs.
As against the first defendants, the plaintiffs’ case is that a banker who pays on a materially altered cheque does so without the customer’s mandate. In Hall & Anor v Fuller & Ors, [1826] 5 B & C 750 a cheque for £3 was altered by the holder to £200 in such a way that no one in the ordinary course of business could have observed it. It was held that the bank could not charge the customer anything beyond the sum for which the cheque was originally drawn. In giving his judgment, Bayley J said at p 757:
The banker, as the depository of the customer’s money, is bound to pay
from time to time such sums as the latter may order. If, unfortunately,
he pays money belonging to the customer upon an order which is not
genuine, he must suffer, and to justify the payment he must show that
the order is genuine, not in signature only, but in every respect. This
was not a genuine order for the customer never ordered the payment of
the money mentioned in the cheque.
In the present case, not only was the amount altered, the payee’s name was also altered. The first defendants, however, denied liability contending that:
(i) having acted in good faith and without negligence, they are
protected by s 80 of the Bills of Exchange Act (Cap 23) (the Act);
(ii) the plaintiffs themselves were in breach of their duty to
exercise reasonable care in drawing up the said cheque, thereby
facilitating the alterations, and the plaintiffs are therefore
estopped;
(iii) they are excluded from liability by the exclusion clauses.
On (i), s 80 of the Act reads:
Where the banker, on whom a crossed cheque is drawn, in good faith and
without negligence pays it, if crossed generally, to a banker, and if
crossed specially, to the banker to whom it is crossed, or his agent
for collection, being a banker, the banker paying the cheque, and, if
the cheque has come into the hands of the payee, the drawer, shall
respectively be entitled to the same rights and be placed in the same
position as if payment of the cheque had been made to the true owner
thereof.
The alterations to the said cheque were clearly material alterations in the light of s 64(2) of the Act. The said cheque was thus avoided by s 64(1) of the Act.
[*463]
Section 64 of the Act reads:
(1) Where a bill or acceptance is materially altered without the
assent of all parties liable on the bill, the bill is avoided
except as against a party who has himself made, authorized or
assented to the alteration, and subsequent indorsers:
Provided that where a bill has been materially altered, but the
alteration is not apparent, and the bill is in the hands of a holder in
due course, such holder may avail himself of the bill as if it had not
been altered, and may enforce payment of it according to its original
tenor.
(2) In particular the following alterations are material, namely, any
alteration of the date, the sum payable, the time of payment, the
place of payment, and, where a bill has been accepted generally,
the addition of a place of payment without the acceptor’s assent.
In Slingsby & Ors v District Bank Ltd, [1932] 1 KB 544 the plaintiffs, executors of a will, kept an executors’ account with the defendants, and retained a firm of solicitors, Cumberbirch & Potts, who used to assist them in matters connected with their testator’s estate. The acting member of the firm was one James Cumberbirch. The plaintiffs, in conference with James Cumberbirch, decided to invest through John Prust & Co, stockbrokers, a sum of 5000 l, part of the estate lodged on deposit with the defendants. James Cumberbirch accordingly drew out a form of cheque for signature by the plaintiffs. It was in the form ‘Pay John Prust & Co or order’ and was drawn on the plaintiffs’ deposit account with the defendants. The cheque was signed by the plaintiffs and left with James Cumberbirch to be posted to John Prust & Co with instructions to invest the money. James Cumberbirch instead of posting the cheque to John Prust & Co fraudulently inserted the words ‘per Cumberbirch & Potts’ in the blank space between the payees’ name and the words ‘or order’; he then indorsed the document with the names ‘Cumberbirch & Potts’ and paid it so altered and indorsed into the Westminster Bank to the credit of a company in which he was interested and which had an account at that bank. The document was accepted without question by the Westminster Bank and passed through the clearing house, and the account of the plaintiffs with the defendants was debited, and that of the company with the Westminster Bank was credited, with the amount on the face of the document. In an action by the plaintiffs against the defendants for conversion, negligence and breach of duty, the Court of Appeal in dismissing the appeal by the defendants held, inter alia, that the cheque had been ‘materially altered’ within the meaning of s 64 of the Bills of Exchange Act 1882, (the English Act) and was avoided as between the plaintiffs and defendants by that section, and that, therefore, the defendants could not rely upon ss 60 and 80 thereof as excusing them for paying the cheque and that, in leaving a blank space between the name of the payee and the words ‘or order’, the plaintiffs were not guilty of any breach of duty towards the defendants.
In the course of his judgment, Scrutton LJ said, at p 559:
This cheque, having been signed by the executors in a form which gave
Cumberbirch no rights, was fraudulently altered by Cumberbirch before
it was issued and, it was not disputed, altered in a material
particular, by the addition of the words ‘per Cumberbirch & Potts’. The
cheque was thereby avoided under s 64 of the Bills of Exchange Act …
The protection given by ss 80 and 82 is excluded in my opinion by the fact that the alteration has made the paper a null and void document, no longer a cheque.
[*464]
Another member of the court, Greer LJ, said at p 562:
I think, in the first place, that s 80 only applies to a case where the
true owner is somebody other than the drawer, and, in the second place,
I think that it does not apply to a cheque which has been avoided by a
material alteration before its issue.
Sections 64 and 80 of the English Act are in pari materia with the corresponding sections of the Act.
Accordingly, I hold that the first defendants are not entitled to rely on s 80 of the Act.
On (ii), the customer owes a duty to his banker to exercise reasonable care and take reasonable precaution against fraud. The duty has been stated by Lord Finlay LC in London Joint Stock Bank Ltd v Macmillan & Arthur, [1918] AC 777 at p 789, as follows:
The relation between banker and customer is that of debtor and
creditor, with a superadded obligation on the part of the banker to
honour the customer’s cheques if the account is in credit. A cheque
drawn by a customer is in point of law a mandate to the banker to pay
the amount according to the tenor of the cheque. It is beyond dispute
that the customer is bound to exercise reasonable care in drawing the
cheque to prevent the banker being misled. If he draws the cheque in a
manner which facilitates fraud, he is guilty of a breach of duty as
between himself and the banker, and he will be responsible to the
banker for any loss sustained by the banker as a natural and direct
consequence of this breach of duty.
At p 810 he said:
The question whether there was negligence as between banker and
customer is a question of fact in each particular case, and can be
decided only on a view of the cheque as issued by the drawer, with the
help of any evidence available as to the course of dealings between the
parties or otherwise.
Thus whether the plaintiffs had exercised reasonable care and taken reasonable precaution against fraud in drawing the said cheque is one of fact taking into account the course of dealings between them and the first defendants.
From the evidence, following the plaintiffs’ standard procedures, a payment voucher in favour of GD Printing Services was prepared by the assistant accounts officer, Miss Lo Hee Hoon. The voucher was then checked by the accounts manager, Madam Koh Chye Ngoh, then certified by the assistant vice-president, Mr Shiomi, and finally approved by Mr Haw Thar Heong, the senior vice-president. The approved voucher then went back to Madam Koh Chye Ngoh who made out the said cheque in favour of GD Printing Services. For the amount to be written in words she used a cheque printer to print after the word ‘Dollars’ of ‘Singapore Dollars’ the words ‘the sum of 260 DOLS 00 cts’. She then wrote in figures ’260.00′ in the box after the ‘S$’ sign. The said cheque attached to the payment voucher and approved invoice was then signed by Mr Shiomi and Mr Haw Thar Heong. It was then handed to the receptionist for posting to the payee. The main criticism by the first defendants is that there were spaces between the word ‘Dollars’ and the printed amount and between ‘$’ sign and the written amount in figures. But this is not even supported by the evidence of their own manager, bank office, Mr Lim Wee Hian (1DW1) on their course of dealings with the plaintiffs and with other customers.
[*465]
Q: So you do not insist on each and every caution?
A: It is for the protection of the customer.
Q: You said you yourself must have some regard to the caution?
A: We will honour the cheques even if they do not comply with the
caution.
Q: Except for cheques written in pencil or blank paper?
A: Yes.
Q: You said in those two cases because they are abnormal and suspicious?
A: Yes.
Q: Would you accept the cheque if I do not use any figures in the box?
A: We will accept.
Q: It is not extraordinary or suspicious?
A: No.
Q: Most banks will accept cheques with no figures in the box?
A: I do not know about [other] banks but we accept.
Q: So strictly your customer can expect the cheque without the figures,
that cheques will be honoured?
A: Yes.
Q: Cheques without the figure do not comply with your caution?
A: It is for the protection of the customer.
Q: But it does not comply with the caution?
A: Correct.
Q: A lot of cheques do not comply with the caution ‘do not write
anything in the 5/8 band’?
A: Yes.
Q: If you see AB20-69, the right signature crosses this 5/8 band all
the time?
A: Yes.
Q: So notwithstanding the caution, this customer will come to expect
you to honour this cheque although he signs beyond the 5/8 band?
A: Yes, crossing this line is not material.
Q: It is common to see cheques stapled with paper?
A: Yes.
Q: You don’t reject them because they are stapled, notwithstanding
AB14, the last line?
A: Correct.
Q: Would you accept a cheque written with a ball point?
A: Yes.
Q: Ball point ink is also written in ink?
A: Yes.
Q: You have never rejected a cheque written with a ball point?
A: I cannot remember having rejected one.
Q: If all the technicalities are in order, you will not reject a cheque
because it is written with ball point pen?
A: Correct.
Cheque printing machine
Q: You agree that it is common practice by customers to use cheque
printing machine in Singapore?
A: Yes.
Q: Most banks use cheque printing machines in writing out cashier’s
order?
A: I don’t know about other banks’ practice. We use cheque printing
machine.
Q: Your bank would not reject a cheque because it was written with a
cheque printing machine?
[*466]
A: Yes.
Q: AB93, what is this?
A: This is first defendants’ cashier order. A cheque printing machine
was used.
Q: As far as you know no cashier’s order of first defendants has been
rejected because a cheque printing machine was used?
A: Correct.
…
Q: Would you personally agree that a cheque printing machine can be
considered a writing or printing in ink?
A: Yes.
Q: So this is different from the situation when the cheque is written
in pencil?
A: Yes.
Q: See AB98. What is that?
A: It is a cashier order of Amex where a cheque printing machine was
used.
Q: You will not reject AB98 because it used a cheque printing machine?
A: Yes.
Q: AB14 says all cheques to be filled in ink?
A: Yes.
Q: As a reasonable bank officer, do you agree that cheques in which a
cheque printing machine is used sufficiently comply with this
requirement?
A: Yes.
Q: See AB94-124, they are all printed with cheque printing machine?
A: Yes.
Q: You agree when a cheque printing machine is used, the amount is
expressed in figures not in words?
A: Yes.
Q: See AB93, your cashier order, the amount is also stated in figure?
A: Yes.
Q: This method using a cheque printing machine does not strictly comply
with the caution because the amount is not expressed in words?
A: Yes.
Q: Notwithstanding what is stated in the caution your customers will
expect their cheques using a printing machine to be honoured?
A: Yes.
Failing to write the amount in figures in the box and leaving too wide a gap
Q: See AB118, the box is left blank, you would accept this cheque?
A: Yes.
Q: Also AB116 and 117, 113, 121, 124, 104, 103, 102, 99, you will
accept these cheques although the box is left blank with no figures?
A: Yes.
Q: You will accept them notwithstanding they are not in compliance with
the caution in that no figures were filled in opposite the ‘$’ sign?
A: Yes.
If the first defendants were prepared to accept cheques with the amount in the box after the ‘S$’ sign left blank, it is surprising that they should be heard to complain that the amount in figures in the box in the said cheque was not written close enough to the ‘S$’ sign. On the complaint that the words ‘The sum of …’ were not printed close enough to the word ‘Dollars’, an examination of the said cheque will show these words as originally written were close to the word ‘Dollars’ but had been erased and rewritten well past the word ‘Dollars’.
[*467]
Accordingly, it is my view that the plaintiffs, following the previous course of dealings between them and first defendants, had exercised reasonable care and had taken reasonable precaution in drawing up the said cheque.
Even if the said cheque had been drawn up leaving spaces facilitating the alterations, the alterations were apparent. This is the evidence of Ms Jean Tham Mun Yee (1DW2), the first defendants’ assistant officer in the payment and receipt department in charge of clearing of cheques.
Q: Now, having scrutinized the cheque in court, is there anything in P1
that will evoke an enquiry or raised your level of alertness?
A: There is erasure on the name, the IC number. I am not talking about
the ink. I am talking about the paper surface having been erased before.
Q: These erasures appear below the name and the IC number?
A: Yes.
Q: Anything else?
A: The amount ‘the sum of 126,260 dols 00 cts’, the background is not
as clear as the rest.
Q: What about the word ‘the’, is it smaller than the other words?
A: Yes.
Q: 1DW1 said the words ‘the sum of’ are larger than ‘dols’ and ‘cts’.
Do you agree?
A: Yes.
Q: So there are erasures on the paper and some words are not of the
same size, would that not put you on enquiry, if you have the chance to
see all these in the course of your duty?
A: Yes.
Q: See the figure in the box. You said because the customer uses the
cheque printer you would honour the cheque even if the box is not
filled?
A: Yes.
Q: See the figure ‘$ 126,260.00′, the full stop is out of alignment
with the rest?
A: Yes.
Q: The ’6′ in ’126′ is straight while the ’6′ in ’260′ is slanting?
A: Yes.
Q: The ’2′ in ’260′ has a wider loop at the bottom compared to ’2′ in
’126′?
A: Yes.
Q: The ’1′ in ’126′ is larger than the rest?
A: Yes.
Q: The ’2′ of ’260′ is larger than the ’2′ of ’126′?
A: Yes.
Q: If you have noticed all these additional features, it would
definitely put you on enquiry?
A: Yes.
Q: If all these had been pointed out to an officer in your bank,
someone in your bank would have called the customer?
A: Yes.
Q: 1DW1 said putting IC numbers in cheques is more common in uncrossed
cheques than in crossed cheques. You agree?
A: Yes.
Q: He said the reason for putting the IC number on an uncrossed cheque
is so that the bank will know it is paying to the right person when
paying over the counter?
A: Yes.
Q: 1DW1 said since crossed cheques cannot be encashed over the counter,
it would be pointless to put in IC number, you agree?
[*468]
A: Yes.
Q: P1, a crossed cheque, has an IC number?
A: Yes.
1DW1 upon his attention being drawn by counsel for plaintiffs to the discrepancies on the said cheque also agreed as follows:
Q: Having looked at the amount in words and figures, would you as a
reasonable bank officer noting these discrepancies agree that they give
rise to suspicion?
A: Yes.
Q: These discrepancies were apparent to you now that you have some time
to examine it?
A: Yes.
Q: The discrepancies do not require the use of microscope to discover
them?
A: Yes [agreeing].
In Leeds and County Bank Ltd v Walker, (1883) 11 QBD 84 the defendant, in satisfaction of a debt, gave the plaintiffs two Bank of England notes, for £100 each. The date and number on one of the notes had been altered but the plaintiffs and defendants were not aware of the alterations. Payment on the note was refused by the Bank of England, and the plaintiffs sought to recover the amount of the note from the defendants. The defendants relied on, inter alia, s 64 of the English Act. In rejecting the defence, Denman J said at pp 90-91:
I think there are several answers to this ground of defence. In the
first place the statute in question, by s 2, contains a definition of
the words ‘bill’ and ‘note’. The former means ‘bill of exchange’, the
latter ‘promissory note’. The [English] Act there contains several
provisions relating wholly to ‘bills’, ss 3 to 72 inclusive. These
constitute Pt II of the [English] Act. Then follow ten clauses wholly
relating to cheques on bankers. These constitute Pt III of the
[English] Act. Then follow the provisions of Pt IV (ss 83, 89) headed
‘promissory notes’, and, by s 89, it is provided that the provisions of
the [English] Act relating to bills apply with the necessary
modifications to promissory notes. It appears to me that this clause
was never intended to cover, and has not the effect of covering, such a
document as a Bank of England note, altered fraudulently so as to fall
within the decision of Suffell v Bank of England (1882) 9 QBD 555.
Bank of England notes differ in many respects from ordinary promissory
notes. They are payable without indorsement to any holder who may
present them. They are a legal tender for the amounts represented by
them. I think that one ‘necessary modification’ in applying s 64 of the
[English] Act to promissory notes is a modification amounting to an
exclusion of Bank of England notes altogether from the operation of s
64 of the [English] Act. But, even if this be not so, s 64 only
applies where the alteration is ‘not apparent’. In the present case I
think it was apparent. By the word ‘apparent’ I do not think it is
meant that the holder only should not have had the means of detecting
the alterations. If the party sought to be bound can at once discern by
some incongruity on the face of the note and point out to the holder
that it is not what it was, that is to say, that it has been materially
and fraudulently altered, I think the alteration is an ‘apparent’ one,
even if it is not an obvious one to all mankind.
Where the alterations are apparent, the Macmillan [1918] AC 777 case does not apply to relieve the bank from liability — Paget’s Law of Banking (10th Ed), pp 222-223:
Where the alteration is obvious or discoverable by the exercise of
reasonable care, or where the state of the cheque raises suspicion of
its having been tampered with and payment is made without inquiry, the
Macmillan case offers no relief.
[*469]
Accordingly, I hold that the first defendants are not entitled to rely on the plea of estoppel against the plaintiffs.
On (iii), the first defendants relied on the exclusion clauses in the opening clause and cl 13 supra.
On the construction of exclusion clauses, Chitty on Contracts, General Principles
(26th Ed), para 945 states:
Exemption clauses must be expressed clearly and without ambiguity or
they will be ineffective. The clause must clearly express what its
intention is. In
Alison (J Gordon) & Co Ltd v Wallsend Shipway and
Engineering Co Ltd (1927) 4 TLR 323, a cylinder was sold by the
defendants to the plaintiffs ‘subject to our usual guarantee clause’.
The clause usual in the trade ‘guaranteed’ the purchaser against
defects discovered within six months of delivery, but excluded
liability for consequential damage. It was held that the defendants
were not protected, for ‘if a person was under a legal liability and
wished to get rid of it, he could only do so by using clear words.’
Exemption clauses will therefore be construed strictly, and the degree
of strictness appropriate to their construction may properly depend
upon the extent to which they involve departure from the implied
obligations ordinarily accepted by the parties in entering into a
contract of a particular kind …On the opening clause read with cl 2(a), it is my view that the plaintiffs had exercised reasonable care and had taken reasonable precaution in drawing up the said cheque. The loss could not be attributed to the plaintiffs’ failure to abide by the clauses on the reverse side of the agreement because these clauses had been disregarded by the first defendants in their course of dealings with the plaintiffs and their other customers.
On cl 13, to exclude liability including liability for negligence in failing to detect the said alterations, the clause must clearly say so without ambiguity. Thus, in Moran v Lipscombe, [1929] VLR 10 the plaintiff left his car at the defendant’s garage and instructed him to adjust the headlights of the car. In the garage was exhibited a notice, seen by the plaintiff, reading ‘Cars garaged and driven at owner’s risk — Every care but no responsibility’. The defendant drove the car on the road to test the headlights when a collision caused by the defendant’s negligence damaged the car. In an action by the plaintiff for damages, it was held that the notice did not amount to an unequivocal and unambiguous notification to the plaintiff that the car was being accepted by the defendant on terms that the defendant was not to be liable for the consequences of his own negligence in driving and therefore the defendant was liable. At p 15 Macfarlan J said:
It is argued that the words of the present notice, ‘at owner’s risk’
and ‘no responsibility’ would, in a contract of carriage, have ample
room to operate without excluding negligence, in as much as the common
carrier is at common law an insurer; that a bailee is at common law
liable only for negligence; and therefore the notice is inoperative
unless it be construed to exclude negligence. This argument written out
means not that the notice did convey to the bailor, or would convey to
the average intelligent layman that the garage proprietor was exempt
from negligence, but that, if the plaintiff knew the law as to
bailments, he would know that the garage proprietor was not liable in
any event except for negligence, and, if he argued correctly, and if he
assumed that the notice was intended to cut down the common law
liability, he would conclude that the notice was intended to exempt
from liability for negligence; and that he must be taken to know the
law, and so must be taken to have agreed to exempt the garage
proprietor [*470] from liability for negligence. Applied to a
notice of this kind, such an argument appears to us to be little less
than grotesque.
Clause 13 was not sufficiently clear to exclude liability for failure to detect the alterations. I therefore hold that the first defendants are liable to the plaintiffs in the amount of the claim.
I now turn to the plaintiffs’ claim against the second defendants. It is based on conversion of the said cheque and money had and received in the sum of $ 126,260. In Marfani & Co Ltd v Midland Bank Ltd, [1968] 2 All ER 573 at p 578, Diplock LJ said:
A banker’s business, of its very nature, exposes him daily to this
peril. His contract with his customer requires him to accept possession
of cheques delivered to him by his customer, to present them for
payment to the banks on which the cheques are drawn, to receive payment
of them and to credit the amount thereof to his own customer’s account
either on receipt of the cheques themselves from the customer or on
receipt of actual payment of the cheques from the banks on which they
are drawn. If the customer is not entitled to the cheque which he
delivers to his banker for collection, the banker, however, innocent
and careful he might have been, would at common law be liable to the
true owner of the cheque for the amount of which he receives payment
either as damages for conversion or under the cognate cause of action,
based historically on assumpsit for money had and received.
The second defendants, however, contended that since the said cheque had been avoided by virtue of s 64 of the Act by the material alterations, it was a valueless piece of paper and there could be no conversion of the same; alternatively, any conversion must be of the original value of the said cheque, that is, $ 260. The second defendants relied on the judgment of Finlay J in Slingsby & Others v Westminster Bank Ltd. [1931] 2 KB 583 In that case, Finlay J held that the plaintiffs could not recover against the defendants who were the collecting bank. He said at pp 585-586:
Whatever may be the rights, so it was argued, of the plaintiffs against
their own bank, who have debited them, they can have no right to
recover against the defendants — not in conversion of the cheque
because the cheque was by reason of the alteration a mere valueless
piece of paper, not in conversion for 5000 l because there was no
conversion of any money of the plaintiffs, not for money had and
received because the money was not the money of the plaintiffs.
I have come to the conclusion that this submission is right and ought to prevail. It seems clear that the document, when it came into the hands of the defendant bank, was not a valid cheque at all. It had been avoided by the material alteration made in it. This being so, it seems to me that no action can be brought upon it against the defendants. They have not dealt either with a cheque or the money of the plaintiffs, and on this short ground I think this action must fail.
It was after having failed against the collecting bank, that Slingsby brought an action against his paying bank on the same cheque in Slingsby v District Bank Ltd. [1932] 1 KB 544 Wright J gave judgment for the plaintiff and his judgment was upheld on appeal by the Court of Appeal. At p 558, Scrutton LJ expressly overruled Finlay J:
[referring to Finlay J's judgment supra] … I cannot understand
this. There are, of course, difficulties as to how in law you should
deal with money claimed by a customer from a bank because the bank has
collected it from the customer’s bank on a document which does not
authorise such collection, but I thought that all those difficulties
had been settled by the decision in Morison’s case [1914] 3 KB
356, followed by this court [*471] in Underwood‘s case
[1924] 1 KB 755; in the Lloyds Bank case [1929] 1 KB 40; and in
Reckitt v Midland Bank, lately affirmed in the House of Lords
(1932) 48 TLR 271. Slingsby v Westminster Bank is, in my opinion,
wrongly decided and should not be followed by any court in preference
to these decisions of the Court of Appeal.
In Midland Bank Ltd v Reckitt & Ors, [1932] 48 TLR 271 Lord Terrington, a solicitor, had from a client a power of attorney entitling him to draw cheques on the clients’ banking account and to apply the moneys for the purposes of his client. Lord Terrington for his own purposes fraudulently drew 15 cheques on his client’s account with the Barclays Bank, signing the cheques by using a rubber stamp which had on the upper line the name of the client and on the lower line ‘his attorney’ and by placing his own signature between the lines. Lord Terrington paid the cheques into his own account with the Midland Bank, the defendants, with whom he had an overdraft. On discovering the facts, the client brought an action against the defendants for damages for conversion of the cheques, and the defendants relied on s 82 of the English Act [in pari materia with s 85 of the Act], alleging that the cheques were crossed cheques and that they had received payment of them in good faith and without negligence. It was admitted that the defendants had acted in good faith.
It was held that, except in the case of two of the cheques, the defendants, in presenting and receiving payment for the cheques, had converted them, and that, as the defendants had, from the form of the cheques, notice as to the money not being Lord Terrington’s money, they were negligent in making no inquiry as to Lord Terrington’s authority to make these payments into his own account, and, therefore, the action succeeded.
Lord Atkins, with whom the other Law Lords concurred, in delivering his judgment said, at pp 273-274:
In these circumstances, I have no doubt that the bank, in presenting
and receiving payment for the cheques converted them. I venture to
quote words of my own used in Underwood‘s case (40 TLR 302;
[1924] 1 KB 774, at p 795) merely because they seem to me applicable
and I cannot express the idea in simpler language:
‘The bank so disposed of the chattels, the cheques, as to deprive both
themselves and the true owners of the dominion over them, and, in
exchange for the pieces of paper, constituted themselves the debtors of
the customer. I cannot imagine a plainer case of conversion.’
It is quite irrelevant to the issue of conversion that, after payment,
the pieces of paper came into possession of the paying bank to be held
as vouchers on account of the true owner, Sir Harold Reckitt. This
position existed in the case of
Morison v London County and
Westminster Bank Ltd (30 TLR 481; [1914] 3 KB 356), where the
collecting bank were held to have converted the cheques.In the light of these authorities, I hold that the second defendants are liable to the plaintiffs in conversion for the amount of $ 126,260.
Against the claim for conversion, the second defendants also claimed statutory protection under s 85 of the Act. Section 85 reads:
(1) Where a banker, in good faith and without negligence –
(a) receives payment for a customer of an instrument to which
this section applies; or
[*472]
(b) having credited a customer’s account with the amount of
such an instrument, receives payment thereof for himself;
and the customer has no title, or a defective title, to the instrument,
the banker does not incur any liability to the true owner of the
instrument by reason only of having received payment thereof.
(2) This section applies to the following instruments, namely:
(a) cheques;
In Bank of Ceylon v Kulatilleke, [1957] NLK 188 the amount of a cheque crossed ‘not negotiable’ was subsequently altered fraudulently by a third party. In a suit by the drawer, the collecting banker’s reliance on s 82 of the Bills of Exchange Ordinance of Ceylon [also in pari materia with our s 85] was rejected. Basnayake CJ, delivering his judgment, said at p 189:
In the instant case, the defendant claims the benefit of s 82 of our
Bills of Exchange Ordinance. The learned district judge has held that
the defendant is not entitled to the benefit of that section on the
ground that a cheque the amount of which is fraudulently raised is not
a ‘cheque’ within the meaning of the expression in that section. It
speaks of a cheque to which the customer ‘has no title or a defective
title’. Those words presuppose that the cheque is a good and valid
cheque and that the only question is one of title to it. The section
applies to cheques which do not have the taint of forgery or fraudulent
alteration, a cheque which is the drawer’s cheque in all respects and
which carries the authority of the drawer. A cheque which has been
altered fraudulently, as in this case by raising the amount, is
invalid. I agree with the learned trial judge that, in the instant
case, the defendant is not entitled to the benefit of s 82.
This decision is consistent with English authorities dealing with statutory protection given to a paying banker. See Slingsby v District Bank Ltd, [1932] 1 KB 544 where Scrutton LJ said (at p 559):
I agree with the view on this point expressed by Sir John Paget at p
225 of his work. The protection given by ss 80 and 82 is excluded in my
opinion by the fact that the alteration has made the paper a null and
void document, no longer a cheque.
Accordingly, I hold that the second defendants are not entitled to statutory protection under s 85 of the Act.
Against the plaintiffs’ claim for money had and received, the second defendants contended that, as collecting bank for $ 126,260 on behalf of their customer ‘Chong Sau Kam’, they had paid over $ 95,900 to her with the balance being ‘frozen’ on an order of seizure by the police in the account of ‘Chong Sau Kam’. Accordingly, they are not liable.
In his Modern Banking Law (1987 Ed), Prof EP Ellinger states (pp 412-413):
A bank that collects a cheque for a person who has no title to it, or
whose title is defective, faces the hazard of an action by the true
owner of the instrument. Two causes of action are available to
substantiate such an action. The first is an action in conversion, for
the purposes of which the cheque is treated as a chattel. The bank
converts it by receiving it for the collection and by presenting it for
payment. The second cause of action is based on the waiver of the tort
involved. In Morison v London County and Westminster Bank Ltd, in
which an agent misused his authority by drawing on his principal’s
account cheques payable to his own order and by arranging for their
collection for the credit of his personal account, Reading CJ explained
the basis of this [*473] second cause of action as follows: The
plaintiff is entitled to waive the tort and sue for the same amount as
money had and received to his use.
From a practical point of view, the cause of action in conversion is to be preferred to the quasi-contractual action based on waiver of tort. The reason for this is that the collecting bank receives the funds as its customer’s agent. It is established that an agent who in good faith has paid over to his principal money to which it is subsequently discovered that the principal has no right cannot be required to return the money to the payor. This doctrine applies to a collecting bank that has received the proceeds of cheques collected by it on behalf of a customer. Once the money is paid to the customer, the bank has changed its position and, being a mere agent, is no longer answerable in an action in money had and received. However, the doctrine in question applies only where the action is brought under this heading and is thus based on the wrongful receipt of the funds.
Having considered the statement, I accept it as a correct statement of the law. Accordingly, I hold that the second defendants are not liable for money had and received but they are liable in conversion.
There will thus be judgment for the plaintiffs in the sum of $ 126,260 plus interest wrongly debited against them thereon calculated to date of judgment and costs. As both defendants are liable for the same loss and both are equally to blame in that they failed to detect the alterations, I apportion liability between them equally. As between the defendants there will be no order as to costs.
Plaintiffs’ claims allowed.
BANK ISLAM MALAYSIA BHD LWN PASARAYA PELADANG SDN BHD July 11, 2008
Posted by islamicbanker in CASES.add a comment
7 MLJ 355, *; [2004] 7 MLJ 355
The Malayan Law Journal
BANK ISLAM MALAYSIA BHD LWN PASARAYA PELADANG SDN BHD
[2004] 7 MLJ 355
SAMAN PEMULA NO 24-32 OF 2003
MAHKAMAH TINGGI (ALOR SETAR)
DECIDED-DATE-1: 4/7/2004
ZAINAL ADZAM PK
CATCHWORDS:
Perbankan – Bank dan urusan bank – Perbankan Islam – Kemudahan Al-Bai Bithaman Ajil – Sama ada Kanun Tanah Negara dan Kaedah-Kaedah Mahkamah Tinggi 1980 terpakai
Undang-Undang Tanah – Gadaian – Tuntutan statutori – Jumlah prinsipal yang perlu dibayar atas tuntutan – Plaintif menyampaikan Borang 16D ke atas defendan – Sama ada plaintif sepatutnya mengeluarkan Borang 16E – Sama ada Borang 16D sah
Undang-Undang Tanah – Gadaian – Perintah jualan – Permohonan untuk jualan – Sama ada terdapat sebarang kausa bertentangan – Kanun Tanah Negara s 256 – Kaedah-Kaedah Mahkamah Tinggi 1980 A 83 k 3
HEADNOTES:
Plaintif telah memberikan satu kemudahan perbankan Islam yang dikenali sebagai Al-Bai Bithaman Ajil (‘kemudahan tersebut’) kepada defendan untuk membeli harta. Sebagai sekuriti pembayaran semula wang yang dipinjam dari kemudahan tersebut defendan telah menggadai 10 bidang tanah (tanah tersebut) kepada plaintif. Gadaian itu telah dikuatkuasakan melalui dua Borang 16A dari Kanun Tanah Negara (‘KTN’). Gadaian tersebut telah di daftarkan pada 23 Julai 1997. Apabila defendan gagal membayar semula pinjaman tersebut pihak plaintif telah mengeluarkan notis tuntutan. Defendan juga gagal mematuhi notis tuntutan tersebut. Plaintif kemudiannya telah mengeluarkan notis berkanun yang tertera di Borang 16D dalam KTN. Sekali lagi, defendan gagal membayar tuntutan tersebut.
Plaintif memohon untuk perintah menjual tanah yang telah digadaikan seperti yang tertera dalam s 256.
Diputuskan, membenarkan permohonan plaintif:
(1) Kemudahan perbankan Al-Bai Bithaman Ajil merupakan satu kemudahan perbankan yang biasa digunakan untuk hartanah sebagai kolateral. Ia melibatkan tiga perjanjian-perjanjian yang berlainan. Bank akan membeli harta daripada penggadai mengikut perjanjian pertama. Dalam perjanjian kedua bank akan menjual harta tersebut kepada penggadai dan dalam perjanjian yang terakhir gadaian dibeli semula kepada penggadai agar bank dapat menjual hartanah tersebut jika penggadai gagal melangsaikan hutangnya. Walaupun, kemudahan perbankan dipinjam dari ajaran Islam, perundangan yang terpakai ialah KTN dan Kaedah-Kaedah Mahkamah Tinggi 1980 (‘KMT’) (lihat perenggan 6); Bank Rakyat Malaysia Bhd v EMCEE Corporation Sdn Bhd [2003] 1 CLJ 625 diikut.
(2) Butir-butir yang patut dipatuhi adalah dari A 83, dan telah dikemukakan dalam afidavit plaintif. Pematuhan butir-butir dari A 83 k 3(3) oleh plaintif oleh kerana beliau telah memberikan informasi yang diminta, kecuali jumlah faedah memandangkan ia boleh dikenakan caj di bawah prinsip islam (lihat perenggan 13).
[*356]
(3) Tiada merit dalam hujahan defendan yang menyatakan bahawa plaintif telah melanggar A 83 k 3(4) KMT. Seperti yang diterangkan di dalam kes Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501, plaintif tidak perlu menegaskan bahawa tanahnya tidak diduduki orang (lihat perenggan 16); Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501 diikut.
(4) Borang 16D yang dikeluarkan oleh plaintif jelas menunjukkan bahawa jumlah hutang yang harus dibayar oleh plaintif adalah RM8,117,601.43 pada 21 Februari 2001. Jumlah ini diperoleh dari PSA dan adalah jumlah yang sama yang tertera dalam notis tuntutan (lihat perenggan 20).
(5) Pengeluaran dokumen hak milik adalah dari pejabat pendaftar seperti yang tertera dalam geran Borang 5B dalam KTN yang dikeluarkan menurut s 86. Jadi plaintif tidak salah dalam membuat permohonan serta merta untuk perintah jualan (lihat perenggan 21).
(6) Borang 16D oleh digunakan sama ada jumlah prinsip boleh dibayar bila diminta. Jadi pengeluaran permohonan berkanun oleh plaintif dalam Borang 16D adalah sah (lihat perenggan 23); Mary Michael v United Malayan Banking Corporation Bhd [1971] 1 MLJ 172 diikut.
(7) Oleh kerana defendan gagal membuktikan apa-apa kausa yang tidak menurut s 256(3) KTN, permohonan plaintif dibenarkan (lihat perenggan 26).
[ English summary
The plaintiff granted an Islamic banking facility known as Al-Bai Bithaman Ajil ('the said facility') to the defendant pursuant to a property purchase agreement and a property sale agreement ('PSA'). As security for the repayment of the said facility, the defendant charged in favour of the plaintiff ten pieces of land ('the said lands'). The charges were effected by way of two Forms 16A of the National Land Code ('NLC'). The charges were registered on 23 July 1997. The defendant defaulted in the repayment of the instalments and a notice of demand was accordingly issued to the defendant. The defendant failed to comply with the notice of demand. Consequently, the plaintiff issued and served on the defendant the statutory notice in Form 16D of the NLC. Again, the defendant failed to pay the amount demanded.
This was the plaintiff's application for an order for sale of the said lands under s 256 of the NLC.
Held, allowing the plaintiff's application:
(1) The Al-Bai Bithaman Ajil facility was a common Islamic banking facility involving immovable properties as collateral. It involved three separate agreements. The bank would purchase the property concerned from the chargor pursuant to the first agreement. In the second agreement, the bank would sell the property to the chargor. The third agreement was a charge given by the chargor to the bank to enable the bank to sell the property in the event of default by the [*357] chargor. Although the said facility was granted under Islamic principles, the laws applicable were the NLC and the Rules of the High Court 1980 (‘the RHC’) (see para 6); Bank Rakyat Malaysia Bhd v EMCEE Corporation Sdn Bhd [2003] 1 CLJ 625 followed.
(2) The particulars required to be furnished under O 83 r 3(3) of the RHC have been provided in the plaintiff’s affidavits. As such, there was compliance with O 83 r 3(3) of the RHC as the plaintiff had provided the information required thereunder, except for the interest amount since it was chargeable under Islamic principles (see para 13).
(3) There was no merit to the defendant’s contention that the plaintiff had breached O 83 r 3(4) of the RHC. As explained in Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501, the plaintiff did not have to state that the said lands were presently unoccupied (see para 16); Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501 followed.
(4) The Form 16D issued by the plaintiff clearly indicated that the amount due under the principles of Al-Bai Bithaman Ajil was RM8,117,601.43 as at 21 February 2001. This amount was derived based on the provisions of the PSA and was the same as the amount stated in the plaintiff’s notice of demand (see para 20).
(5) The issue documents of title in the instant case were Registry titles as they consisted of grants in Form 5B of the NLC which were issued pursuant to s 86 thereof. Therefore, the plaintiff was correct in making the instant application to court for an order for sale (see para 21).
(6) Form 16D of the NLC may be used whether or not the principal sum was payable on demand. Therefore, the issuance of the statutory demand by the plaintiff in Form 16D of the NLC was valid (see para 23); Mary Michael v United Malayan Banking Corporation Bhd [1971] 1 MLJ 172 followed.
(7) Since the defendant had failed to prove the existence of any cause to the contrary in accordance with s 256(3) of the NLC, the plaintiff’s application was allowed (see para 26).]
Untuk kes-kes mengenai perbankan Islam, lihat 1 Mallal’s Digest (4 th Ed, 2002 Reissue) perenggan 1702.
Untuk kes-kes mengenai perintah jualan, lihat 8(2) Mallal’s Digest (4 th Ed, 2001 Reissue) perenggan 1939-2020.
Untuk kes-kes mengenai tuntutan statutori, lihat 8(2) Mallal’s Digest (4 th Ed, 2001 Reissue) perenggan 2085.
Bank Pertanian Malaysia v Zainal Abidin bin Kassim [1995] 2 MLJ 537 (dirujuk)
[*358]
Bank Rakyat Malaysia Bhd v EMCEE Corporation Sdn Bhd [2003] 1 CLJ 625 (diikut)
Central Malaysian Finance Bhd v Loke Kok Lai [1975] 1 MLJ 160 (dirujuk)
Citibank Bhd v Bandar Sungai Buaya Sdn Bhd [2003] 5 CLJ 150 (dirujuk)
Citibank NA v Ibrahim bin Othman [1994] 1 MLJ 608 (dirujuk)
Kandiah Peter v Public Bank Bhd [ 1994] 1 MLJ 119 (dirujuk)
Low Lee Lian v Ban Hin Lee Bank Bhd [1997] 1 MLJ 77 (dirujuk)
Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501 (diikut)
Mary Michael v United Malayan Banking Corporation Bhd [1971] 1 MLJ 172 (diikut)
Nira Sdn Bhd v Malayan Banking Bhd [1990] 1 MLJ 110 (dirujuk)
VAM Hussain v BP Malaysia Sdn Bhd [1970] 2 MLJ 69 (dirujuk)
VRKRS Chettiappah Chetty v Raja Abdul Rashid Ibni Almarhum Sultan Idris [1933] MLJ 18 (dirujuk)
Kanun Tanah Negara ss 86(a), 255(1), 256(3), Borang 5B, 16D, 16E
Kaedah-Kaedah Mahkamah Tinggi 1980 A 83 k 3(3)
Hani Adyanti bte Ahmad (Ramli Amar Jit & Tan) bagi pihak plaintif.
Mokhtar bin Haji Ngah (Mokhtar Ngah & Co) bagi pihak defendan.
JUDGMENTBY: ZAINAL ADZAM PK
ZAINAL ADZAM PK:
1 Plaintif melalui saman pemula telah memohon suatu perintah jualan melalui lelongan awam di bawah s 256 Kanun Tanah Negara (‘KTN’) sebagai pemegang gadaian ke atas hartanah-hartanah kepunyaan defendan yang terkandung dalam suratan hakmilik-suratan hakmilik yang berikut:
1 No Geran 13321 No Lot 4839,
2 No Geran 13322 No Lot 4838,
3 No Geran 13323 No Lot 4837,
4 No Geran 13324 No Lot 4836,
5 No Geran 13325 No Lot 4835,
6 No Geran 13326 No Lot 4834,
7 No Geran 13327 No Lot 4833,
8 No Geran 13328 No Lot 4832,
9 No Geran 13329 No Lot 4831, dan
10 No Geran 13330 No Lot 4830.
2 Kesemua hartanah-hartanah tersebut terletak di dalam Mukim Derga, Daerah Kota Star, Kedah Darul Aman. Plaintif telah memberikan suatu kemudahan perbankan Islam melalui transaksi AI-Bai Bithaman Ajil bagi amaun RM3,806,000 kepada defendan mengikut peruntukan-peruntukan dalam ‘Property Purchase Agreement’ (‘PPA’) dan ‘Property [*359] Sale Agreement’ (‘PSA’) yang ditandatangani oleh plaintif dan defendan pada 6 Julai 1997.
3 Sebagai balasan dan untuk menjamin pembayaran balik pembiayaan kemudahan tersebut defendan telah menggadaikan kesemua 10 hartanah-hartanah tersebut kepada plaintif bagi amaun RM8,962,558. Penggadaian tersebut telah disempurnakan melalui dua borang 16A, Kanun Tanah Negara 1965 yang telah didaftarkan pada 23 Julai 1997. Mengikut plaintif defendan telah tertunggak dalam bayaran ansuran bulanan sebanyak RM345,132.43 setakat 21 Disember 2000. Plaintif melalui peguamcaranya telah menyerahkan notis tuntutan bertarikh 8 Januari 2001 kepada defendan. Atas kegagalan defendan mematuhi tuntutan tersebut, plaintif telah menyerahkan pula Notis 16D KTN bertarikh 8 Mac 2001 kepada defendan. Defendan juga gagai mematuhi tuntutan dalam notis itu dan ianya menyebabkan plaintif membuat permohonan ini. Baki hutang defendan di bawah PSA setakat 21 Februari 2001 yang dinyatakan dalam Borang 16D tersebut ialah RM8,117,601.43.
4 Kemudahan AI-Bai Bithaman Ajil merupakan kemudahan perbankan Islam yang biasa digunakan di mana pinjaman dijaminkan dengan hartanah sebagai kolateral. Kemudahan tersebut melibatkan tiga perjanjian yang berasingan; pertama, pihak bank membeli hartanah berkenaan daripada penggadai; kedua, pihak bank jual balik hartanah berkenaan kepada penggadai; dan ketiga, gadaian yang mana memberi kuasa kepada pihak bank menjualkan hartanah berkenaan jika ada pengingkaran oleh penggadai. Semua proses ini adalah untuk mengelakkan unsur riba dalam kemudahan pembiayaan berkenaan.
5 Penjelasan mengenai transaksi tersebut juga terdapat dalam satu artikel, Of Islamic ‘Loan’ and Other Matters Of Interest (2000) INSAF XXVIX No 3, 91 yang menyatakan sedemikian:
It is a buy-and-sell transaction under which the customer pays the
selling price of the bank by instalments over an agreed period of time.
In this financing transaction the bank buys the property from the
customer pursuant to the Property Purchase Agreement at the property
purchase price, which is usually the amount of facility required by the
customer, say, RM 150,000. The bank then sells the property back to the
customer immediately after the purchase pursuant to the Property Sale
Agreement at the property sale price, which is the sum of the property
purchase price (RM150,000 in the example taken) and the bank’s profit
for the entire tenure of financing required (say RM 150,000 (profit)
for 15 years (tenure) ). The sale price will therefore be RM300,000
which the customer will repay by monthly Instalments of an agreed
figure over 15 years. By way of security for the repayment the customer
will provide such securities as the bank may require. This is usually a
land charge over the property, the subject matter of the transaction,
and, perhaps, a guarantee
6 Walaupun kes ini melibatkan kemudahan pembiayaan di bawah sistem perbankan Islam perundangan yang terpakai ialah KTN dan Kaedah-Kaedah Mahkamah Tinggi 1980 (‘KMT’). Mahkamah Rayuan telah memutuskan kedudukannya dalam kes Bank Rakyat Malaysia Bhd v EMCEE Corporation Sdn Bhd [ 203 ] 1 CLJ 625 seperti berikut:
[*360]
… As was mentioned at the beginning of this judgment the facility is
an Islamic banking facility. But that does not mean that the law
applicable in this application is different from the law that is
applicable if the facility were given under conventional banking. The
charge is a charge under the National Land Code. The remedy available
and sought is a remedy provided by the National Land Code. The
procedure is provided by the Code and the Rules of the High Court 1980.
The court adjudicating it is the High Court. So, it is the same law
that is applicable, the same order that would be, if made, and the same
principles that should be applied in deciding the application
7 Tugas mahkamah dan prinsip yang terpakai dalam permohonan seperti ini telah dijelaskan dalam penghakiman Thome, Pern. HB dalam kes Mahkamah Rayuan VRKRS Chettiappah Chetty v Raja Abdul Rashid Ibni Almarhum Sultan Idris [1933] MLJ 18 yang menyatakan:
… It is to be noted that the legislature in its wisdom has provided
that the chargee may not exercise his rights against the charged lands
without first establishing that default had been made by the chargor,
and calling upon the chargor by a summons to show cause why the charged
premises should not be sold. That in effect is an application by the
chargee for liberty to exercise his rights as chargor against the
charged premises. All that the court has to do on such an application
is to satisfy itself that the requirements of the law have been
complied with, and that default has been made by the chargor.
… The applicant does not commence an action or suit and does not
file a plaint. He does not therefore ‘sue’ in the ordinary acceptance
of that term. Certain it is that the chargee does not ‘sue for debt’,
but he applies for leave to exercise his rights as a chargee. The
proceedings result not in a judgment or decree, but in making or
refusal of an order of sale.
8 Prinsip tersebut iktiraf dan diikuti oleh Mahkamah Agung dalam kes-kes Kandiah Peter v. Public Bank Bhd. [ 1994] 1 MLJ 119 dan Nira Sdn. Bhd. v. Malayan Banking Bhd. [1990]! MLJ 110.
9 Pihak defendan telah membantah permohonan oleh plaintif dengan membangkitkan beberapa isu berasaskan peruntukan s 256(3) KTN di bawah unsur ‘kausa bertentangan’ (’cause to the contrary’).
10 Mahkamah Persekutuan dalam kes Low Lee Lian v Ban Hin Lee Bhd [1997] 1 MLJ 77 , at p 82 telah menjelaskan tiga unsur-unsur ‘kausa sebaliknya’ yang penting seperti berikut:
… The critical phrase in sub-s (3) of s 256 to which we have lent
emphasis, despite having been the subject of judicial pronouncements,
continues to demand the attention of courts. There is no doubt that,
upon a plain reading of the subsection, a High Court is entitled to
refuse an order for sale of charged property once it is satisfied of
the existence of cause to the contrary. But the question then arises:
What is meant by ’cause to the contrary.
In our judgement, ’cause to the contrary’ within s 256(3) may be
established only in three categories of cases.
First, it may be taken as settled that a charger who Is able to bring
his case within any of the exceptions to the Indefeasibility doctrine
housed in s 340 of the Code establishes cause to the contrary …
[*361]
Secondly, a chargor may show cause to the contrary within s 256(3) of
the Code by demonstrating that the chargee has failed to meet the
conditions precedent for the making of an application for an order for
sale …
… Thirdly, a chargor may defeat an application for an order for sale
by demonstrating that its grant would be contrary to some rule of law
or equity.
11 Isu-isu yang dibangkitkan oleh defendan untuk menunjukkan adanya unsur-unsur ‘kausa sebaliknya’ dengan ringkas adalah seperti yang berikut:
1 Kegagalan plaintif mematuhi A 83 k 3(3) Kaedah-kaedah Mahkamah Tinggi 1980 dalam mengemukakan amaun terkini.
2 Kegagalan Plaintif mematuhi A 83 k 3 Kaedah-kaedah Mahkamah Tinggi 1980 kerana plaintif gagal menyatakan premis bebas daripada penyewa.
3 Ketidaksahan Notis Tuntutan dan Notis 16D kerana gagal menyatakan asas kemungkiran.
4 Plaintif telah menyalahgunakan proses undang-undang dengan tidak mengemukakan permohonan lelongan di Pejabat Tanah terlebih dahulu.
5 Penggunaan Notis 16D melanggari peruntukan undang-undang kerana tuntutan Plaintif merupakan ‘principal sum payable on demand’.
12 Seterusnya isu-isu yang dibangkitkan oleh pihak defendan diteliti dan dipertimbangkan.
1 Kegagalan mematuhi Aturan 83, Kaedah 3(3) Kaedah-Kaedah Mahkamah Tinggi 1980 dalam mengemukakan amaun teridnl
13 Pihak defendan menegaskan bahawa ada ‘… wujudnya kekeliruan dan ketidakpastian akan jumlah sebenar tertanggung oleh defendan yang mana ini amat memprejudiskan hak-hak defendan di dalam mengemukakan kesnya …’. Defendan merujuk kepada penghakiman Mohd Hishamudin H dalam kes Bank Pertanian Malaysia v Zainal Abidin bin Kassim & Anor [1995] 2 MLJ 537, di ms541 yang memutuskan:
… In my opinion, the failure to comply with rr 3(6) and 3(3), in
particular, the failure to state:
(a) the amount of the repayments; and
(b) the amount of instalments in arrear,
are serious omissions which warrant a dismissal of the action; for the
absence of such pertinent information is highly prejudicial to the
defendants …
14 Dalam kes ini pihak plaintif sebenarnya telah mengemukakan melalui afidavit-afidavit amaun yang perlu dibayar oleh defendan selepas ditolak ansuran bulanan yang telah dibayar oleh defendan. Amaun-amaun terkini mengenai jualan yang perlu dibayar oleh defendan di bawah PSA, amaun jumlah ansuran yang telah dibayar oleh defendan, lain-lain kos yang [*362] dikenakan dan amaun baki terhutang setelah ditolak bayaran ansuran oleh defendan setakat 8 Oktober 2003 (RM7,894,702.43) telah dikemukakan melalui afidavit tambahan wakil plaintif bertarikh 29 Mac 2004. Dalam permohonan seperti ini pihak pemohon dibenarkan mengemukakan amaun terkini yang perlu dibayar melalui lebih daripada satu afidavit dengan syarat jumlah amaun yang perlu dibayar dinyatakan sebelum tarikh Mahkamah membuat perintah jualan berkenaan. Sebab-sebabnya dijelaskan oleh Mahadev Shanker H dalam penghakiman kes Citibank NA v Ibrahim bin Othman [1994] 1 MLJ 608, di ms 615 yang memutuskan bahawa:
… It is a well-established rule of construction that unless the
context specifically so excludes, words in the singular must include
the plural. It is to be noted that 0 83 r 3(3) gives the court the
power to dispense with the statutory particulars ‘in any case or class’.
More than one affidavit can and is usually filed in this type of case
because invariably the matter cannot be disposed of on the first return
date (eg for non-service) and at least one further affidavit is always
required to state the total amount due on the date of the order.
Provided evidence of the correct amount due has been put before the
final hearing, the court has the power to dispense some omission to
fulfill the rules to the letter, but only if no real prejudice will
thereby result to the defendant …
15 Berbeza dengan kedudukan dalam kes Bank Pertanian Malaysia tersebut di mana dalam ketiga-tiga afidavit plaintif tidak dinyatakan jumlah pembayaran yang telah dibuat oleh defendan dan amaun yang tertunggak, dalam kes ini semua butir-butir yang lengkap sepertimana dikehendaki di bawah A 83 k 3(3) telah dinyatakan oleh plaintif kecuali faedah memandangkan ianya tidak diperuntukkan di bawah kemudahan-kemudahan pembiayaan Islam.
16 Mengikut fasal 19, PSA yang ditandatangani oleh kedua-dua pihak apa-apa penyata akaun yang disahkan oleh pengurus plaintif merupakan keterangan muktamad mengenai amaun terhutang oleh defendan. Selain daripada menafikan amaun terhutang yang tertunggak, pihak defendan tidak langsung pada bila-bila mengemukakan apa-apa penyata akaun atau amaun yang mereka hutang sebenarnya. Mengenai perkara ini, Low Hop Bing H dalam kes Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501 telah memutuskan sedemikian:
… In the context of O 83 r 3(3), it has been held that a bare denial
of a debt is not enough. The defendant as a charger has an onus if he
denies the amount claimed to say how much he admits owing per Mahadev
Shankar (later JCA) in Citibank NA v Ibrahim bin Othman [1994] 1
MLJ 608 which was followed in Multi-Purpose Bank Bhd v Diamond
Agreement Sdn Bhd [2000] 5 MLJ 576 …
17 Saya tidak dapati apa-apa yang memprejudiskan pihak defendan dalam perkara ini, lebih-lebih lagi terdapat bahawa jumlah terhutang dalam affidavit tambahan bagi pihak plaintif (‘RM7,894,702.43′ dalam afidavit terakhir) adalah kurang daripada amaun yang dinyatakan dalam notis tuntutan mereka, iaitu ‘RM8,117,601.43′.
[*363]
2 Kegagalan plaintif mematuhi A 83 KMT kerana plaintif gagal menyatakan premls bebas daripada penyewa
18 Bantahan ini jelas tidak ada merit kerana dalam kes Malaysian Building Society Bhd v Univein Sdn Bhd [2002] 7 MLJ 501 kedudukannya dijelaskan oleh Mahkamah seperti berikut:
On the defendant’s contention that the plaintiff had breached O 83 r
3(4), by failing to give particulars of every person who to the best of
the plaintiffs knowledge is in possession of the charged property. I am
of the view that the plaintiff does not have to give particulars under
O 83 r 3(4) as the delivery of vacant possession in prayer 6 of the
originating summons is not vacant possession to the plaintiff but to
the successful buyer of the properties at the auction: see Perwira
Affin Bank v Tan Tian Ser [1995] 2 CLJ 133. In that case, there was
a similar prayer for vacant possession. Abdul Aziz bin Mohamad J held,
inter alia, that the prayer is misconceived as the chargee who wants a
sale cannot be wanting possession. His Lordship added that the vacant
possession is to the buyer and not to the chargee so that O 83 r 3(4)
does not apply …
3 Ketidaksahan Notis Tuntutan dan Notis 16D kerana gagal menyatakan asas kemungkiran
19 Mengenai isu ini Abdul Malik Ishak J telah menyatakan dalam kes Citibank Bhd v Bandar Sungai Buaya Sdn Bhd [ 2003 ] 5 CLJ 150 kedudukannya seperti berikut:
… I venture to say that a notice of demand in respect of two charges
where the sums under both the charges are lumped together will not be
regarded as defective where, in the circumstances of the case, the
chargor had not been prejudiced or misled by any defect in the said
notice ( Syarikat Kewangan Melayu Raya v Malayan Banking Bhd
[1986] 2 MLJ 253 where the Privy Council dismissed an appeal from the
decision of the Federal Court that was reported in [1984] 1 MLJ 115.
Likewise, a notice of demand which fails to state the exact and precise
amount owing does not have the effect of rendering the notice invalid
unless it demands payment of a sum to which the chargee is not entitled
( Co-operative Central Bank Ltd v Meng Kuang Properties Bhd
[1991] 2 MLJ 283).
20 Notis 16D oleh pihak plaintif telah menyatakan dengan jelas amaun ‘… baki hutang di bawah prinsip Al-Bai Bithaman Ajil berjumlah RM8,117,601.43 setakat 21 Februari 2001…’ Amaun ini adalah mengikut peruntukan-peruntukan PSA yang ditandatangani oleh plaintif dan defendan dan adalah sama dengan amaun yang dinyatakan dalam notis tuntutan yang dikeluarkan oleh plaintif.
4 Plaintif telah menyalahgunakan proses undang-undang dengan tidak mengemukakan permohonan lelong di Pejabat Tanah terleblh dahulu
21 Kesemua suratan hak milik hartanah-hartanah yang terlibat dalam kes ini merupakan geran Borang 5B yang dikeluarkan di bawah s 86(a) KTN. Mengikut s 86 tersebut hartanah-hartanah berkenaan adalah ‘hak milik Pejabat Pendaftaran’. Peruntukan tersebut adalah seperti yang berikut:
[*364]
Form of documents for Registry title
In the case of land to be alienated under Registry title:
(a) the register document of title shall consist of a grant in Form
5B or a State lease in Form 5C, according as the land is to be
alienated In perpetuity or for a term of years;
(b) …
22 Oleh yang demikian pihak plaintif telah membuat permohonan mendapatkan perintah jualan ini dengan sah mengikut s 256 KTN yang memperuntukkan:
Application to Court for order for sale
(1) This section applies to land held under:
(a) Registry title;
(b) …;
(c) … .
5 Penggunaan Notis 16D melanggarl peruntukan undang-undang kerana tuntutan plalntif merupakan ‘principal sum payable on demand’
23 Defendan telah mempertikaikan kesahihan penggunaan Borang 16D oleh plaintif dan menegaskan bahawa borang yang sepatutnya dikemukakan adalah Borang 16E dan bukan Borang 16D kerana tuntutan plaintif adalah berkaitan dengan tuntutan pembayaran wang pokok yang seharusnya dibayar atas permintaan ‘principal sum payable on demand’ mengikut s 255(1) KTN. Pihak defendan telah merujuk kepada petikan daripada penghakiman Hashim Yeop A Sani H dalam kes Central Malaysian Finance Bhd v Loke Kok Lai [1975] 1 MLJ 160, di ms 161 seperti berikut:
… Form 16D should be used, in the words of section 253 of National
Land Code, only were there has been a breach by the chargor of any
agreements on his part ‘ and the object of using that form is to
specify the breach in question so as to give the chargor an opportunity
of remedying the breach and according to section 255(1) of the Code
where the principal sum secured by a charge is payable on demand, the
proper notice to issue be on Form 16E.
24 Jika diteliti penghakiman tersebut, petikan ini sebenarnya adalah petikan oleh Hashim Yeop A Sani H ke atas penghakiman Suffian HMP (YAA ketika itu) dalam kes Mahkamah Persekutuan, VAM Hussain v BP Malaysia Sdn Bhd [1970] 2 MLJ 69. Penghakiman tersebut perlu dibaca dalam konteks sebenarnya kerana perbezaan antara penggunaan Borang 16D dan Borang 16E telah dijelaskan oleh Mahkamah Persekutuan dalam kes Mary Michael v United Malayan Banking Corporation Bhd [1971] 1 MLJ 172, di ms 173 yang telah memutuskan bahawa:
… It is to be observed that a notice in Form 16D applies to any
charge, so that it can validly be used even in the case of a charge
where the principal sum is payable on demand, even though Form 16E is
specially designed for this purpose. This would be particularly true of
a charge where the principal sum bears interest and the chargor is in
default of payment of interest as stipulated in the charge. If there is
no interest payable on the principal sum it is open to the chargee to
give a [*365] notice outside the provisions of the Code either
orally or in writing and, in the event of non-compliance with this
notice, then to issue a notice in Form 16D on the ground that the
chargor is in default. In other words, in the case of a charge where
the principal sum is payable on demand and there is also a stipulation
as regards payment of interest thereon, the chargee can apply for sale
of the charged land either on the ground that the principal sum secured
by the charge is payable on demand or on the ground that there has been
a default in payment of interest. In either case a notice in Form 16D
would be a valid notice …
25 Jelas daripada penghakiman tersebut bahawa Borang 16D boleh digunakan dalam kedua-dua keadaan, iaitu, sama ada ‘principal sum is payable on demand’ atau tidak. Penggunaan Borang 16D oleh plaintif dalam kes ini oleh yang demikian adalah cara yang sah di sisi undang-undang.
26 Berasaskan ketetapan-ketetapan saya mengenai kesemua isu-isu yang dibangkitkan oleh defendan di atas, saya dapati bahawa pihak defendan telah gagal membuktikan ada wujudnya unsur-unsur ‘kausa sebaliknya’ sepertimana dikehendaki di bawah s 256(3) KTNuntuk Mahkamah ini menolakkan permohonan jualan oleh plaintif. Oleh yang demikian bantahan oleh pihak defendan ditolak dengan kos. Pihak plaintif diberi perintah sepertimana yang dipohon untuk menjual kesemua hartanah-hartanah berkenaan secara lelongan awam bagi mendapatkan balik amaun RM7,894,702.43 yang tertunggak sehingga 7 April 2004 seperti dinyatakan dalam afidavit wakil plaintif bertarikh 29 Mac 2004.
Permohonan plaintif dibenarkan.
LOAD-DATE: 12/20/2004
Bhogal v Punjab National Bank; Basna v Punjab National Bank July 11, 2008
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Bhogal v Punjab National Bank; Basna v Punjab National Bank
COURT OF APPEAL, CIVIL DIVISION
[1988] 2 All ER 296
HEARING-DATES: 4, 5, 6, 24 NOVEMBER 1987
24 November 1987
CATCHWORDS:
Bank — Account — Separate accounts — Right to combine or set off — Bank dishonouring customer’s cheque — Bank suspecting that account held by customer as nominee for third party — Third party indebted to bank — Bank seeking to set off credit in customer’s account against debit in third party’s account — Claim by customer for payment of moneys in account — Right of bank to raise defence of equitable set-off to claim.
HEADNOTE:
ASB, a resident of Kenya, was introduced to the defendant bank by S, who was resident in England and was the proprietor of a travel agency. In 1979 ASB opened an external account with the bank’s London branch by the transfer of £950,000 from a New York bank account. The only mandate on the account was to honour cheques and drafts signed by ASB and, although discussions took place between the bank and S regarding the account and statements were sent to S, all withdrawals from the account were made by cheques signed by ASB. Another customer at the bank’s London branch was YB, a travel agent in Beirut, who opened an account in 1983. Much of the money paid into YB’s account came from S’s travel agency but £650,000 came from YB’s account at another bank. There was evidence that YB had signed withdrawal forms in blank and left them with S to be completed as occasion arose and also that the account was the intended destination of part of the profits from an interest arbitrage account operated by S in conjunction with the bank. The bank formed the view that ASB’s and YB’s accounts were nominee accounts beneficially owned by S and decided to treat the two accounts, together with the accounts of S and others, as a group and to refuse to honour cheques drawn on any of the accounts in the group if the effect would be to put the overall balance of the group in debit. As a result the bank dishonoured cheques drawn by ASB and YB when those accounts each had sufficient funds to meet the cheques but another account in the group was heavily overdrawn and the group account would go into debit if the cheques were met. By separate actions ASB and YB sued the bank and obtained summary judgment for the amount of their deposits with the bank. The bank appealed, contending that it should be granted unconditional leave to defend the actions because it had a valid defence by way of equitable set-off.
Held — A banker was required to pay all cheques drawn by a customer in accordance with the mandate given to him if he had funds belonging to the customer, and he was not entitled without warning to refuse to honour a customer’s cheque, when there was money in his account to cover it, merely on the basis of a suspicion that the account was held by the customer as nominee for a third party who was indebted to the bank. Instead, clear and indisputable evidence was required that the customer held his account as a nominee or bare trustee for the third party before the bank could set off the credit in one account against the debit in another. Accordingly, since the evidence did not clearly establish that the accounts of ASB and YB were nominee accounts, the bank could not raise a defence of equitable set-off in their actions. The bank’s appeals would therefore be dismissed.
Ex p Morier, re Willis Percival & Co (1879) 12 Ch D 491 considered.
NOTES:
For the defence of equitable set-off, see 16 Halsbury’s Laws (4th edn) paras 1465–1466, and for cases on the subject, see 41 Digest (Reissue) 8, 26–30.
For a banker’s lien or right of set-off, see 3 Halsbury’s Laws (4th edn) para 78, and for cases on the subject, see 3 Digest (Reissue) 712–722, 4280–4332.
CASES-REF-TO:
Addis v Knight (1817) 2 Mer 117, 35 ER 885.
Aries Tanker Corp v Total Transport Ltd [1977] 1 All ER 398, [1977] 1 WLR 185, HL.
Bank of Tokyo Ltd v Karoon (1984) [1986] 3 All ER 468, [1987] AC 45, [1986] 3 WLR 414, CA.
Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, CA.
Gray v Johnston (1868) LR 3 HL 1.
Hett Maylor & Co Ltd, Re (1894) 10 TLR 412.
Lloyds Bank plc v Ellis-Fewster [1983] 2 All ER 424, [1983] 1 WLR 559, CA.
Morier, Ex p, re Willis Percival & Co (1879) 12 Ch D 491, CA.
INTRODUCTION:
Interlocutory appeals
Bhogal v Punjab National Bank
The defendant, Punjab National Bank, appealed against the order of Hobhouse J in the Commercial Court of the Queen’s Bench Division dated 13 February 1987 whereby, on the application of the plaintiff, Ajit Singh Bhogal, he ordered that judgment under RSC Ord 14 should be entered for the plaintiff against the bank for the sum of £1,501,562dp30 deposited with the bank with interest from 24 July 1986 when it became payable and costs. The facts are set out in the judgment of Dillon LJ.
Basna v Punjab National Bank
The defendant, Punjab National Bank, appealed against the order of Scott J sitting as a vacation judge in the Chancery Division dated 19 August 1987 whereby, on the application of the plaintiff, Yaacoub Basna, by summons dated 4 June 1987 for, inter alia, summary judgment under RSC Ord 14, an account and interim payments pursuant to RSC Ord 29, r 10, the judge ordered that the bank should make interim payments to the plaintiff in the amounts of £7,715.58, £708,777.60 and $ US 169,080.76 and that there should be judgment for the plaintiff against the bank for payment by the bank of the amount found due on the taking of the account. The facts are set out in the judgment of Dillon LJ.
The appeals were heard successively.
COUNSEL:
Stanley Burnton QC and Rhodri Davies for the bank.
Mark Hapgood for the plaintiff Bhogal.
Peter Leaver QC and Alastair R MacGregor for the plaintiff Basna.
JUDGMENT-READ:
Cur adv vult 24 November the following judgments were delivered.
PANEL: DILLON AND BINGHAM LJJ
JUDGMENTBY-1: DILLON LJ
JUDGMENT-1:
DILLON LJ. The court has before it two appeals by the Punjab National Bank against summary judgments under RSC Ord 14 awarded in two separate actions brought against the bank by two of its customers. One of the actions is brought by Mr Ajit Singh Bhogal and he obtained summary judgment against the bank for the sum of £1,501,562.30, the amount of his deposits with the bank, with interest and costs, by an order of Hobhouse J in the Commercial Court made on 13 February 1987. The other action is brought by Mr Yaacoub Basna, and he obtained summary judgment against the bank for interim payments in the amounts of £7,715.58, £708,777.60 and $ US 169,080.76, part of the credit on his account, pending an inquiry as to the balance, by an order of Scott J sitting as vacation judge in the Chancery Division on 19 August 1987. Mr Bhogal and Mr Basna were both customers of the bank’s London branch.
The bank submits that the judgments should be set aside and it should be granted leave to defend both actions because it has a valid defence by way of equitable set-off. It is submitted that the accounts of Mr Bhogal and Mr Basna, and a number of accounts standing ostensibly in the respective names of a Mr P Kumar, Mr K J Sanger, Muscat Trading Corp and Hindustan Travel Services, were mere nominee accounts, the holders of which were at all times nominees for a Mr Joginder Pal Sanger (Mr Sanger), who was, it was asserted, at all times the sole and absolute beneficial owner of the moneys in the accounts, or had a substantial beneficial interest therein. It is consequently submitted that, as the account in the name of Mr Kumar was overdrawn in a very substantial amount at the times when Mr Bhogal and Mr Basna separately called for payment of moneys standing to the credit of their accounts, the bank is entitled by way of equitable set-off to set the credits in the accounts of Mr Bhogal and Mr Basna against the debit on the account in the name of Mr Kumar. These claims of the bank were rejected by Hobhouse J in Mr Bhogal’s case as not amounting on the facts to an arguable defence and by Scott J on the law in Mr Basna’s case.
There are of course well-recognised banking procedures, by guarantees or letters of charge, whereby bankers can with the consent of one customer have recourse to the credits on that customer’s account to cover the overdraft on another customer’s account. None of those procedures was, however, adopted by the bank in either of the present cases. Indeed, in the affidavits of the present manager of the bank it is recognised that the bank’s case is not documented in the manner which ordinary banking practice would require and that it cannot point to any standard form security documentation linking the accounts in the names of Mr Bhogal and Mr Basna with that in the name of Mr Kumar. It is the misfortune of the bank that over the crucial years its London branch was under the control of a succession of managers who were unreliable and left the bank’s service under clouds.
It is unnecessary to go into the facts in any detail. Mr Bhogal is a civil engineer in Kenya. He was introduced to the bank by Mr Sanger in 1979, when the bank was seeking further customers, and he opened an external account. Mr Sanger is resident in England and among other business interests he is the proprietor of (and was earlier one of two partners in) a travel agency under the name of Hindustan Travel Services. The only mandate on Mr Bhogal’s account was a mandate to honour cheques and drafts signed by Mr Bhogal himself and he provided his specimen signature. The moneys in the account were placed on time deposits, partly in sterling and partly in United States dollars. The bank’s certificates acknowledging the deposits contain unqualified promises by the bank to pay the amount of the deposit with interest at maturity as per Mr Bhogal’s instructions. It appears that the account was largely funded by a transfer to it in 1979 of a sum of £950,000 from the New York branch of the State Bank of India there is no evidence before this court to show who directed that transfer, whose account in the New York branch of the State Bank it came from or how or from where it had got to that account.
It appears that all discussions about the rolling over of the deposits on Mr Bhogal’s account were between Mr Sanger in London and the bank, and not with Mr Bhogal in Kenya. Moreover, the bank statements on the account were sent to and checked by Mr Sanger and on one occasion Mr Sanger queried the bank’s interest calculations on the account. There is no indication, however, of any withdrawal from the account having been made except by cheque signed by Mr Bhogal himself. There may well have been discussions in London, to which Mr Bhogal himself was not a party, in 1980 and again in 1983 about Mr Bhogal’s account being used as security for the Hindustan Travel Services and K J Sanger accounts, but the bank’s records in London do not contain any guarantee or letter of charge signed by Mr Bhogal himself, and any counter-securities in support of those accounts which were then granted were unquestionably released shortly afterwards. It is, however, clear that at 1 December 1983 Mr Bhogal made a transfer, which he says was a loan repaid shortly afterwards, to the P Kumar account of the precise sum then required to clear the then overdraft on the P Kumar account.
By the summer of 1986, however, the present management of the London branch of the bank was of the view that, however the situation had come about, it was entitled to treat all the accounts which I have mentioned as a group (the Sanger group of accounts) and to refuse to honour any cheque drawn on any of the accounts in the group which was in credit if the effect would have been to put the overall balance of the group in debit. When therefore on 24 June 1986, when the then current time deposit matured, a cheque drawn by Mr Bhogal for £825,000 was presented, the bank dishonoured the cheque. It did so on the pretext that there was discrepancy between the signature on the cheque and Mr Bhogal’s authorised signature. That was a false pretext to gain time, and it was only later that the bank came up for the first time with the claim, now pressed, that Mr Bhogal was at all times a mere nominee for Mr Sanger and all the accounts in the so-called Sanger group were nominee accounts beneficially owned by Mr Sanger.
So far as Mr Basna is concerned, the facts are considerably more complicated and obscure. Mr Basna is a travel agent in Beirut, and he opened an external account in the name of Basna Air Services, which was his trading name, at the bank’s London branch in 1983. There were much more involved dealings on this account than on Mr Bhogal’s. The dealings included the payment into the account of substantial sums of cash by Hindustan Travel Services it is suggested that these may have represented cash takings of Hindustan Travel Services’ own business in London. If the account was wholly Mr Basna’s own account, there must have been considerable business dealings between Mr Basna and Hindustan Travel Services, but the evidence before us offers little explanation. There does not appear to have been any withdrawal from the Basna account without the written authority of Mr Basna, but there is evidence to suggest that Mr Basna signed forms of authority in blank when he visited London and left the signed forms with Hindustan Travel Services to be completed as occasion arose.
Though much of the money paid into the Basna account came from Hindustan Travel Services, there is also evidence, as a result of further inquiries by the bank’s present manager, that a sum of £650,000 credited to the account in January 1985 came from an account of Mr Basna’s with the State Bank of India, though what that sum represented and how it got to the State Bank is not shown. In addition there is an agreement under which the Basna account is named as the intended destination of part of the profit from a sophisticated, if not questionable, interest arbitrage arrangement, to which the bank was a party, which was operated at, it is said, Mr Sanger’s request through the K J Sanger account. It is said that S500,000 came from this source at the end of December 1986 to a dollar deposit on Mr Basna’s account.
In the upshot in December 1986 the bank dishonoured a cheque drawn by Mr Basna although there were funds in the Basna account to cover it, and the bank then claimed that the Basna account was a mere nominee account belonging beneficially to Mr Sanger.
Against this background I turn to consider the law.
Scott J in his judgment expressed his conclusion in the following passage:
‘The commercial banking commitment that a bank enters into with a person who deposits money with it is just as needful of immediate performance as are a bank’s obligations under a letter of credit or bank guarantee. I think it would be lamentable if a bank were able to defeat a claim by a person who had deposited money on such grounds as the bank is asserting in the present case. It is possible that this action will come to trial in some two to three years’ time and that the bank will fail to make good the arguable case that it has set out before me. It would have succeeded in postponing for that considerable period its obligation to repay a customer who had made a simple deposit of money with it. That seems to me to be totally contrary to the basis on which banks invite and get money deposited with them. I hold that a bank is not entitled to refuse repayment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money.’
The doctrine of equitable set-off has developed from the practice of the courts of equity, before the Judicature Acts, of granting an injunction to restrain a plaintiff (sc in the present cases Mr Bhogal and Mr Basna) from pursuing his claim at law against a defendant (sc the bank) pending the resolution of some cross-claim of the defendant in equity which at law would not have provided a defence to the plaintiff ‘s claim. But as Lord Wilberforce pointed out in Aries Tanker Corp v Total Transport Ltd [1977] 1 All ER 398 at 404–405, [1977] 1 WLR 185 at 191:
‘One thing is certainly clear about the doctrine of equitable set-off–complicated though it may have become from its involvement with procedural matters–namely that for it to apply, there must be some equity, some ground for equitable intervention, other than the mere existence of a cross-claim . . . But in this case counsel could not suggest, and I cannot detect, any such equity sufficient to operate the mechanism, so as, in effect, to override a clear rule of the common law on the basis of which the parties contracted.’
Thus it was held that charterers could not, under the head of equitable set-off, set off a claim for short delivery of cargo against a claim for unpaid freight.
In the banking field there are clear rules of law. (1) It is the duty of the banker to pay within a reasonable time of presentment all cheques drawn by the customer in accordance with the mandate given to the banker provided that the banker has money in his hands belonging to the customer. As Lord Cairns LC stated in Gray v Johnston (1868) LR 3 HL 1 at 11, it would be a serious matter if bankers were to be allowed, on grounds of mere suspicion or curiosity, to refuse to honour a cheque drawn by their customer. He added on the facts of that case: ‘. . . even although that customer might happen to be an administrator or an executor.’ (2) As Scrutton LJ pointed out in Bradford Old Bank Ltd v Sutcliffe[1918] 2 KB 833 at 847, sums paid by a customer into his current account cannot be used by the bank in discharge of the customer’s loan account without the consent of the customer, since no customer could otherwise have any security in drawing a cheque on his current account if he had a loan account greater than his credit balance on current account.
The bank’s claims of equitable set-off are sought to be founded on the decision of this court in Ex p Morier, re Willis Percival & Co (1879) 12 Ch D 491, where the court had to consider the question of equitable set-off of bank accounts, in fact, in the context of the insolvency of the bank. James LJ said that there were two accounts, one the account of A and the other the account of A and B who were executors. It was said that A was the residuary legatee and entitled to the whole of the fund, but it was pointed out that the winding up of the estate, and the ascertainment of residue, had not been finally completed and so set-off between the two accounts was not allowed. James LJ said (at 496):
‘Unless it could be made out clearly that A. and B. were mere trustees of the fund for A., it seems to me that there could not be an equitable set-off, because the money is due in autre droit, and where the money is due in autre droit the only exception which equity has introduced into the principle of a legal set-off is when the money is really and truly the property of one man in the name of another, not when the result of taking the accounts would be to shew that the ultimate balance would be his property . . .’
That was followed, and set-off was allowed, in Re Hett Maylor & Co Ltd (1894) 10 TLR 412, which was a very plain case where the nomineeship of one account was known to both parties and undisputed.
The bank seeks to extend the law as stated by James LJ so as to cover the present case. But it is to be noted that the law laid down in Ex p Morier is crystallised in a short statement of Brett LJ, expressly approved by James LJ, which was in the following terms (at 502):
‘My view is this, that, the account standing in the names of the brother and sister, the case could not have been brought within the rules of equitable set-off or mutual credit, unless the brother was so much the person solely beneficially interested that a Court of Equity, without any terms or any further inquiry, would have obliged the sister to transfer the account into her brother’s name alone.’ (My emphasis.)
It is one thing when the fact that a customer holds his accounts as nominee or bare trustee for a third party is clear and indisputable. It is quite another where the alleged nomineeship is very far from plainly made out and is strongly disputed. It would be wholly contrary to the rules of banking law, above indicated, if a bank could without warning dishonour a customer’s cheque when there were funds to cover it in the account, on a tenuous, if just arguable, suspicion that the account was held by the customer as nominee for a third party who was indebted to the bank, and if the bank could then freeze the customer’s account until it had been ascertained after full inquiry after a lengthy trial a year or more later whether the customer was indeed such a nominee. I can see no equity in the bank in such a case to override, in the words of Lord Wilberforce cited above, the clear rules of law on which bankers and customers habitually deal with each other, especially as the bank in the present case has only itself to thank for not following ordinary banking practice and obtaining standard form security documentation before allowing the account in the name of Mr Kumar to be seriously overdrawn.
The inquiries involved, if the bank were to be granted leave to defend and these actions were to go to trial, would indeed be extensive. In Mr Bhogal’s case they would involve investigating the source, both immediate and ultimate, of all moneys paid to the credit of the account in his name, in case it could be demonstrated that, by some routes not yet divined, Mr Sanger was the source of all those moneys. In Mr Basna’s case there would have to be a similar inquiry into the source of all moneys paid to the credit of the Basna Air Services account, and that would involve an investigation of all dealings between Mr Basna and each of Mr Sanger, Hindustan Travel Services and Mr K J Sanger. It would also be necessary to examine the dealings between Mr Sanger and Mr Kumar (a citizen of Dubai said in the papers before us to be possibly now resident in the United States or Canada) to see whether a nomineeship, and right of indemnity against Mr Sanger, could be made out by the bank in respect of the account in the name of Mr Kumar.
All this is, in my judgment, way outside the concept of equitable set-off as explained by Brett LJ in Ex p Morier and by Lord Wilberforce in the Aries Tanker Corp case. Moreover, even if, at the end, the bank was able to show that the Basna account was in some sense a mixed account fed in part by moneys which belonged to Mr Sanger and in part by moneys which truly belonged to Mr Basna, there could be no equitable set-off at all in view of Mr Basna’s entitlement: see the comments above quoted of James LJ in Ex p Morier as to it not being enough if the taking of an account would merely show an ultimate balance, and not the totality of the money in an account, to belong to the principal of an alleged nominee account holder and see also the decision of Grant MR in Addis v Knight (1817) 2 Mer 117, 35 ER 885.
In my judgment, therefore, the bank has failed to show an arguable defence on the law in either action. I further for my part agree with the conclusions of Hobhouse J on the facts in Mr Bhogal’s case, viz that there is no evidence worth the name to support the contention that Mr Bhogal was a bare nominee for Mr Sanger and an arguable defence is not made out on the facts.
I would therefore dismiss both these appeals.
It was finally argued for the bank that even if the appeals were dismissed a stay of execution should be granted in each action pending judgment in an action which Mr Kumar has brought against the bank, and in which the bank is counterclaiming against Mr Kumar and Mr Sanger. I can see no valid reason at all for granting such a stay.
JUDGMENTBY-2: BINGHAM LJ
JUDGMENT-2:
BINGHAM LJ. In each of these cases there were two issues before the judge. The first was whether, on the material before the judge, the bank showed a triable issue that Mr J P Sanger (Mr Sanger) was the true holder of the account (or accounts) in the plaintiff ‘s name and also of that in the name of Mr P Kumar. The second was whether, if so, that would in law afford the bank any defence to the plaintiff ‘s claim.
In the Basna case, Scott J resolved the first issue in the bank’s favour. He said:
‘I have come to the conclusion, having been taken by counsel through the voluminous evidence . . . that there is material which enables the bank to present an arguable case that the moneys standing to the credit from time to time of the Basna Air Services accounts, or perhaps some part of those moneys, represent moneys in which Mr Sanger has an interest.’
Later, he added:
‘. . . I think that [counsel for the bank] is entitled to say (and it is a submission that I have already indicated I am prepared to accept) that on the state of the evidence the bank’s case that Mr Sanger had an interest in or was the owner of the Basna Air Services accounts cannot be said to be unarguable.’
The judge having taken this view after a perusal of detailed evidence, I should for my part be very slow to disturb his conclusion. As Sir John Donaldson MR said in Lloyds Bank plc v Ellis-Fewster [1983] 2 All ER 424 at 426, [1983] 1 WLR 559 at 562:
‘This was essentially a matter for the judge’s discretion. He thought there was a triable issue. In a case where the triability of the issue depends on evidence as opposed to law, I would think it a very surprising situation if the Court of Appeal was prepared to disturb the judge’s view. If one judge thinks there is a triable issue, it would be surprising if two or three judges think there is not. It is quite different if you are dealing with a triable issue which arises as a matter of law. When it arises as a matter of evidence and fact, it is most unlikely that the Court of Appeal would interfere with the discretion of the judge below.’
In this case, however, no inclination to disturb the judge’s view arises because, having had the benefit of full submissions on the facts and the evidence from both sides, I find myself wholly in agreement with him. The bank’s skeleton argument helpfully summarises 12 matters on which reliance was placed. These, in brief, were as follows. (1) The Basna accounts were apparently opened to receive the proceeds of an interest arbitrage arrangement made in the name of Mr Sanger’s nephew (K J Sanger) but for his (Mr Sanger’s) apparent benefit. (2) The Basna accounts received substantial cash payments which looked like the takings of Mr Sanger’s travel agency. (3) There were large non-cash payments into the accounts by Mr Sanger’s travel agency and company. (4) Large cash withdrawals from the Basna accounts were made on duplicated forms signed by Mr Basna but apparently emanating from Mr Sanger. (5) Mr Sanger conducted discussions with the bank in a manner which suggested that he was a principal and not an agent. (6) One withdrawal from the accounts was made in favour of a relation of Mr Sanger. (7) A transaction initiated by Mr Sanger and involving the Basna account was abandoned when he was told that it would not work, without any complaint or query from Mr Basna. (8) Letters authorising withdrawals appeared to have been signed by Mr Basna in blank and all at one time, although the letters bore dates some weeks apart. (9) A foreign exchange transaction was carried out on the Basna accounts when the bank refused to allow it to be carried out on the Kumar account. (10) Some cheques appeared to have been typed on a typewriter of Mr Sanger’s travel agency. (11) Mr Sanger offered a deed of relinquishment in respect of the profit of his nephew’s interest arbitrage arrangement as security for the Kumar indebtedness. (12) Mr Sanger took a close and detailed interest, inconsistent with his professed role in the transactions, in the interest credited to the Basna accounts.
The facts underlying most of these allegations are very much in issue, and the plaintiff of course challenged in its entirety the inference which the bank invited the court to draw. But the correctness of factual assertions such as these cannot be decided on an application for summary judgment unless the assertions are shown to be manifestly false either because of their inherent implausibility or because of their inconsistency with the contemporary documents or other compelling evidence. The plaintiff has not satisfied me that he is able to discharge that heavy burden on the facts of this case.
The Bhogal case came before a different judge on an earlier occasion and on different (and obviously less strong) material. Hobhouse J decided that the bank raised no triable issue. He said:
‘I have to consider whether there is any basis on which I can draw some inference that there is or may be a defence to the plaintiff ‘s claim, and that is an inference which I feel wholly unjustified in drawing on the material that has been placed before me.’
It is plain, reading his judgment as a whole, that the judge regarded the bank’s defence as no more than an unconvincing series of unsubstantiated assertions. Such a conclusion reached by an experienced commercial judge naturally commands the greatest respect, and the passage I have quoted from Lloyds Bank plc v Ellis-Fewster is, I think, as readily applicable where a judge has decided that there is not as where he has decided that there is a triable issue of fact. If that appeal stood alone I am by no means sure that I should feel entitled to dissent from the judge’s views.
But we have heard these appeals one after the other, and, while the evidence in the Basna case is not evidence in the Bhogal case and should not be treated as such, one’s knowledge of the Basna case must in my view affect one’s evaluation of the evidence in the Bhogal case. I do not find it possible, even if it is desirable, to approach the Bhogal case in a mood of complete ignorance of the stronger but essentially parallel case. It is inevitable that one approaches the Bhogal case with a mind educated by the Basna case.
In support of its defence in the Bhogal case action the bank relied on these matters. (1) There was evidence that Mr Sanger had given instructions concerning this account to Mr Bakshi, one of the bank’s managers, Mr Malhotra, another bank employee, and Mr Jolly, a chief manager. (2) On 1 December 1980 £364,334dp17 was transferred from the Bhogal account to Mr Kumar’s account. This was the exact sum needed to clear the overdraft on that account. (3) On 9 September 1980 in a telex to its head office in Delhi, the bank referred to a deposit of the plaintiff as security for a bank guarantee issued for the benefit of Mr Sanger’s travel agency. (4) On 20 June 1983 Mr Sanger’s nephew (K J Sanger), in a letter apparently signed by him, asked the bank to release a charge over the plaintiff ‘s account given to secure his (the nephew’s) borrowing. (5) The bank’s files contain a memorandum of deposit for the benefit of Mr K J Sanger and bearing an apparent indication that it (or perhaps the original) was signed on behalf of the plaintiff. (6) In proceedings brought by Mr Kumar it is his contention that transactions leading to large debits on the account in his name had been carried out not by him but by Mr Sanger.
These matters certainly do not persuade me that the bank’s case on the merits is correct or even likely to be correct. In any ordinary case the documentation held by the bank would be likely to resolve the question one way or the other. But the bank’s documentation in this case is agreed to be grossly defective. That may no doubt be due to the dishonesty and unreliability of managers whom the bank had the misfortune to employ. That background makes the confident drawing of inferences as to what was going on a great deal harder. I regard the matters relied on by the bank as far from strong but not so tenuous as not to raise a triable issue.
The giving of instructions by Mr Sanger, if accepted as a fact, may show no more than that he was the agent on the spot for a principal abroad who gave him a wide area of authority. But this was not, as I understand the evidence, the impression which the bank’s witnesses received, and it does not tally with Mr Sanger’s evidence of how the account was run. I do not think that one can at this stage rule out the alternative explanation that Mr Sanger was giving instructions and running the account because it was in truth his.
The transfer of £364,334dp17 to Mr Kumar’s account is explained as being a loan which was subsequently repaid. In the judge’s view, ‘all it shows is that there has been at one time in this story a commercial relationship between Mr Kumar and the plaintiff . . .’ Maybe. But the loan of the exact amount needed to clear Mr Kumar’s overdraft, to the nearest 17p, does not suggest a straightforward commercial relationship and might more readily suggest a transfer from one account to another by an account holder with more than one account. If, moreover, this very substantial sum of money was later repaid, one would expect the plaintiff to be able without difficulty to produce some documentary evidence of the repayment. There is none.
The telex of 9 September 1980 was not sent by the plaintiff. It was sent by a fraudulent manager who may have wished to cover his tracks by deceiving his head office. But it does not follow that everything done by a fraudulent man is fraudulent. What, if anything, preceded the sending of this telex is at present wholly unclear.
The letter of 20 June 1983 is again not a letter of the plaintiff ‘s nor, so far as the evidence shows, one seen by him. It may be susceptible of various explanations. For example, it may be a forgery. But there is no evidence that it is a forgery and even if Mr K J Sanger was wrong in thinking that a charge had been given it is not without significance that he thought it had, if he knew of the transaction at all. The existence and terms of this letter may be capable of being satisfactorily explained but until explained they lend some colour to the bank’s contention that the plaintiff ‘s account was operated by and for the benefit of Mr Sanger.
The memorandum of deposit for the benefit of Mr K J Sanger is inconclusive because it bears no signature by the plaintiff. It is not clear whether this is a copy of a document which once existed. It is, however, noteworthy that the date it bears, 15 April 1983, is the date on which Mr K J Sanger, in his letter of 20 June 1983 just referred to, says that this account (among others) was charged to the bank to secure his borrowing. If, in response to that letter, the account was (as he asked) released from the charge it would not be surprising that no original of the memorandum of deposit survived. But if such an original ever existed it would again, in my judgment, lend some colour to the bank’s contention. No reason has been given why the plaintiff should wish to secure the borrowing of Mr K J Sanger.
Mr Kumar’s contentions have not yet been the subject of adjudication and they may turn out to be quite false. It is none the less the case that, albeit to a minor extent, there is an overlap between the contention of the bank and that of Mr Kumar.
The plaintiff says that the sum of £950,000 originally credited to this account in 1979 was transferred from his own account at the State Bank of India in New York. The bank made the point that the origin of this sum had not been explained. The judge did not regard this as a legitimate point:
‘The [bank] have had plenty of time to investigate whether or not the sums that were transferred on that occasion could in some way be linked to Mr Sanger, but they have not produced any evidence at all and I do not see why I should draw inferences against the plaintiff based on his not having explained how he acquired some funds in 1979. It seems to me extraordinary that a customer of a bank should have a refusal to pay on his account sought to be justified by his reluctance to explain where he originally got his money from.’
As to the first of these observations, it must be remembered that the State Bank of India in New York could not lawfully have disclosed this information to the bank, nor (it would seem) could the bank lawfully have procured it to do so (see Bank of Tokyo Ltd v Karoon(1984) [1986] 3 All ER 468, [1987] AC 45). As to the second, in the ordinary way I would certainly agree. But since the bank’s contention would be seriously if not fatally weakened if the funds originally transferred could be clearly shown to be the plaintiff ‘s own unencumbered funds it seems to me surprising that the plaintiff has chosen to adduce no evidence whatsoever on the point, not even a letter from the State Bank of India in New York. Nor has any explanation been given why information on the point might be damaging to the plaintiff or his interests. One is left in the position that evidence which might have resolved the issue in the plaintiff ‘s favour has not been given.
Although hesitant to differ from the judge, I find myself clearly of opinion that the bank does raise a triable factual issue in the Bhogal case. If I am wrong on that point and the judge’s view is to be preferred or is a view which ought not on principle to be disturbed, I would none the less hold that this is a case in which, in relation to this factual question, ‘there ought for some other reason to be a trial’, within the wording of RSC Ord 14, r 3(1).
I, accordingly, find it necessary in both cases to decide the second question. In the Basna case Scott J decided this against the bank. He said:
‘I must, therefore, ask myself whether an argument of that character constitutes a defence available to the bank to the claim made by Mr Basna. There is no doubt but that Mr Basna, who is Basna Air Services, is the legal owner of the moneys standing to the credit of the Basna Air Services accounts. The contention of the bank is that the equitable interest in the moneys lies elsewhere, lies in Mr Sanger. This is not a case, therefore, in which the bank is seeking to exercise its common law right as a banker of combining accounts. This is not a case of common law set-off. The bank is asserting a right of equitable set-off. It is asserting a right of equitable set-off on the footing that Mr Sanger is indebted to it in the sum outstanding on Mr Kumar’s account and that it is indebted to Mr Sanger in the sum standing to the credit of the Basna Air Services account. I have to decide whether a defence of that character is available to the bank when sued by the legal owner, Mr Basna, for repayment of the money standing to the credit of the account. I would accept that, if a bank can show that moneys standing to the credit of an account are in the admission of the legal owner of the account moneys that in equity belong to someone else, equitable set-off can be exercised as against those moneys in respect of debts owed to the bank by that beneficial owner. But the present case is not a case of that sort. The bank’s claim that Mr Sanger is the beneficial owner of the Basna Air Services accounts may at trial, or in some other action, turn out to be well founded, but is a mile away from being clear and does not depend, as I have said and repeat, on anything done, written or said by the legal owner of the accounts. When persons deposit money in a bank they do so in the contractual expectation that they will be able to recover their money in accordance with the terms on which it was placed with the bank, on demand or on notice as the case may be. One of the commercial reasons for placing money in a bank, as opposed to investing it elsewhere, is to achieve certainty as to repayment. ”As safe as money in a bank” is a phrase on which banks are entitled to trade and which reflects the attitude of the general public. In the present case, if the bank’s contention is in law right, it means that a person who deposits money at a bank can be defeated in his claim for repayment for a considerable period, possibly years, provided the bank can show an arguable case that an equitable interest in the money belongs to someone else who is indebted to the bank on some other account. How the matter would stand if that arguable case depended on admissions or things done or documents signed by the legal owner of the account I do not need to decide. It is not the position in this case. But, where, as here, the bank’s case depends on no more than inferences derived from circumstantial evidence and on alleged and disputed statements by third parties, it seems to me it would be a matter of injustice and contrary to the commercial purpose and nature of a bank deposit if a bank were able to raise as a defence to a claim for immediate repayment that an equitable interest in the money was outstanding elsewhere. A bank can, of course, interplead in a case where it has reason to believe that an equitable interest is held by some third party who may claim the money. This case is not that sort of case. The alleged equitable owner in the present case is denying that he has any equitable interest at all. It is the bank that is asserting the right to postpone repayment in order to have decided at a trial the question whether the alleged equitable owner, who denies that status, is in truth an equitable owner, in which case the bank will seek to set off debts owed to it, or alleged to be owed to it, by that person. [Counsel for the bank] has pressed on me that equitable set-off is as available to the bank as to any other litigant and that, if an equitable set-off is arguable on the facts and is not obviously unsustainable, summary judgment ought not to be granted. I am not satisfied that that is the right approach. I am not satisfied that banks should be treated like any other debtors. There are areas of the law where they are not so treated. Where banks enter into commercial commitments, whether in respect of letters of credit or in respect of bank guarantees, the well-settled law requires them to honour their obligations and does not allow them to postpone performance on account of some arguable collateral case against the seller in the case of letters of credit or against the beneficiary in the case of bank guarantees. I do not see why the repayment by banks of moneys deposited should be in any different state. The commercial banking commitment that a bank enters into with a person who deposits money with it is just as needful of immediate performance as are a bank’s obligations under a letter of credit or bank guarantee. I think it would be lamentable if a bank were able to defeat a claim by a person who had deposited money on such grounds as the bank is asserting in the present case. It is possible that this action will come to trial in some two to three years’ time and that the bank will fail to make good the arguable case that it has set out before me. It would have succeeded in postponing for that considerable period its obligation to repay a customer who had made a simple deposit of money with it. That seems to me to be totally contrary to the basis on which banks invite and get money deposited with them. I hold that a bank is not entitled to refuse repayment of money deposited with it on the basis merely of an arguable case that some other debtor of the bank has an equitable interest in the money. If the case is clear beyond a peradventure, if it is made out by things done, written or said, by the legal owner, the case may be different but in the present case I am not prepared to allow the equitable set-off. I think this is a case for summary judgment, and I propose to give judgment accordingly.’
Hobhouse J did not, in view of his answer to the first question, expressly answer the second, but I think it is plain from the tenor of his judgment as a whole that he would have favoured the same approach as Scott J.
The facts of these cases powerfully illustrate the wisdom of the rule which Scott J laid down.
In the Basna case there were a series of deposits with the bank between July 1984 and August 1985. Each of them the bank confirmed to the plaintiff with the unqualified acknowledgement: ‘At maturity we will repay the principal plus interest as per your instructions.’ Between August and November 1985 instructions were given over Mr Basna’s signature for the transfer from the accounts of $32,000 and £2,845,000. These instructions the bank complied with. On 30 October 1986 a cheque was drawn for £110,000. That was dishonoured. Up to that time the plaintiff had been given no indication that instructions would not be complied with in the future as they had been in the past.
In the Bhogal case a cheque drawn by the plaintiff for £275,000 on 6 June 1986 was honoured. A cheque for £825,000 drawn on 24 June was dishonoured, as was a cheque for £1,475,000 drawn on 7 July. Confirmations of deposit bearing the same unqualified acknowledgement as I have noted above were given on 6 and 24 June, but despite this the bank’s solicitors on 16 July said that the bank was unable to confirm that on maturity the funds would be placed at the plaintiff ‘s absolute and unfettered disposal. It was then for the first time that the plaintiff learnt of the suggestion that his account was held by a nominee.
It is obvious from these facts that to allow a bank to raise a defence of equitable set-off would subvert the ordinary straightforward relationship between bank and nominal customer and could moreover cause grave embarrassment to third parties who had relied on the apparent credit of the nominal customer. During much of the hearing I was nevertheless inclined to doubt whether the law was sufficiently clear to enable this court confidently to reject the bank’s claim to equitable set-off in limine. Little of the law is recent, and the cases arose in quite different circumstances. I am, however, persuaded that the commercial considerations referred to expressly by Scott J and impliedly by Hobhouse J, which I have also mentioned, would require any court to reject a defence of equitable set-off in this field unless the defence were clearly brought within the scope of the existing authorities. I would for present purposes be willing to accept the submission of counsel for the plaintiff Basna that a bank may challenge its customer’s title to money in the customer’s account on its own behalf only where (a) its claim is against a sole beneficiary and (b) there is no dispute as to the beneficiary’s sole entitlement and (c) there are no competing claims and (d) there is no requirement for an investigation into whether or not a trust in fact exists. It seems to me that (b) and (d) fairly reflect the effect of Brett LJ’s succinct summary of the law in Ex p Morier, re Willis Percival & Co (1879) 12 Ch D 491 at 502, and in this case there is a very live dispute as to the alleged beneficiary’s sole entitlement and a need for a very searching inquiry whether a trust exists or not.
I have, accordingly, arrived at the same conclusion as Dillon LJ, although by a somewhat different route, and agree that these appeals should be dismissed. I agree with his view that there should be no stay of execution.
DISPOSITION:
Appeals dismissed. Leave to appeal to the House of Lords refused.
SOLICITORS:
Clifford Chance (for the bank); Lovell White & King (for the plaintiff Bhogal); Stilgoes (for the plaintiff Basna).
BANK BUMIPUTRA MALAYSIA BHD. KUALA TRENGGANU V. MAE PERKAYUAN SDN BHD. & ANOR. July 11, 2008
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BANK BUMIPUTRA MALAYSIA BHD. KUALA TRENGGANU V. MAE PERKAYUAN SDN BHD. & ANOR.
SUPREME COURT, KUALA LUMPUR
TUN DATO’ SERI ABDUL HAMID BIN HJ. OMAR LP DATO’ EDGAR JOSEPH JR. SCJ DATO’ MOHD. EUSOFF BIN CHIN SCJ
[CIVIL APPEAL NO. 02-219-91]
7 APRIL 1993
[Appeal allowed in part.
Each party to bear own
costs].
[Rayuan dibenarkan secara sebahagian.
Setiap pihak
menanggung kos sendiri].
JUDGMENT
Abdul Hamid Bin Hj. Omar LP:
In June 1983, the first respondent, Mae Perkayuan Sdn. Bhd. had desired to develop certain lands comprised in Lots 3243 to 3248, Mukim of Dungun, Trengganu, into a housing estate (“the Dungun Project”). It had also desired to purchase 6 Lots of agricultural land in Tampin, Mukim of Alor Gajah, Melaka, in total area 29.1 acres for the purpose of development into a housing estate (“the Alor Gajah Project”). To this end, the first respondent approached the appellant, Bank Bumiputra Malaysia Bhd., Kuala Trengganu (“the Bank”), for a bridging loan for the Dungun Project, and for money to purchase the land for the Alor Gajah Project.
On 25 June 1983, the Bank having studied details of the proposals of the first respondent, had agreed in writing to grant what it called ‘overdraft facilities’ to the first respondent, in the sum of RM4,500,000 (See the facility letter Exh. P2). Among the terms and conditions contained in Exh. P2 were these:
Facility: secured overdraft for RM4,500,000.
Purpose: (1) As building finance for proposed development of 6 Lots of land in Dungun … RM2.4 million. (2) To purchase 29.1 acres of agricultural land in Alor Gajah … RM2.1 million.
Duration: For a period of 4 years.
Security: Legal charge against the following:
(1) (Six parcels of land in Dungun).
(2) (Six parcels of land in Melaka).
Interest: At 2.5% above Base Lending Rate. Any nonpayment of interest as stipulated shall cause it to be capitalised and added to as principal sum, and interest shall be chargeable thereon at the same rate as prescribed above.
Commitment Fee: Chargeable at 1% per annum over the unutilised drawing limit.
Repayments: To be reduced progressively by way of redemption sums for the proposed housing development in Dungun. The redemption sum shall also cover the facility for land purchase and is to be fixed later, upon request for release of titles to End-Financiers.
For your information, all facilities granted by us are subject to periodical review and repayable on demand although we do not at this time anticipate exercising our rights in this respect.
The offer was accepted by the first respondent and Exh. P2 constituted the contract of loan between the parties.
The position by end of July 1985 was that although there was evidence that the first respondent had completed the “earthworks and site preparation”, there was no evidence to show that the amount disbursed by the Bank had not been spent by the first respondent for purposes of the development of the Dungun Project.
On 30 July 1985, the Bank’s head office in Kuala Lumpur wrote to the manager of its branch in Kuala Trengganu a directive (Exh. P13) as follows:
It has already been decided that the customers service the monthly accruing interest since November 1984 and to take steps to regularise the position of their account failing which the facility to be recalled.
From your overdraft report dated 11 July 1985 we observe that substantial excess still prevailed in the accounts. In this regards you are to implement the above decision immediately. We expect to receive a copy each of your letter to the customers within two weeks of the date of this letter.
On 14 October 1985, the Bank’s Manager at its branch in Kuala Trengganu wrote to the first respondent a letter (Exh. P5) which said thus:
Mae Perkayuan Sdn. Bhd.
OD/MC/G/83/121 – RM5,200,000
Pinjaman kemudahan diatas dirujukkan.
Untuk makluman tetuan, pihak Bank telah mengambil keputusan untuk menarik balik kemudahan diatas dan seterusnya tindakan undang-undang akan diambil terhadap tetuan.
Sekian, harap maklum.
(For your information the Bank has decided to withdraw the facilities given as mentioned above and consequently legal action shall be taken against you. That is all).
By letter dated 3 November 1985, the Bank’s solicitors demanded repayment from the first respondent and its two guarantors, of the sum of RM4,322,813.04 being the principal sum plus interest outstanding as at 15 October 1985, failing which they would take legal action to recover the same, and if necessary, to auction the lands charged to the Bank. On 21 July 1986, the Bank caused to be issued a writ in the High Court at Kuala Trengganu against the first respondent for recovery of the amount owing on the overdraft facility, interest thereon at the agreed rate and costs, and against the second and the third respondents as guarantors of the loan. The first respondent entered an appearance, filed a defence and counter-claimed for breach of contract, special damages of RM45 million, and general damages. The second respondent also entered an appearance and filed a defence and so did the third respondent.
In the High Court at Kuala Trengganu the Judge (Mr. Justice Ahmad Fairuz) found as a fact that as at 29 March 1985 RM2.1 million had been disbursed for the purchase of the lands which comprised the Alor Gajah Project. The first disbursement for purpose of the Dungun Project was on 2 October 1983, and thereafter by 21 June 1984 a total sum of RM1,104,286.50 had been disbursed by the Bank on the productions of architect’s certificates showing that the works specified therein had been completed.
At the conclusion of the trial the learned Judge found that the Bank had committed a breach of the bridging loan agreement (Exh. P2) and dismissed the plaintiff’s claim against the respondents. He allowed the counterclaim of the first respondent and awarded damages, against the Bank, of RM6 million for the Dungun project and RM6 million for the Alor Gajah project; RM5 million aggravated damages for injury allegedly suffered by the Sultan of Trengganu; and ordered payments totalling RM1,774,835.50 to be made by the Bank to third parties. Although the awards made by the Judge on the first respondent’s counterclaim amounted to RM18,774,834.50, yet he gave no reason whatever as to how he assessed these damages. The Bank now appeals against the learned Judge’s conclusion that it had committed a breach of the agreement and also against the quantum of damages awarded on the counter-claim against it.
It is not disputed, and the evidence shows, that the facilities were withdrawn by the Bank because the interest instalments due on the amounts disbursed by the Bank had not been paid by the first respondent. It was also not disputed that the Bank never caused to be served upon the respondents any letter demanding that they service or pay up the outstanding interest. However, the Bank did issue a letter, after the facilities were withdrawn, and that letter was dated 23 December 1985 (Exh. P6B) addressed to the first respondent stating as follows:
Faedah Denda Atas Bayaran Lewat.
Adalah dimaklumkan bahawa mulai 1 Disember 1985, faedah denda akan dikenakan ke atas bayaran ansuran/feadah yang lewat dibayar. Kadar faedah denda yang akan dikenakan ialah sekurang-kurangnya 1 % setahun ke atas kadar faedah yang sedia dikenakan dan jumlah denda dikira berdasarkan kepada jumlah hari ansuran/faedah itu lewat dijelaskan. Faedah denda minima yang dikenakan ialah sebanyak RM1.
Untuk mengelakkan faedah denda itu dikenakan ke atas akaun anda, adalah dinasihatkan supaya anda menjelaskan bayaran ansuran/feadah tersebut pada atau sebelum tamat tempoh.
Terima kasih.
(Penalty Interest On Late Payments
This is to inform you that effective 1 December 1985, penalty interest shall be imposed on instalments/interest which are paid late. The rate of penalty interest which will be imposed will be at least 1% per annum on top of the interest which is payable and the total penalty shall be calculated based on the total number of days on which payments which ought to be made, are not made. The minimum penalty interest is RM1.
To avoid this penalty interest being imposed on your account, you are advised to settle the instalments/interest before the end of the period).
In respect of this letter (Exh. P6B) both the first and second witnesses for the Bank could not but admit that there was nothing in Exh. P2 (the agreement) which required the first respondent to make repayment by fixed instalments, or which allowed the Bank to impose a penalty of 1% p.a. on interests or instalments remaining unpaid.
For the Bank, Counsel submitted that the overdraft facilities were withdrawn because the Bank had the right to do since a clause in Exh. P2 stated that all facilities granted by the Bank “are subject to periodical review and repayable on demand”.
We can see no evidence on record to show whether any review was in fact carried out by the Bank and whether any and if so what demand had been made or notice served by the Bank on the respondents before the Bank decided to withdraw the overdraft facilities.
As regards the non-payment of interest on the amounts disbursed by the Bank, it is a term in Exh. P2 that any interest not paid would be capitalised and added to the principal sum, and further interest would be chargeable thereon at the rate of 2.5% above the Bank’s base lending rate. Exh. P2 also made it clear that repayments of the money advanced by the Bank would be done progressively “by way of redemption sums see for the proposed housing development in Dungun. The redemption sum should also cover the facility for land purchase (in Melaka) and is to be fixed later on request for release of titles to End- Financiers”.
The Bank did not call its Chief General Manager at its head office Kuala Lumpur to give evidence. But the respondents called him as a defence witness. He is Arsam bin Damis who had worked in Bank Bumiputra Malaysia Bhd. from April 1977 to 1 August 1987, left the Bank and rejoined it on 1 June 1990 and is still with the Bank’s head office as Chief General Manager.
According to Encik Arsam, an overdraft had two things in common, that is:
(i) the drawdown of the loan is by way of issue of charge; and
(ii) there is no fixed period.
He said that what the Bank had granted to the first respondent in Exh. P2 was not an overdraft facility, but a bridging finance operated under overdraft. Bridging finance is a facility to finance the construction of the houses by the first respondent. The finance is to bridge the period between the time when the developer starts to prepare the ground works and the period when the developer will start to receive the proceeds of sales of the houses from purchasers which is, when sale and purchase agreements are signed.
Thus, the first respondent would receive 10% of the sale price of a house when it enters into a sale and purchase agreement with a purchaser. Upon receipt of this 10%, the first respondent would pay over the same to the Bank to reduce its indebtedness to the Bank. Similarly, when a purchaser pays to the first respondent a second instalment under the sale and purchase agreement upon certification by the architect that a certain stage of the house was completed, the first respondent would pay this over to the Bank; and this procedure would continue until the house was completed, and by which time the purchaser would have paid the total sale price of the house and, if all houses are sold, the Bank would by then be repaid all their money plus interest.
It follows that until the first respondent commenced receiving proceeds of sale from the house purchasers, it was under no obligation to pay to the Bank anything towards the principal sum or towards the interest. But the Bank had to fulfill its obligation to the first respondent in providing the bridging finance, otherwise the project would fail, in which case the first respondent would suffer losses and the Bank would not be able to recover its money plus interest.
The bridging finance is that amount which the Bank, after careful study, finds to be what the first respondent actually needs to carry out the works on the land, before the first respondent starts to get income from the project.
Encik Arsam also explained that the redemption sum mentioned in Exh. P2 is the sum to redeem the land titles charged to the Bank and held by the Bank as security for the bridging finance. The amount of repayment to be paid by the first respondent would depend on the outstanding principal sum plus interest.
The second respondent Mohamed @ Mohamed Anuar bin Embong is a director of the first respondent. He said that the first respondent had completed preparation of the site for development by levelling all the hills and rocks. He had obtained the subdivision of the lands into 93 lots. The layout plan had been approved by the Land Office on 19 March 1983. (Exh. D15 & D16). The building plans for shop-houses and dwelling houses were approved on 4 June 1983 by the Town Council of Dungun, (Exh. D17). Getting the approvals took a great deal of time because these were matters beyond his control. In any event, before the overdraft facilities were terminated he had already obtained all the necessary Government approvals including a housing developer’s licence. The only licence which had then yet to be approved by the Government was an advertising and sale permit without which the first respondent would not be able to advertise in the newspapers about the sales of the dwelling houses and the shop houses to be built. He could begin construction of the houses only after getting all these necessary approvals from the Government agencies as required by law. Up to the time of the termination of the overdraft facilities, a considerable sum of money had been spent by the first respondent but it had received no income because no sale and purchase agreement could yet be signed.
Having examined the evidence and the documents produced by the parties, we find that the first respondent had submitted its project and feasibility studies to the Bank. According to Encik Arsam, the Bank would not have agreed to finance the housing project unless it was fully satisfied that the project was viable. It goes without saying that when a bank offers a loan, it does so with a view to profit.
Upon the evidence, we find that there had been negotiations between the Bank and the first respondent before the Bank agreed to give the bridging finance in the terms appearing in Exh. P2. The Bank knew full well that the first respondent would receive no income whatsoever from the project until sale and purchase agreements were signed. The Bank would not be expecting any repayment until then. For that reason, the Bank had agreed to capitalise all interest on all sums disbursed by the Bank, which means interest which was not paid would be compounded.
From the contemporary documents we find that the reason why the Bank recalled the loan was solely because the first respondent had not paid the interest. The Bank had never notified the first respondent that if interest were not paid, it would recall the loan. Nowhere in Exh. P2 is it said that the first respondent was required to pay the interest monthly or at any other intervals.
The overdraft facility for bridging finance was for a specific period of four years. When the Bank, without notice, recalled the loan on 14 October 1985, there was still about eight and a half months to run.
We note that to ensure that the first respondent would fully utilise the loan, the Bank had imposed a commitment fee of 1% per annum over the unutilised drawing limit. But now the Bank says that despite the fixed period of 4 years, a clause in Exh. P2 allows it to recall the loan at any time. This Court had in Eushun Properties Sdn. Bhd. v. MBF Finance Bhd. [1992] 2 MLJ 137 dealt with a similar issue, and there Mohamed Yusoff SCJ quoted what Goff J. said in an unreported case of Titford Property Co. Ltd. v. Cannon Street Acceptance Ltd. on 22 May 1975 –
It seems to me, where a bank allows an overdraft for a fixed time for a specific purpose – whether the time be such as the parties think is required for the achievement of the purpose, or only the most the bank will also allow, that time is binding on the bank; otherwise the customer might well be led into a disastrous position, as has happened here. The customer, on the faith of the bank’s promise to a loan, an overdraft for a fixed term, commits himself and then finds the overdraft cut off, so that he cannot meet his liabilities, and in addition he had incurred indebtedness to the bank in respect of abortive expenditure .. (The bank) could not, in my judgment, with one hand grant a facility for a term for a purpose which to its knowledge clearly involves the plaintiffs in incurring expenditure and liabilities, with a view to ultimate profit, and with the other take it away by an unqualified right to require repayment on demand at any time. In my judgment, therefore, I must modify cl 9, by reading it as subject to the provision as to the duration of this facility, or ignore it altogether.
We consider that the Bank was not entitled to issue the recall letter purely on the ground that interest had not been serviced by the first respondent because the first respondent is not obliged under the agreement to pay interest during the bridging period.
It would have been otherwise if, for example, the Bank had established that the amount disbursed had been used for purposes other than the development of the project, or the project had been abandoned, which was not the case here. To that extent, the demand clause could be invoked by the Bank.
The Bank’s first witness stated that the other reason for recalling the loan was because the first respondent had not started to construct the houses. If that had been the case, then we consider that there was a reciprocal obligation on both parties to discuss the reasons for the delay or to make proposals and counter-proposals and try to solve the problem, and if necessary to extend the period of completion of the project so that neither party would suffer any loss.
Under the circumstances, we find that the Bank had in recalling the loan mid-term, committed a breach of the agreement contained in Exh. P2, and we accordingly affirm the learned trial Judge’s decision on this issue.
The Quantum of Damages, generally.
The consequences of a breach of contract are governed by s. 74 of the Contract Act 1950 , which states –
74.(1) When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
(2) Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
The first respondent’s counterclaim
In their counterclaim, the first defendant sought special damages amounting to RM49,274,823.43 for loss of profits from the Dungun and Alor Gajah housing projects, and also general damages. The learned Counsel for the Bank submitted that this counterclaim must fail as the respondent had failed to give the details and itemise the losses in the statement of defence. He urged that there was no evidence adduced in Court to support this counterclaim on special damages.
The first respondent’s claim for loss of profits in respect of the Dungun Project
We note that before the Bank approved the bridging finance in the form of an overdraft for a fixed period, the first respondent had submitted its project papers and feasibility study (Exh. D20) prepared by Mohd. Anuar & Co. who were financial and land consultants, housing developers and first class appraisers. These papers gave the details of the works to be carried out for purposes of the project, including construction costs, management costs, consultant’s fees, legal fees, contractors profits, and interest to be paid to the Bank, etc., and the sale price of each type of house to be sold. The lands on which the houses were to be built were not Malay Reservation lands. The 15 units of shophouses were of double storey type while the dwelling houses were to consist of 16 units of bungalows, 20 units of semi-detached houses and 42 units terrace houses all of single storey type. Besides Malays, there was a non- Malay population of about 60,000 in the neighbourhood of the housing projects, so that it could be reasonably presumed that there would have been a significant market for the dwelling houses. The evidence of the second respondent as director of the first respondent shows that he had received a large number of inquiries from potential buyers but could not enter into any sale and purchase agreements with them because the first respondent had not obtained the necessary advertisement and sale permit from the Housing Ministry. The witness had discussed the details of the project papers and feasibility study with the Bank according to which the anticipated total development costs of the project would have been RM6,030,920 while the anticipated proceeds of sales of the dwelling houses were said to amount to RM12,250,000 in which case, it was anticipated that the first respondent would make a projected profit of RM6,219,080.
The evidence of the Chief General Manager of the Bank’s head office shows that the Bank would not have approved the bridging finance unless it was satisfied that the projects would be viable and profitable. The Bank was fully aware and knew that if for any reason the projects could not be completed, the first respondent could incur a heavy loss in terms of loss of profit, and consequently, the Bank too might incur losses as the first respondent might not be in a position to repay the sums advanced to it.
The notes of evidence show that although the Bank had closed its case as plaintiff, in the interest of justice, the trial Court had allowed the Bank to re-open its case by calling the Bank’s Manager at Kuala Trengganu, Encik Mohd. Bustamin, to give his comments on Exh. D20. This witness said that the project papers and feasibility study showed that the project was a profitable one, and the Bank had acknowledged that it was a profitable and viable project before agreeing to give the bridging finance.
The fourth witness for the respondents was a quantity surveyor, Mohd. Rasid bin Hainin, with Akitek Indahreka of 13 years standing. Prior to joining Akitek 1 Indahreka he had been in Government service for 5 / 2 years. While in Government service, his duties included preparing bills of quantities, tender agreements and he was also in charge of school, road and water works projects, until he joined Akitek Indahreka in 1983. He was involved in about 20 housing projects in Trengganu. He said more than 90% of housing projects in Trengganu had been completed.
Mohd. Anuar & Co. had engaged Mohd. Rasid to prepare the layout and building plans for the first respondents’ housing projects. Mohd.. Rasid had prepared the most economical costs for the project by which he meant that having regard to the progress and the development of the surrounding areas, the houses to be constructed must be of the types which would be the most saleable. His calculations showed that the total development cost would amount to RM5,821,878, the houses when completed and sold would fetch
RM11,216,600 and consequently the project would bring a profit of around RM5.3 million.
The law in England with regard to measure of damages for breach of contract to lend money is stated in the treaties on damages in Halsbury’s Laws of England 4th Edn. Vol. 12 p. 465, paragraph 1179 –
Damages for breach of a contract to lend money may be nominal or substantial according to the circumstances which will in each case determine the reasonable contemplation as to the loss which is liable to result from the breach. Thus the cost of raising the money elsewhere may be recoverable as a natural result and where the defendant had knowledge of other probable consequences of his breach, he may have to render full compensation for the loss thereby inflicted upon the plaintiff. Whether the damages claimed are damages arising naturally from the breach or damages for which the contract breaker is liable because of his special knowledge at the time of the contract depends also on all the circumstances of the case.
It will be seen that the law in this country as to the measure of damages for breach of contract as provided under s. 74 of the Contracts Act , is the same as in England, and requires that the damage or loss suffered must be within the contemplation of both parties. In this case, the Bank had full knowledge from the very beginning that the project, if successfully and duly completed, would bring in a profit of about RM5.3 million to the first respondent. The Bank had studied every aspect of the project and had decided what amount was required by the first respondent as bridging finance before the first respondent could be expected to derive a profit from sales of dwelling houses. Once the first respondent commenced to derive such profit, it could be expected to apply the same towards reduction of its overdraft with the Bank and completion of the project. It is public and common knowledge that where a financial institution withdraws its financial facility from a developer engaged on a housing project, it becomes virtually impossible for the developer to obtain financial facilities from alternative sources.
We are, therefore, of the view that the loss of profits on the housing project which the first respondent would suffer was the natural and probable result of the breach of agreement by the Bank, and when the Bank agreed to provide the bridging finance to the first respondent, the Bank well knew of the loss that the first respondent would incur should the Bank break the contract. In General Securities Ltd. v. Don Ingram Ltd. [1940] SCR (Canada) at 670, the facts were that under an agreement in 1933 the respondent was the retail distributor, and for some time in 1937, the wholesale distributor, for the Studebaker Corporation of Canada, which manufactured and sold automobiles. In February, 1934, the appellant and the respondent entered into an agreement by which the appellant undertook to furnish such credit and advance such moneys as might be required from time to time to finance exclusively the respondent’s purchases of automobiles and to supply working capital for the respondent’s business. Pursuant to this agreement the appellant, during the years 1934, 1935, 1936 and 1937 furnished the respondent with credit and made advances. In the autumn of 1937 the respondent was contemplating the purchase of twenty-six automobiles from the Studebaker Corporation and the appellant agreed unconditionally with the respondent to finance the purchase of these automobiles, and in October of that year the respondent, relying upon this agreement with the appellant, contracted with the Studebaker Corporation to purchase these automobiles. In December the automobiles reached Vancouver and the bills of lading, with draft attached, were presented to the respondent for acceptance and payment. The appellant, on being requested to furnish funds for this purpose pursuant to the agreement, refused to do so. The respondents having endeavoured unsuccessfully to arrange elsewhere for funds to meet the draft, the Studebaker Corporation terminated its agreement with the respondent on the 10 January 1938, and sold most of the automobiles to persons appointed by the Corporation in place of the respondent. The learned trial Judge found that as a result, the respondent was obliged to discontinue its business and its assets had to be sold at a loss. The Judge was of the opinion that loss of profits on the automobiles and loss of the respondent’s franchise with the consequent loss of its business and loss on realization of its assets were under the circumstances natural and probable results which must have been and were within the contemplation of the appellant. The appellant was therefore liable to pay damages to the respondent accordingly. The Court of Appeal, and the Supreme Court of Canada confirmed that judgment.
The loss of profit to the first respondent here, will have to be assessed by the Court on the evidence available before it. Neither in the Court below nor before us had the Bank made any attempt to challenge or contradict the computations by the first respondent contained in its project paper and feasibility study or the testimony given by the quantity surveyor on behalf of the first respondent.
As for the quantum of damages for the loss of profits in respect of the Dungun project the learned Judge summed up as follows:
(i) Keterangan SD5 menunjukkan kedua-dua pihak Bank dan defendan 1 telah samasama bersetuju bahawa keuntungan yang akan diperolehi daripada projek di Dungun ini ialah tidak kurang daripada RM6 juta dan pihak Bank akan memperolehi balik wang pokok yang dipinjamkan kepada defendan 1 bersama-sama itu. Tidak pula terdapat keterangan-keterangan yang menyatakan selain daripada apa yang dikatakan oleh SD5. Ditunjuk lagi oleh SD5 bahagian kandungan D20 yang menyatakan bahawa keuntungan bersih dari projek di Dungun ialah sebanyak RM6, 219,800. Dan tidak berdapat keterangan-keterangan yang menumpaskan implikasi keteranganketerangan SD1 dan SD2 bahawa D20 telah diambilkira oleh pihak Bank sebelum P2 dikeluarkan.
((i) The evidence of DW5 shows that both the Bank and the defendant No. 1 had agreed that the profits to be derived from the project at Dungun would not be less than RM6 million and that the Bank would be able to recover from the profits the amount advanced to the defendant No. 1 together with interests. There is no other evidence except what had been stated by DW5. DW5 also pointed out the relevant part of exhibit D20 which stated that the nett profit from the Dungun project would be RM6, 219,800. No evidence was adduced to challenge the evidence of DW1 and DW2 who stated that the Bank had taken into consideration the contents of exhibit D20 before exhibit P2 was issued).
Be that as it may, on the evidence produced in the Court below, there appears to be two computations as to profits that the Dungun project would have fetched. Apart from the evidence of expected profits relied upon by the learned Judge, there was the evidence of Mohd. Rasid, the quantity surveyor with Akitek Indahreka, who testified to the effect that after taking into account various factors including development costs, “this project, if completed, would realise a profit. Based on experience, the total net profit would be about RM5,394,722″ (RM11,216,600 – RM5,821,878). In consideration, we are of the view, that the net profit as estimated by Mohd. Rasid would, on balance of probabilities, be acceptable and should, therefore, be preferred to the assessment of RM6.2 million made by the learned Judge and we so find. We would also award interest thereon at the rate of 5% p.a. from date of accrual or cause of action until judgment under s. 11 of the Civil Law Act, 1956 , and thereafter, until payment, at the rate of 8% p.a. under O. 42 r. 12 of the Rules of the High Court.
The first respondent’s claim for loss of profits in respect of the Alor Gajah Project
As for the claim for other damages suffered, we do bear in mind s. 74 of the Contracts Act which is declaratory of the common law rules as to assessment of damages in contract enunciated in Hadley v. Baxendale [1854] 9 Ex, 34. Once the claimant has proved that the kind of damages suffered was foreseeable then the guilty party is liable to the full extent of it whether foreseeable or not provided that the extent of the damages claimed has been established on the balance of probabilities. In other words, it would not be sufficient for a claimant to merely show that the extent of damage alleged was merely possible. To hold otherwise would dispense with proof of quantum altogether. (See Litigation Support and Financial Assessment of Damages by D.R. Chilver and CJ Lemar p. 57).
In the light of the principles governing the assessment of damages, we are unable to subscribe to the judgement made by the learned Judge when he allowed the loss of profits in respect of the Alor Gajah project. It is our view that loss of profits claimed in respect of the Alor Gajah project were dependent upon the application of profits expected from the Dungun project and would be too remote and should not therefore be allowed. We therefore disallow this claim and set aside the Judge’s award of RM6 million in respect thereof.
The first respondent’s claim for exemplary damages
The principles for an award of exemplary damages appear in Rook v. Barnand [1964] AC 1129 and Cassell v. Broome [1972] 1 All ER 801. In this case, we feel that the first respondent had not established its claim in accordance with these principles. We therefore disallow this claim and set aside the Judge’s award of RM5 million in respect thereof.
The first respondent’s claim for re-imbursement of damages paid to third party
Our view is that the first respondent had not properly substantiated this claim. There was no evidence adduced from the third parties concerned showing that they had received damages from the first respondent. We therefore disallow this claim and set aside the Judge’s award of RM1,774,834.50 in respect thereof.
The Bank’s claim for recovery of the loan
The dismissal of the Bank’s counterclaim in respect of the sum owing by the first respondent to the bank on the overdraft facility on the ground that the Bank was in breach of contract in recalling the overdraft prematurely cannot be justified. The Bank’s claim for recovery of the loan was entirely a separate matter from the first respondent’s claim for damages against the Bank. There is no ground in law for exempting the first respondent from liability to repay the loan. However, the Bank’s claim for interest on the loan at the rate agreed in the facility letter, for the period after the overdraft was prematurely recalled, must be disallowed on the ground that in so recalling the overdraft, the Bank was in breach of contract. The first respondent must, therefore, pay the agreed rate of interest on the loan up to the date when the overdraft was prematurely withdrawn. It follows that the amount the Bank is entitled to recover as at 15 October 1985 is RM4,322,813 (RM Four Million Three Hundred and Twenty Two Thousand Eight Hundred and Thirteen). In addition, the Bank should be entitled to simple interest of 5% p.a. as from the time the overdraft was prematurely withdrawn, until judgment, under s. 11 of the Civil Law Act 1956 , and thereafter, until payment, at the rate of 8% p.a. under O. 42 r. 12 of the Rules of the High Court. And, we so order.
As for costs, it is our view that each party should bear its own costs here and in the Court below and we so order. Deposit to be refunded to appellant.
Eusoff Chin SCJ, who has read this judgment, has expressed his agreement with it.
Edgar Joseph Jr. SCJ:
Supporting Judgment
I have had the advantage of reading the draft judgment of the Lord President with which I agree and to which I would add this short supporting judgment on the issue of liability, insofar as the first respondent’s counterclaim is concerned.
The appellants, Bank Bumiputra (the Bank), had given the overdraft facility to the first respondent, Mae Perkayuan Sdn. Bhd. (the Customer) pursuant to its letter of facility dated 25 June 1983, addressed to the Customer, being Ex P2 (the facility letter), wherein were set out the terms of the loan, the material portions thereof, in typescript words, being as follows:
Facility: Secured Overdraft for RM4,500,000
Purpose:
(1)As building finance for proposed development of 6 lots of land in Dungun belonging to Yang Teramat Mulia Yang Di Pertuan Muda, Terengganu (Now DYMM Sultan of Terengganu). $2.4 Million
(2)To purchase 29.1 acres of agricultural land in Alor Gajah, Melaka (including incidental cost of RM100,000). $2.1 Million $4.5 Million
Security: Legal Charge against the following:
For (1) above
(i) First Legal Charge (Third Party) against 6 parcels of land in Mukim & District of Dungun, Terengganu under MG 245 Lot 3243 to MC 250 Lot 3248.
For (2) above
(ii) First Legal Charge against 6 parcels of land to be purchased in Mukim Pulau Sebang, Alor Gajah, Melaka under:
G 3487 Lot 2099. Mukim Grant Lot 1125. G 3488 Lot 2100. Mukim Grant Lot 1126. G 3489 Lot 2101. Mukim Lease Lot 1759. Duration: For a period of 4 years. Interest: At 2.5% above our Base Lending Rate.
The Bank may, at its absolute discretion vary the rate of interest from time to time and the variation shall take effect from the date specified in the notice.
Any non-payment of interest as stipulated shall cause it to be capitalised and added to the principal sum and interest shall be chargeable thereon at the same rate as prescribed above. Commit- Chargeable at 1% per annum over the ment Fee: unutilised drawing limit. Disburse-
(1)Bridging Finance for ment: RM2,400,000
To be released progressively against Architect’s Certificate of Completion, after compliance of all conditions precedent and security document on the properties in Dungun have been executed and consent to charge has been obtained.
(2) Purchase of land in Alor Gajah for RM2,100,000
Funds to be released through the Bank’s solicitors direct to the vendor subject to confirmation by solicitor that:
(i) Balance of purchase price has been paid (if any). (ii) Unencumbered titles and valid memorandum of transfer are in their custody.
Repayment: To be reduced progressively by way of redemption sums for the proposed housing development in Dungun. The redemption sum shall also cover the facility for land purchase and is to be fixed later, upon request for release of titles to End- Financiers.
However, the ante – penultimate para of the facility letter in printed words was as follows:
For your information, all facilities granted by us are subject to periodical review and repayable on demand although we do not at this time anticipate exercising our rights in this respect.
In the event, in compliance with the penultimate para of the facility letter, which read as follows:
If the above terms and conditions are acceptable to you, kindly signify your acceptance by signing and returning the duplicate of this letter within fourteen (14) days of the above date,
the customer signified acceptance of those terms, and returned the same. Consequent thereto, the customer executed the security documents, being the charges under the National Land Code, 1965, which provided that the loan shall be repayable on demand.
It will be seen, therefore, that on the one hand, the typescript words of the facility letter which constituted the contract of loan provided for a loan for a specified period (a term loan) and for a specified purpose, to wit, to provide bridging finance of $2.4 million for the Dungun Project and to provide finance of $2.1 million for the purchase of lands in Alor Gajah, whereas on the other hand, the printed words in the facility letter and the security documents, provided that the loan, shall be repayable on demand.
Clearly, the typescript words, in their ordinary meaning, contradict the printed words in the facility letter, as well as the words in the security documents. In a situation such as this, due weight must be given to the “contra proferentes rule” and the printed words must be rejected in favour of the typescript words.
I am supported in this by the following passage in Chitty on Contracts, Vol. 1, 24th Edn., para 716, p. 330 which reads:
Printed and written clauses. Where the contract is contained in a printed form with writing superadded, the written words, if there should be any reasonable doubt about the sense and meaning of the whole, are to have greater effect attributed to them than the printed words, in as much as the written words are the immediate language and terms selected by the parties themselves for the expression of their meaning, and the printed words are a general formula adapted equally to their case and that of all other contracting parties upon similar occasions and subjects. Robertson v. French [1803] 4 East 130, 136; Heilbut, Symons & Co. [1917] 2 KB 348, 358, 361; The Brabant [1967] 1 QB 588. And in event of a difference between words and figures, the written words normally prevail. Saunderson v. Piper [1839] 5 Bing NC 425.
Even discounting the fact that “the term loan” provisions were in typescript words while the “on demand” provisions were printed, the same result as aforesaid should follow if the provisions were entirely in typescript words. In this, I am supported by the following passage in Paget’s Law of Banking (10th Edn.,) p. 183:
Some banks when lending for a specific period (a term loan) pursuant to a facility letter setting out the terms of the contract of loan provide either in the facility letter or in their security documents that the loan shall be repayable on demand. It is submitted that in the event of such conflicting provisions, if there is no breach by the borrower of the conditions on which the loan was granted, the provision for a term loan would take precedence. The right to repayment on demand is repugnant to the main object of the transaction (See Titford Property Co Ltd v. Cannon Street Acceptances [1975] unreported; and see also the cases on fundamental breach culminating in Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827). In short, where a banker agrees to lend for a specific period, that agreement cannot, unless there is a breach by the borrower, be terminated by the bank purely on the strength of its alleged right to repayment on demand or on the strength of such a right given in its standard security document.
In Titford Property Co Ltd v. Cannon Street Acceptances (ibid), Goff J. (as he then was) said this:
It seems to me, where a bank allows an overdraft for a fixed time for a specific purpose – whether the time be such as the parties think is required for the achievement of the purpose, or only the most the bank will allow, that time is binding on the bank; otherwise the customer might well be led into a disastrous position, as has happened here. The customer, on the faith of the bank’s promise to a loan, an overdraft for a fixed term, commits himself and then finds the overdraft cut off, so that he cannot meet his liabilities, and in addition he had incurred indebtedness to the bank in respect of abortive expenditure … [The bank] could not, in my judgment, with one hand grant a facility for a term for a purpose which to its knowledge clearly involves the plaintiffs in icurring expenditure and liabilities, with a view to ultimate profit, and with the other take it away by an unqualified right to require repayment on demand at any time. In my judgment, therefore, I must modify cl 9, by reading it as subject to the provision as to the duration of this facility, or ignore it altogether.
The above passage in the judgment of Goff J. was applied by our Supreme Court in Eushun Properties Sdn. Bhd. v. MBF Finance Bhd. [1992] 2 MLJ 137 .
The Bank might have had no intention to grant a term loan to the customer in this case, but that is beside the point because in construing an agreement in writing, the intention of the parties must be gathered from the words appearing in the contract and parole evidence tending to vary the written agreement would be inadmissible though such evidence would be admissible to show that the minds of the contracting parties were not ad idem. There was, however, no attempt by the Bank in this case to claim rectification on the ground that the agreement did not represent the common intention of the parties, that being the only ground upon which rectification can be granted.
The Bank was therefore in breach of contract when it treated the term loan as an on demand loan and recalled it prematurely, that is to say, before its right to do so had accrued and so the customer is entitled to damages.
If, contrary to my primary view, the typescript words and the printed words can be read together and be given a reasonable meaning, from the commercial point of view, and the contract of loan is construed as an on demand loan, the borrower in this case was entitled to some reasonable time to re-pay. This is emphasised by the ante-penultimate para of the facility letter, which reads:
For your information, all facilities granted by us are subject to periodical review and repayable on demand although we do not at this time anticipate exercising our rights in this respect. (Emphasis added).
In this context, I am reminded of what Linden J. said in the Canadian case of Broadloom Cpn (1968) Ltd v. Bank of Montreal et al [1979] 25 OR (2d), 198, which was an action for damages for failure of a creditor to give reasonable time for repayment of an on demand loan. Linden J. recognised that the bank concerned was obliged to give the debtor some reasonable time to repay the loan even though the loan was a demand loan. He went on to hold that in assessing what length of time was reasonable in a particular fact situation various factors must be analyzed, namely:
(1) the amount of the loan;
(2) the risk to the creditor of losing his money or the security;
(3) the length of the relationship between the creditor and the debtor;
(4) the character and reputation of the debtor;
(5) the potential ability of the debtor to raise the money required in a short period;
(6) the circumstances surrounding the demand for payment; and
(7) any other relevant factors.
In the recent case Emar Sdn. Bhd. v. Aidigi Sdn. Bhd. [1992] 2 MLJ 734 I had occasion, when speaking for the Supreme Court, to quote with approval the above passage in the judgment of Linden J.
The next question to consider is whether, upon the evidence in the present case, the Bank had carried out the periodical survey they had promised and then given the customer a reasonable time, before recalling the overdraft facility.
I am of the view that there is no evidence or no sufficient evidence that the Bank had carried out a final periodical survey and then given the customer a reasonable time for repayment before recalling the overdraft facility, and so, on this alternative ground also, the Bank was in breach of contract and consequently, the customer is entitled to damages.
The Lord President and Eusoff Chin, SCJ, who, together with me, comprised the Court, have read the draft of this supporting judgment and have asked me to say that they agree with it.
RULES OF THE HIGH COURT 1980
PU(A) 50/1980
|
Order 42. Judgments and Orders. Rule 1. Judgment to be pronounced in open Court. (O. 42 r. 1) Every judgment after trial must be pronounced in open Court, wither immediately on the conclusion of the trial, or on a subsequent day of which due notice must be given to the parties. Rule 2. Written judgment to be filed (O. 42 r. 2) Whenever the Court delivers a written judgment, the original or a copy thereof, signed by the Judge must be filed. Rule 3. Judgment of absent Judge. (O. 42 r. 3) When a Judge who has tried any proceedings is unable through death, illness or other cause to pronounce judgment, the judgment written by him may be read by any other Judge or by the Registrar. Rule 4. Entry of judgment in Cause Book. (O. 42 r. 4) The proper officer in the Registry must enter in the cause book a minute of every judgment or final order given or made by the Court. Rule 5. Form of judgment, etc. (O. 42 r. 5) (1) If, in the case of any judgment, a form thereof is prescribed in Form 79 the judgment must be in that form. (2) The party entering any judgment shall be entitled to have recited therein a statement of the manner in which the writ or other originating process by which the cause or matter in question was begun was served. (3) An order must be marked with the name of the Judge or the Registrar by whom it was made and must be sealed. Rule 6. Judgment, etc. requiring act to be done: Time for doing it. (O. 42 r. 6) (1) Subject to paragraph (2), a judgment or order which requires a person to do an act must specify the time after service of the judgment or order, or some other time, within which the act is to be done. (2) Where the act which any person is required by any judgment or order to do is to pay money to some other person, give possession of any immovable property or deliver any movable property, a time within which the act is to be done need not be specified in the judgment or order by virtue of paragraph (1), but the foregoing provision shall not affect the power of the Court to specify such a time and to adjudge or order accordingly. Rule 7. Date from which judgment or order takes effect. (O. 42 r. 7) (1) A judgment or order of the Court takes effect from the day of its date. (2) Such a judgment or order shall be dated as of the day on which it is pronounced, given or made, unless the Court orders it to be dated as of some other earlier or later day, in which case it shall be dated as of that other day. Rule 8. Preparation of judgment or order. (O. 42 r. 8) (1) Where the party in whose favour a judgment or order is given or made is represented by a solicitor, a copy of the draft shall be submitted for approval to the solicitor (if any) of the other party who shall within 2 days of the receipt thereof, or within such further time as may in any case be allowed by the Registrar, return such copy with his signed consent or any required amendments thereto. (2) When the solicitor omits to return the copy of the draft within the time prescribed, he shall be deemed to have consented to the terms thereof. (3) In any case where the solicitors concerned are unable to agree upon the draft, any one of them may obtain an appointment before the Registrar, of which notice shall be given to the other, to settle the terms of the judgment or order. (4) Every judgment or order shall be settled by the Registrar, but in the case of a judgment or order made by a Judge, any party may require the matter in dispute to be referred to the Judge for his determination. (5) Where the other party has no solicitor, the draft shall be submitted to the Registrar. Rule 9. Orders required to be drawn up. (O. 42 r. 9) (1) Subject to paragraph (2), every order of the Court shall be drawn up unless the Court otherwise directs. (2) An order- (a) which- (i) extends the period within which a person is required or authorised by these rules, or by any judgment, order or direction, to do any act; or (ii) grants leave for the doing of any of the acts mentioned in paragraph (3); and (b) which neither imposes any special terms nor includes any special directions other than a direction as to costs, need not be drawn up unless the Court otherwise directs. (3) The acts referred to in paragraph (2)(a)(ii) are- (a) the issue of any writ, other than a writ of summons notice of which is required for service out of the jurisdiction; (b) the amendment of a writ of summons or other originating process or a pleading; (c) the filing of any document; (d) any act to be done by an officer of the Court other than a solicitor. Rule 10. Drawing up and entry of judgments and orders. (O. 42 r. 10) (1) Where a judgment given in a cause a matter is presented for entry in accordance with this rule at the Registry, it shall be entered by an officer of the Registry in the book kept for the purpose. (2) The party seeking to have such a judgment entered must draw up the judgment and present it to the proper officer of the Registry for entry. (3) On entering any such judgment the proper officer shall file the judgment and return a duplicate thereof to the party who presented it for entry. (4) Every order required to be drawn up must be drawn up by the party in whose favour the order has been made and if that party fails to draw up the order within 7 days after it is made any other party affected by the order may draw it up. (5) The order referred to in paragraph (4) must, when drawn up, be produced at the Registry, together with a copy thereof, and when passed by the proper officer the order, sealed with the seal of the High Court, shall be returned to the party producing it and the copy shall be lodged in the Registry. Rule 11. Duplicates of judgments and orders. (O. 42 r. 11) (1) Not less than one clear day after a judgment or order has been filed a duplicate thereof shall be supplied on payment of the prescribed fee out of the Registry to any party in the proceedings. (2) The duplicate of a judgment or order may be a carbon copy of the original except that if the Registrar so directs, the duplicate of every judgment or order of such class as he directs, shall be a photographic copy or a copy produced by type lithography or other similar process. (3) Before a duplicate of a judgment or order is issued it must be sealed and there must be noted thereon the number of the judgment, the date of entry and the amount of any stamp on the original. (4) Where by any of these rules or any order of the Court the original judgment or order is required to be produced or served it shall be sufficient to produce or serve the duplicate. (5) A further duplicate of a judgment or order may, on payment of the prescribed fee, be issued if the Registrar is satisfied that the duplicate has been lost and that the applicant for a further duplicate is entitled to it. (6) A judgment or order shall not be amended except on production of the duplicate thereof last issued, and if the judgment or order is amended the duplicate so issued, shall be similarly amended, and the amendment sealed, under the direction of the Registrar. Rule 12. Interest on judgment debts. (O. 42 r. 12) [Sub. PU(A) 445/86] Every judgment debt shall carry interest at the rate of 8 per centum per annum or at such other rate not exceeding the rate aforesaid as the Court directs (unless the rate has been otherwise agreed upon between the parties), such interest to be calculated from the date of judgment until the judgment is satisfied. Rule 13. Setting aside or varying judgments and orders. (O. 42 r. 13) [Ins PU(A) 192/93] Where in these Rules provisions are made for the setting aside or varying of any order or judgment, a party intending to set aside or to vary such order or judgment must make his application to the Court and serve it on the party who has obtained the order or judgment within thirty days after the receipt of the order or judgment by him. |
RULES OF THE HIGH COURT 1980
PU(A) 50/1980
|
Order 42. Judgments and Orders. Rule 1. Judgment to be pronounced in open Court. (O. 42 r. 1) Every judgment after trial must be pronounced in open Court, wither immediately on the conclusion of the trial, or on a subsequent day of which due notice must be given to the parties. Rule 2. Written judgment to be filed (O. 42 r. 2) Whenever the Court delivers a written judgment, the original or a copy thereof, signed by the Judge must be filed. Rule 3. Judgment of absent Judge. (O. 42 r. 3) When a Judge who has tried any proceedings is unable through death, illness or other cause to pronounce judgment, the judgment written by him may be read by any other Judge or by the Registrar. Rule 4. Entry of judgment in Cause Book. (O. 42 r. 4) The proper officer in the Registry must enter in the cause book a minute of every judgment or final order given or made by the Court. Rule 5. Form of judgment, etc. (O. 42 r. 5) (1) If, in the case of any judgment, a form thereof is prescribed in Form 79 the judgment must be in that form. (2) The party entering any judgment shall be entitled to have recited therein a statement of the manner in which the writ or other originating process by which the cause or matter in question was begun was served. (3) An order must be marked with the name of the Judge or the Registrar by whom it was made and must be sealed. Rule 6. Judgment, etc. requiring act to be done: Time for doing it. (O. 42 r. 6) (1) Subject to paragraph (2), a judgment or order which requires a person to do an act must specify the time after service of the judgment or order, or some other time, within which the act is to be done. (2) Where the act which any person is required by any judgment or order to do is to pay money to some other person, give possession of any immovable property or deliver any movable property, a time within which the act is to be done need not be specified in the judgment or order by virtue of paragraph (1), but the foregoing provision shall not affect the power of the Court to specify such a time and to adjudge or order accordingly. Rule 7. Date from which judgment or order takes effect. (O. 42 r. 7) (1) A judgment or order of the Court takes effect from the day of its date. (2) Such a judgment or order shall be dated as of the day on which it is pronounced, given or made, unless the Court orders it to be dated as of some other earlier or later day, in which case it shall be dated as of that other day. Rule 8. Preparation of judgment or order. (O. 42 r. 8) (1) Where the party in whose favour a judgment or order is given or made is represented by a solicitor, a copy of the draft shall be submitted for approval to the solicitor (if any) of the other party who shall within 2 days of the receipt thereof, or within such further time as may in any case be allowed by the Registrar, return such copy with his signed consent or any required amendments thereto. (2) When the solicitor omits to return the copy of the draft within the time prescribed, he shall be deemed to have consented to the terms thereof. (3) In any case where the solicitors concerned are unable to agree upon the draft, any one of them may obtain an appointment before the Registrar, of which notice shall be given to the other, to settle the terms of the judgment or order. (4) Every judgment or order shall be settled by the Registrar, but in the case of a judgment or order made by a Judge, any party may require the matter in dispute to be referred to the Judge for his determination. (5) Where the other party has no solicitor, the draft shall be submitted to the Registrar. Rule 9. Orders required to be drawn up. (O. 42 r. 9) (1) Subject to paragraph (2), every order of the Court shall be drawn up unless the Court otherwise directs. (2) An order- (a) which- (i) extends the period within which a person is required or authorised by these rules, or by any judgment, order or direction, to do any act; or (ii) grants leave for the doing of any of the acts mentioned in paragraph (3); and (b) which neither imposes any special terms nor includes any special directions other than a direction as to costs, need not be drawn up unless the Court otherwise directs. (3) The acts referred to in paragraph (2)(a)(ii) are- (a) the issue of any writ, other than a writ of summons notice of which is required for service out of the jurisdiction; (b) the amendment of a writ of summons or other originating process or a pleading; (c) the filing of any document; (d) any act to be done by an officer of the Court other than a solicitor. Rule 10. Drawing up and entry of judgments and orders. (O. 42 r. 10) (1) Where a judgment given in a cause a matter is presented for entry in accordance with this rule at the Registry, it shall be entered by an officer of the Registry in the book kept for the purpose. (2) The party seeking to have such a judgment entered must draw up the judgment and present it to the proper officer of the Registry for entry. (3) On entering any such judgment the proper officer shall file the judgment and return a duplicate thereof to the party who presented it for entry. (4) Every order required to be drawn up must be drawn up by the party in whose favour the order has been made and if that party fails to draw up the order within 7 days after it is made any other party affected by the order may draw it up. (5) The order referred to in paragraph (4) must, when drawn up, be produced at the Registry, together with a copy thereof, and when passed by the proper officer the order, sealed with the seal of the High Court, shall be returned to the party producing it and the copy shall be lodged in the Registry. Rule 11. Duplicates of judgments and orders. (O. 42 r. 11) (1) Not less than one clear day after a judgment or order has been filed a duplicate thereof shall be supplied on payment of the prescribed fee out of the Registry to any party in the proceedings. (2) The duplicate of a judgment or order may be a carbon copy of the original except that if the Registrar so directs, the duplicate of every judgment or order of such class as he directs, shall be a photographic copy or a copy produced by type lithography or other similar process. (3) Before a duplicate of a judgment or order is issued it must be sealed and there must be noted thereon the number of the judgment, the date of entry and the amount of any stamp on the original. (4) Where by any of these rules or any order of the Court the original judgment or order is required to be produced or served it shall be sufficient to produce or serve the duplicate. (5) A further duplicate of a judgment or order may, on payment of the prescribed fee, be issued if the Registrar is satisfied that the duplicate has been lost and that the applicant for a further duplicate is entitled to it. (6) A judgment or order shall not be amended except on production of the duplicate thereof last issued, and if the judgment or order is amended the duplicate so issued, shall be similarly amended, and the amendment sealed, under the direction of the Registrar. Rule 12. Interest on judgment debts. (O. 42 r. 12) [Sub. PU(A) 445/86] Every judgment debt shall carry interest at the rate of 8 per centum per annum or at such other rate not exceeding the rate aforesaid as the Court directs (unless the rate has been otherwise agreed upon between the parties), such interest to be calculated from the date of judgment until the judgment is satisfied. Rule 13. Setting aside or varying judgments and orders. (O. 42 r. 13) [Ins PU(A) 192/93] Where in these Rules provisions are made for the setting aside or varying of any order or judgment, a party intending to set aside or to vary such order or judgment must make his application to the Court and serve it on the party who has obtained the order or judgment within thirty days after the receipt of the order or judgment by him. |
CONTRACTS ACT 1950 (Revised 1974)
ACT 136
|
74. Compensation for loss or damage caused by breach of contract. (1) When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. (2) Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. (3) Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default as if the person had contracted to discharge it and had broken his contract. Explanation – In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. ILLUSTRATIONS (a)A contracts to sell and deliver 50 gantangs of saltpetre to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 gantangs of saltpetre of like quality at the time when the saltpetre ought to have been delivered. (b)A hires B‘s ship to go to Telok Anson, and there take on board, on the 1st of January, a cargo, which A is to provide, and to bring it to Port Dickson, the freight to be paid when earned. B‘s ship does not go to Telok Anson, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of the trouble and expense. (c)A contracts to buy off B, at a stated price, 50 gantangs of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it. (d)A contracts to buy B‘s ship for $60,000, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise. (e)A, the owner of a boat, contracts with B to take a cargo of tin to Singapore, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Singapore is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of tin falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Singapore, at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived. (f)A contracts to repair B‘s house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract. (g)A contracts to let his ship to B for a year, from the 1st of January, for a certain price. Freights rise, and, on the 1st of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the 1st of January. (h)A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it. (i)A delivers to B, a carrier, a machine, to be conveyed, without delay, to A‘s mill, informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract. (j)A, having contracted with B to supply B with 1,000 tons of iron at $100 a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at $80 a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B, in consequence, rescinds the contract. C must pay to A $20,000, being the profit which A would have made by the performance of his contract with B. (k)A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and, in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A (but which had not been then communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation. (l)A, a builder, contracts to erect and finish a house by the 1 January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the 1st of January, it falls down and has to be rebuilt by B, who in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost and for the compensation made to C. (m)A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A. (n)A contracts to pay a sum of money to B on a day specified. A does not pay the money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the day of payment. (o)A contracts to deliver 50 gantangs of saltpetre to B on the 1st of January, at a certain price. B afterwards, before the 1st of January, contracts to sell the saltpetre to C at a higher price than the market price of the 1 January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the 1st of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account. (p)A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B‘s mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill. (q)A contracts to sell and deliver to B, on the 1st of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entitled to receive from A, by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the manufacture. (r)A, a shipowner, contracts with B to convey him from Kelang to Sydney in A‘s ship, sailing on the 1st of January, and B pays to A, by way of deposit, one-half of his passage-money. The ship does not sail on the 1st of January, and B, after being, in consequence, detained in Kelang for some time, and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with interest, and the expense to which he is put by his detention in Kelang, and the excess, if any, of the passage-money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late. |
BANK BUMIPUTRA MALAYSIA BHD V. FU LEE DEVELOPMENT SDN BHD & ORS July 11, 2008
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BANK BUMIPUTRA MALAYSIA BHD V. FU LEE DEVELOPMENT SDN BHD & ORS
HIGH COURT [KUALA LUMPUR]
CIVIL SUIT NO D4-23-3162-87
ZAKARIA YATIM, J
10 SEPTEMBER 1990
Zakaria Yatim J
This is an appeal by the plaintiff against the decision of the senior assistant registrar given on 24 August 1988, ordering that their application for summary judgment against the second defendant be dismissed with costs.
There are three defendants in this suit. The first defendant, a limited company, was granted an overdraft facility for $1,600,000 by the plaintiff for a period of two years, vide a letter of approval dated 14 December 1987. By a letter of guarantee dated 18 December 1978 the second and third defendants jointly and severally guaranteed the repayment of the overdraft facility to the plaintiff.
The second defendant, in his statement of defence, admits executing the letter of guarantee. He avers that by reason of the first defendant’s default in repaying the loan by 31 December 1980 the said guarantee became effective and enforceable, but since the period of limitation had expired sometime before 31 December 1986 the said guarantee ceased to be binding or enforceable against him. According to him the letter of guarantee is null and void and unenforceable. In his affidavit affirmed on 12 August 1988 the second defendant states:
I admit being a guarantor for the loan granted by the plaintiff to the first defendant by the letter of approval dated 14 December 1978 and the terms therein …
It is not in dispute that the plaintiff, by a letter dated 14 December 1978 granted to the first defendant an overdraft facility of $1,600,000 under account number 001-12646-91 for a period of two years. It is not in dispute that the first defendant had defaulted in the terms of the overdraft facility in that they failed to make repayments on the due date, that is 14 December 1980 or soon thereafter. It is also not in dispute that the second defendant signed the letter of guarantee on 18 December 1978 as one of the two guarantors for the overdraft facility. Both counsel for the plaintiff and counsel for the second defendant asked the court to decide on one point only, viz whether the plaintiff’s action against the second defendant was time-barred. In the course of their submissions, however, they also touched on the allegation made by the second defendant that there had been a variation in the terms of the letter of approval. I shall deal with the question of limitation first.
Miss S Roy submitted that under the letter of approval dated 14 December 1978 the facility was granted for a period of two years. The expiry date was 14 December 1980. According to her, the six-year period started to run from 15 December 1980 which, she said, was the date that the cause of action arose. She then cited Nasri v Mesah [1971] 1 MLJ 32 where the Federal Court held that a cause of action on a contract accrued on the date of the breach and in the case of actions founded on contact, the time ran from the breach. In my view Nasri’s case, applies to the borrower, who is the first defendant in the instant case but does not apply to the second defendant. The next case cited was Nadefinco Ltd v Kevin Corp Sdn Bhd [1978] 2 MLJ 59. In that case the Federal Court held that the cause of action accrued the instant the mining company failed to pay the first instalment due. The action was barred by limitation as it was commenced more than six years after the cause of action had arisen. In that case a contract was entered into between the plaintiff, the mining company and the defendant and two others. Under the contract the mining company was to pay the plaintiff monthly instalments and the first instalment was to be paid on 20 January 1968. The three defendants jointly and severally guaranteed the repayment of the money to the plaintiff in the event of default. In that case it was the term of the contract that the cause of action against the guarantors accrued as soon as the defendants failed to pay the first instalment due. The next case relied upon by the second defendant was Sim Siok Eng v Kong Ming Bank Bhd [1980] 2 MLJ 21.
In that case the Federal Court held that time ran from the date of the loan or from the last payment of interest or part payment of capital and accordingly the bank’s claim on the overdraft was statute-barred. The bank appealed against the decision of the Federal Court to the Privy Council and the Privy Council allowed the appeal. The facts of that case were that the bank had given an unsecured overdraft facility to the appellant. Subsequently on 20 August 1970 the overdraft facility was increased to $90,000 limit and by 28 June 1971, he was overdrawn in the sum of $259,957.12 inclusive of interest. The account remained dormant until 4 November 1974 when the appellant paid the bank $65,000. On 4 April 1978, the bank’s solicitors demanded payment of the balance owing and on 7 April 1978 the bank issued the writ against the appellant. The Privy Council decided that time began to run from the time the appellant made payment on 4 November 1974 and the bank was not time-barred when the action was commenced. It is to be noted that Siok Eng’s case [1980] 2 MLJ 21 did not involve guarantors.
Miss S Roy submitted that in the present case, the cause of action accrued against the first defendant on 14 December 1980. She said that no demand was required to initiate a suit against the borrower. She added that since the present suit against the borrower was filed on 16 September 1987, a period of six years and nine months had expired and accordingly the plaintiff was time-barred. She contended that when the principal contract was determined, so also was the guarantee itself.
In my view the cases relied upon by Miss S Roy are not relevant to the present case. The situations in those cases are different from that in the present case.
In the present case, the letter of guarantee states:
In consideration of you having agreed to advance credit facilities to Fu Lee Development Sdn Bhd .. up to the sum of ringgit: one million six hundred thousand only ($1,600,000) .. with interest thereon .. We Ahmad Sobri HA Tajuddin .. and Mohammad Bin Hamzah .. (hereinafter called ‘the guarantor/s’) hereby agree with and jointly and severally guarantee you as follows:
1 .. ‘We will pay you on demand as follows:
(i) The sum of ringgit: one million six hundred thousand only ($1,600,000) .. and any part of the moneys hereby guaranteed which is now or shall at any time be owing or remain due and unpaid to you from the borrowers …’ (Emphasis added.)
It is clear from the terms of the letter of guarantee quoted above that the plaintiff is only entitled to claim up to $1,600,000 together with interest if a demand is made to the second defendant for the payment of such sum with interest. A letter of demand dated 29 July 1987 was sent by the plaintiff through their solicitors to the second defendant by AR Registered Post. It is not in dispute that the letter was duly received by the second defendant. The said letter is reproduced below:
YB Dato Muhammad bin Hamzah
Lot 3.21, 3rd Floor,
Pertama Kompleks
Jalan Tuanku Abdul Rahman
50100 Kuala Lumpur AR Registered
Dear Sirs,
Re: Secured Overdraft for $1,800,000
Account No 001-16246-91
Joint and Several Guarantee for $1,600,000
We act for Bank Bumiputra Malaysia Bhd of Menara Bumiputra, Jalan Melaka, Kuala Lumpur.
We have been instructed by our client that there is an outstanding amount of $1,719,322.21 under account No 001-12646-91 in respect of an overdraft facility granted by our client to Fu Lee Development Sdn Bhd, inclusive of interest as at 15 November 1986 and further interest continuing at the rate of 5.5% above our client’s base lending rate (which is currently at 9.75% per annum) from 16 November 1986 until full settlement thereof.
We have been instructed that you have jointly and severally executed a letter of guarantee for $1,600,000 on 18 December 1978 whereby you guaranteed the repayment of any moneys advanced by our client to Fu Lee Development Sdn Bhd which remain due and unpaid to our client by Fu Lee Development Sdn Bhd.
Take notice that we have been instructed to demand which we hereby do that you settle the said sum of $1,719,322.21 and interest continuing thereon at the rate of 5.5% above our client’s base lending rate (which is currently at 9.75% per annum) from 16 November 1986, within fourteen (14) days of the date hereof failing which we have instructions to institute legal proceedings against you for the recovery thereof without any further notice to you.
Yours faithfully,
Sgd
In my opinion, when the above demand was made to the second defendant a cause of action arose against him. Therefore time started to run from the date of the letter of demand for the purpose of the Limitation Act 1953. Since the present suit was filed on 16 September 1987 the plaintiff’s claim against the second defendant is not time-barred.
Where there is a covenant or promise to pay a collateral sum on demand, such as a covenant by a surety for the principal debtor a request must be made before an action is brought or before the money can be considered as owing by the collateral debtor. See Re J Brown’s Estate [1893] 2 Ch 300. In Bradford Old Bank Ltd v Sutcliff [1918] 2 KB 833, the English Court of Appeal decided that the plaintiff’s claim was not barred by the statute of limitations, as no cause of action arose against the surety until demand had been made by the plaintiffs. Bradford‘s case [1918] 2 KB 833 has been cited with approval by the Federal Court in Wee Kee Puan v Oversea-Chinese Banking Corp Ltd [1982] 1 MLJ 64. In its judgment in that case, the Federal Court said at p 65:
It is settled law that for the purpose of the statute of limitation as regards overdraft the cause of action against the borrower arises everytime an advance is made by the bank and that no demand for repayment of debt is necessary for the accrual of the cause of action, unless there is a term in the overdraft agreement requiring such notice — Parr’s Banking Co Ltd v Yates [1898] 2 QB 460, Bian Chiang Bank Bhd v Kwong Hing Cheong [1978] 2 MLJ 193. On the other hand the cause of action against a person who stood as a surety for an overdraft facility only accrues when a demand for repayment is made to the surety. Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833.
Besides raising the question of limitation, the second defendant also alleged that there was a variation in the terms of the letter of approval in that the plaintiff allowed the overdraft facility to extend to a period of about nine years without the consent of the second defendant. Encik Pawancheek argued that even though the extension of the duration of the overdraft facility was a variation of the principal contract, such variation was unsubstantial and did not discharge the second defendant from liability.
Section 86 of the Contracts Act 1950 states:
Any variance, made without the surety’s consent, in the terms of contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.
The above section is in pari materia with s 133 of the Indian Contract Act 1872. The Indian Supreme Court has interpreted the words ‘any variance’ to mean substantial variation. In MS Amiruddin v Thomco’s Bank Ltd AIR 1963 SC 746, Hidayatullah J, in his judgment at p 753 said:
.. the law now accepts that unsubstantial alterations which are to the benefit of the surety do not discharge the surety from liability. Of course, if the alteration is to the disadvantage of the surety, or its unsubstantial character is not self evident, the surety can claim to be discharged. The court will not then enquire whether it in fact harmed the surety …
The question that arises here is what constitutes unsubstantial alteration. In Amiruddin’s case AIR 1963 SC 746, Sarkar J in his judgment at p 750 said that ‘ .. an alteration in an instrument which is not to the prejudice of a party to it is not a material alteration …’ Such alteration must be to the advantage of the guarantor and not to his disadvantage. Finally unsubstantial alteration must be self evident.
In my opinion the variation, if any, in the terms of the letter of approval in the present case is not a substantial variation. The extension of the period of the overdraft facility did not prejudice the original borrower. On the other hand it was an advantage to the borrower as well as to the guarantors. Furthermore the unsubstantial nature is self evident in this case. In the circumstances the second defendant is not discharged as a guarantor by such unsubstantial variation.
Encik Pawancheek further contended that if at all there had been a variation of the principal contract, it was not necessary to obtain the prior consent of the second defendant in view of cl 3(iv) in the letter of guarantee. Miss S Roy, on the other hand, argued that the time or indulgence allegedly granted to the borrower amounted to a substantial variation which prejudiced the position of the second defendant.
Clause 3 (iv) of the letter of guarantee clearly states:
This guarantee shall be without prejudice to and shall not be affected nor shall I/we (or any of us) be released or exonerated by any of the matters following:
…
(iv) Any time given or extended to the borrower and/or any other security instruments guarantee or contract or any other indulgence granted to or compromise composition or arrangement made with the borrower and/or any other person or persons whether with or without consent or notice to us.
It is clear from the terms of the time and indulgence clause quoted above, the extension of the period of the overdraft facility without the consent of the second defendant did not discharge him from his liability under the guarantee. In Malayan Banking Bhd v Yap Seng Kee & Ors [1988] 1 MLJ 313, Mohamed Yusoff J (as he then was) considered a similar time and indulgence clause in the letter of guarantee and decided that the plaintiff was entitled to vary the securities, which had been agreed to by the defendants or to grant whatever indulgence to the companies without obtaining the consent of the defendants. In that case the variation alleged was that the various disbursements of the facilities granted to the borrowers were not in accordance with the terms of the letters of approval. I respectfully agree with the decision of Mohamed Yusoff J.
For the reasons stated above I allow the appeal with costs and order that summary judgment be entered against the second defendant as prayed in the statement of claim.
BANK BUMIPUTRA MALAYSIA BERHAD V. FU LEE DEVELOPMENT SDN BHD
HIGH COURT [KUALA LUMPUR]
LIM BENG CHOON, J
ORIGINATING SUMMONS NO: S7-24(31)-1959-1988
14 SEPTEMBER 1992
On July 15, 1988, Bank Bumiputra Malaysia Berhad, the applicant applied by way of this originating summons for inter alia an order of sale of lands held undo: EMR 2353 Lot No 659, EMIR 2242 Lot No 499 and EMR 2527 Lot No 508 all in the Mukim of Ulu Kelang (“the said lands”) by public auction under the directions of this Court to recover the sums of M$1,719,322.21 together with interest from November 16, 1986, until the date of actual payment, at the rate of 5.5% per annum above the applicant’s base lending rate (which was then 9.75% per annum), calculated in accordance with the terns of the relevant charge dated December 15, 1978, (“the said charge”) made between the applicant and Fu Lee Development Sdn Bhd, the respondent. Apparently the applicant at the time of filing the said originating summons was not aware that the respondent company had already been wound up since March 7. 1986, and a winding up order ,;vas obtained by the petitioner, one Tan Joo Lian in Companies(Winding-Up) Petition No C4-42-264-96 on the same date The official receiver was duly appointed provisional liquidator of time respondent company. When the applicant became aware of the said winding up order they served this originating summons on the official receiver on September 8, 1988. As neither the respondent nor the official receiver on their behalf had entered any appearance:, the applicant thereafter filed a certificate of non-appearance on September 28. 1988. The applicant then proceeded to take out a notice of appointment to hear this originating summons and served the same on the official receiver on September 28, 1988. It was not until May 29, 1989, that the applicant applied to this court by way of summons-in-chambers for leave of the court pursuant to s 226(3) of the Companies Act 1965 to proceed with this originating summons against the respondent. I must admit that when this application of the applicant A as heard on July 15, 1989 it did not strike me neither was my attention drawn to the fact that this action was instituted by the applicant after the aforesaid winding up order was granted and the applicant had taken several steps in the proceedings. I accordingly granted leave on July 15, 1989. I deliberately raise this issue as there might well be a doubt as to whether the applicant could institute this action against the respondent company without first applying for leave of court pursuant to the said s 226(3).I therefore invited counsel acting for the respective parties to address me on this point.
After hearing counsel on June 17,1992, I accepted their submissions that since leave had 20 in any case been granted the parties agreed that the plaintiff could proceed in the present action.
Reverting to the case for the applicant, the said charge was duly registered on December 21, 1978, under Presentation No 2436178 Jilid 10 Folio 7. According to the applicant the respondent failed to perform and observe the terms of the said charge and in particular had failed to make payments to the applicant on the due dates or at all. The applicant after having served a notice of demand for payment of the whole principal sum and interest through its solicitors, went on to serve the statutory notice of default in Form 16D of the National Land Code 1965 (“the NLC”) on March 16, 1988. The respondent had failed to comply with the said statutory notice within the stipulated time or at all. Hence the applicant instituted this action in which the particulars as required under Order 83 rules 3(3) and 3(6) of the Rules of the High Court 1980 (“the RI IC”) have been set out.
On February 13, 1989, one Rukaiyah bt Julai @ Rukayah applied by way of summons in-chambers to intervene (“the intervener”) and defend this action. She also prayed for a stay of this action pending the outcome of her application. In her affidavit in support of her application affirmed on January 25, 1989, she averred that under the terms and conditions of a sale and purchase agreement dated November 23, 1981, (“S & P Agreement”) she purchased a dwelling house erected on all the piece of land known as “Provisional Lot 77″ (” Lot 77″) held under EMR 2242, 2353 and 2527 for Lots 499, 659 and 508 in Mukim of Ulu Kelang, District of Gombak. As she had fully paid the whole of the purchase price of M$89,300/- she is the contractual/beneficial owner of Lot 77 with the dwelling house constructed thereon. It is a term of the S & P agreement particularly under the clause 16(b) whereby the respondent agreed that immediately priortothehandingoverthevacantpossessionofdiesaiddwellinghousetohertheywere to ensure that the Lot 77 was free from any encumbrance other than those imposed by the conditions expressed and/or implied in the document of title to the said lot and by the said agreement. The respondent had delivered vacant possession of the Lot 77 and the dwelling houses but the Lot 77 was not delivered free from any encumbrance. The intervener went on to aver that the applicant was aware and/or had knowledge of the sale of the Lot 77 together with the dwelling house to her by the respondent. Furthermore she alleged that the applicant was aware or ought to be aware that she had paid the purchase price and that Lot 77 should have been delivered to her free from all encumbrances. Under the circumstances she therefore asserted that the court ought not make an order for sale of Lot 77 as she had acquired equities in the same.
The applicant bank through their manager one Halim Muhamat affirmed and filed an affidavit in reply on May 29,1989. The deponent averred that the said charge was created in favour of the applicant by the respondent as security for an overdraft facility of M$ 1,600,000/- granted by the applicant to the respondent pursuant to a letter of offer dated December 14, 1978. A copy of the said letter (“the letter of offer”) is annexed to the affidavit and marked as exhibit “B”. As the said charge was registered in favour of the applicant on December 21, 1978, and the intervener had entered into the S & P agreement with the respondent on November 23, 1981, it could not therefore be said that at all material times the applicant was aware and/or had knowledge of the sale of Lot 77 to the intervener. In any event so said the deponent, even if the applicant was deemed to have knowledge of the fact that such sale was made by the respondent to the intervener after November 23, 1981, the fact that the said lot was delivered by the respondent to the intervener not free from encumbrances (on account of the said charge) could not invalidate the said charge as the applicant, as chargee, is a complete stranger to the S & P agreement. The deponent then went on to give the background of the events that took place leading to the filing of this originating summons and the applicant’s application for leave to proceed pursuant to s 226(3) of the Companies Act 1965 as the respondent was wound up between the date of filing of this originating summons and the date it was extracted. It was then averred that the intervener had not shown any reasons whether at law or in equity why this court ought not to make an order for sale as prayed for by the applicant.
It appears to me that the case for the plaintiff is pegged on the following grounds:
(1) as the said charge was registered earlier, the plaintiff has acquired an indefeasible legal interest in Lot 77 by virtue of s 340(1) of the National band Code;
(2) as the intervener has acquired only a beneficial and/or equitable interest in Lot 77 under the S & P agreement, her interest is therefore subservient to the indefeasible interest of the applicant arising from the said charge;
(3) the intervener has failed to furnish “a cause to the contrary” for the purposes of s 256 of the National Land Code 1965.
On the other hand the intervener relies mainly on the ground that there is cause to the contrary, fur tills court to withhold the order for sale under s 256(3) of the National Land Code 1965 to respect of Lot 77. She is also alleging that the act or omission on the part of the plaintiff in the present case amounts to unconscionable conduct and they are astopped from exercising their right for an order for sale. Furthermore laches in equity would apply against them. In the alternative the intervenes suggests that this is an appropriate instance to apply the doctrine of marshalling.
I shall first deal with the plaintiff’s case It would seem to me that their case depends very much on tile indefensibility concept as provided ins 340(1) of the NLC It is appropriate therefore to examine the legal principle governing this concept. The principle underlying the provision of our NLC particularly on the effect of registration affecting the title or interest of a registered proprietor has been expounded by Abdul Hamid FJ (as he then was) in Tai Ler Lee Co Sdn Bhd v Official Assignee & Ors [1983] CLJ 387 (Rep); [1983] 1 CLJ 183(1983) 1 MLJ 81 @ 84 where the learned judge cited the following passage from the judgment of Waimiha Sawmilling Company Limited v. Waione Timber Company Limited [1926] AC 101 @106:
“The cardinal principle of the statute is that the register is everything and that except in cases of actual fraud on the part of the person dealing with the registered proprietor such person upon registration of the title under which he takes from the registered proprietor has an indefeasible title against all the world. “(Emphasis supplied).
Again in the same page the learned judge citing another passage from the judgment in PJTV Denson (M) Sdn Bhd & Ors v Roxy (Malaysia) Sdn Bhd [1980] 1 LNS 55; [1980] 2 MLJ 136 @ 138 says:
” As it stands the registered title of the said land in the hands of the second and third appellants is indefeasible. The concept of indefeasibility of title is so deeply embedded in our land law that it seems almost trite to restate it. Therefore the registration of the transfer of the said land under the National Land Code defeats all prior unregistered interest in that land unless the party who acquires the registered title has been guilty of fraud (see s 240(2)(a) of tile National Land Code).. ” (Emphasis, supplied).
Based on the aforementioned principles the law on tile concept of indefeasibility of title and interest in land is well-settled In the present case as the said charge made between the applicant and the respondent was registered on December 21, 1978, nearly three years before the intervener entered into the S & P agreement with the respondent to purchase Lot 77 on November 23, 1981, which has yet to be transferred to the intervener, the applicant, at least prima facie, has acquired an indefeasible interest in the said lot by reason of the said charge over the lot pursuant to s 340(1) of the NLC. The indefeasible interest of the applicant can only be defeated if it can be proved that the applicant has been guilty of fraud. On the authorities, it is clear that the question of the existence or otherwise of fraud is one of fact and circumstances surrounding each case. The onus is upon the person alleging fraud to prove fraud not on a balance of probabilities but beyond reasonable doubt (see PJTV Denson’s case (supra) and Saminathan v. Pappa[1980] 1 LNS 174 [1980] 2 MLJ 136 cited in the Tai, Lee‘s case). Counsel for the intervener rightly refrained from alleging fraud on the part of the applicant in the present case. However that may be he asserted that there is in any case “cause to the contrary” pursuant to s 256(3) of the NLC in the present case thereby depriving the applicant from obtaining an order for sale. To support her contention that there is a “cause to the contrary” her counsel drew my attention to certain terms and conditions of the charge annexure in order, (if I understand him correctly), to show that
(i) the applicant had, if not expressly, at least implicitly consented to the sale of Lot 77 to the intervener,
(ii) the applicant had established what learned counsel described as a “collection machinery” in the form of some sort of a central account into which all proceeds from the sales of the houses in the project should be paid and the funds from the said central account would be utilised to make repayments to the overdraft granted to the respondent and
(iii) the proceeds of the sales of the houses to the purchasers in the said project who had fullypaid up the purchase prices inclusive of Lot 77 to the intervener would have been paid into the central account and would have been utilised to repay that part of the overdraft granted to the respondent in the development and construction of the said houses which had been sold to and fully paid for by the relevant purchasers.
As the applicant deemed fit to apply for an order for sale of all the lots of land in the development project carried out by the respondent inclusive of Lot 77 sold to the intervener it is clear that the applicant did not utilise the “collection machinery” which it had established. Counsel then went on to submit that by the terms of the letter of offer dated December 14, 1978 (exhibit ‘B’ annexed to the affidavit of Halim Muhamat of May 29, 1989) the fixed loan granted to the respondent was for a maximum of two years and repayments must be completed within that period. Again the applicant-did not insist on the respondent’s compliance with this term. I shall have more to say regarding this term appearing in the said letter of offer later in this judgment. However that may be I have to say, with due respect, that the contentions of the learned counsel for the intervener are entirely without any merit and I say so for these reasons. Firstly the charge amrexure together with the said letter of offer is nothing more than an agreement executed between the applicant and the respondent. The terms and conditions therein are binding only on the two parties who entered into the agreement. This proposition is but an elementary rule of the law governing contract. Following from this rule, it can therefore be said that even if the applicant had not strictly adhered to the terms of the agreement, it does not give the intervener the right to rely on the terms of the agreement to challenge the right of the applicant to apply for an order for sale of the various lots specified in the charge. It is to be noted that the proper party to challenge the applicant is the respondent who had chosen not to do so. Secondly, the contention of learned counsel about the establishment of a collection machinery and the payments of the overdraft from funds channelled to this machinery is based not on fact but on his own inference drawn from the terms and conditions appearing in clauses 38 to 40 of the charge annexure. Nothing is mentioned in the said clauses regarding repayment of the loan and overdraft facility granted to the respondent. The clauses merely required the respondent inter alia to apply the loan exclusively to the development project and to furnish the applicant with the monthly financial statements as well as the annual balance sheet and profit and loss account of the respondent. The provisions in the said clauses are inserted solely to keep the applicant informed of the manner in which the respondent was carrying out and operating the development project. For the above reasons whether the applicant has made use of the “collection machinery” or not is irrelevant and cannot be said to give rise to a “cause to the contrary” as specified in s 256(3) of the NLC.
The matter does not end here for it is still necessary for me to examine whether there remained some equity in the intervener to override the said charge. In doing so I have taken note of the following relevant terms of the S & P agreement:
(a) Clause 1 w hereby the vendor agreed to sell and the purchaser to purchase Lot 77 together with the dwelling house to be constructed thereon free from all encumbrances other than those imposed by the provisions of the agreement.
(b) Clause 16 which provides:
16 (a) The vendor shall not immediately after the execution of this agreement subject the said lot to any further encumbrance other than those already subsisting without the prior approval of the purchaser provided however that such approval of the purchaser shall not be unreasonably withheld in the event of the vendor desiring to further encumber the said land and/or the said lot for purposes of obtaining further finances for the development of the said estate.
(b) Immediately prior to the handing over of vacant possession of the said property to the purchaser as provided hereunder, the vendor shall ensure that the said lot shall be free from any encumbrance other than those imposed by the conditions expressed and/or implied in the document of title to the said lot and by this agreement.
(c) In consideration of the aforesaid the purchaser hereby agrees, covenants and undertakes that he will not caveat or encumber in any way the said land and/ or the said estate and/or any title thereto.”
Bearing in mind that the charge made against the various lots inclusive of Lot 77 was registered as far back as December 21, 1978, and that the intervener had the means to find out regarding the said charge, the intervener rightly chose not to challenge the validity of the charge but rather chose to maintain that she had established “a cause to the contrary” under s 256(3) of the NLC. That being the case the question of whether in the circumstances of this case, the intervener has some sort of equity to override the charge is fully answered by the judgment of the Privy Council in Keng Soon Finance Bhd v MK Retnam Holdings Sdn Bhd & .Anor [1989] 1 CLJ 1 (Rep); [1989] 1 CLJ 897; [1989] 1 MLJ 457. In that case the appellant granted a loan to the 1st respondent, the developer of 59 lots of land for purpose of the development project. The loan was secured by a legal charge on the 59 lots, the repayment was to be made from the proceeds of the sale of the houses built thereon. At the material time the majority of the plots had already been sold to purchasers under agreements for sale which contained the following two clauses:
“3. Subject to the provisions of clause 4 hereof, die purchaser agrees that the vendor may subject the land sold to the purchaser to encumbrances at any time after the signing of this agreement. 10
4. The land sold to the purchaser shall be free from any encumbrance immediately prior to the handing over of vacant possession of the building to the purchaser.”
One of the contentions raised in that case was that the existence at the date of the charge to the knowledge of the appellant/chargee of existing contracts for the sale to purchasers of individual lots constituted a “cause to the contrary”. In rejecting this contention Lord Oliver of Aylmerton said at p 460:
“Even assuming – a point which does not arise in the instant case and has not been argued – that this section might not protect a purchaser or chargee acquiring title with actual notice of the equitable interest of a purchaser, their Lordships are quite unable to see how the interest of a purchaser who has expressly consented to the creation of the clrargee’s interest could prevail over the registered title. Nor, in their Lordships’ opinion, could it furnish a `cause to the contrary’ for the purposes of s 256 “
The above cited opinions of the Privy Council apply with equal force to the present case. Here the express purpose of clause 16(a) of the S & P agreement is to sustain the encumbrance viz the said charge already subsisting prior to the execution of the said agreement. In short the intervener agreed to purchase Lot 77 although she knew that the said lot was at the material time subject to the said charge. I am quite unable to see how the beneficial interest of the intervener who has expressly consented to the said charge remaining over the lot she purchased could prevail over the legal interest of the applicants who had registered the charge under the NLC. Nor could the beneficial interest of the intervener furnish a “cause to the contrary” for the purpose of s 256 of the NLC. It is therefore my considered opinion that the applicant is not inhibited by law to apply for and obtain the order for sale of the lands in question.
Finally I shall turn to the remaining contentions raised by the counsel for the intervener based on the doctrines of limitation, laches, estoppel and marshalling. On the question of Limitation Act 1953 (Act 254)inter alia prohibiting the recovery of the principal sum of money secured by a charge on land it is to be noted that s 21(1) of the said Act prohibits the recovery of money secured by a charge on land after the expiration of 12 years from the date when the right to receive the money accrued. There is no dispute that overdraft facility in the present case was to be repaid on December 20, 1980, and this action for an order for sale was filed on July 15, 1988. The applicant is therefore not barred by the said Act to recover the moneys due under the charge. As to the question of laches, the overdraft facility was only recalled on August 22, 1985, and thereafter the applicant allowed time for the respondent to repay the overdraft It was only after the respondent clearly failed to make payment that the applicant took steps to send a letter of demand and even then the respondent still made a final attempt to settle the matter. It was only after the final attempt to settle the matter failed that the applicant had to resort to court action. In any event this maxim of laches has no application to cases to which the statutes of limitation apply either expressly or by analogy (see SNELL’S PRINCIPLES OF EQUITY 28th Edn p 34). The next matter as raised by counsel for the intervener is that the applicant is estopped from denying that Lot 77 is not excluded from the operation of the charge . Estoppel can operate only if it can be shown that the applicant has by words on conduct made to the intervener an unambiguous promise or assurance which is intended to affect the legal relations between them (whether contractual or otherwise) and the other party act upon it to his detriment. It is essential that the representor knows that the other party will act on his statement (see SNELL’S ON PRINCIPLES OF EQUITY 28th Edrr at p 556).
In the present case there is no evidence at all that the applicant has made any representations let alone any unambiguous representations to the intervener. The intervener is merely relying on the terms of the charge annexure and the said letter of offer scant by the applicant to the respondent long before the intervener executed the S & P Agreement with the respondent to support her allegation of estoppel. It is entirely without basis for the intervener to rely on the equitable estoppel in the absence of any evidence even to suggest that the intervener had, prior to her execution of the S & P agreement and/or her payment of the full purchase price of Lot 77, seen let alone read the contents of the charge annexure and/or the said letter of offer. It follows therefore even if certain terms and conditions in the aforementioned documents could amount to representations which if relied on by the intervener would alter her position to her detriment (to which, as can be seen later, I cannot concede) it certainly cannot be said that the intervener relied on the said representations and acted upon them to her detriment. Another equally, important point is that there is nothing in the contents of the charge annexure and/or the letter of offer which could amount to an unambiguous representation made to the intervener. In any event the applicant here is merely exercising his statutory right under s 256(3) of the NLC and the maxim of estoppel cannot negative the applicant’s right conferred by statute – See SNELL’S PRINCIPLES OF EQUITY, 28th Edn p 557 and p 561 where the author cited the case of Western Fish Products Ltd v Penwith DC (1981) 2 All ER 201. Finally as to the intervenor’s reliance on the doctrine of marshalling, I am of the view that with due respect to counsel, this doctrine has no application to the present case simply because here the applicant is only trying to recover the loan from the sale of the said lands. The applicant as chargee has no other means to recover the monies lent to the chargor. The doctrine of marshalling can only apply if and only if the applicant as creditor of the respondent has a right to resort to two fluids of the respondent for payment of the debt. It is only if the applicant had access to two funds of the respondent and the intervener, as a second creditor of the respondent, had a right to resort to one of the two funds then and only then could the doctrine of marshalling apply (see SNELL‘S ON PRINCIPLES OF EQUITY 28th Edn p 416).
For the above reasons the application of the intervener to intervene and to stay the action of the applicant in this originating summons is dismissed with costs.
Bank of Montreal v. Tourangeau and Royal Bank of Canada July 11, 2008
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Bank of Montreal v. Tourangeau and Royal Bank of Canada
[1980] O.J. No. 3843
Ontario
High Court of Justice
Van Camp J.
November 25, 1980.
D. Silverson, for plaintiff.
W. Spooner, Q.C., for defendant, Royal Bank of Canada.
1 VAN CAMP J.:— This action raises the issues of conversion, negligence and breach of trust by the defendant bank when cheques payable to two corporations were deposited in the personal account of the sole director and shareholder in the defendant bank and then withdrawn by him personally or by bank drafts payable to others. The plaintiff is the banker of the two corporations and holds registered assignments of book debts and rights of subrogation. Judgment has been signed against the director and shareholder, the defendant, Tourangeau, for default of appearance.
2 He was the only corporate officer and the sole shareholder of Brian Tourangeau Limited, which was incorporated in June, 1975, and Brian Tourangeau Lumber Company Limited. Both of these companies had established current accounts with the branch of the plaintiff at Smyth Rd. and St. Laurent Blvd. in the City of Ottawa. Copies of the articles of incorporation, the borrowing by-law, the banking resolution and the certificate of the names of the directors and officers of Brian Tourangeau Limited were filed with the bank when the account was opened. The banking resolution set out that the Bank of Montreal was appointed the banker of the company and the company undertook that the resolution was irrevocable until a resolution repealing it was passed and a certified copy delivered to the bank.
3 On or about May 14, 1976, Brian Tourangeau Limited executed a general assignment of book debts in favour of the plaintiff, which was registered under the provisions of the Personal Property Security Act, R.S.O. 1970, c. 344, on May 20, 1976. On that same date, Brian Tourangeau and one M.A. Tourangeau executed a guarantee of indebtedness for Brian Tourangeau Limited. On January 7, 1977, Brian Tourangeau entered into a subrogation agreement with the plaintiff whereby he agreed to subrogate all his claims and rights against Brian Tourangeau Limited to the plaintiff and that all moneys owing by Brian Tourangeau Limited to him were not to be withdrawn except with the bank’s written consent. On March 10, 1977, Brian Tourangeau Lumber Company Limited executed a general assignment of all book debts to the plaintiff which was registered on March 25, 1977. A certified copy of the letters of incorporation and of the guarantee of indebtedness of Brian Tourangeau Lumber Company Limited were deposited with the plaintiff.
4 No loans were made to Brian Tourangeau Lumber Company Limited except for the odd minor overdraft. Brian Tourangeau Limited owed the plaintiff $75,000 more or less in July, 1977, under three different types of demand loans. In July, 1977, the accounts were operating to the satisfaction of the plaintiff. No demand for payment was made until September, 1977, when demand was made on Brian Tourangeau Limited and the guarantors, Brian Tourangeau and Margaret Tourangeau and Brian Tourangeau Lumber Company Limited. Judgment has been signed against Brian Tourangeau Limited and Brian Tourangeau Lumber Company Limited. About $66,000 together with interest remained unpaid in May, 1978.
5 The defendant, Brian Tourangeau, opened his personal bank account with the defendant, the Royal Bank of Canada, at its branch at St. Laurent and Smyth Rd. on August 5, 1977. This branch was directly across the street in the same shopping plaza. The account was opened by the deposit of two cheques:
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- one cheque from R.J. Nicol Construction (1975) Limited for $23,132.41 and another cheque payable to Brian Tourangeau Limited for $814. On inquiry by Mr. McDonald, who was the branch administration officer of the bank, Tourangeau said that he owned the company and was the president and sole signing officer. McDonald advised Tourangeau that the smaller cheque should be deposited in the company account. In his account, Tourangeau mentioned opening a company account with the branch of the Royal Bank and was told that they would require his company seal and the normal banking resolutions before deposit. They were willing to have the company cheque deposited in a company account and wait for the proper documentation; however, Tourangeau said that he did not have the seal and he preferred to wait until he had it before opening an account in the name of the company. The branch agreed to accept the company cheque for deposit because of the large deposit in his name. If the cheque were returned as unauthorized, it would be charged to his account. The larger cheque was accepted also for deposit only. Tourangeau advised that his main business account was with the Bank of Montreal branch across the street. McDonald saw no need to inquire of that branch because there was sufficient security in the large personal deposit. The inference that I drew from the evidence of McDonald and of Warren, the Bank of Montreal branch manager, was that the two branches were in competition and there was very little communication between them. As no line of credit was being set up and no loan was being made, no credit check was made.
6 McDonald said that it was not uncommon for individuals to open a personal account at one bank and a business account at another bank; although it was not normal banking practice to deposit a company cheque in the personal account, it was done as a convenience; there was no reason for alarm and no reason to call the Bank of Montreal. The only concern was whether Tourangeau had signing authority as the bank would be liable to the company without such authority; protection was given by keeping the funds frozen in his personal account which had sufficient funds to cover it. Both the Rule Book of Practice and Procedure and the circulars from the Head Office Manual contained the following guide:
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- 4(b) ITEMS PAYABLE TO INCORPORATED COMPANIES, ETC.
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- In accordance with normal banking practice, subject to the undernoted, an item payable to an incorporated company, partnership, municipality, school district, lodge, society or other organization, must be credited to the deposit account of the organization as required by the standard banking resolution for incorporated companies, societies, lodges, etc. and by the School Act of certain provinces.
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- Exception: Where an item is payable to an organization, or to the joint order of two or more organizations or any combination of organizations and individuals, it may be negotiated for a purpose other than for credit to the account of the payee(s) provided:
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- (1)
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The payee(s) endorses the item.
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- (2)
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The presenter endorses the item and is fully responsible for the amount should the item be dishonoured for any reason whatsoever.
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- (3)
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The presenter, if an individual, is not an employee, officer or agent of any payee.
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- (4)
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The Manager or Branch Administration Officer approves the transaction by initialling on the face of the item and also below the endorsement of the party for whom it is to be negotiated.
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- The foregoing does not apply to a proprietorship where a declaration and undertaking from the sole owner is held.
McDonald said that not all rules and procedures were followed exactly and he considered that the circumstances here brought this within an exception.
7 On August 19th, Brian Tourangeau made a further deposit in his personal account of $7,476.20, which was made up of two cheques of $6,900 and $576.20. The cheque for $6,900 was a cheque from Acc-Par Systems Limited made payable to the Brian Tourangeau Lumber Company Limited. It was endorsed as follows:
B.M. Tourangeau
For deposit Brian Tourangeau Lumber Company Limited
B.M. Tourangeau
8 On August 30, 1977, there was deposited in the personal account the amount of $11,636.10 which was made up of three cheques for $9,300.50, $20 and $2,266.10. The cheque for $9,300.50 was from Admiral Engineering and Construction Limited payable to the order of B. Tourangeau Ltd. It was endorsed as follows:
B.M. Tourangeau
for Brian Tourangeau Lumber Co. Ltd.
B.M. Tourangeau
9 The statement of account for the personal account shows two further deposits on September 1st and 6th. Between August 19th and September 14th, all except $10.16 was withdrawn; $26,880 had been withdrawn before the deposit on August 30th.
10 McDonald had assumed that the plaintiff would not be harmed as it was the usual practice for a bank which was loaning to a customer to have a list of the receivables and to monitor them. Tourangeau had given the assignment of the accounts receivable to the Department of Revenue.
11 In September, 1977, Tourangeau went to the branch of the plaintiff bank to tell them that he had been able to cash several of the cheques and showed the passbook. The manager of the plaintiff’s branch telephoned McDonald who came to review the documents held by the plaintiff. McDonald then called Tourangeau in, told him that the Bank of Montreal was questioning the right of the defendant bank to accept the two cheques for $6,900 and $9,350 and that the defendant bank would look to him for payment if the funds had to be returned to the Bank of Montreal.
12 All cheques were cleared by the banks on which they were drawn without any question as to the method of endorsement. As to banking practices, I had the assistance of the evidence of Mr. Lowrey, the superintendent of credit for the Ontario Eastern and North-Eastern Regions of the Canadian Imperial Bank of Commerce. He confirmed that a cheque payable to a corporation should not be deposited to a personal account. An account could be opened in the name of the corporation provided that the banking resolutions and other forms were completed before the funds were released. When pressed by counsel, he did say that although he would never cash a cheque payable to a corporation and endorsed by it, if a good customer who had an account with sufficient funds to cover came in with a cheque which had been endorsed by a corporation, he would deposit it but it was not good banking practice.
13 What distinguishes this action from the many decisions cited to me is that the action is brought not by the company to whom the cheques were made payable but by a creditor of that company which held assignment of book debts. It is also to be noted that Tourangeau had authority to make, endorse and deposit cheques of the company, apart from the restrictions to the guarantees given to the plaintiff by Tourangeau and Brian Tourangeau Lumber Company Limited. If Tourangeau had taken the cheques herein to the plaintiff bank, he would have been able to endorse them for deposit and he would have been able to write cheques from the company to himself.
14 This case must be distinguished from A.L. Underwood, Ltd. v. Bank of Liverpool et al., [1924] 1 K.B. 776, although there is at first a close resemblance of the facts. In that case, Atkin L.J. said at pp. 795-6:
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- The first question is: Had Underwood actual authority to deal with the cheques as he did? The judge has found that he was pursuing a general course of fraudulent dealing with all the accompaniments of fraud, concealment and falsification of books. He was, in fact, defrauding the company’s bankers, who had granted an overdraft on the security of a floating charge, which covered the assets represented by the cheques. He was using the proceeds of the cheques in question to pay his own private debts. Under ordinary circumstances actual authority appears to be clearly negatived. Nevertheless it was contended that the fact that Underwood was the sole director, and practically the sole shareholder, gave him, in pursuance of the articles, actual authority. He was entrusted with all the powers of the company, the company can only act through its directors, and the directors, or director if only one, could do what they willed with the company’s assets. If this means anything it means that a board of directors acting as such have actual authority to defraud the company by using the company’s assets to pay debts due to butchers or moneylenders by the individual directors. Such an act is quite outside the class of acts — management of the company’s business — authorized to be done by the board. The directors, whether collectively or singly, have not actual authority to steal the company’s goods.
In that case, there was another shareholder and the action was brought by the company itself. Here I find that Tourangeau was acting with the actual authority of the company and that both he and the company were acting to defraud the plaintiff by depositing in his account and by his use thereby of the proceeds of moneys which had been assigned to the plaintiff and which Tourangeau and the companies held in trust for the plaintiff. The question here is whether the plaintiff has any claim against the defendant bank for permitting the companies and Tourangeau to so deposit the funds and withdraw them. The plaintiff asserts its claim on the grounds of conversion, breach of trust and negligence. The modern tort of conversion is defined in certain passages in Lloyds Bank, Ltd. v. Chartered Bank of India et al., [1929] 1 K.B. 40, and in Arrow Transfer Co. Ltd. v. Royal Bank of Canada et al. (1971), 19 D.L.R. (3d) 420, [1971] 3 W.W.R. 241 [affirmed [1972] S.C.R. 845, 27 D.L.R. (3d) 81, [1972] 4 W.W.R. 70]. In the former at pp. 55-6, Scrutton L.J. said:
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- Conversion primarily is conversion of chattels, and the relation of bank to customer is that of debtor and creditor. As no specific coins in a bank are the property of any specific customer there might appear to be some difficulty in holding that a bank, which paid part of what it owed its customer to some other person not authorized to receive it, had converted its customer’s chattels; but a series of decisions binding on this Court, culminating in Morison’s case, [1914] 3 K.B. 356, and Underwood’s case, [1924] 1 K.B. 775, have surmounted the difficulty by treating the conversion as of the chattel, the piece of paper, the cheque under which the money was collected, and the value of the chattel converted as the money received under it: see the explanation of Phillimore L.J. in Morison’s case …
In the Arrow Transfer Co. decision, Robertson J.A. quoted certain passages from T.N. Bright’s Banking Law and Practice in New Zealand, 2nd ed. (1969), p. 180, from an article by Denning L.J. published in 65 L.Q. Rev. 37 (1949), and from the judgment of Diplock L.J. in Marfani & Co. Ltd. v. Midland Bank Ltd., [1968] 2 All E.R. 573 at pp. 577-8. If I may paraphrase what is said therein, the historic origin of the tort of conversion is found in the old form of action of trover which did not lie for money as such but did lie for the wrongful interference with goods. A cheque is made up of two parts, a chattel part and a chose in action. The chattel part, the written instrument, is goods. The measure of damages for the conversion of those goods is determined by the value of the cheque which is the chose in action, the right to receive payment of the sum of money for which it is drawn. It is important then to distinguish between the right of action and the measure of damages. The plaintiff says that it is entitled to bring this action for conversion because there was assigned to it all choses in action. But the law with respect to cheques is the Bills of Exchange Act, R.S.C. 1970, c. B-5, and not the assignment of book debts or the Personal Property Security Act. The only persons who can bring action for conversion of a cheque would be the payee or endorsee or the drawer of it. All that the plaintiff holds is that of the assignment of the chose in action part. It has not any rights under the cheque as such and it is not entitled to bring an action for conversion of the cheque.
15 What then was the duty owed by the defendant bank to the plaintiff as cestui que trust. Section 165 of the Bills of Exchange Act is as follows:
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- 165(1) A cheque is a bill of exchange drawn on a bank, payable on demand.
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- (2) Except as otherwise provided in this Part, the provisions of this Act applicable to a bill of exchange payable on demand apply to a cheque.
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- (3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.
The rights and powers of a holder in due course are defined in s. 74 thereof as follows:
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- 74. The rights and powers of the holder of a bill are as follows:
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- (a)
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he may sue on the bill in his own name;
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- (b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;
A holder in due course is defined in s. 56(1) as follows:
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- 56(1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely:
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- (a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact;
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- (b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.
16 There are certain authorities that are helpful in considering the words “in good faith” and the question of notice of defect in the title. In White v. Dominion Bank, [1935] 1 D.L.R. 42 at p. 46, [1934] 3 W.W.R. 385, 42 Man. R. 400, Prendergast C.J.M. said:
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- On the matter of knowledge and duty to inquire when negotiable securities are involved, I would refer to Sweeny v. Bank of Montreal (1885), 12 S.C.R. 661; affd 12 App. Cas. 617, where the defendant was aware that the transferor held the instrument “in trust” although it did not appear to whom, and Earl of Sheffield v. London Joint Stock Bank Ltd. (1888), 13 App. Cas. 33, holding that though the bank had the legal title to the securities, they were not purchasers for value without notice as they should have inquired into the extent of the transferor’s authority whether the securities were negotiable or not. In London Joint Stock Bank v. Simmons, [1892] A.C. 201, at p. 221, Lord Herschell said that if there be anything in the dealing that causes suspicion that something is wrong, then “the take of the instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicions aside without further inquiry.” In the same case, it appears from Lord Macnaghten’s reference to the Sheffield case, that the matters of notice and being put on inquiry are questions of fact.
At p. 57, Trueman J.A. said:
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- This finding of good faith is crucial in the action. The bonds in question being negotiable by the law merchant, a good title therein could be obtained by the bank if it took them in good faith and without notice or knowledge of want of title in the company. What this means is well stated in Smith’s Leading Cases, 13th ed., vol. 1, p. 542, in the following passage:–”There is no doctrine of constructive notice to affect the holder of a negotiable instrument. That appears distinctly from the opinion given by Parke, B., in May v. Chapman, (1847) 16 M. & W. 355, [153 E.R. 1225], with the approval of Willes, J., in Raphael’s Case, (1855) 17 C.B. 161, [139 E.R. 1030] that ‘notice and knowledge’ of a defect in title means not merely express notice, but knowledge, or the means of knowledge to which the party wilfully shuts his eyes–a suspicion in the mind of the party and the means of knowledge in his power wilfully disregarded. A similar view was expressed by Lord Herschell in London J.S. Bank v. Simmons, [1892] A.C. 201, at p. 221, a case where it was held that knowledge that the person dealing with a negotiable instrument is only an agent does not compel the person taking it to inquire into the nature of his title or the extent of his authority. As Lord Herschell said (at p. 217), ‘it is of the very essence of a negotiable instrument that you may treat the person in possession of it as having authority to deal with it, be he agent or otherwise, unless you know to the contrary.’ In that case the decision in Sheffield v. London J.S. Bank, (1888) 13 A.C. 333, was explained to have been founded upon the fact that there the defendants knew or suspected that the person from whom they took was exceeding his authority.”
He then continued at pp. 59-60:
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- “This passage was quoted by Willes J. in delivering his judgment in Raphael v. Bank of England, 17 C.B. at p. 175, where it was treated as undoubted law that negligence did not invalidate the title of a person taking a negotiable instrument in good faith and for value. I think, therefore, that the rule of law enunciated by Parke B. (in Foster v. Pearson, 1 C.M. & R. [1849] at p. 855 [149 E.R. 1324]) is firmly established in the existing law (referring to the rule that the holder of negotiable securities can give a title which he himself did not possess to a bona fide holder for value).”
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- This does not mean that there may not be negligence which affords evidence of bad faith. In Jones v. Gordon, (1877), 2 App. Cas. 616, the holder was held to have disentitled himself because he wilfully shut his eyes. Lord Blackburn there said (pp. 628-9):–”I consider it to be fully and thoroughly established that if value be given for a bill of exchange, it is not enough to shew that there was carelessness, negligence, or foolishness in not suspecting that the bill was wrong, when there were circumstances which might have led a man to suspect that. All these are matters which tend to shew that there was dishonesty in not doing it, but they do not in themselves make a defence to an action upon a bill of exchange. I take it that in order to make such a defence … it is necessary to shew that the person who gave value for the bill … was affected with notice that there was something wrong about it when he took it. I do not think it is necessary that he should have notice of what the particular wrong was. … But then I think that such evidence of carelessness or blindness as I have referred to may with other evidence be good evidence upon the question which, I take it, is the real one, whether he did know that there was something wrong in it. If he was (if I may use the phrase) honestly blundering and careless, and so took a bill of exchange, or a banknote when he ought not to have taken it, still he would be entitled to recover. But if the facts and circumstances are such that the jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind–I suspect there is something wrong, and if I ask questions and make further inquiry, it will not longer be my suspecting it, but my knowing it, and then I shall not be able to recover–I think that is dishonesty.”
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- Lord Herschell’s judgment in the Simmons case ([1892] A.C. 201) may now again be looked at. At p. 221, he says:–”The tribunal must investigate the facts for itself and determine whether those who claim to hold a negotiable instrument have made out that they took it in good faith and for value. One word I would say upon the question of notice, and being put upon inquiry. I should be very sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments. But regard to the facts of which the taker of such instruments had notice is most material in considering whether he took in good faith. If there be anything which excites the suspicion that there is something wrong in the transaction, the taker of the instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicions aside without further inquiry.” Referring to this passage, Beven on Negligence, 4th ed., vol. 1, p. 1485 observes:–
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- ”To avoid misconception of Lord Herschell’s meaning … we must bear in mind that in the ordinary case of taking a negotiable instrument the onus is on the person impugning the title of the holder; so that Lord Herschell’s dictum must be confined to those cases where, by showing circumstances of suspicion, the prima facie presumption in favour of the holder is displaced, and he is called on to show that his possession of the instrument is consistent with good faith and that he is a holder for value.”
17 On the facts herein, I find that the defendant bank did not take the cheque in good faith. The branch administration officer of the defendant bank was asked to do something that was not in accordance with the normal banking practice or its rules. He was asked to do so by one who was not an old established customer at the bank but who had opened his personal bank account with the deposit of the cheque that day. He was advised that the company’s bank account was in the plaintiff’s bank across the street. When he was told that Tourangeau was the sole shareholder and officer of the companies, even the Acc-Par cheque payable to Tourangeau personally should have made him think that it was probably funds payable to one of the companies. However, that by itself and the deposit of the small cheque payable to the company, endorsed by it to its officer, and deposited in his name might only have constituted carelessness. But the history of the further deposits in the same pattern and the history of the withdrawals that were permitted combined with the means of knowledge by a search of assignment of book debts or by a telephone call to the other bank had to mean that the defendant bank was shutting its eyes to the facts presented to it.
18 Tourangeau had received through the action of the company and his own act property of the company that he was not entitled to retain for his own benefit. He held that property in trust for the companies to convey to the assignee of the book debts, the plaintiff. Even if he were entitled as agent to have those moneys in his own account, the use of them, other than to pay the plaintiff, was improper. It was a trust which the defendant bank was bound to recognize if it had ascertained the facts. In the words of Rinfret J. in M.A. Hanna Co. and Provincial Bank of Canada, [1935] S.C.R. 144 at p. 161, [1935] 1 D.L.R. 545 at p. 559, there was “… evidence of circumstances reasonably giving rise to ‘a suspicion of something wrong combined with a wilful disregard of the means of knowledge’ (per Willes J. in Raphael v. Bank of England) or evincing ‘a design or fixed purpose to avoid knowing’ (per Lord Selborne in Agra Bank v. Barry (1874), L.R. 7 E. and I. App. 135)”. Consequently, the defendant bank holds the property “under a transmitted fiduciary obligation to account for it” to the cestui que trust, the plaintiff: John et al. v. Dodwell & Co. Ltd., [1918] A.C. 563 at p. 569, as quoted in Baxter, The Law of Banking and the Canadian Banking Act, 2nd ed. (1968), p. 146.
19 There will be judgment for the plaintiff in the sum of $17,064 together with interest at 9.25% from June 23, 1978. (Counsel had made no submissions that I should vary this date.) The plaintiff will have its costs of this action against the defendant, the Royal Bank of Canada.
Judgment for plaintiff.
BANK OF CHINA V LEE KEE PIN July 11, 2008
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The Malayan Law Journal
BANK OF CHINA V LEE KEE PIN
[1961] 1 MLJ 286
ORIGINATING SUMMONS NO 358 OF 1960
OCJ PENANG
DECIDED-DATE-1: 18 MAY 1961
RIGBY J
CATCHWORDS:
Mortgage – Deposit of title deeds – Sale of land by mortgagee – Lease by mortgagor – Conveyancing and Law of Property Ordinance (Cap 118), s 23 – Variation of conditions of sale
HEADNOTES:
The plaintiffs obtained judgment against the defendant for the recovery of $ 520,654.99 being moneys lent to and paid on behalf of the defendant together with the interest and bank charges due and payable thereon. No payment having been made by the defendant, the plaintiffs applied for and obtained an order for the sale of the defendant’s property secured to them by way of deposit of title deeds, with vacant possession but, however, subject to “the existing right of any third party if any.” The conditions of sale had been sent to the defendant and on the day before the sale took place the defendant insisted that the property be sold subject to a lease which he had granted to a third party for two years with an option to the lessee to renew for a [*287] further two years. The existence of this lease had never been disclosed to the plaintiffs.
In an application to vary the conditions of sale so that the property may be sold with vacant possession.
Held:
(1) a lease for two years with an option to renew for a further two years
is not a lease for a term exceeding three years;
(2) in the circumstances of the case the rent was not so substantially
below the best rent obtainable as to justify setting aside the lease;
accordingly the lease was valid and the property must be sold subject to it.
Case referred to
Holt v Dawson [1939] 3 All ER 635
APPLICATION
Khoo Keat Siew for the plaintiff.
M Abraham for the defendant.
ACTION:
APPLICATION
LAWYERS: Khoo Keat Siew for the plaintiff.
M Abraham for the defendant.
JUDGMENTBY: RIGBY J
This is an application to vary the Conditions of Sale in respect of the house and land comprising No. 125, York Road, Penang, the property of one Lee Kee Pin, pursuant to an Order made by me on the 28th November, 1960. The history of the proceedings giving rise to this application are as follows. In July, 1959, the Bank of China, as plaintiffs, sued Lee Kee Pin, as defendant, by way of Specially Indorsed Writ, for the sum of $ 574,000 odd being moneys lent to and paid on behalf of the defendant by the Bank in the course of its ordinary banking transactions, together with the interest and bank charges due and payable thereon. Considerable difficulty was experienced in effecting service of the Writ on the defendant and an Order for substituted service had to be obtained. The defence was then filed pleading, inter alia, that by virtue of the provisions of the 1958 Banking Ordinance the plaintiffs had no right to sue for the money owing to them. That preliminary plea, which was wholly devoid of any equitable merit, was heard and dismissed by this Court in November, 1959. An appeal against that decision was lodged but later withdrawn. Pleadings in the action closed in December, 1959, but notwithstanding that fact, despite repeated written requests, the defendant failed to file any Affidavit of Documents until an Order to do so was issued by me in Chambers, at the instance of the plaintiffs, in February, 1960. In March, 1960, the case was transferred into the Fixing List for a date to be fixed for hearing. In April the plaintiffs obtained an Order for lis pendens in respect of the defendant’s property, including the house at 125, York Road. In May a Consent Order was made for accounts to be taken. In September, after accounts and inquiries had been taken and made before him the Registrar issued his Certificate that the plaintiffs were entitled to payment from the defendant of $ 520,654.99. In October, no payment whatsoever having been made by the defendant of any of the moneys found due by him to the plaintiff Bank, the Bank applied by way of Originating Summons for an Order for sale of the defendant’s two properties, one of which was 125, York Road, secured to them by the defendant by way of deposit of title deeds. Again, the defendant could not be found and an Order for substituted service had to be obtained. However, subsequently the application was heard in November, 1960. At the hearing of the application it became apparent that the defendant and his family were all living at 125, York Road. Although there is no note of it upon the record, as far as my memory serves me some vague suggestion was put forward by Mr. Lim Huck Aik, as counsel then appearing on behalf of the defendant, that there might be in existence some agreement of lease of the property between the defendant and some member of his family. What is quite clear, however, is that although there was considerable argument as to the precise terms that ought to be used in the Order for sale no mention whatsoever was made as to the existence of a definite lease of the premises. An Order was then made by me on the 28th November, 1960, directing, inter alia, that the premises be sold “with vacant possession but subject to the existing right of any third party, if any.” In February, 1961, a summons was taken out returnable before the Registrar on the 7th March, for an Order to proceed with the sale by public auction on the 6th April, subject to a reserve price fixed by the plaintiffs and approved by the Registrar. An Order was made accordingly. On the 5th April, a day before the sale was due to take place and after the Conditions of Sale had been sent to the defendant’s solicitors for approval, the defendant’s solicitors thought fit to insist that the property be sold, subject to a lease, which they produced for the first time and the existence of which had never previously been disclosed. Such is the somewhat disgraceful history of these proceedings. There is not the slightest doubt in my mind that the defendant, from the very outset, has done everything possible to resist and obstruct the plaintiff Bank’s perfectly legitimate claim to recover sums of money due and owing to them by the defendant. Equally there is no doubt in my mind that anticipating that judgment must necessarily be given against him, he sought to prevent the inevitable sale of his property by entering into a lease of his house to a third party for a period of years. It is obvious now, and it must have been obvious then, that a sale of his house, with vacant possession, would fetch very considerably more than a sale subject to the right of possession of an existing tenant. The proceedings do little credit to the defendant nor, I regret to say, to the solicitors then acting on his behalf. But I am not, at this stage, concerned with the morals of the matter but simply whether or not the lease is a valid one or whether I have any power, in these proceedings, to set it aside.
The circumstances in which the lease was entered into can be briefly stated. On the 16th March, 1960, — 71/2 months after these proceedings had been instituted against him but 6 months before the Registrar’s Certificate had been issued [*288] declaring that he owed the plaintiff over half a million dollars — the defendant leased his house at 125, York Road to the General Rubber Trading House Ltd., a company incorporated in Singapore and having an office in Penang. The lease was duly stamped on the 19th March. It was for a period of two years with an option to the lessee to renew for a further two years. The rent was $ 170 per month.
It is not disputed that throughout the whole period since it was leased the defendant and his family have continued to live in and occupy the whole premises. The arrangement was that the house was intended to provide residential accommodation for the proposed new Manager of the Company’s Penang Branch on his transfer from Singapore. In the interval the house — or, rather, one room in the house — was used by the Company’s Managing Director, a personal friend of the defendant, on his periodical business visits to Penang. Such visits took place every one or two months and lasted for 2 to 7 days each visit. Part of the house is also used from time to time, by the Penang Manager of the Company, at their volition, as a recreation room.
The powers of a mortgagor in possession, as against the mortgagee or any incumbrancers, are contained in section 23 of the Conveyancing and Law of Property Ordinance (Cap. 118). The mortgagor may enter into an occupation lease of his mortgaged land for any term not exceeding 3 years and providing, inter alia, that such lease “shall reserve the best rent that can reasonably be obtained, regard being had to the circumstances of the case.”
Mr. Khoo Keat Siew, who has argued the case for the plaintiff Bank most strenuously, contended that he was entitled to impeach the validity of the lease on the ground that both these conditions had not been complied with, namely, that the lease was for more than 3 years and that the rent was not the best that could reasonably be obtained. He contended that a lease for 2 years with an option given to the lessee to renew for a further 2 years, was, in effect, a lease for a term exceeding 3 years. I do not think that this is a correct view. I think the position is correctly stated in Cheshire’s Modern Real Property, 6th edition, page 132, in the following passage:–
“A lease exceeds 3 years … only if it is one which must last for
longer than that period. If it designates a period which may be
less than 3 years, then it is valid without any formalities, even
though it is capable of lasting longer.”
Turning now to the rather more difficult problem of the alleged inadequacy of the rent. Evidence was given by an experienced assessor that the house was situated in a first-class residential area; that there was a considerable demand for this type of house; and that there should have been little difficulty in March, 1960, in letting the house for a rental of $ 400 per month. He admitted that the demand for such houses came mostly from the R.A.F. and R.A.A.F., although he added that there was, to his knowledge, some local demand for houses at such a rental. The defendant said that he had based the rental on the annual rateable value. Under the Contract of Lease the lessee had also to pay all conservancy charges, electric light and water, and all rates and taxes. The lessee was a friend of his, with whom he had had business dealings in the past. There was also the undoubted factor that the lessee permitted him and his family to remain in the house, though the Company’s Managing Director said he made it clear to the defendant, on the occasions when he visited Penang, that he would have to look for alternative accommodation elsewhere. The words contained in the subsection of the Ordinance are that the lease shall reserve “the best rent that can reasonably be obtained, regard being had to the circumstances of the case.” I am reluctantly of the opinion that, considering all the circumstances of the case, the evidence before me is not such that I can fairly and properly say that the rent was so substantially below the best rent obtainable as to justify me setting aside the lease.
Finally, Mr. Khoo Keat Siew somewhat belatedly took the point that the lease itself was not admissible in evidence under section 5 of the Registration of Deeds Ordinance (Cap. 121). Whilst conceding that under section 26 of the Ordinance leases for under 3 years were excluded from the provisions of the Ordinance he contended that that only applied in the case of leases under 3 years where the granting of the lease was “accompanied by actual possession from the making of such lease …” He argued that the evidence given negatived the fact that the lessee had actual possession of the house from the date of the signing of the lease, and he contended that the possession in fact remained with the lessor who continued to live in the house with his family. It is perhaps unfortunate that the lessee was not asked the direct question whether the defendant, at the time of the lease, had given him the key to the house since the handing over of the key is, to quote the words of Scott L.J. in Holt v Dawson [1939] 3 All ER 635, “a symbolic act which at common law carries with it possession of that to which the key is the means of access.” But I see no real substance in Mr. Khoo Keat Siew’s contention. The facts show that not only could the lessee make use of the house as and when he wanted to do so, but also that the Penang Branch of the company resorted to it when they wished to use it, or part of it. Those facts, to my mind are sufficient to establish actual possession of the property.
For all these reasons, with considerable regret, I have come to the conclusion that this application must be dismissed and I must decline to vary or alter the Conditions of Sale in such a manner as to direct that the property be sold with vacant possession. My original Order must therefore stand.
[*289] Since it is abundantly clear that the whole of these proceedings have become necessary by reason of the defendant failing to declare from the very outset the existence of this lease, I order that the plaintiffs’ costs of this application be taxed and paid by the defendant.
Application dismissed.
SOLICITORS:
Solicitors: Hogan, Adams & Allan; M Abraham.
LOAD-DATE: June 3, 2003
HOUSE OF LORDS
[1950] AC 186, [1950] 1 All ER 405, 66 TLR (Pt 1) 441, 43 R&IT 180, [1950] WN 98
HEARING-DATES: 22, 23, 24 NOVEMBER 1949, 9 FEBRUARY 1950
9 FEBRUARY 1950
CATCHWORDS:
Bankruptcy – Petition – Service – Service out of the jurisdiction – “Debtor” – Foreigner – “Carrying on business” – Business continued till all debts paid – Bankruptcy Act, 1914 (c 59), s 1(1)(a), (2)(c), s 4(1)(c).
HEADNOTE:
T, a citizen of Rumania, carried on leather business in England, and on 1 January 1946, two notices of assessment for £ 10,000 each were issued to him in respect of excess profits tax in connection with his business in respect of the chargeable accounting periods ending on 31 March 1943, and 31 March 1945. On 10 January 1946, a further notice of assessment was issued to him for £ 10,000 for excess profits tax in respect of the chargeable accounting period ending on 31 March 1944. T left England on 31 October 1946, and had ever since resided in Eire. By the end of 1946, T had disposed of his business. On 14 November 1947, a bankruptcy petition was presented at the instance of the Crown against T in respect of the non-payment of excess profits tax amounting to £ 30,000. It was not denied that there was prima facie evidence of an intent in T to delay or defeat the Crown in its claim by remaining out of England.
Held – (i) section 1(2)(c) of the Bankruptcy Act, 1914, by its express terms extended not only to British subjects but to foreigners, and was applicable to T, notwithstanding that he was a Rumanian subject and that the act of bankruptcy alleged was committed outside England.
Re Debtors (No 836 of 1935) ([1936] 1 All ER 875), considered.
(ii) although T was not actively carrying on business for many months before the presentation of the petition, he did not cease to trade for the purposes of the Act until all sums due in respect of the business were collected and all debts were paid, there being no difference in this respect between trade debts incurred by buying and selling and excess profits tax, and, therefore, T was carrying on business in England at the time of the act of bankruptcy specified in s 1(1)(d) of the Act so as to be “debtor” within s 1(2)(c), and the Crown was not debarred by s 4(1)(c) from presenting the petition.
Re Dagnall ([1896] 2 QB 407), Re Worsley ([1901] 1 QB 309), Re Clark ([1914] 3 KB 1095), Re Allen ([1915] 1 KB 285) and Re Reynolds ([1915] 2 KB 186) approved.
Decision of the Court Of Appeal (sub nom., Re A Debtor (No 335 of 1947) ([1948] 2 All ER 533), affirmed.
NOTES:
As to Bankruptcy Jurisdiction over Foreigners, see Halsbury, Hailsham Edn, Vol 2, pp 9, 10, 61-63, paras 10, 74; and for Cases, see Digest, Vol 4, pp 24-26, Nos 193-207.
CASES-REF-TO:
Cooke v Vogeler (Charles A) Co [1901] AC 102, 70 LJKB 181, 84 LT 10, 4 Digest 25, 199.
Ex p Crispin, Re Crispin (1873), 8 Ch App 374, 42 LJ Bcy 65, 28 LT 483, 37 JP 391, 4 Digest 25, 196.
Ex p Blain, Re Sawers (1879), 12 ChD 522, 41 LT 46, 4 Digest 25, 197.
Re Pearson, Ex p Pearson [1892] 2 QB 263, 61 LJQB 585, 67 LT 367, 4 Digest 25, 202.
Re Debtors (No 836 of 1935) [1936] 1 All ER 875, [1936] Ch 622, 105 LJCh 265, 154 LT 592, Digest Supp.
Re Dagnall, Ex p Soan and Morley [1896] 2 QB 407, 65 LJQB 666, 75 LT 142, 4 Digest 32, 267.
Re Reynolds, Ex p White Bros Ltd [1915] 2 KB 186, 84 LJKB 1346, 112 LT 1049, 4 Digest 33, 274.
Re Worsley [1901] 1 QB 309, 70 LJQB 93, 84 LT 100, 4 Digest 32, 268.
Re Clark, Ex p Pope and Owles [1914] 3 KB 1095, 84 LJKB 89, 112 LT 873, 4 Digest 33, 271.
Re Allen, Ex p Shaw [1915] 1 KB 285, 84 LJKB 271, 112 LT 194, 4 Digest 33, 273.
INTRODUCTION:
Appeal
Appeal by a debtor against an order of the Court of Appeal, dated 16 July 1948, and reported [1948] 2 All ER 533, allowing an appeal by the Crown from an order of Mr Registrar Parton, made on 7 April 1948, and discharging an order giving leave to serve a bankruptcy petition out of the jurisdiction. The respondent argued that, being a Rumanian subject, he was not a “debtor” within the meaning of the Bankruptcy Act, 1914, s 1(2), and that he had not committed an act of bankruptcy on which a petition could be grounded inasmuch as he did not carry on business in England at the date of the petition or during any portion of the three months prior thereto. The House of Lords dismissed the appeal. The facts appear in the opinion of Lord Porter.
COUNSEL:
Caplan for the debtor; The Solicitor General (Sir Frank Soskice KC) J H Stamp and A F M Berkeley for the Crown
JUDGMENT-READ:
Their Lordships took time for consideration. 9 February 1950. The following opinions were delivered.
PANEL: LORD PORTER, LORD NORMAND, LORD MORTON OF HENRYTON, LORD REID AND LORD RADCLIFFE
JUDGMENTBY-1: LORD PORTER.
JUDGMENT-1:
LORD PORTER.:
My Lords, the appellant is a citizen of Rumania. For some years, however, before the proceedings under review, he carried on a leather business in this country, apparently with success. On 1 January 1946, two notices of assessment for £ 10,000 each in respect of excess profits tax in connection with this business, covering the two chargeable accounting periods ending on 31 March 1943 and 31 March 1945, were issued to the appellant, and on 10 January 1946, a further notice of assessment was issued to him for another sum of ___10,000 for excess profits tax in respect of the chargeable accounting period ending 31 March 1944. Certain incidental proceedings were taken, but they are not material to the question now before your Lordships. It is enough to record that on 14 November 1947, a bankruptcy petition at the instance of the Crown was issued in respect of the non-payment of these three sums, amounting to £ 30,000 in all, which had not then been paid, and are still unpaid. It appears that the appellant had disposed of his business by the end of 1946 and meanwhile he left this country on 31 October of that year and has resided in Eire since that date.
By the Bankruptcy Act, 1914, s 1, it is provided:
“(1) A debtor commits an act of bankruptcy in each of the following cases:-(a) If in England or elsewhere he makes a conveyance or assignment of his property to a trustee or trustees for the benefit of his creditors generally; (b) If in England or elsewhere he makes a fraudulent conveyance, gift, delivery, or transfer of his property, or of any part thereof; (c) If in England or elsewhere he makes any conveyance or transfer of his property or any part thereof, or creates any charge thereon, which would under this or any other Act be void as a fraudulent preference if he were adjudged bankrupt; (d) If with intent to defeat or delay his creditors he does any of the following things, namely, departs out of England, or being out of England remains out of England, or departs from his dwelling-house, or otherwise absents himself, or begins to keep house; … (2) In this Act, the expression ‘a debtor,’ unless the context otherwise implies, includes any person, whether a British subject or not, who at the time when any act of bankruptcy was done or suffered by him-(a) was personally present in England; or (b) ordinarily resided or had a place of residence in England; or (c) was carrying on business in England, personally, or by means of an agent or manager; or (d) was a member of a firm or partnership which carried on business in England.”
Section 4 of that Act provides:
“(1) A creditor shall not be entitled to present a bankruptcy petition against a debtor unless … (c) the act of bankruptcy on which the petition is grounded has occurred within three months before the presentation of the petition, and (d) the debtor is domiciled in England, or within a year before the date of the presentation of the petition has ordinarily resided, or had a dwelling-house or place of business, in England, or (except in the case of a person domiciled in Scotland or Ireland or a firm or partnership having its principal place of business in Scotland or Ireland) has carried on business in England, personally or by means of an agent or manager, or (except as aforesaid) is or within the said period has been a member of a firm or partnership of persons which has carried on business in England by means of a partner or partners, or an agent or manager … “
In these circumstances the contention for the Crown is that the appellant has committed an act of bankruptcy because when the petition was issued he was a debtor in that he was carrying on business in England personally at that time and that being out of England he remained out of England with intent to defeat or delay his creditors and so committed the act of bankruptcy defined in s 1(1)(d). It is not denied that he is remaining out of England, nor that there is prima facie evidence of an attempt to defeat or delay the Crown in its endeavour to collect the debt which is claimed to be due, but the appellant maintains that, being a Rumanian subject, he is not a debtor within the meaning of the Act, and that he has not committed an act of bankruptcy inasmuch as he did not carry on business in England at the date of the petition, or during any portion of the three months prior thereto. The Crown maintains that the wording of sub-s (2) in terms embraces both English subjects and foreigners provided that either class carried on business in this country at the date of the act of bankruptcy relied on, or within three months prior thereto, and that there is a long series of cases which establish that a business does not cease to be carried on in this country until all the debts incurred in the course of it have been discharged.
As regards the first point, the appellant maintains that, despite its wording, sub-s (2) has no application save in the case of British subjects or persons domiciled here or in a case where the act of bankruptcy relied on was committed in this country. In the present case he relies on the facts that the petition is based on an allegation that, being out of England, he has remained abroad, that he is a Rumanian subject, and that the alleged act of bankruptcy by its very nature has not been, and could not be, committed in this country. It would, he says, be contrary to the comity of nations and to the ordinary construction of Acts of Parliament to decide that an act committed out of this country by a foreign national domiciled abroad should be held to come within the mischief of the Act.
My Lords, s 4(1) limits the circumstances in which a creditor can present a bankruptcy petition, but I do not think that it throws any further light on his right to do so. Before it can be presented, there must be a debtor and he must have committed an act of bankruptcy. If those two pre-requisites are established, the petition may be issued subject to the conditions laid down in s 4. The answer, therefore, to the question submitted to your Lordships depends, in the first instance, on the true meaning of s 1(1)(d) and (2)(c). Interpreted in accordance with its strict wording, the latter sub-section applies to British and foreign nationals alike, and, unless some principle to the contrary can be established, I should so construe it. If I am right in this, an invocation of the comity of nations is irrelevant. If the meaning of an Act of Parliament is ambiguous, that doctrine may be prayed in aid, but, where an English statute enacts a provision in plain terms, no such principle applies. Any foreign nation of which the person affected is a member, or with whom such person is domiciled, is free to disregard the provisions of the English enactment, but the person concerned cannot himself take exception, though it may be he will escape from compliance with its terms because he is out of the jurisdiction and cannot be reached by English process. The principle is, I think, accurately expressed in Halsbury’s Laws Of England, Hailsham ed, vol 31, p 509, paras 658, 659:
“658. There is a presumption that Parliament does not assert or assume jurisdiction which goes beyond the limits established by the common consent of nations. On the principles already stated, however, this presumption must give way before an intention clearly expressed. 659. Statutes are to be interpreted, provided that their language admits, so as not to be inconsistent with the comity of nations. International law, however, being mainly conventional, can, it seems, only be administered by the courts when it forms part of the law of this country. If, therefore, statutory enactments are clearly inconsistent with international law, they must be so construed, whatever the effect upon the rights of aliens not within the jurisdiction may be.”
The observations of the Earl Of Halsbury LC in Cooke v Vogeler (Charles A) Co ([1901] AC 107) are to the same effect.
In considering the authorities, it is not, I think, necessary to refer to any case preceding Ex p Crispin, Re Crispin, but before that and the succeeding cases are dealt with, and before the statements contained in them are appraised, it is essential to bear in mind what the relevant statutory provisions were at the time when they were decided. In Crispin’s case, the statute applicable was the Bankruptcy Act, 1869, and that case in terms decided only that “an alien non-trader domiciled abroad who contracts debts in England cannot be made a bankrupt upon an act of bankruptcy committed abroad.” In the course of his judgment, however, Mellish LJ laid down (8 Ch App 380) three considerations as supporting the conclusion at which he had arrived. The first two referred to wording which is similar to that which is now to be found in s 1(1)(a), (b) and (d) of the present Act. Paragraph (a), he says, is clearly intended to relate to a conveyance which is to operate according to English law; para (b) clearly means fraudulent by the law of England; and para (d) implies that the person who remains out of England has his home or place of business in England and cannot reasonably be held to apply to the case of a foreigner remaining in his own home. In ascertaining the effect of this case, however, it has to be borne in mind that the Act of 1869 contained no definition of the word “debtor,” and the court, being unable to find any intermediate meaning for that word between any debtor, whatever his nationality or domicil, who commits an act of bankruptcy anywhere and a debtor who commits an act of bankruptcy in this country or is otherwise subject to the law of this country, chose the latter. The act of bankruptcy alleged was the going or remaining out of England with intent to defeat or delay creditors, and the headnote is, I think, accurate in saying (ibid, 374):
“An alien non-trader domiciled abroad, who contracts debts in England, is liable to be made a bankrupt under the Bankruptcy Act, 1869, if he commits an act of bankruptcy in England, although he may have left England before the petition for adjudication is presented. But he cannot be made a bankrupt upon an alleged act of bankruptcy committed abroad.”
This language, indeed, but repeats the observations of the court (ibid, 379).
Ex p Blain was also decided under the Act of 1869, and in it the court held (i) that an act of bankruptcy must be a personal act or default and cannot be committed through an agent nor by a firm as such, and (ii) that to use the words of Brett LJ (12 ChD 528):
“… upon the ground of the limited power of the legislature of England to legislate, all the authorities have held that it is necessary that the act of bankruptcy should have been committed in England, if the person against whom the statute is invoked is a foreigner who is not domiciled in England.”
In that case, the persons against whom the petition was presented, and by order discharged, were Chilean subjects who had never been in this country, though they were members of a firm carrying on business here. Undoubtedly, the subsequent Bankruptcy Acts have altered the first principle decided; whether they have altered the second is the matter for your Lordships’ consideration
The Bankruptcy Act, 1883, like the Act of 1869, contains no definition of debtor, though it increases the number of acts which are acts of bankruptcy. It does, however, contain a fresh section-s 6-which enacts that a creditor shall not be entitled to present a bankruptcy petition against a debtor unless-s 6(1)(d)-the debtor is domiciled in England or, within a year before the date of the presentation of the petition, he ordinarily resided in or had a dwelling-house or place of business in England. In Ex p Pearson an American citizen who was resident in America but was said to have carried on business in England within a year was served with a bankruptcy notice in America and it was sought to make him bankrupt thereon. The court held that s 6(1)(d) made no difference in law-it did not enlarge the class of debtors but only limited the cases in which a bankruptcy petition could be presented. At the same time it affirmed the principle laid down in Ex p Blain, Fry LJ saying ([1892] 2 QB 268):
“… I can entertain no doubt that s. 4 of the Act of 1883 relates only to debtors who are subject, either by birth and natural allegiance or by temporary residence, to the English law.”
Cooke v Vogeler (Charles A) Co raised a somewhat different question. In that case, two American subjects resided and carried on business in America, but they also carried on a branch of their business in this country, and had assets here. In December, 1899, they executed an assignment of all their property to their manager in America in trust to pay their debts. This was said to be an act of bankruptcy under s 4(1)(a) of the Act of 1883, which is in the same terms as s 1(1)(a) of the Act of 1914. They had, it was argued, “in England or elsewhere [made] a conveyance … of [their] property to a trustee … for the benefit of [their] creditors generally.” The contention failed: Lord Halsbury said ([1901] AC 108):
“The words ‘debtor’ and ‘creditor’ certainly cannot be sufficient to give jurisdiction to the English Court of Bankruptcy, because if unlimited they would give jurisdiction all over the world in respect of debts, petitions, or acts of bankruptcy committed anywhere … Once it is admitted that a limit must be placed upon those words, it must follow that the limit must be ‘debtor’ and ‘creditor’ respectively who are subject to the jurisdiction of the English bankruptcy law … The whole argument, I think, depended upon the generality of the word ‘debtor’.”
Lord Davey, who also spoke, affirmed the decision in Ex p Pearson to the effect that s 6 was a limiting and not an enlarging section, and had not altered the law in this respect.
My Lords, in these cases no question arose as to the effect of the change in the law brought about by the description of debtor which was inserted for the first time in the Bankruptcy and Deeds of Arrangement Act, 1913, s 8, and repeated in s 1(2) of the Act of 1914, but some discussion as to its effect took place in 1936 in Re Debtors. The problem in that case was the same as that in Vogeler’s case. Two American citizens carried on a financial business in partnership in a number of foreign cities including London and Paris, the London business being managed by an Englishman. In 1935, the London business was wound-up, and its assets were applied, so far as they went, in settlement of English claims. At this time both partners were living in America, and in August of that year executed in the State of New York an assignment of their property to trustees for the benefit of their creditors, an assignment which in the case of one partner comprised the whole of his property. Against that partner, the petitioning creditor relied on the execution of the assignment as an act of bankruptcy. The Court of Appeal, following Vogeler’s case, held that an assignment executed abroad by a foreign national, not domiciled or resident in England, did not constitute an act of bankruptcy unless it was intended to operate in accordance with English law. The court considered itself bound by the decision in Vogeler’s case in spite of the fact that the Act of 1914 had added a definition of or additional meaning to the word “debtor.” In the opinion of the members of the Court of Appeal, Vogeler’s case was decided on two grounds-(i) that the person petitioned against was not a debtor, and (ii) that the assignment was not an act of bankruptcy. As regards the first point, the court were inclined to think that the provisions of the Act of 1914 had disposed of the difficulty, and that the American gentleman who was petitioned against was a debtor, but, in their opinion, the House of Lords had also decided that a deed of assignment or conveyance executed by a domiciled foreigner in his own country is not an act of bankruptcy within the meaning of the Bankruptcy Acts if it is to operate according to the law of the foreign country in which it is made.
My Lords, whatever view one may take of this decision, it has no direct bearing on the question now under consideration. It is a decision on the terms of s 1(1)(a) not s 1(1)(d), and deals with the limitation to be placed on the meaning of the word “conveyance,” not with the width of that class of persons who are included in the word “debtor.” The appellant, however, relies on the fact that the provisions of s 1(2) are not definitive, ie, they do not say what a debtor is, but merely add a fresh type or fresh types to those who have been held in law to constitute the category of debtors, and therefore leave it still necessary to put some limit on so wide a class. Let me assume then, without expressing any opinion as to the validity of the contention, that the sub-section should read: “In addition to one who is already subject to the English bankruptcy law, the word debtor shall also embrace a non-British subject who, at the time when the act of bankruptcy was committed, was carrying on business in England.” On this wording, if the appellant was carrying on business in England when he failed to pay his debt to the Crown, he would, prima facie, be a debtor since, as a result of the wording of the section, it is immaterial that he was not a British subject, and from the terms of para (b) it is clear that residence is only one of four alternative requisites which constitute a debtor within the meaning of the Act-residence may be a factor which brings him within that class, but it is not a necessary element. Whatever limitation may formerly have been put on the meaning of the word “debtor,” a wider sense has now been given to it. It includes not only persons who were in the past subject to the English bankruptcy law, but a new class consisting of persons who are not British subjects or domiciled in this country, but carried on business in England at the time when the act of bankruptcy was committed. Whether Re Debtors was rightly decided or not, one still has to construe sub-s (1)(d), and I find it difficult to see what bearing a narrowed construction of the word “conveyance” in s 1(1)(a) has on the width of the class of debtors who can commit the act of bankruptcy defined in s 1(1)(d). As Lord Greene MR points out ([1948] 2 All ER 536), an act within sub-s (1)(d) can only be committed by someone abroad. That person must, of course, have been carrying on business in England within three months of the act of bankruptcy alleged, and the factors needed to fulfil this condition will require analysis at a later stage, but, once it is established that these requirements are fulfilled, the sub-section declares in terms that it does not matter whether the person concerned is a British subject or not. He is a debtor provided he fulfils any one of the four conditions stipulated for in the sub-section. In seeking to say that the provisions are confined to a British national or British domiciled person or to a case where the act of bankruptcy is committed in this country the appellant seems to me to give the go-by to the words “whether a British subject or not,” and I do not understand what extension of the law he suggests to have been intended by them unless his contention is that they apply to some of the acts of bankruptcy set out above, but not to all-at any rate not to the one relied on in this case. I cannot find that the wording of the Act makes any such differentation between what is required to constitute one category of those whom the present Act declares to be included in the class of debtors and another, and I can see no reason for its implication.
My Lords, out of respect for a strenuous argument presented to your Lordships, I have dealt at some length with this aspect of the case, but in the end I find myself coming back to the judgment of the Master Of The Rolls and find myself in complete agreement with its expression and substance. Like him I think the point is disposed of if one reads the relevant words of the statute in their appropriate position. I repeat them as a convenient method of winding up the view I hold on this question. Section 1(1)(d) will then run: “Any person, whether a British subject or not, who at the time when any act of bankruptcy was done by him was carrying on business in England commits an act of bankruptcy if, with intent to defeat or delay his creditors, being out of England, he remains out of England.” So read, I find it impossible to add as a limitation the provision that no foreigner is hit by the Act unless he in some way owes allegiance to the law of England, or the act has been committed in this country. To adopt this construction is not to limit the meaning of the wording of the section but to contradict it.
The further argument, however, still remains open to the appellant that he was not carrying on business in England within three months of the presentation of the petition, and, therefore, was not a debtor within the meaning of the Act. In a sense it is true that the appellant was not actively carrying on business within three months of the presentation of the petition, but there is a series of cases beginning with Re Dagnall and ending with Re Reynolds which in unbroken sequence have decided that trading does not cease when, as the expression is, “the shutters are put up,” but that it continues until the sums due are collected and all debts paid. It is true that all the decisions have been given in respect of married women’s trading and that a distinction has been made between the earlier Acts, where the expression was “as a trader,” and the later, where the phrase “carrying on trade” is found, but it is the later, not the earlier, phrase which has been adopted in the Act of 1914. It was suggested on behalf of the appellant that the decisions had application to married women only, because the wording was first used in the Married Women’s Property Act, 1882, and transferred therefrom to the Bankruptcy and Deeds of Arrangement Act, 1913, and thence to the present Act. I cannot follow why the same wording should have one significance when employed of married women and another in the case of all other persons engaged in trade. More particularly, I think that the meaning placed on the words in the cases referred to must be followed when it is remembered that two Acts of Parliament have been passed since Re Dagnall and Re Worsley were decided and that those cases have been followed and approved in Re Clark, Re Allen and Re Reynolds. In my opinion, those cases were rightly decided, and are conclusive of the present question.
There is, however, one further matter which requires consideration. In all the cases referred to the debts which were to be paid or collected were strictly trade debts, and it is maintained that in that respect they differ from the case under appeal in that the debt claimed by the Crown to be due is in respect of excess profits tax, and that such a debt is not a trade debt but a sum due for taxes, and no more connected with the appellant’s business than income tax or any other tax liability. Whatever else may be said about excess profits tax, however, it is imposed on the debtor because he has been trading, and I do not see any reason for confining trade debts to those incurred in buying or selling. Re Allen shows that they extend to liabilities incurred in incidental matters which occur during the course of carrying on the trade, including a liability for careless driving of a servant resulting in an accident. In Dagnall’s case Vaughan Williams J said ([1896] 2 QB 410):
“It seems to me that trading is not completed until you have performed all the obligations that the fact of trading imposed upon you”
and this language was quoted with approval by Swinfen Eady LJ in Re Reynolds ([1915] 2 KB 191). I think it is accurate, and that the payment of excess profits tax was one of the obligations imposed on the appellant by his trading. I would dismiss the appeal with costs.
JUDGMENTBY-2: LORD NORMAND.
JUDGMENT-2:
LORD NORMAND.:
My Lords, I concur in the judgment of my noble and learned friend on the Woolsack.
JUDGMENTBY-3: LORD MORTON OF HENRYTON.
JUDGMENT-3:
LORD MORTON OF HENRYTON.:
My Lords, I concur.
JUDGMENTBY-4: LORD REID.
JUDGMENT-4:
LORD REID.:
My Lords, I concur.
JUDGMENTBY-5: LORD RADCLIFFE.
JUDGMENT-5:
LORD RADCLIFFE.:
My Lords, I have nothing to say in this appeal except that I agree that the appeal should be dismissed.
DISPOSITION:
Appeal dismissed with costs.
SOLICITORS:
William Foux & Co (for the appellant); Solicitor of Inland Revenue.
AUSTRALIAN SECURITIES COMMISSION v BANK LEUMI LE-ISRAEL and ORS July 11, 2008
Posted by islamicbanker in CASES.add a comment
AUSTRALIAN SECURITIES COMMISSION v BANK LEUMI LE-ISRAEL and ORS
No. NG 3201 of 1995
FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
1995 AUST FEDCT LEXIS 891; BC9500091
18 December 1995, heard;
20 December 1995, delivered
CATCHWORDS: [*1] JUDGMENTS AND ORDERS – Form of orders – Non-compliance with secondary notices
and substantial shareholding disclosure obligations – Costs – Orders pending
possible appeal.
Corporations Law, s613(1), s709, s722, s742(2), s744(6), s1335(2)
Federal Court of Australia Act 1976 (Cth) s23, s43
Federal Court Rules, O23
Messiter v Hutchinson (1987) 10 NSWLR 525.
JUDGES: SACKVILLE J
Sackville J:
In the judgment delivered in this matter on 14 December 1995, I directed the ASC to bring in draft minutes of order. I also invited the parties to make submissions on costs. On 18 December 1995, I considered submissions from the parties on the form of the orders that should be made and on costs. I indicated that I would make orders later in the week.
DECLARATIONS AND ORDERS
I consider that the following declarations and orders are appropriate to give effect to the judgment, otherwise than in relation to the issue of costs.
1. In these orders:
“ANZ” means ANZ Nominees Ltd, the third respondent to these proceedings.
“ASC” means the Australian Securities Commission, the applicant in these proceedings.
“BB” means BB Nominees Pty Ltd, the fourth respondent to these proceedings. [*2]
“EBC” means EBC Zurich AG, the second respondent to these proceedings.
“EBC Nominees” means ANZ, BB, National, Galah and Statton.
“EBC’S Shares in OAP” means those OAP shares held by any of the EBC Nominees on behalf of EBC, as at the date of these Orders.
“GALAH” means Galah Nominees Pty Ltd, the sixth respondent to these proceedings.
“Leumi” means Bank Leumi le-Israel, the first respondent to these proceedings.
“Leumi’s shares in OAP” means those OAP shares held by ANZ on behalf of Leumi as at the date of these Orders, excluding the 80,000 OAP shares held by Leumi as principal.
“National” means National Nominees Ltd, the fifth respondent to these proceedings.
“OAP” means Offset Alpine Printing Group Ltd, the eighth respondent to these proceedings.
2. DECLARE that Leumi contravened s722(1) of the Corporations Law, in that Leumi, having received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the CORPORATIONS LAW in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995.
3. DECLARE that EBC contravened s722(1) of the Corporations Law, in that EBC, having [*3] received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the Corporations Law in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995.
4. DECLARE that EBC contravened s722(1) of the Corporations Law in that EBC, having received on 24 April 1995 a Secondary Notice dated 20 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 24 April 1995.
5. DECLARE that EBC contravened s709(1) of the Corporations Law in that EBC, being a substantial shareholder in OAP, failed to give a written notice to OAP before the end of two business days after the day on which EBC became aware of the relevant interest or interests by reason of which EBC was a substantial shareholder in OAP.
6. ORDER that Leumi dispose of Leumi’s shares in OAP in the manner described in para8 of these Orders.
7. ORDER that EBC dispose of EBC’s shares in OAP in the manner described in para9 of these Orders.
8. ORDER that Leumi instruct ANZ to sell Leumi’s shares in OAP to the highest bidder on any day up [*4] to and including the last remaining date for the acceptance (“the relevant date”) of any offer for the shares in OAP (“the shares”) current at the date of these Orders (whether or not subsequently varied or extended), or of any other offer made or announced on or before midnight on 24 January 1996 for the whole or any part of Leumi’s shares in OAP, such that by the relevant date ANZ has disposed of all of Leumi’s shares in OAP.
In this paragraph “any other offer” means an offer for all or part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by PtA Statement, PtC Statement or by any other bid.
9. ORDER that EBC instruct each of the EBC Nominees to sell EBC’s shares in OAP to the highest bidder on any day up to and including the last remaining date for the acceptance (“the relevant date”) of any offer for the shares in OAP (“the shares”) current at the date of these Orders (whether or not subsequently varied or extended), or of any other offer made or announced on or before midnight on 24 January 1996 for the whole or any part of EBC’s shares in OAP, such that by the relevant date each of the EBC Nominees has disposed of all of EBC’s [*5] shares in OAP held by it for EBC.
In this paragraph “any other offer” means any offer for all or part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by PtA Statement, PtC Statement or by any other bid.
10. ORDER that the Orders made on 4 May 1995 be dissolved.
11. ORDER that each of Leumi and ANZ, by itself, its servants and agents, be restrained from dealing with, whether by disposal or otherwise, Leumi’s shares in OAP or any interest in those shares, otherwise than in accordance with para8 of these Orders.
12. ORDER that EBC and each of the EBC Nominees, by itself, its servants and agents, be restrained from dealing with, whether by disposal or otherwise, EBC’s shares in OAP or any interest in those shares, otherwise than in accordance with para9 of these Orders.
13. ORDER that each of the cross-claims of Leumi and EBC be dismissed.
I make the following comments on these orders: PARA1
The definitions of “Leumi’s shares in OAP” and “EBC’s shares in OAP” follow the form suggested by the ASC and adopted by Leumi and EBC. The definitions are intended to take account of the increases in the holdings of Leumi and EBC [*6] after the ASC received the information in response to the primary notices issued in April 1995.
The exclusion of the 80,000 OAP shares held by Leumi as principal refers to the 80,000 shares held by ANZ on behalf of Leumi and beneficially owned by Leumi, being the shares referred to in the letters from Atanaskovic Hartnell to the ASC dated, respectively, 31 May 1995 and 19 June 1995.
PARA2
I think it appropriate to make a declaration that Leumi has breached s722 of the Corporations Law, rather than s723. On my findings, Leumi contravened s722, by failing to comply with the secondary notices within two business days of receiving the faxed secondary notice. It is true that I have found that Leumi made a “request” for the purposes of s721. However, that request was out of time. I also found that there was no basis for challenging the ASC’s refusal of the request. I did not find it necessary to deal with Leumi’s application to extend the time for making the request. Had I done so, I would have rejected the application, on the ground that it would be futile to extend the period for making a request. PARA6 AND PARA7
I think orders should be made in accordance with s613(1)(d) [*7] of the Corporations Law, directing disposal of the relevant shares.
PARA8 AND PARA9
These generally follow the form of orders proposed by Leumi and EBC, save that they incorporate, as suggested by Mr Weber for Arklow, a specific time by reference to which an offer is to be identified for the purposes of each of the paragraphs. I think this makes the orders clearer and does not cut across the statutory scheme governing take-over announcements created by Pt6.4 of the Corporations Law.
Mr Lindsay submitted that orders should be made vesting the shares in the ASC and, in effect, giving it the carriage of the disposal of the shares. However, I do not think that such an order is consistent with the judgment. In any event, the purpose of the orders is to ensure that the shares are sold to the highest bidder within the time frame specified. It was not suggested that the orders would be ineffective to achieve this purpose.
PARA10
I think it is preferable for the interlocutory orders to be discharged and fresh orders made restraining dealings in the shares, save in accordance with para8 and para9. As Mr White pointed out, there may be some unintended consequences if all the [*8] interlocutory orders are continued.
DIVIDENDS
I do not think there is any basis in the judgment for requiring OAP to hold all dividends due by it to ANZ or the EBC Nominees.
COSTS: ASC, LEUMI AND EBC
The ASC submitted that Leumi and EBC should pay its costs and that these should be paid out of the proceeds of sale of the shares. Leumi and EBC each submitted that their costs should be paid by the ASC, at least from the date they made open offers to sell the shares held by them in OAP.
On 10 May 1995, Leumi’s solicitors sent an open letter to the ASC, containing the following passage:
“However, in an effort to settle this matter and achieve a result apparently desired by the Australian Securities Commission, our client would be prepared to consent, next Monday 15 May 1995, to an order along the lines of para5 to the Commission’s Application. Were the Commission to be agreeable to this course of action, obviously the precise terms and conditions of the order would need to be considered. Our client would wish, in this regard, that the order permit the Third Respondent a period of time during which to dispose of the shares at market price. Considering that the shares [*9] are quite thinly traded, our client would submit to you that the appropriate period should be six months.”
Para5 of the ASC’s application sought an order, alternatively to other relief, that ANZ Nominees Ltd divest itself of the shares held by it in OAP on behalf of Leumi. On 11 May 1995, EBC’s Australian solicitors advised the ASC by means of an open letter that
[o]ur client is prepared to consent to an order that the relevant shares be sold on terms acceptable to you….As discussed, our client’s preference is for a sale of the shares to the stockmarket preferably in the hands of a broker and over a relatively short period of time – say 5 to 6 months”.
On 13 June 1995, EBC’s solicitors sent a further open letter to the ASC, containing the following passage:
“In the light of the relief that you seek in the Statement of Claim and the consequences of any vesting orders the Court might make in your favour, our client has instructed us to put to you again the following proposal in relation to the settlement of the proceedings. Our client is prepared to consent to an order that the relevant shares be sold by a third party trustee approved by you on terms acceptable to you. [*10] Our client will agree to pay your costs of the proceedings including any costs and expenses you may incur relating to the sale process and for the proceeds of the sale to be treated in effect in the same way that is referred to in your letter of 7 June 1995. Our client’s proposal provides you with the ultimate relief you are otherwise seeking from the Court in the proceedings.”
Mr White, who appeared with Ms Wines for Leumi, and Mr Conti QC, who appeared with Mr Kunc for EBC, relied on these letters as warranting an order for costs in favour of Leumi and EBC against the ASC. They submitted that the letters, in substance if not in form, constituted offers of compromise within O23, r2(1) of the Federal Court Rrules and that the ASC had obtained a judgment not more favourable than the terms of the offer. Accordingly, Leumi and EBC were entitled, unless the Court otherwise ordered, to receive their costs from the ASC. Alternatively, they submitted that the offers constituted Caldebank letters which were to be taken into account in exercising the Court’s discretion to award costs under s1335(2) of the Corporations Law or s43(1) and s43(2) of the Federal Court of Australia Act 1976 [*11] (Cth): Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97 (FCA/Spender J), at 100-101.
I do not think that either letter can be regarded as an offer of compromise for the purposes of FCR, O23. They do not follow the prescribed form: O23, r3(2). If they were offers of compromise, the fact that they had been made should not have been disclosed to the Court until all questions of relief had been determined: FCR, O23, r8. I am prepared, however, to assume that the letters should be taken into account in the exercise of the Court’s discretion on costs, on the principles discussed in Messiter v Hutchinson (1987) 10 NSWLR 525 (SCt NSW/Rogers J).
In my opinion, on this assumption, the letters do not justify making an order for costs in favour of Leumi or EBC. Nor do they justify not awarding costs to the ASC, should it otherwise be entitled to an order for costs against Leumi and EBC.
At the time Leumi and EBC made their respective open offers, no take-over offer had been made for the shares in OAP. The first take-over offer was not made until 13 October 1995, some five weeks before the hearing of the matter. Nor did the open letters acknowledge that Leumi and EBC had [*12] contravened the Corporations Law. Indeed, the issue of whether they had contravened the Corporations Law was hotly contested throughout the proceedings.
In the result, the ASC established that Leumi and EBC contravened s722 of the Corporations Law and that, in addition, EBC contravened s709 of the Corporations Law by failing to file a substantial shareholder notice. Moreover, I have held that these contraventions should not be excused under s743 of the Corporations Law. I noted in the judgment (at 122) that, had the take-over offers not been made by Fobiti and Arklow, there would have been much to be said for vesting the shares in the ASC until the information sought in the secondary notices was provided by Leumi and EBC. The existence of the take-over offers was an important, if not critical factor in the decision that Leumi and EBC should be ordered to give instructions to sell the shares, and that an order vesting the shares in the ASC should not be made. The making of the take-over offer, so far as this litigation was concerned, was a fortuitous development for which neither the ASC nor Leumi or EBC was responsible.
It follows that the orders that have ultimately been made [*13] are substantially different from the offers of compromise made by Leumi and EBC. If it matters, the orders ultimately made are more favourable to the ASC than those proposed in the offer of compromise. Moreover, the ASC may well have obtained even more favourable relief had not fortuitous circumstances (from the perspective of ASC, Leumi and EBC) not intervened shortly before the hearing.
The ASC has succeeded on what I consider to have been the major points in issue between the parties, namely, whether Leumi and EBC contravened the Corporations Law and, if so, whether these contraventions should be excused. The ASC did not succeed in obtaining all the relief that it sought. However, its failure was, at least to a significant extent, attributable to events which occurred only shortly before the hearing. Furthermore, the argument that an order vesting the shares in the ASC would cause unfair prejudice to the competing bidders, which was important in determining the final form of orders, only emerged at the stage of submissions. This argument was relied on especially (although not exclusively) by OAP and Arklow, the latter only being joined as a party on the day the hearing commenced. [*14]
Leumi and EBC contended that there were other factors which suggested that an order for costs should not be made in favour of the ASC. They pointed to the absence of bad faith by Leumi and EBC, the fact that the case raised novel issues of considerable difficulty and that, in one sense, the litigation had the qualities of a test case. I do not think that any of these factors detracts from the proposition that the ASC has largely succeeded in the litigation and that the appropriate course, subject to one minor exception, is that its costs should be paid by Leumi and EBC. Nor have I overlooked the fact that the ASC did not succeed on all issues of liability (if they may be so described). For example, the ASC did not succeed in establishing that Leumi had contravened s709 of the Corporations Law, although it did succeed on that issue against EBC. On balance, however, I do not think that this should alter the outcome, namely, that Leumi and EBC should pay the costs of the ASC.
The qualification to which I have referred is that, having regard to a notice to admit facts given by Leumi to the ASC, the ASC should pay Leumi’s costs of proving that Leumi was a resident of Switzerland [*15] and that it carried on business in Switzerland.
COSTS: OTHER PARTIES
Arklow was joined as a party on the condition that it would not seek an order for costs. Although OAP was a party from the outset, I do not think that it should be in any different position in relation to costs. I think that it should bear its own costs.
Ms Johnson, on behalf of National, sought an order for costs. On the evidence, its role was simply as a nominee company. National did not play an active part in the proceedings, although it was required to attend court initially, when the ASC sought interlocutory relief. I do not think that any order for costs should be made in its favour.
COSTS AND THE PROCEEDS OF SALE
The ASC sought an order that the costs payable by Leumi and EBC be paid out of the proceeds of any sale of the shares. Mr White pointed out that, ordinarily, such an order would be sought by relying on the principles applicable to MAREVA injunctions. While this may be so, I do not think that the availability of other remedies precludes an order of this kind, if there is power to make it.
On the evidence, Leumi and EBC are Swiss corporations, carrying on business in Switzerland. [*16] There is nothing in the evidence to suggest that they carry on business in Australia, except by giving instructions to acquire shares on behalf of undisclosed principals, or that they have assets beneficially held by them in Australia. Mr Conti and Mr White asserted that each is a reputable corporation and that it should not be assumed that they would not meet any costs order. However, no suggestion was made as to how the ASC might be able to enforce any costs order, if an order of the kind proposed by Mr Lindsay were not made.
In my view, there is power to make the orders sought by the ASC. It is true that s742(2) permits the Court to make “in relation to anyof the shares such order or orders as it thinks just”. Leumi and EBC submitted that an order requiring the costs to be paid out of the proceeds of sale of the shares was not an order “in relation to any of the shares”. However, I think the necessary power can be found in s744(6) of the Corporations Law, which states that an order under a “relevant provision” (including s742(2)) may include such ancillary or consequential provisions as the Court thinks just and reasonable. I think it is ancillary or consequential to orders [*17] directing the disposal of shares (s742(2) and s613(1)(d) of the Corporations Law) to require the ASC’s costs of the proceedings in which such a direction is made to be met out of the proceeds of sale. Alternatively, the power to make such an order can be found in s23 of the Federal Court of Australia Act 1976.
Accordingly, I make the following orders as to costs:
14. ORDER that, subject to para15 of these Orders, Leumi and EBC pay the costs of the ASC of these proceedings.
15. ORDER that the ASC pay Leumi’s costs of proving that Leumi was a resident of Switzerland and that it carried on business in Switzerland.
16. ORDER that the costs referred to in para14 of these Orders, after allowing for the costs referred to in para15 of these Orders, be paid out of the proceeds of sale of Leumi’s shares in OAP and of EBC’s shares in OAP. LIBERTY TO APPLY
I think it appropriate to provide that the parties should have liberty to apply, in the event that any issue arising out of these orders needs to be referred to the Court. Accordingly, the orders will include the following:
17. GRANT liberty to the parties to apply on 48 hours notice.
ORDERS PENDING POSSIBLE APPEAL
[*18]
Mr Lindsay sought a “stay” of the orders directing Leumi and EBC to give instructions for their shares in OAP to be sold, although he did not dispute that, in conformity with the judgment, a sale of the shares should take place, albeit (as he described it) on an “interlocutory basis”. The ASC’s draft orders also provide for the proceeds of any sale of the shares to be paid into court pending an appeal.
As I understand the ASC’s position, its primary concern is to preserve the subject matter of the proceedings pending an appeal (should one be instituted). Without limiting the ASC, it wishes to be able to argue that, even if the shares held for Leumi and EBC are sold, the proceeds of sale should be held in trust so as to allow the Full Court, should it so decide, to make distribution of the proceeds conditional upon compliance with the secondary notices and (in the case of EBC) conditional upon the giving of a substantial shareholder’s notice. The ASC also might wish to argue on appeal that, even if the shares have been sold, they should have been vested in the ASC, pending compliance by Leumi and EBC with the relevant provisions of the Corporations Law.
Mr Lindsay stated that [*19] he did not yet have instructions to appeal and submitted that those instructions could not fairly be expected until final orders had been made. I think that in these circumstances the appropriate course is to preserve the ASC’s position pending a decision whether or not to appeal, so far as that can be done consistently with the judgment I have already delivered. The proceeds of sale of the shares in OAP, held for Leumi and EBC, should be paid into court pending further order. If no appeal is instituted, I would expect these orders to be discharged and payment of the proceeds be made to the appropriate nominee company. If an appeal is instituted, it will be open to the parties to apply to vary the terms of the orders, should they be so advised.
I appreciate that Mr Conti and Mr White argued that the Full Court has no power to order that the proceeds of sale be withheld from the “rightful owners” pending compliance with the provisions of the Corporations Law. However, that seems to me to be a matter for argument, should an appeal be instituted. The availability of the argument does not prevent the status quo being maintained so far as is possible, having regard to the orders I intend [*20] to make. This allows the ASC, if so advised, to proceed with an appeal to the Full Court and to gain practical benefits should its arguments succeed. The ASC, Leumi and EBC, although not consenting to orders in the terms of para18 and para19 below, have agreed on the form of orders should I take the view (as I do) that the proceeds of sale should be preserved pending a decision by the ASC (or any other party) whether or not to appeal. I have altered the form submitted by the parties only slightly.
18. ORDER that upon completion of any sale of Leumi’s shares in OAP pursuant to para8 of these Orders, the proceeds of sale (net of ordinary expenses incurred in effecting the sale) shall be paid into Court and thereafter invested by the District Registrar, at the direction in writing of the solicitors for Leumi (with the consent in writing of the solicitor for the ASC), in the name of Leumi, to abide further orders of the Court.
19. ORDER that upon completion of any sale of EBC’s shares in OAP pursuant to para9 of these Orders, the proceeds of sale (net of any ordinary expenses incurred in effecting the sale) shall be paid into Court and thereafter invested by the District Registrar, [*21] at the direction in writing of the solicitors for EBC (with the consent in writing of the solicitor for the ASC), in the name of EBC, to abide further orders of the Court.
I should make two further comments. First, I do not think it appropriate to make any orders restraining the payment of dividends already declared by OAP to ANZ and the EBC Nominees and by them to Leumi and EBC, pending a possible appeal. Secondly, Mr Weber asked me to provide expressly that nothing in the orders is to place any obligation on OAP or Arklow in respect of the net proceeds of sales of the shares after completion of the sales. However, I do not think such provision is necessary.
ORDER:
1. In these orders
“ANZ” means ANZ Nominees Ltd, the third respondent to these proceedings.
“ASC” means the Australian Securities Commission, the applicant in these proceedings.
“BB” means BB Nominees Pty Ltd, the fourth respondent to these proceedings.
“EBC” means EBC Zurich AG, the second respondent to these proceedings.
“EBC Nominees” means ANZ, BB, National, Galah and Statton.
“EBC’S Shares in OAP” means those OAP shares held by any of the EBC Nominees on behalf of EBC, as the date of these Orders. [*22]
“GALAH” means Galah Nominees Pty Ltd, the sixth respondent to these proceedings.
“Leumi” means Bank Leumi le-Israel, the first respondent to these proceedings.
“Leumi’s shares in OAP” means those OAP shares held by ANZ on behalf of Leumi as at the date of these Orders, excluding 80,000 OAP shares held by Leumi as principal.
“National” means National Nominees Ltd, the fifth respondent to these proceedings.
“OAP” means Offset Alpine Printing Group Ltd, the eighth respondent to these proceedings.
THE COURT DECLARES THAT:
2. Leumi contravened s722(1) of the Corporations Law, in that Leumi, having received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995.
3. EBC contravened s722(1) of the Corporations Law in that EBC, having received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995.
4. EBC contravened s722(1) of the [*23] Corporations Law in that EBC, having received on 24 April 1995 a Secondary Notice dated 20 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 24 April 1995.
5. EBC contravened s709(1) of the Corporations Law in that EBC, being a substantial shareholder in OAP, failed to give a written notice to OAP before the end of two business days after the day on which EBC became aware of the relevant interest or interests by reason of which EBC was a substantial shareholder in OAP.
THE COURT ORDERS THAT:
6. Leumi dispose of Leumi’s shares in OAP in the manner described in para8 of these Orders.
7. EBC dispose of EBC’s shares in OAP in the manner described in para9 of these Orders.
8. Leumi instruct ANZ to sell Leumi’s shares in OAP to the highest bidder on any day up to and including the last remaining date for the acceptance (“the relevant date”) of any offer for the shares in OAP (“the shares”) current at the date of these Orders (whether or not subsequently varied or extended), or of any other offer made or announced on or before midnight on 24 January 1996 for the [*24] whole or any part of Leumi’s shares in OAP, such that by the relevant date ANZ has disposed of all of Leumi’s shares in OAP.
In this paragraph “any other offer” means an offer for all or part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by PtA Statement, PtC Statement or by any other bid.
9. EBC instruct each of the EBC Nominees to sell EBC’s shares in OAP to the highest bidder on any day up to and including the last remaining date for the acceptance (“the relevant date”) of any offer for the shares in OAP (“the shares”) current at the date of these Orders (whether or not subsequently varied or extended), or of any other offer made or announced on or before midnight on 24 January 1996 for the whole or any part of EBC’s shares in OAP, such that by the relevant date each of the EBC Nominees has disposed of all of EBC’s shares in OAP held by it for EBC.
In this paragraph “any other offer” means any offer for all or part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by PtA Statement, PtC Statement or by any other bid.
10. The Orders made on 4 May 1995 be dissolved.
11. Each of Leumi [*25] and ANZ, by itself, its servants and agents, be restrained from dealing with, whether by disposal or otherwise, Leumi’s shares in OAP or any interest in those shares, otherwise than in accordance with para8 of these Orders.
12. EBC and each of the EBC Nominees, by itself, its servants and agents, be restrained from dealing with, whether by disposal or otherwise, EBC’s shares in OAP or any interest in those shares, otherwise than in accordance with para9 of these Orders.
13. Each of the cross-claims of Leumi and EBC be dismissed.
14. Subject to para15 of these Orders, Leumi and EBC pay the costs of the ASC of these proceedings.
15. The ASC pay Leumi’s costs of proving that Leumi was a resident of Switzerland and that it carried on business in Switzerland.
16. The costs referred to in para14 of these Orders, after allowing for the costs referred to in para15 of these Orders, be paid out of the proceeds of sale of Leumi’s shares in OAP and of EBC’s shares in OAP.
17. Liberty be granted to the parties to apply on 48 hours notice.
18. Upon completion of any sale of Leumi’s shares in OAP pursuant to para8 of these Orders, the proceeds of sale (net of ordinary expenses [*26] incurred in effecting the sale) shall be paid into Court and thereafter invested by the District Registrar, at the direction in writing of the solicitors for Leumi (with the consent in writing of the solicitor for the ASC), in the name of Leumi, to abide further orders of the Court.
19. Upon completion of any sale of EBC’s shares in OAP pursuant to para9 of these Orders, the proceeds of sale (net of any ordinary expenses incurred in effecting the sale) shall be paid into Court and thereafter invested by the District Registrar, at the direction in writing of the solicitors for EBC (with the consent in writing of the solicitor for the ASC), in the name of EBC, to abide further orders of the Court.
Representation:
Counsel for the applicant: Mr G Lindsay SC
Solicitor for the applicant: Mr Peter Stepek, Regional General Counsel of the
Australian Securities Commission
Counsels for the first respondent: Mr RW White and PP Wines
Solicitors for the first respondent: Atanaskovic Hartnell
Counsels for the second respondent: RA Conti QC and Mr F Kune
Solicitors for the second respondent: Freehill Hollingdale and Page
Solicitors for the fifth respondent: Ms L Johnson of Mallesons Stephen [*27] Jaques
Solicitors for the eight respondent: Mr P Grade of Landerer and Company
Counsel for the ninth respondent: Mr R Weber
Solicitors for the ninth respondent: Minter Ellison
FEDERAL COURT UNREPORTED JUDGMENTS
AUSTRALIAN SECURITIES COMMISSION v BANK LEUMI LE-ISRAEL
NG 3201 of 1995
Federal Court of Australia
BC9507542
18 December 1995, heard
20 December 1995, delivered
CATCHWORDS: JUDGMENTS AND ORDERS – Form of orders – Non-compliance with secondary notices and substantial shareholding disclosure obligations – Costs – Orders pending possible appeal.
HEADNOTES: Acts cited:
Corporations Law, ss 613(1), 709, 722, 742(2), 744(6), 1335(2).
Federal Court of Australia Act 1976 (Cth) ss 23, 43.
Federal Court Rules, O 23
Cases cited:
Messiter v Hutchinson (1987) 10 NSWLR 525.
JUDGES: Sackville J
Sackville J
In the judgment delivered in this matter on 14 December 1995, I directed the ASC to bring in draft minutes of order. I also invited the parties to make submissions on costs. On 18 December 1995, I considered submissions from the parties on the form of the orders that should be made and on costs. I indicated that I would make orders later in the week.
Declarations and Orders
I consider that the following declarations and orders are appropriate to give effect to the judgment, otherwise than in relation to the issue of costs.
1. In these orders:
”ANZ” means ANZ Nominees Ltd, the third respondent to
these proceedings.
”ASC” means the Australian Securities Commission, the
applicant in these proceedings.
”BB” means BB Nominees Pty Ltd, the fourth respondent
to these proceedings.
”EBC” means EBC Zurich AG, the second respondent to
these proceedings.
”EBC Nominees” means ANZ, BB, National, Galah and
Statton.
”EBC’ s shares in OAP” means those OAP shares held by
any of the EBC Nominees on behalf of EBC, as at the date of
these Orders.
”Galah” means Galah Nominees Pty Ltd, the sixth
respondent to these proceedings.
”Leumi” means Bank Leumi le-Israel, the first
respondent to these proceedings.
”Leumi’s shares in OAP” means those OAP shares held
by ANZ on behalf of Leumi as at the date of these Orders,
excluding the 80,000 OAP shares held by Leumi as principal.
”National” means National Nominees Ltd, the fifth
respondent to these proceedings.
”OAP” means Offset Alpine Printing Group Ltd, the
eighth respondent to these proceedings.
2. DECLARE that Leumi contravened s 722(1) of the Corporations
Law, in that Leumi, having received on 20 April 1995 a Secondary
Notice dated 18 April 1995 under s 719(1) of the Corporations Law
in relation to shares in OAP, failed to comply with the Secondary
Notice before the end of two business days after 20 April 1995.
3. DECLARE that EBC contravened s 722(1) of the Corporations
Law, in that EBC, having received on 20 April 1995 a Secondary
Notice dated 18 April 1995 under s 719(1) of the Corporations Law
in relation to shares in OAP, failed to comply with the Secondary
Notice before the end of two business days after 20 April 1995.
4. DECLARE that EBC contravened s 722(1) of the Corporations Law
in that EBC, having received on 24 April 1995 a Secondary Notice
dated 20 April 1995 under section 719(1) of the Corporations Law,
in relation to shares in OAP, failed to comply with the Secondary
Notice before the end of two business days after 24 April 1995.
5. DECLARE that EBC contravened s 709(1) of the Corporations Law
in that EBC, being a substantial shareholder in OAP, failed to
give a written notice to OAP before the end of two business days
after the day on which EBC became aware of the relevant interest
or interests by reason of which EBC was a substantial shareholder
in OAP.
6. ORDER that Leumi dispose of Leumi’s shares in OAP in the
manner described in para 8 of these Orders.
7. ORDER that EBC dispose of EBC’s shares in OAP in the manner
described in para 9 of these orders.
8. ORDER that Leumi instruct ANZ to sell Leumi’s shares in OAP
to the highest bidder on any day up to and including the last
remaining date for the acceptance (”the relevant date”) of any
offer for the shares in OAP (”the shares”) current at the date
of these Orders (whether or not subsequently varied or extended),
or of any other offer made or announced on or before midnight on
24 January 1996 for the whole or any part of Leumi’s shares in
OAP, such that by the relevant date ANZ has disposed of all of
Leumi’s shares in OAP.
In this paragraph ”any other offer” means an offer for all or
part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by Pt A Statement, Pt C Statement or by any other
bid.
9. ORDER that EBC instruct each of the EBC Nominees to sell EBC’
s shares in OAP to the highest bidder on any day up to and
including the last remaining date for the acceptance (”the
relevant date”) of any offer for the shares in OAP (”the shares’
‘) current at the date of these Orders (whether or not
subsequently varied or extended), or of any other offer made or
announced on or before midnight on 24 January 1996 for the whole
or any part of EBC’s shares in OAP, such that by the relevant
date each of the EBC Nominees has disposed of all of EBC’s shares
in OAP held by it for EBC.
In this paragraph ”any other offer” means any offer for all or
part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by Pt A Statement, Pt C Statement or by any other
bid.
10. ORDER that the Orders made on 4 May 1995 be dissolved.
11. ORDER that each of Leumi and ANZ, by itself, its servants and
agents, be restrained from dealing with, whether by disposal or
otherwise, Leumi’s shares in OAP or any interest in those shares,
otherwise than in accordance with para 8 of these Orders.
12. ORDER that EBC and each of the EBC Nominees, by itself, its
servants and agents, be restrained from dealing with, whether by
disposal or otherwise, EBC’s shares in OAP or any interest in
those shares, otherwise than in accordance with para 9 of these
Orders.
13. ORDER that each of the cross-claims of Leumi and EBC be
dismissed.
I make the following comments on these orders:
Para 1
The definitions of ”Leumi’s shares in OAP” and ”EBC’s shares OAP” follow the form suggested by the ASC and adopted by Leumi and EBC. The definitions are intended to take account of the increases in the holdings of Leumi and EBC after the ASC received the information in response to the primary notices issued in April 1995.
The exclusion of the 80,000 OAP shares held by Leumi as principal refers to the 80,000 shares held by ANZ on behalf of Leumi and beneficially owned by Leumi, being the shares referred to in the letters from Atanaskovic Hartnell to the ASC dated, respectively, 31 May 1995 and 19 June 1995.
Para 2
I think it appropriate to make a declaration that Leumi has breached s 722 of the Corporations Law, rather than s 723. On my findings, Leumi contravened s 722, by failing to comply with the secondary notices within two business days of receiving the faxed secondary notice. It is true that I have found that Leumi made a ”request” for the purposes of s 721. However, that request was out of time. I also found that there was no basis for challenging the ASC’s refusal of the request. I did not find it necessary to deal with Leumi’s application to extend the time for making the request. Had I done so, I would have rejected the application, on the ground that it would be futile to extend the period for making a request.
Paras 6 and 7
I think orders should be made in accordance with s 613(1)(d) of the Corporations Law, directing disposal of the relevant shares.
Paras 8 and 9
These generally follow the form of orders proposed by Leumi and EBC, save that they incorporate, as suggested by Mr Weber for Arklow, a specific time by reference to which an offer is to be identified for the purposes of each of the paragraphs. I think this makes the orders clearer and does not cut across the statutory scheme governing take-over announcements created by Pt 6.4 of the Corporations Law.
Mr Lindsay submitted that orders should be made vesting the shares in the ASC and, in effect, giving it the carriage of the disposal of the shares. However, I do not think that such an order is consistent with the judgment. In any event, the purpose of the orders is to ensure that the shares are sold to the highest bidder within the time frame specified. It was not suggested that the orders would be ineffective to achieve this purpose.
Para 10
I think it is preferable for the interlocutory orders to be discharged and fresh orders made restraining dealings in the shares, save in accordance with paras 8 and 9. As Mr White pointed out, there may be some unintended consequences if all the interlocutory orders are continued.
Dividends
I do not think there is any basis in the judgment for requiring OAP to hold all dividends due by it to ANZ or the EBC Nominees.
Costs: ASC, Leumi and EBC
The ASC submitted that Leumi and EBC should pay its costs and that these should be paid out of the proceeds of sale of the shares. Leumi and EBC each submitted that their costs should he paid by the ASC, at least from the date they made open offers to sell the shares held by them in OAP.
On 10 May 1995, Leumi’s solicitors sent an open letter to the ASC, containing the following passage:
However, in an effort to settle this matter and achieve a result apparently desired by the Australian Securities Commission, our client would be prepared to consent, next Monday 15 May 1995, to an order along the lines of para 5 to the Commission’s Application. Were the Commission to be agreeable to this course of action, obviously the precise terms and conditions of the order would need to be considered. Our client would wish, in this regard, that the order permit the Third Respondent a period of time during which to dispose of the shares at market price. Considering that the shares are quite thinly traded, our client would submit to you that the appropriate period should be six months.”
Para 5 of the ASC’s application sought an order, alternatively to other relief, that ANZ Nominees Ltd divest itself of the shares held by it in OAP on behalf of Leumi.
On 11 May 1995, EBC’s Australian solicitors advised the ASC by means of an open letter that
[o]ur client is prepared to consent to an order that the relevant shares be sold on terms acceptable to you ….As discussed, our client’s preference is for a sale of the shares to the stockmarket preferably in the hands of a broker and over a relatively short period of time – say 5 to 6 months.
On 13 June 1995, EBC’s solicitors sent a further open letter to the ASC, containing the following passage:
In the light of the relief that you seek in the Statement of Claim and the consequences of any vesting orders the Court might make in your favour, our client has instructed us to put to you again the following proposal in relation to the settlement of the proceedings. Our client is prepared to consent to an order that the relevant shares be sold by a third party trustee approved by you on terms acceptable to you. Our client will agree to pay your costs of the proceedings including any costs and expenses you may incur relating to the sale process and for the proceeds of the sale to be treated in effect in the same way that is referred to in your letter of 7 June 1995. Our client’s proposal provides you with the ultimate relief you are otherwise seeking from the Court in the proceedings.
Mr White, who appeared with Ms Wines for Leumi, and Mr Conti QC, who appeared with Mr Kunc for EBC, relied on these letters as warranting an order for costs in favour of Leumi and EBC against the ASC. They submitted that the letters, in substance if not in form, constituted offers of compromise within O 23, r 2(1) of the Federal Court Rules and that the ASC had obtained a judgment not more favourable than the terms of the offer. Accordingly, Leumi and EBC were entitled, unless the Court otherwise ordered, to receive their costs from the ASC. Alternatively, they submitted that the offers constituted Caldebank letters which were to be taken into account in exercising the court’s discretion to award costs under s 1335(2) of the Corporations Law or ss 43 (1) and (2) of the Federal Court of Australia Act 1976 (Cth): Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97 (FCA/Spender J), at 100-101.
I do not think that either letter can be regarded as an offer of compromise for the purposes of FCR, O 23. They do not follow the prescribed form: O 23, r 3(2). If they were offers of compromise, the fact that they had been made should not have been disclosed to the Court until all questions of relief had been determined: FCR, O 23, r 8. I am prepared, however, to assume that the letters should be taken into account in the exercise of the Court’s discretion on costs, on the principles discussed in Messiter v Hutchinson (1987) 10 NSWLR 525 (SCt NSW/Rogers J).
In my opinion, on this assumption, the letters do not justify making an order for costs in favour of Leumi or EBC. Nor do they justify not awarding costs to the ASC, should it otherwise be entitled to an order for costs against Leumi and EBC.
At the time Leumi and EBC made their respective open offers, no take-over offer had been made for the shares in OAP. The first take-over offer was not made until 13 October 1995, some five weeks before the hearing of the matter. Nor did the open letters acknowledge that Leumi and EBC had contravened the Corporations Law. Indeed, the issue of whether they had contravened the Corporations Law was hotly contested throughout the proceedings.
In the result, the ASC established that Leumi and EBC contravened s 722 of the Corporations Law and that, in addition, EBC contravened s 709 of the Corporations Law by failing to file a substantial shareholder notice. Moreover, I have held that these contraventions should not be excused under s 743 of the Corporations Law. I noted in the judgment (at 122) that, had the take-over offers not been made by Fobiti and Arklow, there would have been much to be said for vesting the shares in the ASC until the information sought in the secondary notices was provided by Leumi and EBC. The existence of the take-over offers was an important, if not critical factor in the decision that Leumi and EBC should be ordered to give instructions to sell the shares, and that an order vesting the shares in the ASC should not be made. The making of the take-over offer, so far as this litigation was concerned, was a fortuitous development for which neither the ASC nor Leumi or EBC was responsible.
It follows that the orders that have ultimately been made are substantially different from the offers of compromise made by Leumi and EBC. If it matters, the orders ultimately made are more favourable to the ASC than those proposed in the offer of compromise. Moreover, the ASC may well have obtained even more favourable relief had not fortuitous circumstances (from the perspective of ASC, Leumi and EBC) not intervened shortly before the hearing.
The ASC has succeeded on what I consider to have been the major points in issue between the parties, namely, whether Leumi and EBC contravened the Corporations Law and, if so, whether these contraventions should be excused. The ASC did not succeed in obtaining all the relief that it sought. However, its failure was, at least to a significant extent, attributable to events which occurred only shortly before the hearing. Furthermore, the argument that an order vesting the shares in the ASC would cause unfair prejudice to the competing bidders, which was important in determining the final form of orders, only emerged at the stage of submissions. This argument was relied on especially (although not exclusively) by OAP and Arklow, the latter only being joined as a party on the day the hearing commenced.
Leumi and EBC contended that there were other factors which suggested that an order for costs should not be made in favour of the ASC. They pointed to the absence of bad faith by Leumi and EBC, the fact that the case raised novel issues of considerable difficulty and that, in one sense, the litigation had the qualities of a test case. I do not think that any of these factors detracts from the proposition that the ASC has largely succeeded in the litigation and that the appropriate course, subject to one minor exception, is that its costs should be paid by Leumi and EBC. Nor have I overlooked the fact that the ASC did not succeed on all issues of liability (if they may be so described). For example, the ASC did not succeed in establishing that Leumi had contravened s 709 of the Corporations Law, although it did succeed on that issue against EBC. On balance, however, I do not think that this should alter the outcome, namely, that Leumi and EBC should pay the costs of the ASC.
The qualification to which I have referred is that, having regard to a notice to admit facts given by Leumi to the ASC, the ASC should pay Leumi’s costs of proving that Leumi was a resident of Switzerland and that it carried on business in Switzerland.
Costs: Other Parties
Arklow was joined as a party on the condition that it would not seek an order for costs. Although OAP was a party from the outset, I do not think that it should be in any different position in relation to costs. I think that it should bear its own costs.
Ms Johnson, on behalf of National, sought an order for coats. On the evidence, its role was simply as a nominee company. National did not play an active part in the proceedings, although it was required to attend court initially, when the ASC sought interlocutory relief. I do not think that any order for costs should be made in its favour.
Costs and the Proceeds of Sale
The ASC sought an order that the costs payable by Leumi and BBC be paid out of the proceeds of any sale of the shares. Mr White pointed out that, ordinarily, such an order would be sought by relying on the principles applicable to Mareva injunctions. While this may be so, I do not think that the availability of other remedies precludes an order of this kind, if there is power to make it.
On the evidence, Leumi and EBC are Swiss corporations, carrying on business in Switzerland. There is nothing in the evidence to suggest that they carry on business in Australia, except by giving instructions to acquire shares on behalf of undisclosed principals, or that they have assets beneficially held by them in Australia. Mr Conti and Mr White asserted that each is a reputable corporation and that it should not be assumed that they would not meet any costs order. However, no suggestion was made as to how the ASC might be able to enforce any costs order, if an order of the kind proposed by Mr Lindsay were not made.
In my view, there is power to make the orders sought by the ASC. It is true that s 742(2) permits the Court to make ”in relation to any of the shares such order or orders as it thinks just”. Leumi and EBC submitted that an order requiring the costs to be paid out of the proceeds of sale of the shares was not an order ”in relation to any of the shares”. However, I think the necessary power can be found in s 744(6) of the Corporations Law, which states that an order under a ”relevant provision” (including s 742(2)) may include such ancillary or consequential provisions as the Court thinks just and reasonable. I think it is ancillary or consequential to orders directing the disposal of shares (s 742(2) and s 613(1)(d) of the Corporations Law) to require the ASC’s costs of the proceedings in which such a direction is made to be met out of the proceeds of sale. Alternatively, the power to make such an order can be found in s 23 of the Federal Court of Australia Act 1976.
Accordingly, I make the following orders as to costs:
14. ORDER that, subject to para 15 of these Orders, Leumi and EBC
pay the costs of the ASC of these proceedings.
15. ORDER that the ASC pay Leumi’s costs of proving that Leumi
was a resident of Switzerland and that it carried on business in
Switzerland.
16. ORDER that the costs referred to in para 14 of these Orders,
after allowing for the costs referred to in para 15 of these
orders, be paid out of the proceeds of sale of Leumi’s shares in
OAP and of EBC’s shares in OAP.
Liberty to Apply
I think it appropriate to provide that the parties should have liberty to apply, in the event that any issue arising out of these orders needs to be referred to the Court. Accordingly, the orders will include the following:
17. GRANT liberty to the parties to apply on 48 hours notice.
Orders Pending Possible Appeal
Mr Lindsay sought a ”stay” of the orders directing Leumi and EBC to give instructions for their shares in OAP to be sold, although he did not dispute that, in conformity with the judgment, a sale of the shares should take place, albeit (as he described it) on an ”interlocutory basis”. The ASC’s draft orders also provide for the proceeds of any sale of the shares to be paid into court pending an appeal.
As I understand the ASC’s position, its primary concern is to preserve the subject matter of the proceedings pending an appeal (should one be instituted). Without limiting the ASC, it wishes to be able to argue that, even if the shares held for Leumi and EBC are sold, the proceeds of sale should be held in trust so as to allow the Full Court, should it so decide, to make distribution of the proceeds conditional upon compliance with the secondary notices and (in the case of EBC) conditional upon the giving of a substantial shareholder’s notice. The ASC also might wish to argue on appeal that, even if the shares have been sold, they should have been vested in the ASC, pending compliance by Leumi and EBC with the relevant provisions of the Corporations Law.
Mr Lindsay stated that he did not yet have instructions to appeal and submitted that those instructions could not fairly be expected until final orders had been made. I think that in these circumstances the appropriate course is to preserve the ASC’s position pending a decision whether or not to appeal, so far as that can be done consistently with the judgment I have already delivered. The proceeds of sale of the shares in OAP, held for Leumi and EBC, should be paid into court pending further order. If no appeal is instituted, I would expect these orders to be discharged and payment of the proceeds be made to the appropriate nominee company. If an appeal is instituted, it will be open to the parties to apply to vary the terms of the orders, should they be so advised.
I appreciate that Mr Conti and Mr White argued that the Full Court has no power to order that the proceeds of sale be withheld from the ”rightful owners” pending compliance with the provisions of the Corporations Law. However, that seems to me to be a matter for argument, should an appeal be instituted. The availability of the argument does not prevent the status quo being maintained so far as is possible, having regard to the orders I intend to make. This allows the ASC, if so advised, to proceed with an appeal to the Full Court and to gain practical benefits should its arguments succeed.
The ASC, Leumi and EBC, although not consenting to orders in the terms of paras 18 and 19 below, have agreed on the form of orders should I take the view (as I do) that the proceeds of sale should be preserved pending a decision by the ASC (or any other party) whether or not to appeal. I have altered the form submitted by the parties only slightly.
18. ORDER that upon completion of any sale of Leumi’s shares in
OAP pursuant to para 8 of these Orders, the proceeds of sale (net
of ordinary expenses incurred in effecting the sale) shall be
paid into Court and thereafter invested by the District
Registrar, at the direction in writing of the solicitors for
Leumi (with the consent in writing of the solicitor for the ASC),
in the name of Leumi, to abide further orders of the Court.
19. ORDER that upon completion of any sale of EBC’s shares in OAP
pursuant to para 9 of these Orders, the proceeds of sale (net of
any ordinary expenses incurred in effecting the sale) shall be
paid into Court and thereafter invested by the District
Registrar, at the direction in writing of the solicitors for EBC
(with the consent in writing of the solicitor for the ASC), in
the name of EBC, to abide further orders of the Court.
I should make two further comments. First, I do not think it appropriate to make any orders restraining the payment of dividends already declared by OAP to ANZ and the EBC Nominees and by them to Leumi and EBC, pending a possible appeal. Secondly, Mr Weber asked me to provide expressly that nothing in the orders is to place any obligation on OAP or Arklow in respect of the net proceeds of sales of the shares after completion of the sales. However, I do not think such provision is necessary.
1. In these orders
”ANZ” means ANZ Nominees Ltd, the third respondent to
these proceedings.
”ASC” means the Australian Securities Commission, the
applicant in these proceedings.
”BB” means BB Nominees Pty Ltd, the fourth respondent
to these proceedings.
”EBC” means EBC Zurich AG, the second respondent to
these proceedings.
”EBC Nominees” means ANZ, BB, National, Galah and
Statton.
”EBC’ s shares in OAP” means those OAP shares held by
any of the EBC Nominees on behalf of EBC, as at the date of
these Orders.
”Galah” means Galah Nominees Pty Ltd, the sixth
respondent to these proceedings.
”Leumi” means Bank Leumi le-Israel, the first
respondent to these proceedings.
”Leumi’s shares in OAP” means those OAP shares held
by ANZ on behalf of Leumi as at the date of these Orders,
excluding the 80,000 OAP shares held by Leumi as principal.
”National” means National Nominees Ltd, the fifth
respondent to these proceedings.
”OAP” means Offset Alpine Printing Group Ltd, the
eighth respondent to these proceedings.
The court declares that:
2. Leumi contravened s 722(1) of the Corporations Law, in that
Leumi, having received on 20 April 1995 a Secondary Notice dated
18 April 1995 under s 719(1) of the Corporations Law, in relation
to shares in OAP, failed to comply with the Secondary Notice
before the end of two business days after 20 April 1995.
3. EBC contravened s 722(1) of the Corporations Law in that EBC,
having received on 20 April 1995 a Secondary Notice dated 18
April 1995 under s 719(1) of the Corporations Law, in relation to
shares in OAP, failed to comply with the Secondary Notice before
the end of two business days after 20 April 1995.
4. EBC contravened s 722(1) of the Corporations Law in that EBC,
having received on 24 April 1995 a Secondary Notice dated 20
April 1995 under s 719(1) of the Corporations Law, in relation to
shares in OAP, failed to comply with the Secondary Notice before
the end of two business days after 24 April 1995.
5. EBC contravened s 709(1) of the Corporations Law in that EEC,
being a substantial shareholder in OAP, failed to give a written
notice to OAP before the end of two business days after the day
on which EBC became aware of the relevant interest or interests
by reason of which EBC was a substantial shareholder in OAP.
The court orders that:
6. Leumi dispose of Leumi’s shares in OAP in the manner described in
para 8 of these Orders.
7. EBC dispose of EBC’s shares in OAP in the manner described in
para 9 of these Orders.
8. Leumi instruct ANZ to sell Leumi’s shares in OAP to the highest
bidder on any day up to and including the last remaining date for
the acceptance (”the relevant date”) of any offer for the
shares in OAP (”the shares”) current at the date of these
Orders (whether or not subsequently varied or extended), or of
any other offer made or announced on or before midnight on 24
January 1996 for the whole or any part of Leumi’s shares in OAP,
such that by the relevant date ANZ has disposed of all of Leumi’s
shares in OAP.
In this paragraph ”any other offer” means an offer for all or
part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by Pt A Statement, Pt C Statement or by any other
bid.
9. EBC instruct each of the EBC Nominees to sell EBC’s shares in OAP
to the highest bidder on any day up to and including the last
remaining date for the acceptance (”the relevant date”) of any
offer for the shares in OAP (”the shares”) current at the date
of these Orders (whether or not subsequently varied or extended),
or of any other offer made or announced on or before midnight on
24 January 1996 for the whole or any part of EBC’s shares in OAP,
such that by the relevant date each of the EBC Nominees has
disposed of all of EBC’s shares in OAP held by it for EBC.
In this paragraph ”any other offer” means any offer for all or
part of the shares:-
(i) whether or not subsequently varied or extended; and
(ii) whether by Pt A Statement, Pt C Statement or by any other
bid.
10. The Orders made on 4 May 1995 be dissolved.
11. Each of Leumi and ANZ, by itself, its servants and agents, be
restrained from dealing with, whether by disposal or otherwise,
Leumi’s shares in OAP or any interest in those shares, otherwise
than in accordance with paragraph a of these Orders.
12. EBC and each of the EBC Nominees, by itself, its servants and
agents, be restrained from dealing with, whether by disposal or
otherwise, EBC’s shares in OAP or any interest in those shares,
otherwise than in accordance with para 9 of these Orders.
13. Each of the cross-claims of Leumi and EBC be dismissed.
14. Subject to para 15 of these Orders, Leumi and EBC pay the coats
of the ASC of these proceedings.
15. The ASC pay Leumi’s costs of proving that Leumi was a resident of
Switzerland and that it carried on business in Switzerland.
16. The costs referred to in para 14 of these Orders, after allowing
for the costs referred to in para 15 of these Orders, be paid out
of the proceeds of sale of Leumi’s shares in OAP and of EBC’s
shares in OAP.
17. Liberty be granted to the parties to apply on 48 hours notice.
18. Upon completion of any sale of Leumi’s shares in OAP pursuant to
para 8 of these Orders, the proceeds of sale (net of ordinary
expenses incurred in effecting the sale) shall be paid into Court
and thereafter invested by the District Registrar, at the
direction in writing of the solicitors for Leumi (with the
consent in writing of the solicitor for the ASC), in the name of
Leumi, to abide further orders of the Court.
19. Upon completion of any sale of EBC’s shares in OAP pursuant to
para 9 of these Orders, the proceeds of sale (net of any ordinary
expenses incurred in effecting the sale) shall be paid into Court
and thereafter invested by the District Registrar, at the
direction in writing of the solicitors for BBC (with the consent
in writing of the solicitor for the ASC), in the name of EBC, to
abide further orders of the Court.
Counsel for the applicant: Mr G Lindsay SC
Solicitors for the applicant: Mr Peter Stepek, Regional General Counsel of the Australian Securities Commission
Counsel for the first respondent: Mr R W White and Ms P P Wines
Solicitors for the first respondent: Atanaskovic Hartnell, Solicitors
Counsel for the second respondent: Mr R A Conti QC and Mr F Kunc
Solicitors for the second respondent: Freehill Hollingdale & Page, Solicitors
Solicitors for the fifth respondent: Ms L Johnson of Mallesons Stephen Jaques, Solicitors Solicitors for the eighth respondent: Mr P Garde of Landerer & Company, Solicitors
Counsel for the ninth respondent: Mr R Weber
Solicitors for the ninth respondent: Minter Ellison, Solicitors
05/17/2005
AUSTRALIAN SECURITIES COMMISSION v EBC ZURICH AG and ORS
NG 3461 of 1995
FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BC9501502
27 October and 3 November, 1995, heard;
14 December 1995, delivered
CATCHWORDS:
CORPORATIONS – Shares – Australian Securities Commission – Secondary notices
requiring information concerning interests in shares – Non-compliance by
person served – Non-compliance with substantial shareholder provisions of
Corporations Law – Nature of relief.
PRACTICE AND PROCEDURE – Service outside the jurisdiction – Substituted
service.
Corporations Law, s613(1), s709, s719, s722(1), s741, s742, s744.
Federal Court Rules, O.1, R4; O.7, R9; O.8, R1-R5.
Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270, var’d sub
nom Crosley Ltd v North Broken Hill Holdings Ltd [1987] VR 119.
Brunswick NL v Blossomtree Pty Ltd (1992) 7 WAR 226.
JUDGES: SACKVILLE J
REASONS FOR JUDGMENT THE PROCEEDINGS
In these proceedings, the applicant (the “ASC”) seeks orders under ss.613, 741, 742 and 744 of the Corporations Law, in substance against the first respondent (“EBC”). The ASC claims that it is entitled to the relief by reason of EBC’s contravention of s722(1) of the Corporations Law, in that it failed to comply with secondary notices issued under s719 of the Corporations Law in relation to shares held by it in the third respondent (“Dome”) and in the fourth respondent (“Allegiance”). The ASC also claims that it is entitled to relief by reason of EBC’s contravention of s709 of the Corporations Law. The ASC says that EBC is a substantial shareholder of both Dome and Allegiance, but that it failed to give a notice to each company within two days of becoming aware of the interests by reason of which it became a substantial shareholder in each company.
Dome and Allegiance are companies incorporated in Australia. The second respondent (“National Nominees”) is also incorporated in Australia and its ultimate holding company is the National Australia Bank Ltd. EBC is a public stock corporation incorporated in the Canton of Zurich in Switzerland. It carries on business in Zurich.
The relief sought by the ASC includes orders requiring EBC to comply with two secondary notices dated 18 August 1995, issued to EBC by the ASC, pursuant to s719 of the Corporations Law. These notices relate to a parcel of 6,611,000 ordinary 20 cent fully paid shares in the issued capital of Dome, held by National Nominees on behalf of EBC (the “Dome parcel”). As at 4 August 1995, Dome had issued a total of 137,146,512 fully paid shares. In the event of a failure by EBC to comply with the orders, the ASC seeks orders that the Dome parcel should vest in the ASC.
The ASC seeks similar relief in relation to a parcel of 2,680,000 ordinary 20 cent fully paid shares in the issued capital of Allegiance, held by National Nominees on behalf of EBC (the “Allegiance parcel”). As at 10 August 1995, Allegiance had issued 57,500,005 shares. In the event of a failure by EBC to comply with the orders, the ASC seeks orders that the Allegiance parcel should vest in the ASC.
THE HEARING
At the hearing Mr Lindsay SC appeared on behalf of the ASC. EBC, despite being served with initiating process in accordance with directions made by Foster J. on 28 August 1995 and despite being notified of the hearing, neither filed a notice of appearance nor attended the hearing. Consequently it offered no opposition to the orders sought by the ASC.
National Nominees did file a notice of appearance and was represented at the hearing by Ms Dunford. National Nominees did not oppose the orders being sought by the ASC and Ms Dunford confined her submissions to the question of National Nominees’ costs.
Dome also filed a notice of appearance and was represented at the hearing by Mr Powers. Dome did not oppose the making of the orders sought by the ASC, except that Mr Powers submitted that, before what he described as the drastic remedy of “confiscation” was invoked, EBC should be ordered to dispose of the shares (see Corporations Law, s744(7)). Mr Powers also made submissions on costs. After hearing submissions from Mr Lindsay, I drew to the attention of the parties who appeared some questions in relation to the service effected on EBC. In particular, I queried whether an order for substituted service of initiating process on EBC had been made by Foster J. and, if not, whether fresh steps needed to be taken to ensure proper service. At a further hearing, Mr Lindsay made additional submissions on the question of service.
This decision is being handed down on the same day as my decision in proceedings entitled Australian Securities Commission v Bank Leumi Le-Israel, 14 December 1995, to which EBC is also a party. It is important to appreciate that the two cases do not involve the same issues. The present proceedings were, in substance, undefended. No expert evidence was adduced as to the effect under Swiss law of a Swiss corporation complying with secondary notices or the substantial shareholder requirements of the Corporations Law. Accordingly, the arguments considered in the Bank Leumi Case do not arise in these proceedings.
THE LEGISLATION
I do not propose to set out the relevant provisions of the Corporations Law at length. They are to be found in ss.708-711, 713 (substantial shareholding provisions); 717-719, 721-722 (primary and secondary notices); 741 (power of court with respect to defaulting shareholder), 742 (power of court where beneficial ownership of shares is not disclosed); 744 (miscellaneous provisions); 613 (remedial orders); 1324 (power of Court to grant injunctions); 1339, 1341 (power of ASC in relation to unclaimed property and shares). Some of the provisions are extracted in the Bank Leumi Case.
It is, however, appropriate to note that where a person fails to comply with a “primary” or “secondary” notice requiring particulars of a relevant interest in shares, the Court has power, on the application (inter alia) of the ASC to make such order or orders as it thinks just, including a “remedial order”: s742(2). Such an order may also be made if a substantial shareholder fails to notify the company of its shareholding: s741(1). Remedial orders include restraining the disposal of an interest in the shares and vesting the shares in the ASC: s613(1). The principal purpose of the legislation was explained by Fullagar J in Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270 (S.Ct. Vic/Fullagar J), at 283:
“The object of the legislature was to create and maintain an informed market for public company shares, and it regards the object as so important that it provides for drastic consequences ensuing (in the discretion of the court) upon any blocking of information even for three business days after a request. (In the days of radiotelegraphy and telex machines and internationally-dialled telephones, it is no surprise to find that the short notice applies to all corporations wherever situated, again subject, as regards consequences, to the very wide discretion of the court.)”
This decision was overturned on appeal on the ground that the particular notice was defective, but the Full Court cast no doubt on this passage: Crosley Ltd v North Broken Hill Holdings Ltd [1987] VR 119 (Vic S.Ct/FC), at 136.
COURSE OF THE PROCEEDINGS
The ASC sought interlocutory relief ex parte from Foster J on 28 August 1995. On that date his Honour made orders, pending a further hearing, restraining National Nominees and EBC from disposing of or otherwise dealing with the Dome parcel and the Allegiance parcel. Those orders were subsequently continued, subject to a variation in the number of shares covered by the orders, until further order of the Court.
On 28 August 1995, Foster J gave directions for service of the orders made by him. Para2 was as follows:
“This Order be served on EBC by delivery to Freehill, Hollingdale and Page, at Level 30, 19-29 Martin Place, Sydney by delivering the Order to Garry Charles Besson, a partner of that firm, personally or by leaving the Order at that address with a person whom the person leaving the orders believes on reasonable grounds to work at that address and to have attained the age of 16 years, by 12 noon Australian Eastern Standard Time on 29 August 1995 AND DIRECTS that the application and the supporting affidavit of Peter James Dumas sworn 28 August 1995 (including the Exhibit hereto) be similarly delivered.”
One of the reasons this form of order was adopted was that his Honour was informed, correctly, that Freehill, Hollingdale and Page were acting for EBC in the Bank Leumi Case. In any event, sealed copies of the various documents specified in Foster J’s orders were served in accordance with those orders on 29 August 1995.
When the proceedings were again before Foster J, on 30 August 1995, a solicitor for the firm informed Foster J that the firm would not be forwarding the documents to EBC because “we do not wish to be involved in a breach of Swiss law”. However, the solicitor also informed Foster J that EBC was aware of the service of the documents. The reference to Swiss law was apparently to Article 271 of the Swiss Penal Code, para1 of which (in translation) reads as follows:
“1. Any person who, without authorization, carries out, on Swiss territory, actions which fall within the province or the public authorities, [and] any person who carries out such acts for a foreign State, individual, or organization, [and] any person who sanctions such acts, shall be punished by imprisonment or, in serious cases, reclusion.”
The following exchange took place at the hearing of 30 August 1995 between his Honour and Mr Riordan, appearing for the ASC:
“HIS HONOUR: Well, what course do you wish to take?
MR RIORDAN: Your Honour, I would ask for a ruling in effect that service has been effected upon EBC by virtue of the satisfaction of the order for substituted service. I can show your Honour the opinion of Dr Noble to which Miss Chang refers if that would be of any assistance to the court.
HIS HONOUR: It is a matter we will have to go into but putting that aside for the moment that is an outstanding question, what else is being sought today? MR RIORDAN: The ASC would seek a continuation of the restraining orders and secondly that the matter go over to 7 September at which stage we have the other proceedings on foot for directions and it seems appropriate as matters of fact are common the proceedings should proceed together. So the ASC simply seeks to have the status quo maintained until 7 September.
HIS HONOUR: We know that the proceedings have been brought to the attention of the first respondent.
MR RIORDAN: That is correct your Honour.
HIS HONOUR: The only outstanding problem is whether the forwarding of the documents which have been served upon Freehills is, I suppose, essential to the question of whether service has been effected. Apparently they know of the existence of the proceedings.
MR RIORDAN: Yes your Honour.
HIS HONOUR: Is it of any significance here today to obtain some order that service has been effected or is it sufficient of that matter as determined along with the other matters—
MR RIORDAN: Perhaps it should be determined with the other matters your Honour.”
COMMUNICATIONS WITH EBC
The evidence shows that the ASC has communicated directly with EBC by facsimile on a number of occasions and that EBC has responded by letter on one occasion. The communications were as follows:
* By facsimile dated 28 August 1995, the ASC advised EBC of the orders made that day and provided copies of the orders, the ASC’s application and the supporting affidavit. This was done “for your information (and not by way of service)”. The copy of the application sent by facsimile was not signed and sealed, as required by the Federal Court Rules in relation to a copy for service: O.7, R1(2).
* By facsimile dated 29 August 1995, the ASC advised EBC of the service of court process on Freehill Hollingdale and Page and noted that a copy of the exhibit to the affidavit would be forwarded by courier.
* By facsimile dated 30 August the ASC advised EBC that the restraining orders had been continued until 7 September 1995.
* By facsimile dated 31 August, the ASC forwarded for information, and not by way of service, a sealed copy of the orders made on 30 August 1995.
* EBC returned the documents received by it under cover of a letter dated 31 August 1995. The letter was as follows:
“We cannot accept serving of papers which are not served through the appropriate diplomatic channels due to Article 271 of the Swiss Penal Code.
We herewith return these papers.”
The papers returned included the original secondary notices. * By a facsimile dated 27 September 1995, the ASC advised EBC that the proceedings had been adjourned until 27 October 1995 at which time the ASC proposed to apply for final orders. The ASC invited EBC to enter an appearance and to ensure that all persons claiming an interest in the Dome and Allegiance parcels be made aware of the proceedings.
JURISDICTION
Mr Lindsay submitted that the Court could exercise jurisdiction under the Corporations Law in respect of the ASC’s application against EBC, by reason of O.8, R1 of the Federal Court Rules. In particular he relied on O.8, R1(h) and (l):
“1. Subject to R2 and Divisions 2 and 3 of this Order, originating process may be served outside the Commonwealth in the following cases:
…
(h) where the subject matter of the proceeding, so far as concerns the person to be served is property in the Commonwealth;
…
(l) where the proceeding concerns the construction, effect or enforcement of an Act or a regulation or other instrument having or purporting to have effect under an Act.”
Mr Lindsay contended that the requirements of R1(h) were satisfied because the subject matter of the proceedings consisted of the Dome and Allegiance parcels. These shares were “property in the Commonwealth”, since shares in a company are situated in the place where they are registered and can only be transferred: Brassard v Smith [1925] AC 371; PE Nygh, Conflict of Laws in Australia (6th ed, 1995), 488. Alternatively, Mr Lindsay contended that the proceedings concern the construction, effect or enforcement of the Corporations Law and the secondary notices having effect under that Law. I accept these submissions.
SERVICE
It is necessary to determine whether EBC has been duly served with the initiating process. In this connection a number of rules other than O.8, R1 are relevant:
“O.8 R2 LEAVE OR CONFIRMATION
2(1) Service outside the Commonwealth of originating process is not valid under this Order unless-
(a) the service is in accordance with the prior leave of the Court given under subR(2);
(b) the Court confirms the service under subR(4); or
(c) the person served waives objection by entering an appearance.
2(2) Where the Court is satisfied of the following matters-
(a) that the proceeding is a proceeding in which the Court has jurisdiction;
(b) that the proceeding is a proceeding to which rule 1 applies; and
(c) that the applicant has a prima facie case for the relief which he seeks, the Court may, by order, grant leave to serve originating process outside the Commonwealth under this Order.
2(3) The evidence on a motion for leave under subR(2) shall include evidence showing in what country or place the person to be served is, or probably may be found, and whether that country is a convention country or a non-convention country.
2(4) Where originating process has been served outside the Commonwealth without a prior motion for leave under subR(2), and the Court is satisfied-
(a) on the matters mentioned in sub-rule (2); and
(b) that the failure to apply for leave is sufficiently explained, the Court may by order confirm the service.
RULE 3 OTHER DOCUMENTS
3. Subject to any convention, service outside Australia of a document other than originating process is valid if the service is in accordance with the prior leave of the Court or is confirmed by the Court.
RULE 4 RULES AS TO SERVICE GENERALLY
4. Subject to this Order and subject to any convention, the Rules apply to service outside Australia under this Order as they apply to service inside Australia.
RULE 5 MODE OF SERVICE
5. A document which is to be served outside Australia need not be served personally on the person required to be served so long as it is served on him in accordance with the law of the country in which service is effected.”
O.7, R9 provides as follows:
RULE 9 SUBSTITUTED SERVICE
9(1) Where for any reason it is impractical to serve a document in the manner set out in the Rules, the Court may on an application made ex parte order that, instead of service, such steps be taken as are specified in the order for the purpose of bringing the document to the notice of the persons to be served.
9(2) Where the Court makes an order under subR(1), the Court may order that the document be taken to have been served on the happening of any specified event, or on the expiry of any specified time.
The orders made by Foster J on 28 August 1995 do not make it entirely clear whether his Honour was intending to make an order for substituted service on EBC pursuant to O.7, R9. For such an order to be made, the applicant must demonstrate that for some reason “it is impractical to serve a document in the manner set out in the Rules”. Mr Lindsay informed me that evidence was tendered to his Honour which showed that service in Switzerland was “impractical” in the relevant sense. That evidence, so I was informed, included expert opinions as to the effect of art.271 of the Swiss Penal Code. This article is intended to protect Switzerland’s sovereignty against acts of a foreign state or entity which are regarded as a matter of authority under Swiss law. It also appears from the exchange that took place in court on 30 August 1995 that his Honour viewed the order previously made by him as one for substituted service. In these circumstances, although the orders do not specifically invoke O.7, R9, I think they should be read as orders made under that rule, and were intended to bring the documents to the attention of the EBC.
Mr Lindsay accepted that Foster J was not asked to and did not grant leave to serve the originating process outside Australia, pursuant to O.8, R2(2). Although there was material before his Honour that would, or might have been, sufficient to satisfy the conditions specified in that sub-rule, no leave was sought. I accept that this occurred because of the urgency of the application on 28 August 1995 and because it was thought likely, having regard to the course of other proceedings in which EBC had appeared, that invoking O.7, R9 would secure the attendance of EBC before the Court.
On the material before me, I am satisfied of the matters specified in O.8, R2(2). I am also satisfied that the initiating process and supporting material has come to the attention of EBC. While Freehill Hollingdale and Page did not forward the documents served on them to EBC, copies of those documents were sent by facsimile to EBC by the ASC.
In my view it is appropriate to make an order under O.7, R9(2) that the documents delivered to Freehill Hollingdale and Page should be taken to have been served on EBC at the time they were delivered to Freehill Hollingdale and Page. I also think it is appropriate to make an order confirming service outside the Commonwealth on EBC, pursuant to O.8, R2(4). In this connection I am satisfied of the matters mentioned in O.8, R2(2) and I am also satisfied that the failure to apply for leave is sufficiently explained. In my opinion, although an order for substituted service on Australian solicitors was made by Foster J, this is a case where “originating process has been served outside the Commonwealth” within the meaning of O.8, R2(4). The purpose of the order for substituted service was to bring the documents to the attention of EBC in Switzerland. While the documents themselves were not forwarded by Freehill, Hollingdale and Page, EBC was told of them and received copies directly from the ASC.
Mr Lindsay invited me, if it were necessary to do so, to make an order under O.1, R8 dispensing with compliance with the Rules, insofar as they require
(i) originating process to be served personally on EBC (O.8, R1(1)); and
(ii) the copy for service to be signed and sealed (O.8, R1(2)).
Unsealed copies of the application and supporting affidavit were sent by facsimile to EBC on 28 August 1995. I infer from the correspondence that these documents were received by EBC at about the time they were transmitted from Australia. While the ASC expressly stated that the documents were being forwarded for information only (to avoid possible difficulties with art.271), they alerted EBC to the proceedings and gave it the opportunity to participate if it wished to do so. The evidence shows that EBC had engaged local solicitors for the purposes of other proceedings and (as I would infer) could have chosen to instruct them to appear on its behalf in these proceedings. There is no evidence in these proceedings that instructing Australian solicitors would have exposed EBC to liability under Swiss law. In these circumstances, if it were necessary to make an order under O.1, R8, in the terms suggested by Mr Lindsay, I would do so. However, in view of the conclusions I have already reached, I do not think it is necessary to make such an order.
SECONDARY NOTICES
The evidence satisfies me of the following:
(i) On 11 August 1995, the ASC served by facsimile a primary notice on National Nominees under s718 of the Corporations Law, in relation to its holding of 8,646,700 shares in Dome. The notice required a statement of its relevant interest in the company.
(ii) On 11 August 1995, the ASC served by facsimile a primary notice on National Nominees, also under s718 of the Corporations Law, in relation to its holding of 3,680,000 shares in Allegiance.
(iii) On 11 August 1995, National Nominees replied to the primary notices, stating that it held 6,611,000 shares in Dome and 3,680,000 shares in Allegiance on behalf of EBC.
(iv) On 18 August 1995, the ASC issued a secondary notice, under s719 of the Corporations Law, to EBC, in relation to the Dome parcel. This notice was served on EBC in Switzerland by facsimile on 18 August 1995 and also by courier on 21 August 1995.
(v) On 18 August 1995, the ASC issued a secondary notice, under s719 of the Corporations Law, in relation to the Allegiance parcel. This notice was also served on EBC in Switzerland by facsimile on 18 August 1995 and by courier on 21 August 1995.
(vi) EBC has not responded to either notice, except that (as previously noted) it returned them on 31 August 1995. It is therefore in breach of its obligations under s722 of the Corporations Law. The information sought by the secondary notices does not appear on the register of Dome or Allegiance: see Corporations Law, s727(c).
SUBSTANTIAL SHAREHOLDER NOTICES The evidence satisfied me of the following:
(i) On 30 June 1995, EBC was beneficially entitled to 5.28 per cent of the total issued capital of Dome and 6.4 per cent of the total issued capital of Allegiance. There had been some change in the shareholding in Allegiance by August 1995. (ii) EBC has not lodged substantial shareholder notices, as required by the Corporations Law, s709-s711.
RELIEF SOUGHT The ASC seeks orders to the following effect:
(i) that EBC comply with the secondary notices served upon it in relation to the Dome parcel and the Allegiance parcel;
(ii) that EBC comply with its obligations under s709(3) of the Corporations Law to give substantial shareholders notice in respect of the Dome parcel and the Allegiance parcel;
(iii) that if EBC fails to comply with the orders, the shares should vest in the ASC until sold by it;
(iv) that the ASC sell the shares in such manner and on such terms as it thinks fit and that it be at liberty to decline to make payments out of the proceeds of sale to any person claiming to be entitled thereto until that person provides appropriate information sought in the secondary notices.
Mr Lindsay acknowledged that an order under s613 of the Corporations Law, vesting the shares in the ASC is a stringent measure. However, he argued that it was an appropriate measure in the circumstances of the present case since such an order (which would apply only in the event of EBC continuing not to comply with its statutory obligations) would serve to provide a fully informed market. Moreover, whatever perceived difficulties may have arisen in relation to s271 of the Swiss Penal Code, EBC has been served with the secondary notices, and has failed to comply with them. No explanation for the non-compliance, either in relation to the secondary notices or the substantial shareholding provisions has been forthcoming in these proceedings. The shareholdings in both companies are by no means trivial, since each has exceeded the substantial shareholding threshold (although the shareholding in Allegiance has since been reduced).
Care must be taken in relation to a drastic remedy such as a vesting order. However, in the circumstances of the present case, if EBC persists in its failure to comply with the statutory requirements, it seems to me that a vesting order serves the objects of the legislation: see Brunswick NL v Blossomtree Pty Ltd (1992) 7 WAR 226 (S.Ct. WA/FC), at 234-235. Similarly, I think it is appropriate that the orders provide for the sale of the shares, with the proceeds to be held by the ASC in accordance with the unclaimed property regime in Pt9.7 of the Corporations Law.
I think that the orders should include provision for notification to EBC of their terms. Mr Lindsay accepted that this is appropriate. Dome sought a direction that it be given prior notification of any sale of the Dome parcel by the ASC. I propose to accede to this request.
I also think it appropriate, as Mr Lindsay suggested, that liberty be reserved to apply for relief against the orders during a period of two months from the date they are made. The power of the ASC to sell the shares should be exercisable only after the expiration of the two month period.
In the absence of evidence relating to Swiss law, I think it appropriate to make orders directing compliance with the secondary notices and with the requirements of s709(3) of the Corporations Law.
COSTS
The ASC, Dome and National Nominees each sought orders that their costs be paid by EBC and that, if unpaid, they be met from the proceeds of sale of the shares by the ASC. In my view, there is power to make such orders under ss.742(2) and 744(6) of the Corporations Law and s43 of the Federal Court of Australia Act 1976 and I propose to exercise the power.
ORDERS I make the following orders:
1. ORDER that, subject to para5 of these orders, EBC Zurich AG (“EBC”) comply, within 7 days of the date of these orders, with the two Secondary Notices dated 18 August 1995, which relate to the parcel of 6,611,000 ordinary 20 cent fully paid shares in the issued capital of Dome Resources NL (“Dome”) held by National Nominees Limited (“National”) on behalf of EBC (“the Dome Parcel”)
2. ORDER that, subject to para6 of these orders, EBC comply, within 7 days of the date of these orders, with the Secondary Notices dated 18 August 1995, which relate to the parcel of 2,680,000 ordinary 20 cent fully paid shares in the issued capital of Allegiance Mining NL (“Allegiance”) held by National on behalf of EBC (“the Allegiance Parcel”).
3. ORDER that, subject to para5 of these orders, EBC give to Dome within 7 days of the date of these orders, a written notice which complies with s709(3) of the Corporations Law.
4. ORDER that, subject to para6 of these orders, EBC give to Dome, within 7 days of the date of the orders herein, a written notice which complies with s709(3) of the Corporations Law.
5. ORDER that, upon the expiration of 7 days from the date of these orders, if EBC has failed to comply with para1 and para3 of these orders, then the Dome Parcel shall vest in the Australian Securities Commission (“ASC”) until sold by it pursuant to these orders.
6. ORDER that, upon the expiration of 7 days from the date of these orders, if EBC has failed to comply with paragraphs 2 and 4 of these orders, then the Allegiance Parcel shall vest in the ASC until sold by it pursuant to these orders.
7. ORDER that, upon the expiration of two months from the date of these orders, the ASC shall, subject to the succeeding paragraphs of these orders, proceed to sell any shares vested in it by virtue of these orders (“the Relevant Shares”) in such manner and on such terms as it thinks fit.
8. DIRECT that, before any sale of the Dome Parcel, the ASC give to Dome 14 days’ prior notice of the number of shares to be sold, the proposed manner of sale and the price at which it is proposed to offer the shares for sale.
9. GRANT liberty to Dome to apply on 24 hours notice with respect to the ASC’s proposals for sale of the Dome Parcel.
10. ORDER that, subject to para11 of these orders, any proceeds of the sale of the Relevant Shares be applied to the payment of the ASC’s costs (to the extent that they remain unpaid), including any investigation costs incurred under s91 of the ASC Law and any costs of and incidental to the sale of the Relevant Shares, and then to the costs of Dome and the costs of National (to the extent that they remain unpaid). The balance of the proceeds should be dealt with in accordance with s577 and Pt9.7 of the Corporations Law.
11. ORDER that, subject to any further order of the Court, the ASC is at liberty to decline to make any payments out of the proceeds of sale of the Relevant Shares to any person claiming entitlement to the whole or a part of the proceeds unless that person provides the information requested by the relevant Secondary Notice referred to in paragraphs 1 and 2 hereof, information regarding the basis of that person’s entitlement to the proceeds and an explanation of that person’s failure to provide the information earlier.
12. GRANT LIBERTY to any person, including the Respondents, to apply for relief against these orders during a period of two calendar months from the date of the order herein.
13. ORDER that EBC pay the costs of the ASC, Dome and National of these proceedings.
14. DIRECT, pursuant to Federal Court Rules, O.7, R9(2), that the application and supporting affidavit delivered to Freehill Hollingdale and Page should be taken to have been served on EBC on 29 August 1995.
15. CONFIRM, pursuant to Federal Court Rules, O.8, R2(4), service of these proceedings on EBC outside Australia.
16. DIRECT that the ASC notify EBC of the terms of these orders by facsimile directed to the address referred to in the letter dated 31 August 1995 from EBC to the ASC, within three days of the date of these orders.
ORDER:
MINUTES OF ORDER THE COURT:
1. ORDERS that, subject to para5 of these orders, EBC Zurich AG (“EBC”) comply, within 7 days of the date of these orders, with the two Secondary Notices dated 18 August 1995, which relate to the parcel of 6,611,000 ordinary 20 cent fully paid shares in the issued capital of Dome Resources NL (“Dome”) held by National Nominees Limited (“National”) on behalf of EBC (“the Dome Parcel”).
2. ORDERS that, subject to para6 of these orders, EBC comply, within 7 days of the date of these orders, with the Secondary Notices dated 18 August 1995, which relate to the parcel of 2,680,000 ordinary 20 cent fully paid shares in the issued capital of Allegiance Mining NL (“Allegiance”) held by National on behalf of EBC (“the Allegiance Parcel”).
3. ORDERS that, subject to para5 of these orders, EBC give to Dome within 7 days of the date of these orders, a written notice which complies with s709(3) of the Corporations Law.
4. ORDERS that, subject to para6 of these orders, EBC give to Dome, within 7 days of the date of these orders, a written notice which complies with s709(3) of the Corporations Law.
5. ORDERS that, upon the expiration of 7 days from the date of these orders, if EBC has failed to comply with para1 and para3 of these orders, then the Dome Parcel shall vest in the Australian Securities Commission (“ASC”) until sold by it pursuant to these orders.
6. ORDERS that, upon the expiration of 7 days from the date of these orders, if EBC has failed to comply with para2 and para4 of these orders, then the Allegiance Parcel shall vest in the ASC until sold by it pursuant to these orders.
7. ORDERS that, upon the expiration of two months from the date of these orders, the ASC shall, subject to the succeeding paragraphs of these orders, proceed to sell any shares vested in it by virtue of these orders (“the Relevant Shares”) in such manner and on such terms as it thinks fit.
8. DIRECTS that, before any sale of the Dome Parcel, the ASC give to Dome 14 days’ prior notice of the number of shares to be sold, the proposed manner of sale and the price at which it is proposed to offer the shares for sale.
9. GRANTS liberty to Dome to apply on 24 hours notice with respect to the ASC’s proposals for sale of the Dome Parcel.
10. ORDERS that, subject to para11 of these orders, any proceeds of the sale of the Relevant Shares be applied to the payment of the ASC’s costs (to the extent that they remain unpaid), including any investigation costs incurred under s91 of the ASC Law and any costs of and incidental to the sale of the Relevant Shares, and then to the costs of Dome and the costs of National (to the extent that they remain unpaid). The balance of the proceeds should be dealt with in accordance with s577 and Pt9.7 of the Corporations Law.
11. ORDERS that, subject to any further order of the Court, the ASC is at liberty to decline to make any payments out of the proceeds of sale of the Relevant Shares to any person claiming entitlement to the whole or a part of the proceeds unless that person provides the information requested by the relevant Secondary Notice referred to in para1 and para2 hereof, information regarding the basis of that person’s entitlement to the proceeds and an explanation of that person’s failure to provide the information earlier.
12. GRANTS liberty to any person, including the respondents, to apply for relief against these orders during a period of two calendar months from the date of the order herein.
13. ORDERS that EBC pay the costs of the ASC, Dome and National of these proceedings.
14. DIRECTS, pursuant to Federal Court Rules, O.7, R9(2), that the application and supporting affidavit delivered to Freehill Hollingdale & Page should be taken to have been served on EBC on 29 August 1995.
15. CONFIRMS, pursuant to Federal Court Rules, O.8, R2(4), service of these proceedings on EBC outside Australia.
16. DIRECTS that the ASC notify EBC of the terms of these orders by facsimile directed to the address referred to in the letter dated 31 August 1995 from EBC to the ASC, within three days of the date of these orders.
NOTE: Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules
Representation:
Mr GC Lindsay SC, instructed by Mr Peter
Stepek, Solicitor for Australian Securities
Commission, appeared for the applicant.
Ms Dunford, of Mallesons Stephen Jaques,
Solicitors, appeared for the second
respondent.
Mr L Powers of Minter Ellison, Solicitors,
appeared for the third respondent.
AUSTRALIAN SECURITIES COMMISSION v BANK LEUMI LE-ISRAEL and ORS
NG 3201 of 1995
FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BC9501504
20-21 November, 1995, heard;
14 December 1995, delivered
CATCHWORDS:
CORPORATIONS – Shares – Secondary Notices issued by Australian Securities
Commission to foreign corporation – Compliance risks breach of foreign law -
whether foreign corporations bound to comply with notices under Corporations
Law, s722.
Secondary Notices – whether notices can be given to foreign corporations
where to do so contravenes foreign law – whether notices can be served by fax
under Corporations Law, s719.
Secondary Notices – whether letters constitute “request” for exemption under
Corporations Law, s721 – whether decision on request vitiated by pre-judgment
or failure to take into account relevant considerations.
Substantial Shareholder Notices – whether foreign corporation obliged to give
notice if to do so risks contravention of foreign law – whether foreign
corporation is a “bare trustee” of shares for the purposes of Corporations
Law s39(b).
Secondary Notices – failure to comply – power to excuse non-compliance under
Corporations Law, s743 – whether foreign corporations should be excused from
non-compliance – nature of relief to be granted.
Corporations Law, s39(b), s109X, s110D, s603, s613, s708, s709, s719, s721,
s722, s741, s742, s743, s744.
Polites v The Commonwealth (1945) 70 CLR 60.
Re North Broken Hill Holdings Pty Ltd (1986) 10 ACLR 270.
Arhill Pty Ltd v General Terminal Co Pty Ltd (1990) 23 NSWLR 545.
De Beeche v The South American Stores (Gath and Chaves) Ltd [1935] AC 148.
Societe Internationale Pour Participations Industrielles et Commerciales, SA
v Rogers 357 US 197 (1958).
Federal Trade Commission v Compagnie de Saint-Gobain-Pont-A-Mousson 636 F2d
1300 (1980).
Adsteam Building Industries Pty Ltd v The Queensland Cement and Lime Co Ltd
(No.4) [1985] 1 QdR 127.
Hastie and Jenkerson v McMahon [1990] 1 WLR 1575.
Electronic Rentals Pty Ltd v Anderson (1971) 124 CLR 27.
Little v Minister for Land Management (1992) 77 LGRA 346.
Air-India v Wiggins [1980] 1 WLR 815.
Corumo Holdings Pty Ltd v C Itoh Pty Ltd (1991) 24 NSWLR 370
Regazzoni v KC Sethia (1944) Ltd [1958] AC 301.
Federal Trade Commission v Comagnie de Saint-Gobain-Pont-A-Mousson 636 F2d
1300 (1980)
Attorney-General (United Kingdom) v Heinemann Publishers Australia Pty Ltd
(1988) 165 CLR 30.
NM Superannuation Pty Ltd v Hughes (1992) 27 NSWLR 26.
Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70.
JUDGES: SACKVILLE J
SACKVILLE J: REASONS FOR JUDGMENT INDEX
Page I INTRODUCTION 4 – The Proceedings 4 – The Relief Sought 5 – Other Parties 7 – Timing 8 II THE FACTS 8 – Background 8 – The Secondary Notice to Leumi 11 – Leumi’s Response 14 – The ASC’s Decision in Relation to Leumi 15 – The Second Secondary Notice to Leumi 17 – Leumi’s Application to the Administrative Appeals Tribunal 18 – Secondary Notice to EBC 18 – EBC’s Response 19 – The ASC’s Decision in Relation to EBC 21 – The Take-Over Offers 22
III THE LEGISLATION 23 – Information as to Beneficial Ownership: Pt6.8 24 – Substantial Shareholdings Provisions: Pt6.7 28 – Power to Excuse Contraventions 31 – Extraterritorial Operation of the Corporations Law 32 – Service of Notices 32
IV THE ISSUES 33
V THE EXPERT EVIDENCE 35 – The Expert Witnesses 35 – Swiss Law 37 – Article 273 39 – Article 271 43 – Article 47 of the Banking Law 46
VI WERE LEUMI AND EBC OBLIGED TO COMPLY WITH THE SECONDARY NOTICES, NOTWITHSTANDING THAT COMPLIANCE PLACED THEM AT RISK OF VIOLATING SWISS LAW? 47 – Background 47 – Principles of Construction 49 – Pt6.8 of the Corporations Law 54 – Enforcement and Prescription Jurisdiction 60 – Attorney-General v Heinemann 62 – Self-Incrimination 63 VII WAS SERVICE OF THE SECONDARY NOTICE IN SWITZERLAND AUTHORISED BY THE CORPORATIONS LAW? 67 – The Submissions 67 – The Question of Construction 68
VIII WAS SERVICE OF THE SECONDARY NOTICES BY FAX AUTHORISED BY THE CORPORATIONS LAW? 75 – The Arguments 75 – The Authorities 77 – The Construction Issue 79 – An Original Document? 82
IX WERE THE SECONDARY NOTICES INVALID BY REASON OF ANY PRE-JUDGMENT BY THE ASC? 84
X DID THE ASC FAIL TO CONSIDER PROPERLY REQUESTS MADE BY LEUMI AND EBC UNDER s721? 87 – Background 87 – Did Leumi Make a Request? 89 – Did EBC Make a Request? 91 – Pre-Judgment by the ASC 92 – Alleged Failure to Take Into Account Relevant Considerations 95
XI DID LEUMI AND/OR EBC CONTRAVENE THE SUBSTANTIAL SHAREHOLDER PROVISIONS? 97 – Application of s709 97 – Substantial Shareholder: Leumi 102 – Substantial Shareholder: EBC 106
XII SHOULD LEUMI AND/OR EBC BE EXCUSED FROM THEIR CONTRAVENTIONS UNDER s743? 107 – The Arguments 107 – Exercise of Discretion 109
XIII WHAT RELIEF SHOULD BE GRANTED? 116 – The Submissions 116 – The Relief 119 I. INTRODUCTION THE PROCEEDINGS
In these proceedings the applicant, the Australian Securities Commission (“ASC”), seeks relief against two Swiss corporations in respect of what it claims are breaches of the Corporations Law. The corporations are the first respondent, Bank Leumi Le-Israel (“Leumi”) and the second respondent, EBC Zurich AG (“EBC”). The ASC alleges, among other things, that Leumi and EBC have failed to comply with secondary notices issued by the ASC under the Corporations Law. The secondary notices required them to provide information concerning their shareholdings in an Australian company. The ASC also alleges that Leumi and EBC have failed to comply with the substantial shareholder notice provisions of the Corporations Law.
Leumi and EBC deny that they have been, or are, in breach of the Corporations Law. They raise many issues by way of defences to the ASC’s allegations. At the forefront are their claims that compliance with the notices and with the substantial shareholder provisions, would cause them to breach Swiss law. They argue that the Corporations Law should not be construed so as to require foreign corporations to breach the law of the country in which they are incorporated and conduct business. Leumi and EBC also claim that service of the secondary notices on them breached Swiss law and was not authorised by the Corporations Law. THE RELIEF SOUGHT
The proceedings were commenced by the ASC on 3 May 1995. The relief claimed by the ASC in its further amended statement of claim includes declarations that Leumi and EBC have contravened s.722(1) of the Corporations Law, by failing to comply with secondary notices served on them by the ASC in relation to shares held by them in the eighth respondent, Offset Alpine Printing Group Ltd (“OAP”). The ASC also seeks declarations that Leumi and EBC have contravened s709(1) of the Corporations Law, in that each was a substantial shareholder in OAP but had failed to give the required written notice to OAP specifying their interests.
The ASC claims consequential relief, including
* orders that Leumi and EBC comply with the secondary notices;
* orders that Leumi and EBC give written notices complying with s709 of the Corporations Law;
* orders that the shares be vested in the ASC absolutely or subject to such terms and conditions as the Court thinks fit;
* in the alternative, orders that the nominee companies (the third to the seventh respondents), who are the registered owners of the shares in OAP held on behalf of Leumi and EBC, divest themselves of the shares;
* reservation of liberty to apply to any person claiming an interest in the shareholdings of Leumi and EBC in OAP.
On 4 May 1995, interlocutory orders were made restraining Leumi and EBC from giving instructions for their shares in OAP to be disposed of and restraining the other respondents from disposing of any shares in OAP held by them on behalf of Leumi or EBC. OAP was directed, subject to further order of the Court, to disregard the exercise of any rights in respect of the shares by the third to the seventh respondents, each of which is a nominee company holding shares in OAP on behalf of Leumi and EBC. OAP was also restrained from registering a transfer or transmission of any shares in OAP held by Leumi or EBC. These orders remain in place.
Leumi and EBC entered unconditional appearances in the proceedings. Each has been separately represented and has opposed the relief sought by the ASC. At the hearing Leumi was represented by Mr R. White, who appeared with Ms Wines. Mr Conti QC appeared with Mr Kunc for EBC.
Both Leumi and EBC filed cross-claims. As amended, Leumi’s cross-claim seeks an order under s11 of the Administrative Decisions (Judicial Review) Act 1975 (Cth) (“ADJR Act”) extending the time for filing an application to review a decision made by the ASC on 5 September 1995. That decision was to refuse what Leumi claimed was a request under s721 of the Corporations Law, that the ASC certify that there were special reasons why the information sought in the secondary notices did not have to be given. The amended cross claim also seeks an order quashing the ASC’s decision to refuse the request.
EBC’s cross-claim seeks orders pursuant to s743 of the Corporations Law that, if EBC has contravened s722, the contravention should be excused. The main argument put in support of the cross claim is that there is a real or serious risk that EBC would be in breach of the Swiss Penal Code if it were to comply with the secondary notices.
OTHER PARTIES
The third to the seventh respondents are nominee companies incorporated in Australia. Only one of these, the fifth respondent (National Nominees Ltd), appeared in the proceedings. However, it has submitted to the orders of the Court and has played no part in the hearing.
OAP was represented at the hearing by Mr Oakes SC. He argued that any relief granted by the Court should allow the shares held by Leumi and EBC to be sold, in the interests of an efficient market in OAP shares. OAP relied on the fact that by the date of the hearing, two companies, Fobiti Pty Ltd (“Fobiti”) and Arklow Pty Ltd (“Arklow”) had made competing offers to acquire the whole of the issued share capital of OAP. At the hearing, Mr Muddle announced an appearance for Arklow and sought an order joining Arklow as a respondent to the proceedings. He did so primarily on the ground that Arklow, having made a take-over offer for all shares in OAP, wished to be heard on the form of relief, if any, to be granted to the ASC. Mr Lindsay SC, who appeared for the ASC, did not object to this course. None of the other respondents objected. Accordingly, I made an order joining Arklow as the ninth respondent, subject to an undertaking, given on its behalf by Mr Muddle, that Arklow would not seek costs from any other party.
TIMING
The hearing was expedited. At the time the proceedings were set down for final hearing, only the first takeover offer had been made. It was expressed to expire on 29 November 1995. Since that time two other offers have been made, one of which is a revised offer by the original offeror, Fobiti. Those offers expire, unless extended, on 29 December 1995. In accordance with the parties’ request, this judgment has been prepared in sufficient time to enable final orders to be made before the expiration of the current offers.
II THE FACTS BACKGROUND
OAP is a company incorporated in Victoria. It was previously known as Oilmet Resources NL. At all material times, OAP has been admitted to the Official List of the Australian Stock Exchange (“ASX”). Its principal activity is printing.
On 5 April 1995, the ASC was informed by the ASX of ASX investigations into the trading of OAP securities. The ASX was concerned that there may have been a failure to comply with the substantial shareholder notice provisions of the Corporations Law. This concern apparently arose out of the fact that the ASX had received information that Leumi and EBC had sold over 720,000 shares into an on-market buy-back scheme for shares in OAP.
On 6 April 1995, the ASC obtained a list of the top 40 shareholders in OAP as at 5 April 1995. This showed that the shareholders in OAP included:
* the third respondent, ANZ Nominees Ltd (“ANZ Nominees”), holding 4,653,433 shares (19.56 per cent of the issued capital);
* the fourth respondent, BB Nominees Pty Ltd (“BB Nominees”), holding 162,437 shares (0.68%);
* the fifth respondent, National Nominees Ltd (“National Nominees”), holding 1,214,319 shares (5.10%);
* the sixth respondent, Galah Nominees Pty Ltd (“Galah Nominees”), holding 1,783,037 shares (7.49%); and * the seventh respondent, Statton Nominees Pty Ltd (“Statton Nominees”), holding 1,380,818 (5.80%).
Between 7 and 10 April 1995, the ASC issued primary notices to those shareholders under s718 of the Corporations Law. The notices required each recipient to give to the ASC a written statement within two days, providing particulars of all relevant interests in the shareholding of that recipient in OAP.
In consequence of the primary notices, the ASC received information that a total of 4,038,600 shares in OAP (16.97 per cent of the issued capital) were held by the recipients of those notices on behalf of Leumi, and 5,293,771 (22.25 per cent of the issued capital) were held on behalf of EBC. The shareholdings revealed by the primary notices are shown in the chart set out below.
[Editor's Note-chart referred to cannot be reproduced on the Info-One system] Leumi is incorporated in Switzerland as a stock corporation and is duly registered with the Commercial Register of the Canton of Zurich. It is a bank, permitted to carry on business subject to the provisions of the Swiss Federal Law on Banks and Savings Banks. Leumi carries on business at offices in Zurich and Geneva.
EBC is also a joint stock corporation incorporated in Switzerland and is registered with the Commercial Register of the Canton of Zurich. It is not a bank, but carries on business as a finance company.
THE SECONDARY NOTICE TO LEUMI
On 18 April 1995 the ASC prepared a secondary notice, addressed to Leumi at its address in Zurich, Switzerland. The notice was accompanied by a covering letter, as follows:
“I enclose a notice issued pursuant to subsection 719(1) of the Corporations Law requiring information as to the ownership of the shares held by ANZ Nominees Pty Ltd in Offset Alpine Printing Group Ltd.
…
Please note that the issuing of the attached notice does not amount to an assertion of extraterritorial enforcement jurisdiction because the subject matter of the notice is Australian shares and any enforcement action for non-compliance would occur in Australia in relation to those shares.”
The notice followed Form 609, which may be used for the purposes of a secondary notice under s719(1): Corporations Regulations, Reg6.8.01(4). The body of the notice was as follows:
“1. Take notice that the Australian Securities Commission pursuant to a primary notice (as defined in s717 of the Corporations Law), has received information that you are:
a.* a person with a relevant interest in (1); or
b.* a person who has given relevant instructions (2) in relation to
4,038,600 voting shares in Offset Alpine Printing Group Limited, ACN 003 394 876 that are held by ANZ Nominees Pty Ltd of Level 25, 530 Collins Street, Melbourne VIC 3000.
2. The Commission requires you to give to the Commission:
(a) in accordance with subs722(1) of the Corporations Law; and
(b) within 2 business days after you have received this notice;
a statement in writing setting out:
(c) full particulars of your relevant interest in those shares and the circumstances because of which you acquired that interest; and
(d) so far as you know, full particulars of:
(i) the name and address of every other person who has a relevant interest in any of the shares; and
(ii) each such interest and the circumstances because of which the person has that interest; and
(iii) the name and address of each person who has given you relevant instructions in relation to any of the shares; and
(iv) those relevant instructions; and
(v) the date(s) on which the instructions were given to you.
… NOTES
(1) See Division 5 of Pt1.2 of the Corporations Law
(2) See s717 of the Corporations Law
DIRECTION
Under subs721(1) of the Corporations Law, an application for exemption from providing any or all of the required particulars may be lodged with the Australian Securities Commission within 2 business days after this notice is received.
The Australian Securities Commission may, under subs721(2), modify this requirement to give information.”
The document was signed for the ASC “by its delegate Peter Dumas”.
On 20 April 1995, the letter and the notice were sent by facsimile transmission (“fax”) to Leumi at its offices in Switzerland. In its defence, Leumi admitted that the fax was received by it at its office on 20 April 1995, but pleaded that the fax was not received by an officer having responsibility for the matter “until May 1995″.
The original letter and secondary notice were dispatched by international courier to Leumi at its Zurich address. The letter and notice were delivered at that address on 24 April 1995.
On 26 April 1995, the ASC faxed a further letter to Leumi. The letter stated that, unless a satisfactory response to the notice was forthcoming, the ASC intended to apply to the Federal Court to enforce compliance. The letter contained this paragraph:
“Further, the Commission does not accept that Swiss Secrecy Regulations are sufficient reason not to provide the information required under the above Notice”.
LEUMI’S RESPONSE
On 27 April 1995, Leumi faxed a letter to the ASC. One of the issues to be decided is whether this letter was a “written request that, for special reasons set out in the request…the information should not be given to [the ASC]“, within the meaning of s721(1) of the Corporations Law. The letter should therefore be set out in full:
“Reference is made to your letter dated April 18, 1995, which was received by us on April 24, 1995, as well as your telefax of yesterday.
With respect to the notice attached to your aforementioned letter requiring information as to the ownership of the shares held by A.N.Z. Nominees Pty Ltd in OFFSET ALPINE PRINTING GROUP LIMITED we cannot but draw the Commission’s attention to our status as a Swiss bank. As such we are subject to Swiss law, in particular Swiss Secrecy Regulations. Therefore, and notwithstanding what is said in para3 of your yesterday’s fax, our bank would clearly and seriously infringe applicable Swiss law by furnishing you with the statement required by the Commission as per the said notice.
Please be further advised that the mere fact of this reply may not be interpreted by you and/or the Commission as indication of our bank being aware of any particulars of the subject matter of the notice.
We trust that you and the Commission understand our position which is in compliance with applicable Swiss law and appreciate your and the Commission’s comprehension.” There was subsequent correspondence between the ASC and Leumi’s Australian solicitors, to which reference is made below. However, Leumi has not provided the ASC with the information sought in the secondary notices.
THE ASC’S DECISION IN RELATION TO LEUMI
On 22 June 1995, the ASC, without prejudice to its contention that Leumi had lodged no request within the meaning of s721(1) of the Corporations Law, invited Leumi, through its Australian solicitors, to identify the details of any request that it alleged had been made pursuant to s721(1). The letter also invited Leumi to make all submissions and provide material that it alleges should be taken into account in considering the request. By a reply of 28 June 1995, Leumi’s solicitors identified the letter of 27 April 1995 as constituting the request. The letter continued as follows:
“(iv) submissions – the special reasons are set out in the letter, namely that compliance with the notice would infringe Swiss law. Further, by way of submission pertaining to such special reasons, it is submitted that forcing a Swiss resident bank to comply with a notice under Australian law contrary to the provisions of Swiss law, which could cause the imposition of penalties on our client, would be unreasonable and harmful to international comity.”
Although that letter does not expressly refer to previous correspondence, other than the letter of 27 April 1995, Leumi’s solicitors had faxed a letter to the ASC on 21 June 1995. That letter enclosed a memorandum from Dr Schurmann, described as an “independent lawyer practising in Zurich”. Dr Schurmann expressed the view that Leumi would contravene Swiss law if it provided the information sought by the ASC, whether in response to the secondary notice or an order of the Federal Court. The letter of 21 June 1995 included the following:
“We ask you to carefully consider, again, the difficult position [Leumi] is in and the impossibility of it ignoring Swiss law”.
On 4 July 1995, the ASC sent a letter to Leumi’s solicitors asking a series of detailed questions. Among other things, the letter asked whether Leumi had requested the consent of the beneficial shareholders to compliance with the secondary notices. On 10 July 1995, Leumi’s solicitors responded, but did not provide answers to the questions asked, on the ground that the ASC’s position required further clarification.
At some stage, the date of which does not appear clearly from the evidence, the ASC asked Mr Goldie, a lawyer in its New South Wales Regional Office, to make a decision under s721:
“on the unadmitted assumption that a request has been made by [Leumi] to the ASC on 27 April 1995 that information required by secondary notices given to [Leumi] in April 1995 should not be given to the ASC.”
Mr Goldie had not previously been involved in ASC’s investigation of the ownership of OAP shares, nor in these proceedings. Mr Goldie gave his decision in writing, pursuant to s721(3) of the Corporations Law, on 5 September 1995. He refused Leumi’s request. After identifying the documents which he had considered, he set out his reasons:
“The reasons put forward by Bank Leumi for its request to the ASC are that, as a Swiss bank, it is subject to Swiss Secrecy Regulations and it would infringe applicable Swiss law by providing the ASC with the statement required by the ASC’s secondary notices given to it in April 1995.
I am not satisfied that the reasons put forward by Bank Leumi constitute “special reasons”, within the meaning of subs721(2) of the Corporations Law, why the information required by the secondary notices given to it in April 1995 should not be given to the ASC. Accordingly Bank Leumi’s request is refused.
In making this decision I have determined that, on balance, upholding the objects of Pt6.8 of the Corporations Law in maintaining an informed market in shares listed on Australian stockmarkets – which objects could be defeated if the reasons put forward by Bank Leumi constituted “special reasons” under subs721(2) of the Corporations Law – outweigh both considerations of international comity in this instance and the possibility that as an indirect consequence of my so finding the Court may, in its discretion, make orders which vest the shares in persons or bodies other than the current beneficial owners of the shares.”
This decision was notified to the Australian solicitors acting for Leumi on 6 September 1995.
THE SECOND SECONDARY NOTICE TO LEUMI
On 6 October 1995, the ASC sent a further secondary notice to Leumi, by means of a letter delivered to Leumi’s Australian solicitors. The solicitors responded by making a written request pursuant to s721(1) of the Corporations Law, on behalf of Leumi. The request was that the information sought, except as to 80,000 shares which Leumi held as principal, should not be given, as to do so would contravene art.47 of the Swiss Federal Law on Banks and Savings Banks (“Swiss Banking Law”) and art.271 of the Swiss Penal Code. In support of the request, the solicitors referred to the evidence of Dr Schurmann filed in the proceedings. The letter noted that the information sought in relation to 80,000 shares beneficially owned by Leumi, had already been provided to the ASC. On 13 October 1995, the delegate of the ASC, Mr Goldie, refused the request. That refusal is not in issue in the present proceedings.
LEUMI’S APPLICATION TO THE ADMINISTRATIVE APPEALS TRIBUNAL
On 16 October 1995, Leumi applied to the Administrative Appeals Tribunal (“AAT”) for review of Mr Goldie’s decision of 13 October 1995. On 3 November 1995, Leumi applied to the AAT under s29(7) of the Administrative Appeals Tribunal Act 1975 (Cth) for an extension of time to make an application to challenge Mr Goldie’s decision of 5 September 1995 to refuse relief under s721(1) of the Corporations Law. Leumi’s applications have not yet been determined by the AAT.
SECONDARY NOTICE TO EBC
On 18 April 1995, the ASC prepared a secondary notice, addressed to EBC at its address in Switzerland. The covering letter was in the same terms as that to Leumi, the terms of which are set out earlier in this judgment. The notice itself followed Form 609 and, except for the details of the voting shares held by EBC, was identical to the notice sent to Leumi. The notice did not include a reference to the 162,437 shares in OAP held by BB Nominees on behalf of EBC. The notice was signed by Mr Dumas, as the delegate of the ASC.
On 20 April 1995, at 4.41pm, Australian Eastern Standard time, Mr Blackwell of the ASC faxed the covering letter and the secondary notice to EBC at its fax number in Zurich. On the same day, Mr Blackwell sent the secondary notice and the covering letter to EBC at its Zurich address by international courier. The notice and letter were duly delivered to EBC’s offices in Zurich on 24 April 1995.
On 20 April 1995, the ASC issued a second notice relating to the parcel held by BB Nominees. The covering letter and the notice were, in substance, in the same form as the first notice. The documents were forwarded by the ASC to Switzerland by international courier and were delivered to EBC’s officer in Switzerland on 24 April 1995. The covering letter and the notice were also faxed to EBC in Switzerland at 11.41am Australian Eastern Standard Time on 26 April 1995.
EBC’S RESPONSES
On 21 April 1995, EBC sent a fax to the ASC, as follows:
“We acknowledge the receipt of your fax of 20 April 1995.
Due to Swiss secrecy regulations we cannot, however, provide the requested details about the ownership of subject shares.”
On 26 April 1995, the ASC responded to EBC’s fax. The ASC’s response stated, as it had in its letter to Leumi, that it did not accept that “Swiss Secrecy Regulations” were sufficient reason not to comply with the secondary notice. The ASC advised that unless a satisfactory response was received by 28 April 1995, the ASC intended to apply to the Federal Court to enforce compliance.
On 28 April 1995, EBC faxed the ASC to advise that Mr Fundulus, who was handling the matter, was away and would respond shortly to the ASC’s fax of 26 April 1995. On 3 May 1995 Mr Fundulus faxed the ASC to advise that “we are contacting clients from all around the world to get instructions and require another fourteen days to get back to you”.
On 11 May 1995, EBC’s Australian solicitors held a meeting with the ASC. On that date the solicitors advised the ASC that EBC was prepared to consent to an order that the relevant shares be sold on terms acceptable to the ASC. Since EBC maintained that it was a bare trustee in relation to the shares, I infer (as Mr Conti accepted that I should) that EBC made this offer on instructions from the beneficial holders of the shares. A similar open offer was made by EBC on 13 June 1995. It was common ground that EBC has not provided the ASC with the information sought in the secondary notices.
THE ASC’S DECISION IN RELATION TO EBC
The ASC’s position was and is that EBC’s fax of 21 April 1995 did not constitute a request by EBC pursuant to s721(1) of the Corporations Law, that it should not be required to give the requested information to the ASC. However, the ASC took an approach to EBC’s letter similar to that which it took in relation to Leumi’s faxed letter of 27 April 1995. Mr Goldie was asked to make a decision under s721, on the unadmitted assumption that the faxed letter of 21 April 1995 constituted a request for the purpose of s721(1) of the Corporations Law.
On 22 June 1995, after the commencement of these proceedings, the ASC wrote to EBC’s Australian solicitors, inviting them to identify any request made pursuant to s721(1) of the Corporations Law, and to make any submissions that it alleged should be taken into account by the ASC in making a decision in any such request. On 27 June 1995, the solicitors responded by identifying the letter of 21 April 1995 as the request. The solicitors made the following submissions:
“(iv) The provisions of the Swiss Secrecy Regulations and in particular Articles 271 and 273 of the Swiss Penal Code, that our client would breach these provisions if it were to comply with the secondary notices and accordingly ought not to be required to provide the information sought by the secondary notices.” On 4 July 1995, the ASC sought further details from EBC’s solicitors of the provisions of Swiss law relied on by them in seeking exemptions from the ASC. The letter also asked whether EBC had advised the persons on whose behalf EBC held the shares specified in the notices and whether EBC had requested their consent to compliance with the notices. There appears to have been no response to this letter.
Mr Goldie gave his decision in writing, refusing the request, on 5 September 1995. His reasons were, in substance, the same as those given by him in relation to the (assumed) request by Leumi. On 6 September 1995, the ASC notified EBC of Mr Goldie’s decision.
THE TAKE-OVER OFFERS
Since these proceedings were commenced, a series of unconditional offers has been made for the shares in OAP.
On 13 October 1995 Fobiti lodged a Part C Statement with the Australian Stock Exchange in relation to all ordinary shares in OAP. Fobiti, which is a wholly owned subsidiary of Kalamazoo Holdings Ltd, offered the sum of $ 2.30 per share cum dividend, or $ 2.215 per share ex dividend. The Part C Statement recorded that, immediately before the announcement of the offer, Fobiti held 1.29 per cent of the OAP shares on issue. The offer was said to be open until 29 November 1995, unless extended. The directors of OAP recommended acceptance of this offer and indicated that, in the absence of a higher bid, they intended to accept the offer for their own shareholdings.
On 14 November 1995 Arklow, a subsidiary of The Independent Print Media Group Pty Ltd, lodged a Part C Statement in relation to all ordinary shares in OAP. Arklow offered the sum of $ 2.40 per share ex dividend. At the date of the announcement of Arklow’s offer, it was entitled to 1.6 per cent of the issued capital in OAP. The offer was expressed to be open until 28 December 1995, unless extended. The directors of OAP have now recommended acceptance of this offer, in the absence of any higher bid.
On 17 November 1995 Fobiti increased its offer to $ 2.60 per share ex dividend and extended the offer until 29 December 1995.
III THE LEGISLATION INFORMATION AS TO BENEFICIAL OWNERSHIP: PT6.8
Pt6.8 of the Corporations Law sets out procedures designed to enable the ASC, or a listed company, to ascertain details of beneficial shareholdings in the company. S718(1) allows the ASC to “give to the holder of particular voting shares in a company a primary notice in relation to those shares”. A company may also issue its own primary notice: s718(4). A primary notice is one addressed to the holder of the shares requiring the holder to give a written statement setting out, inter alia, so far as is known to the holder, full particulars of every other person having a “relevant interest” in the shares and the circumstances because of which that person has the interest: s717. I refer in more detail to the concept of “relevant interest” when dealing with the substantial shareholder provisions, contained in Pt6.7 of the Corporations Law.
S719(1) provides for the ASC to give a secondary notice:
“719(1) Where the Commission receives, pursuant to a primary notice or secondary notice given to a person in relation to particular shares in a company, information that:
(a) another person has a relevant interest in any of the shares; or
(b) another person has given relevant instructions in relation to any of the shares;
the Commission:
…
(d) otherwise; may
give to the other person a secondary notice in relation to the first-mentioned shares.”
A secondary notice is defined in s717 as follows:
“‘secondary notice’, in relation to shares in a company, means a written notice addressed to a person requiring the person to give to the body giving the notice a written statement setting out:
(a) full particulars of any relevant interest that the person has in any of the shares and of the circumstances because of which the person has that interest; and
(b) so far as is known to the person:
(i) full particulars of the name and address of every other person (if any) who has a relevant interest in any of the shares;
(ii) full particulars of each such interest, and of the circumstances because of which the other person has that interest; and
(iii) full particulars of the name and address of each person (if any) who has given to the person to whom the notice is addressed relevant instructions in relation to any of the shares and of those relevant instructions, and the date on which those relevant instructions were given.”
“Relevant Instructions”, in relation to shares, is defined by s717 to mean:
“instructions or directions:
(a) in relation to the acquisition or disposal of the shares;
(b) in relation to the exercise of any voting or other rights attached to the shares; or
(c) in connection with any other matter relating to the shares;”
The ASC is empowered to provide information received pursuant to a primary or secondary notice to the company whose shares are the subject of the notice: s720.
S721 was the subject of argument in the present case. It provides as follows:
“721(1) A person who receives a primary notice or secondary notice in relation to shares in a company may, before the end of 2 business days after the day on which the notice was received, lodge a written request that, for special reasons set out in the request:
(a) the information should not be given to the body that gave the notice;
(b) if the Commission gave the notice – the information, if given to the Commission, should not be provided under s720, or should be so provided only in a particular form; or
(c) if the company gave the notice – the information should only be given to the company in a particular form.
(2) Where the Commission is satisfied that there are special reasons why:
(a) particular information should not be given to the body that gave the notice;
…
the Commission may give to the person a certificate referring to the information and stating that:
…”
If the ASC refuses the request, the person making it must comply with the notice within two business days of being notified of the refusal: s723(b).
The duty of the person receiving a notice is dealt with in s722:
“722(1) A person who receives a primary notice or secondary notice in relation to shares in a company shall, unless before the end of 2 business days after the day on which the person receives the notice the person lodges a request under subs721(1) in relation to particular information that the notice requires the person to give, comply with the notice before the end of 2 business days after that day.”
Where a person has contravened s722 or s723 in relation to a notice given to the person under s718 or s719, s742(2) applies. S742(2) provides that, on the application of the ASC (among others):
“the Court may make in relation to any of the shares such order or orders as it thinks just, including, but without limiting the generality of the foregoing:
(d) a remedial order; and
(e) for the purpose of securing compliance with any other order made under this subsection, an order directing the company or any other person to do or refrain from doing a specified act.”
S613 provides that a “remedial order”, in relation to the Court, is a reference to any one or more of the following orders:
“(a) an order restraining the exercise of any voting or other rights attached to shares;
(b) an order directing a body corporate not to make payment, or to defer making payment, of any amount or amounts due from the body corporate in respect of shares;
(c) an order restraining the acquisition or disposal of, or of an interest in, shares;
(d) an order directing the disposal of, or of an interest in shares;
(e) an order vesting in the Commission shares or an interest in shares;
(f) an order directing a body corporate not to register the transfer or transmission of shares;
(g) an order that an exercise of the voting or other rights attached to shares be disregarded;
…”.
The powers of the Court under a “relevant provision” (including s741 and s742), are further dealt with in s744(7) and (8). Those sub-sections provide as follows:
“(7) Without limiting the nature of the orders that may be made by the Court under a relevant provision directing the disposal of, or of an interest in, shares in a company, such an order may include one or more of the following provisions:
(a) a provision that the disposal shall be made within such time and subject to such conditions (if any) as the Court thinks just, including, if the Court thinks fit, a condition that the disposal shall not be made to a particular person or persons or to a particular class or classes of persons;
…
(8) The Court may direct that, where a share or an interest in a share is not disposed of in accordance with an order of the Court under a relevant provision, the share or interest shall vest in the Commission.”
Where a share vests in the ASC by an order under a relevant provision or a direction under s744(8), the ASC may, subject to any directions of the Court, get in, sell or otherwise dispose of, or deal with, the share as it sees fit: s744(9)(a).
SUBSTANTIAL SHAREHOLDINGS PROVISIONS: PT6.7
The substantial shareholdings provisions are contained in Part 6.7 of the Corporations Law. A person who is a “substantial shareholder” in a company, including a company listed on a stock exchange, is required to give a written notice to the company in the prescribed form: ss.603, 709(1). A person is a substantial shareholder, relevantly, if the person is entitled to not less than 5 per cent of the voting shares in the company: s708(1),(4),(5). The notice must be given before the end of two business days after the day on which the person becomes aware of “the relevant interest or interests because of which the person is a substantial shareholder”: s709(4). The notice must state, inter alia, the prescribed particulars of the voting shares in the company in which the substantial shareholder or an “associate” of that person has a relevant interest or relevant interests: s709(3)(b).
A person is entitled to shares in a body corporate if that person has a “relevant interest” in the shares: s609(1)(a). The person is also entitled to shares if a person who is an “associate” of the first-mentioned person has a relevant interest in the shares: s609(1)(b). The “basic rule” is that a person who has power to vote in respect of a voting share, or who has power to dispose of a share, has a relevant interest in that share: s31; see also s30(2),(3). A relevant interest in a share is disregarded if the share is subject to a trust and the person has the relevant interest as a bare trustee: s39(b).
A reference to an “associate” of a person includes
(i) a person in concert with whom the primary person is proposing to act; or
(ii) with whom the primary person is, or proposes to become, associated in any other way, in respect of the matter to which the associate reference relates: s15(1). However, s16(1) provides that a person is not an associate of another by virtue of s15(1) merely because:
“(a) one gives advice to the other, or acts on the other’s behalf, in the proper performance of the functions attaching to a professional capacity or a business relationship;
(b) one, a client, gives specific instructions to the other, whose ordinary business includes dealing in securities, to acquire shares on the client’s behalf in the ordinary course of that business;
…”.
If a person who is already a substantial shareholder increases or reduces the shareholding in a particular class by more than 1 per cent of the shares in that class, a further notice must be given to the company within two days of the person becoming aware of the change: s710(1)(c),(4). A person who ceases to become a substantial shareholder must also give a notice to the company: s711(1),(4).
Where a substantial shareholder contravenes s709, s710 or s711, s741(1) provides that the Court, on the application of the ASC or the company, whether or not the contravention continues,
“may make such order or orders as it thinks just, including (without limiting the generality of the foregoing):
(a) a remedial order; and
(b) for the purpose of securing compliance with any other order made under this section, an order directing the company or any other person to do or refrain from doing a specified act.” “Remedial order” has the meaning given by s613, to which reference has already been made.
POWER TO EXCUSE CONTRAVENTIONS S743 confers power on the Court to excuse contraventions.
“743(1) Where a person has contravened a provision of this Chapter and, on application by any interested person, the Court is satisfied that, in all the circumstances the contravention ought to be excused, the Court may make an order declaring any act, document or matter not to be invalid because of the contravention and to have effect, and at all times to have had effect, as if there had been no such contravention.
(2) If the Court is satisfied that in all the circumstances a contravention of s709, s710, s711, s722 or s723 ought to be excused, the Court shall not make an order under s741 or s742, as the case may be, other than:
(a) an order restraining the exercise of voting or other rights attached to shares; or
(b) an order that an exercise of voting or other rights attached to shares be disregarded.
(3) The circumstances to which the Court may have regard in deciding whether or not a contravention of a provision by a person ought to be excused include the contravention having been due to the person’s inadvertence or mistake, to the person not having been aware of a relevant fact or occurrence or to circumstances beyond the control of the person.
(4) This section applies notwithstanding anything contained in any other provision of this Chapter.”
The Court is not to make an order under s741, s742 or s743 “if it is satisfied that the order would unfairly prejudice any person”: s744(2). EXTRATERRITORIAL OPERATION OF THE CORPORATIONS LAW
S110D of the Corporations Law provides for the extraterritorial operation of some Chapters, including Chapter 6.
“110D Chapters 1 to 6, inclusive, and 9, apply, according to their tenor, in relation to:
(a) natural persons, whether resident in this jurisdiction or in Australia or not and whether Australian citizens or not; and
(b) all bodies corporate and unincorporated bodies, whether formed or carrying on business in this jurisdiction or in Australia or not; and
(c) acts and omissions outside this jurisdiction, whether in Australia or not.”
SERVICE OF NOTICES
S719(1), the terms of which were set out earlier, provides for the ASC to “give…a secondary notice in relation to shares”. The service of documents is further addressed in s109X and s109Y of the Corporations Law. Both are within Chapter 1 of the Law and are therefore to be applied in accordance with s110D.
The sections are as follows:
“109X(1) For the purpose of any provision of this Law that requires or permits a document to be served on a person, whether the expression “serve”, “give” or “send” or any other expression is used, the document may be served:
(a) …
(b) on a body corporate other than:
(i) a company; or (ii) a recognised company; or (iii) a registered body;
by leaving it at, or sending it by post to, the head office, a registered office or a principal office of the body corporate.
(2) Nothing in subs(1):
(a) affects the operation of any other provision of this Law or any other law of the Commonwealth or of this or another jurisdiction that authorises the service of a document otherwise than as provided in that subsection; or
(b) affects the power of a court to authorise service of a document otherwise than as provided in that subsection.
109Y Where a provision of this Law authorises or requires any document to be served by post, whether the expression “serve” or the expression “give” or “send” or any other expression is used, then:
(a) the service is taken to be effected by properly addressing and posting (under pre-paid post) the document as a letter to the last known address of the person to be served; and
(b) unless the contrary is proved, the service is taken to have been effected at the time at which the letter would have been delivered in the ordinary course of post.”
The definitions (s9), defines the terms “body corporate”, “company”, “recognised company” and “registered body”, all of which are used in s109X(1)(b). The result is that s109X(1)(b) applies to a corporation incorporated outside Australia and which is not registered (pursuant to Pt4.1, Div.2 of the Corporations Law) as a foreign company carrying on business in Australia.
IV THE ISSUES The parties raised a very large number of issues. These can be summarised in the following list of questions:
* Were Leumi and EBC obliged to comply with the secondary notices, having regard to the secrecy provisions of Swiss law?
* Was service of the secondary notices on Leumi and EBC in Switzerland authorised by the Corporations Law, having regard to the provisions of Swiss law governing service of documents in Switzerland?
* Was service of the secondary notices by fax authorised by the Corporations Law?
* Were the secondary notices invalid by reason of any pre- judgment of issues by the ASC?
* Did the ASC fail to consider properly requests made by Leumi and EBC under s721 of the Corporations Law?
* Did Leumi and/or EBC contravene the substantial shareholder provisions of the Corporations Law?
* Should Leumi and/or EBC be excused from any contra-ventions, by reason of s743 of the Corporations Law?
* Assuming Leumi and EBC have contravened the Corporations Law, what relief should be granted to the ASC? Some of these questions, in particular the first two, depend to some extent on findings as to Swiss law. Accordingly, I shall deal at the outset with the expert evidence relating to Swiss law. I shall then turn to each of the questions identified above.
V THE EXPERT EVIDENCE THE EXPERT WITNESSES
The general principle, prior to the introduction of the Evidence Act 1995 (Cth), was that foreign law could be provided only by the evidence of appropriately qualified experts: PE Nygh, Conflict of Laws in Australia (6th ed. 1995), 269. This principle has been qualified by s174 and s175 of the Evidence Act 1995. S174 permits evidence of the statutes, proclamations, treaties or acts of state of a foreign country to be adduced by producing official publications or other reliable sources of information. S175(1) permits evidence of unwritten or common law to be adduced by producing books which contain reports of court judgments (if that book would be used in the country itself). S175(2) allows evidence of the interpretation of statutes to be adduced by producing similar materials.
In the present case, the ASC, Leumi and EBC each adduced evidence, in the form of affidavits and reports, from experts in Swiss law. None of the experts was cross-examined. To the extent that there are differences in their views, it is necessary to resolve them by assessing the comparative qualifications and experience of the experts and by considering their reasoning in the light of the materials on which they relied.
Mr Lindsay read affidavits and reports prepared by Mr Wehrli, a lawyer practising in a private firm in Geneva. Mr Wehrli has comparatively limited experience, having been admitted to the Geneva bar in 1988 and having earned an LL.M. in international banking in 1990 from Boston University. Mr Wehrli’s areas of expertise include criminal and banking law, as well as “international mutual assistance”.
Mr White relied on affidavits and reports from Dr Schurmann, a senior partner in a Zurich firm of lawyers. Dr Schurmann became a member of the Zurich bar in 1972, after obtaining a Ph.D. in law. His areas of expertise include corporate and banking law and he is a member of a number of professional associations. Dr Schurmann clearly has extensive experience in the practice of banking law in Switzerland.
Mr Conti read affidavits and reports prepared by Dr Nobel, a Professor of Civil, Trade and Commercial law at the University of St Gallen, Switzerland. Dr Nobel received a doctorate for a thesis in law in 1974. He has sat as a substitute judge of the Superior Court and the Court of Commerce of the Canton of Zurich over a period of ten years. Dr Nobel has taught at a number of Universities and published widely in the field of Swiss Banking and Finance Law. Dr Nobel’s qualifications are impressive, and he, too, has considerable experience as a commentator and judge in the field of Swiss banking law.
In my view, Dr Schurmann and Dr Nobel have rather more impressive qualifications and greater experience in banking law than does Mr Wehrli. This factor cannot be conclusive in resolving any conflict in their evidence; plainly it is necessary to assess the reasoning process and the materials relied upon by each expert. In this respect it will be seen that I have not found Dr Schurmann’s evidence to be especially helpful on some aspects of Swiss law. However, some weight should be attached to the respective qualifications and experience of the experts.
SWISS LAW
All experts agreed that the provisions of Swiss law relevant to the present proceedings were arts. 271 and 273 of the Swiss Penal Code and art.47 of the Swiss Banking Law. An English translation of these provisions as provided by Mr Wehrli, is as follows:
“Article 271 of the Swiss Penal Code
1. Any person who, without authorization, carries out, on Swiss territory, actions which fall within the province of the public authorities, [and] any person who carries out such acts for a foreign State, individual, or organisation, [and] any person who sanctions such acts, shall be punished by imprisonment or, in serious cases, reclusion.
2. Any person who uses violence, deception or threats to force a person onto foreign territory in order to deliver said person to a foreign authority, individual or organisation, or to put said person’s life or bodily integrity in danger, shall be punished by reclusion.
3. Any person who provides for such a delivery shall be punished by reclusion or imprisonment.”
“Article 273 of the Swiss Penal Code
Any person who tries to discover a manufacturing or business secret in order to give it to a foreign government or individual, or to a foreign company, or to the agents of any of the above, [and] any person who gives a manufacturing or business secret to a foreign government or individual, or to a foreign company, or to the agents of any of the above, shall be punished by imprisonment or, in serious cases, by reclusion. The judge may also demand payment of a fine.”
“Article 47 of the Swiss Federal Law on Banks and Savings Banks
1. Whoever divulges a secret entrusted to him or of which he has become aware in his capacity as officer, employee, mandatory, liquidator or commissioner of a bank, as representative of the Banking Commission, officer or employee of a recognised auditing company and whoever tries to induce others to violate professional secrecy, shall be punished by imprisonment for not more than six months or by a fin[e] of not more than CHF50,000.
2. If the act has been committed by negligence, the penalty shall be a fine not exceeding CHF30,000.
3. The violation of professional secrecy remains punishable even after termination of the official or employment relationship or the exercise of the profession.
4. Federal and cantonal regulations concerning the obligation to testify and to furnish information to a government authority shall apply.” Dr Nobel stated that, in ordinary cases, the maximum penalty for breach of arts. 271 and 273 was three years’ imprisonment. However, he expressed the view that it was unlikely that such a term would ever be imposed, although other consequences, such as loss of a dealer’s licence, could follow for a person convicted.
ARTICLE 273
Dr Schurmann attached to one of his reports a memorandum prepared by the Office of the General Attorney of Switzerland in 1986. That memorandum identified several goals pursued by art.273 of the Swiss Penal Code.
“It is designed, first of all, to protect Switzerland from infringements upon its sovereignty resulting from direct gathering of information or from denounciations [sic.] to a foreign addressee on the one hand, and from disclosures of information compelled by foreign authorities, on the other. Furthermore, it is designed to protect the Swiss economy, which is affected as such whenever persons or companies falling under the jurisdictional scope of Article 273 are the object of such inquiries. The Swiss Supreme Court has repeatedly emphasised that violating or endangering private business secrets also impairs the interests of the Swiss economy. Thus, the protection of the economic interests of companies affected constitutes indirectly also one of the basic aims of this penal norm. Where extensive information is sought by foreign courts or administrative bodies outside of the established framework of judicial assistance pursuant to international treaties and Swiss law, the disclosure sought may well conflict with the purposes of Article 273.”
The memorandum also states that the interests of foreigners are protected by art. 273 against disclosure only if they are so intertwined with the interests of Switzerland as to be “inseparable”. On this basis, Mr Wehrli expressed the view that if the shares in OAP held by Leumi and EBC were held on behalf of persons domiciled outside Switzerland (as he thought was likely to be the case), the interests of those persons would not have sufficient contact with Switzerland to attract the operation of art.273 in the event of an unauthorised disclosure. In his view, the mere fact of having a banking or business relationship with a Swiss bank or company is generally not considered to create a sufficient link with Switzerland to affect Swiss sovereign interests in the Swiss economy.
Accordingly, although Mr Wehrli accepted that the Swiss courts and authorities had taken a broad view of the phrase “business secret”, he did not think that art.273 would protect the interests of non-Swiss domiciliaries for whom Swiss corporations held shares in an Australian company. By implication, as I read his evidence, Mr Wehrli accepted that, if the Swiss corporations held shares in an Australian company on behalf of a party domiciled in Switzerland, there could be sufficient connection with Switzerland to attract art.273. In these circumstances, a disclosure of the Swiss domiciliary’s beneficial interest, without the authorisation of the domiciliary, would breach art.273.
Dr Schurmann’s opinion was that a Swiss bank (and presumably a non-bank Swiss corporation) “may be found to violate” art.273 if it surrenders substantial information regarding its customers to foreign authorities, without a formal request for assistance being made to Swiss authorities. However, this conclusion was not justified by a substantial process of reasoning, and I have not found it particularly helpful.
Dr Nobel expressed the opinion that there is a sufficient connection with Switzerland, for the purposes of art.273, if a disclosure of a business secret affects an owner of the secret who is domiciled in Switzerland. If the owner is not so domiciled, the question is whether the owner of the secret is regarded by Swiss law as having a “legitimate interest” in maintaining its secrecy. Dr Nobel considered that the question was not certain, because Swiss courts had not ruled on the situation and the information sought by the notices was directed to “private economic interests” in a company incorporated outside Switzerland. Dr Nobel observed that art.273 “was implemented to protect manufacturing or business secrets which, in the national economic interest of Switzerland require protection”. However, he thought that there was a “risk”, because of the uncertainty, that EBC would breach art.273 if it supplied the information sought by the notices without the consent of clients.
In his second report, Dr Nobel was more definite in his opinion. He expressed the view that there is a “real and appreciable risk of liability” for EBC’s officers, employees and agents, should EBC comply with the notices. He supported this conclusion by referring to the works of legal scholars, who have argued that art.273 is attracted if a secret is physically “materialised” in Switzerland. Dr Nobel expressed the view that, if a corporation like EBC holds foreign shares for foreign domiciliaries, the secret is “materialised” in Switzerland. Unfortunately, the authorities referred to by Dr Nobel (mostly in German or French) were not adduced in evidence, so that it is difficult to assess whether his characterisation of EBC’s arrangements is supported by the literature. It is also relevant that Dr Nobel stressed the importance to a Swiss corporation of not giving any reason for suspicion that the criminal law might have been violated. Dr Nobel pointed out that media reports could be very harmful. This reasoning rather suggests a concern, not so much with the likelihood of a successful prosecution, but with the harmful effects of an investigation, whatever its outcome.
I accept Dr Nobel’s evidence that, if EBC provides to the ASC the information sought in the secondary notices, there is “real and appreciable risk” that a Swiss court would find that art.273 applies to EBC’s officers, employees and agents, at least where EBC holds the shares in OAP for a Swiss domiciliary. I also accept that there is also a small risk that a Swiss court would find that art.273 applies to a disclosure by EBC without the consent of its clients, where EBC holds the shares in OAP for non-Swiss domiciliaries. However, having regard to the views expressed by Mr Wehrli and to Dr Nobel’s reasoning, I think that that risk is significantly less than where the beneficial owner of the shares is a Swiss domiciliary. I do not accept that it is accurately described as a “real and appreciable” risk.
The experts did not suggest that Leumi’s circumstances are materially different from those of EBC, so far as the application of art.273 is concerned. Accordingly, I find that Leumi’s position in relation to art.273 is the same as EBC’s. All the experts agreed that a Swiss corporation, and its officers, employees and agents would not be exposed to liability under art.273 if the client consented to or authorised disclosure of the information. I accept this evidence.
ARTICLE 271
Mr Wehrli acknowledged that the purpose of art.271 of the Swiss Penal Code is to protect Swiss sovereignty and that the service of process is an act of State that can be executed in Switzerland only by a Swiss authority. However, in his view, art.271 does not apply to the service of notices which do not include any threat of sanction. Mr Wehrli observed that the secondary notices issued by the ASC did not contain an explicit threat of sanctions. Although Mr Wehrli did not say so expressly, I infer that his view is that service of the notices on Leumi or EBC, whether by fax or courier, did not violate art.271. Dr Schurmann considered the applicability of art.271 only in relation to the service of a notice to answer interrogatories, where the notice is issued in the course of Australian proceedings. (A question relating to interrogatories arose at one stage in these proceedings but is no longer relevant.) I do not think that Dr Schurmann’s observations on this issue can be readily applied to the secondary notices.
Dr Nobel, in his first report, expressed the view that art.271 extends to the act of serving documents in order to enforce a law. Moreover, a foreign regulatory authority which sends a notice requiring information to a Swiss corporation commits an act for which a “public authority is competent”, within the meaning of art.271. Accordingly, in his view, the employees or agents of the ASC who sent the secondary notices to Switzerland by fax or courier, had breached art.271. He also considered that any officers, employees and agents of EBC who provided information to the ASC in answer to the notices illegally served “could be held in breach of [art.271] as aiders and abetters” of the breach by the ASC’s employees and agents. Dr Nobel pointed out that Swiss courts had adopted a broad interpretation of aiding and abetting, although he acknowledged that the matter had not been considered by the Swiss courts in the context of persons answering notices of the kind involved in the present case.
In his second report, Dr Nobel expressly disagreed with Mr Wehrli’s view that the secondary notices would not be regarded as having a legal effect on the recipients. Dr Nobel’s view was that any kind of legal effect, including those imposed by Australian law, would be enough.
On the question of whether the notices contain a threat of sanctions, I think that Dr Nobel’s analysis is more convincing than that of Mr Wehrli. I think, however, that there is a real question as to whether persons sending a fax transmission (“fax”) from Australia to Switzerland “[carry] out, on Swiss territory, actions which fall within the province of the public authorities”, within the meaning of art.271. Neither Dr Nobel nor Mr Wehrli specifically addressed this issue, although Mr Wehrli did not appear to disagree with the proposition that the sending of a fax was within art.271. However, this may well be because his attention was not directed to the issue.
I find that service of the secondary notices on Leumi and EBC by courier in Switzerland was likely to have breached art.271 of the Swiss Penal Code. Doing the best I can with the material available to me, I find that there was a risk that service of the secondary notices on the Swiss corporations, by means of faxes sent from Australia to Switzerland, breached art.271. However, the risk of a prosecution succeeding under Swiss law in such circumstances is significantly less than in the case of service of documents effected in Switzerland by courier. I also find that there is some risk that Leumi and EBC, and their officers and agents, would contravene art.271, as aiders and abetters of any breaches of art.271 by the ASC and its agents, if Leumi and EBC complied with the secondary notices. However, it is necessary to have regard to the lack of authoritative guidance on this issue under Swiss law and the rather general character of Dr Nobel’s reasoning on this point. I think that the risk of a prosecution based on aiding and abetting, although not fanciful, cannot be described as real and appreciable. If the disclosure to the ASC were made with the authority of the clients of Leumi and EBC, I think that the risk of prosecution of the Swiss corporations, or their servants or agents, as aiding and abetting any contravention by the ASC of art.271, is not appreciable.
ARTICLE 47 OF THE BANKING LAW
Article 47 of the Swiss Banking Law applies only to Leumi, since EBC is not a bank. The only evidence on the application of art.47 was given by Dr Schurmann and Mr Wehrli. As I read their evidence, there was no substantial disagreement between them on the scope of art.47. The following emerges from their evidence.
Article 47 was primarily enacted to protect the private interest of investors and other clients, as well as the interests of a sound and efficient financial market. It applies to all Swiss banks, as well as branches of foreign banks in Switzerland. Article 47 applies regardless of the domicile of customers. Article 47 does not prevent a Swiss bank from seeking or obtaining the consent of persons to whose behalf they hold shares to divulge information of the kind sought in the secondary notices. Nor does it prevent the person on whose behalf the shares are held from instructing the bank to comply with the notices. However, under Swiss law, there is no obligation on the bank to seek the customer’s approval for the disclosure of information. If the bank does not receive consent to the information being divulged to a foreign regulatory authority it would be a breach of art.47 for the bank to divulge the information.
Mr Wehrli and Dr Nobel disagreed as to whether Swiss banks follow a practice of requesting customers in advance for a waiver to permit answers to be given to questions raised by foreign regulators. On the evidence I cannot find that there is any such general practice.
VI. WERE LEUMI AND EBC OBLIGED TO COMPLY WITH THE SECONDARY NOTICES, NOTWITHSTANDING THAT COMPLIANCE PLACED THEM AT RISK OF VIOLATING SWISS LAW?
BACKGROUND
Leumi and EBC argued that they were not obliged to comply with the secondary notices issued by the ASC, since compliance would expose them to the risk of contravening the secrecy provisions contained in art.273 of the Swiss Penal Code and art.47 of the Swiss Banking Law. This argument was based on the proposition that s722 of the Corporations Law, which imposes a duty on a person receiving a secondary notice to comply with that notice within two business days, was not intended to apply to a foreign corporation which can comply with the secondary notice only at the risk of contravening the law of a friendly foreign country.
Leumi and EBC also submitted that service of the secondary notices on them, whether by fax or by courier, was not authorised by s719 of the Corporations Law. This was because giving the notice in this fashion (so it was said) contravened art.271 of the Swiss Penal Code and s719 did not contemplate that the ASC could serve a notice on a foreign corporation in breach of foreign law.
These issues are interconnected, since they each depend on the construction of Pt6.8 of the Corporations Law, having regard to principles of international comity. It is, however, convenient to commence with the argument that Leumi and EBC were not obliged to comply with the secondary notices because they would be at risk of contravening Swiss law.
In putting this argument, both Leumi and EBC commenced with the proposition that disclosure of the information sought in the secondary notices would infringe Swiss law. The findings I have made suggest that the position is not quite as clear-cut as this. A distinction must be drawn, so far as art.273 of the Swiss Penal Code is concerned, between customers of Leumi and EBC who are Swiss domiciliaries and those who are not. Moreover, art.47 of the Swiss Banking Law applies only to Leumi and not EBC. I shall deal with the argument on this issue on the assumption that disclosure of the information sought in the secondary notices would place Leumi and EBC at a real and appreciable risk of contravening Swiss law.
PRINCIPLES OF CONSTRUCTION
The approach to the construction of legislation said to breach international law or principles of international comity was not in dispute between the parties. As Latham CJ said in Polites v The Commonwealth (1945) 70 CLR 60, at 69:
“every effort should be made to construe Commonwealth statutes so as to avoid breaches of international law and of international comity.”
See, also, at 77, per Dixon J, at 80-81, per Williams J; Minister for Immigration and Ethnic Affairs v Teoh (1995) 69 ALJR 423, at 430, per Mason CJ and Deane J; at 447, per McHugh J. However, as the Chief Justice observed in Polites, the Commonwealth Parliament has power to legislate in breach of international law, taking the risk of international complications, if it wishes to do so: Polites, at 61; Chu Kheng Lim v Minister for Immigration (1992) 176 CLR 1, at 65, per McHugh J. It was not suggested by any party that these principles did not apply to the Corporations Law which is a law in force in the Australian Capital Territory, and applied to each State by the Corporations Act of each State. Territorial supremacy is an established principle of international law: Oppenheim’s International Law, eds. R Jennings and A Watts (9th ed, 1992), at 458. Thus, under international law, a sovereign power is bound to respect the subjects and the rights of all other sovereign powers outside its territory: The Queen v Jameson [1896] 2 QB 425, at 430. In accordance with the principle of construction to which I have referred, domestic legislation is generally presumed not to be intended to breach this principle: Meyer Heine Pty Ltd v China Navigation Co Ltd (1965) 115 CLR 10, at 23-24, per Kitto J.; Attorney-General of New Zealand v Ortiz [1984] 1 AC 1, at 19, per Lord Denning MR. However, the presumption is rebuttable and its strength will depend upon the subject matter of the legislation: Air-India v Wiggins [1980] 1 WLR 815 (HL), at 820-821, per Lord Scarman.
It follows that the presumption that legislation operates territorially can be rebutted by explicit language stating that the legislation is to have effect in the territory of another country. It can be rebutted, even without explicit language, as illustrated by Re North Broken Hill Holdings Pty Ltd (1986) 10 ACLR 270 (S Ct Vic/Fullagar J), a case concerned with s261 of the Companies (Vic.) Code 1981, the forerunner to the provisions now contained in Pt6.8 of the Corporations Law. Fullagar J held that the word “person”, as used in s261, applied to a Swiss corporation, neither registered nor carrying on business in Australia. His Honour considered (at 282) that a more restrictive interpretation would “set at nought” the elaborate statutory machinery established by the Code, which was designed to promote an informed market for shares in public companies. (The decision was reversed by the Full Court, but on other grounds: Crosley Ltd v North Broken Hill Holdings Ltd [1987] VR 119 (S Ct Vic/FC).) This case should be compared with Arhill Pty Ltd v General Terminal Co Pty Ltd (1990) 23 NSWLR 545 (NSW S Ct/Rogers CJ Comm D), at 550-555. There Rogers CJ Comm D. refused to read a general rule of court, which permitted service outside the State of documents other than originating process, as authorising service of a subpoena on a Japanese company in Japan. His Honour took into account that service of the subpoenas would infringe Japanese sovereignty.
S110D of the Corporations Law explicitly states that Chapter 6 applies, according to its terms, to natural persons, whether resident in Australia or not, and whether Australian citizens or not. It also states explicitly that Chapter 6 applies to all bodies corporate, whether formed or carrying on business in Australia or not and to acts and omissions outside Australia. Leumi and EBC acknowledged that the express provisions of s110D of the Corporations Law rebut the presumption against extra-territorial operation of the legislation.
Leumi and EBC nonetheless contended that s110D is insufficient to rebut the presumption that Australian Parliaments in the interests of international comity, do not intend to create obligations on foreign corporations compliance with which would contravene the law of a friendly state. This presumption is based not merely upon the principles of territorial supremacy, but on the notion that Australian law will not compel the fulfilment of an obligation which requires something to be done which is illegal in another country: De Beeche v The South American Stores (Gath and Chaves) Ltd [1935] AC 148 (HL), at 156, per Viscount Sankey LC. The principle was applied by the House of Lords, in the context of an action to enforce a contract, in Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. In that case, as a matter of comity, the House of Lords declined to enforce a contract, which contemplated that jute bags would be shipped from India to South Africa, in violation of Indian law.
Clearly, very considerable caution must be exercised before construing legislation so as to impose duties on foreigners which create a risk that they may be required to contravene foreign law. Ultimately, however, the question is one of ascertaining the intention of the legislature by reference to the language used and the objects of the legislative scheme.
Sometimes the issue is specifically addressed in the local legislation. For example, s5(1) of the Trade Practices Act 1974 (Cth) extends some sections of the Act to conduct outside Australia by bodies corporate carrying on business in Australia. A claim for damages under s82 of the Act cannot, however, be made by reason of such conduct unless the Minister gives written consent: s5(3). The Minister must give consent unless, inter alia, “the law of the country in which the conduct concerned was engaged in required or specifically authorised” the conduct: s5(5)(a). If, however, the legislation does not address the issue specifically the question is whether, having regard to the presumption that legislation should be construed in accordance with principles of international law and comity, there is a sufficiently clear legislative content to impose duties on foreigners, even though compliance may require the foreigner to breach (or be at risk of breaching) foreign law.
The point is illustrated by a decision of the Supreme Court of the United States, Societe Internationale Pour Participations Industrielles et Commerciales, SA v Rogers 357 US 197 (1958). A Swiss corporation, Society Internationale, said to be closely associated with the German firm IG Farben, brought suit under the Trading with the Enemy Act to recover assets held by the Alien Property Custodian. Society Internationale sought to be relieved from orders for the production of documents, on the ground that disclosure of the required bank records would violate Swiss law. Indeed the Swiss Federal Attorney, taking the view that disclosure would violate art.273 of the Swiss Penal Code and art.47 of the Swiss Banking Law, confiscated the records. Harlan J, for the Court, held that the policies underlying the Trading with the Enemy Act justified the production order. In particular, the need to allow the US Government the opportunity to establish links between a claimant and enemy aliens supported the making of the order. To hold that the fear of punishment meant that Societe Internationale did not have “control” of the documents, would undermine Congressional policies and “invite efforts to place ownership of American assets in persons or firms whose sovereign assumes secrecy of records” (at 205).
Societe Internationale v Rogers has been regarded in the United States as establishing that the “blocking statute” of another country does not deprive an American court of the power to order a party subject to its jurisdiction to produce evidence, even though the act of production may violate the blocking statute: Societe Nationale Industrielle Aerospatiale v United States District Court for the Southern District of Iowa, 482 US 522 (1987), at 544, n.29.
PT6.8 OF THE CORPORATIONS LAW
In determining whether a foreign corporation must comply with s.722 of the Corporations Law, even if compliance involves a breach or risk of a breach of foreign law, it is necessary to consider the legislative scheme of which s722 is but one component. S722, of itself, is equivocal. It simply imposes a duty to supply information on persons who “receive” secondary notices. But s722 must be read with s110D. This section provides that Chapter 6 applies according to its tenor in relation to all bodies corporate, whether or not formed or carrying on business in Australia, and to acts and omissions, whether outside Australia or not. It is true that s110D does not specifically address the question of compliance by a foreign corporation with a secondary notice where compliance with the notice would contravene foreign law. Nonetheless, s110D evinces a legislative intend that the Corporations Law should apply to foreign corporations and to acts and omissions outside Australia. If read literally, s722 and s110D in combination impose a duty on a foreign corporation to comply with a secondary notice served outside Australia, even if compliance requires the corporation to take steps outside Australia.
But the question remains whether Pt6.8 in general and s722 in particular are intended to apply to foreign corporations, where compliance by them would nor might contravene the secrecy laws of another country. In answering this question assistance is derived from considering the objects of the legislative scheme embodied in Pt6.8. The forerunner to Pt6.8 was s261 of the Companies Code 1981, which in turn was based on s27 of the Companies Act 1976 (UK). S261 was amended in 1983 and s.261A was inserted into the Code at the same time. S261A, which was the predecessor of the current s742 of the Corporations Law, listed the powers of the court in the event of non-compliance with s261. (See generally JJ Hockley, “Beneficial Interests in Company Shares: Proposals for Reform of s261 and 261A of the Companies Act and Code” (1988) 6 Companies and Securities LJ 27.) The Explanatory Memorandum for the Companies and Securities Legislation (Miscellaneous Amendments) Bill 1983 set out the reasons for requiring disclosure under s261 (para371):
“Reasons for requiring disclosure. S261 forms part of the shareholding disclosure provisions of the , and is complementary to the substantial shareholdings disclosure provisions. There are several reasons why it may be important to ascertain the nature, extent and identity of the beneficial interests in the voting shareholdings (that are less than the substantial shareholdings threshold) in a listed public company:
(a) Lack of such knowledge may have an unsettling effect on the company and its operation as a result of uncertainty as to the identity and therefore intentions of significant voting shareholders.
(b) A party with a total beneficial interest in the voting shares less than 10 per cent [now 5%] of the issued voting shares may be in a position to covertly influence decision making or establish a basis from which to launch a takeover bid, without the company or other shareholders being aware of the situation.
(c) Members of the company have a legitimate interest in the control of the company, because the policies of those with influence within the company can significantly affect the value of each share and each shareholding.
(d) Disclosure may help identify possible instances of insider trading.
(e) Disclosure may act to better inform the public market. As stated by the Company Law Advisory Committee (Eggleston Committee) in its Second Interim Report:
“In the case of companies whose shares are traded on stock exchanges, shareholders are entitled to know whether there are in existence substantial holders of shares which might enable a single individual or corporation or small group, to control the destinies of the companies, and if such a situation does exist, to note who are the persons on whose exercise of voting power the future of the company may depend.” In Re North Broken Hill, Fullagar J (at 283) explained the purpose of s261 and s261A in these terms:
“The object of the legislature was to create and maintain an informed market for public company shares, and it regards the object as so important that it provides for drastic consequences ensuing (in the discretion of the court) upon any blocking of information even for three business days after a request. (In the days of radiotelegraphy and telex machines and internationally-dialled telephones, it is no surprise to find that the short notice applies to all corporations wherever situated, again subject, as regards consequences, to the very wide discretion of the court.)”
Earlier in his judgment (at 282), his Honour had said this:
“The purpose of the legislation in Div 4 of Pt5 of the Code is to promote an informed market for the shares in public companies, and to prevent substantial transactions on an uninformed market. A practical means adopted for effecting this purpose is to compel disclosure of ultimate control of purchased shares by compelling disclosure of all links in the chain between the purchaser on the record and the person who controls the shares purchased, and requiring registration of the facts disclosed. It would be contrary to this apparent purpose, and nothing short of absurd, if the elaborate machinery designed to achieve it could be set at nought by the mere subterfuge of inserting a foreign puppet company between the holder of the share and the citizen who in fact instigated their purchase and controlled them from the moment of purchase.”
On appeal, the Full Court cast no doubt on those observations. Indeed, the Full Court endorsed (at 136) Fullagar J.’s statement, that “the legislature deliberately chose a small and hair-pressure trigger for what is a very powerful and potentially destructive gun”. Fullagar J’s observations were cited with approval by the Full Court of the Supreme Court of Western Australia in Brunswick NL v Blossomtree Pty Ltd (1992) 7 WAR 226, at 234-235.
In my view, if a foreign corporation subject to secrecy laws was not bound to comply with secondary notices issued by the ASC in respect of Australian companies, the scheme of compulsory disclosure created by Pt6.8 is likely to be severely hampered, if not rendered unworkable. In Re North Broken Hill, Fullagar J remarked on the ease of international communications. Since his Honour made these observations, technological advances have made international communications and transactions even easier. It is a simple matter for any shareholder in an Australian corporation, including an Australian resident, to select as nominee a corporation located in a jurisdiction with stringent commercial secrecy laws.
In my opinion, Pt6.8 chooses to address the possible difficulties created by secrecy laws of other countries in a different way than that suggested by Leumi and EBC. The approach taken is to confer a discretion on the ASC and the Court to exempt foreign corporations (among others) from compliance with s722, or to excuse non-compliance. S721 allows a person who has received a secondary notice to lodge a written request that, for special reasons set out in the request, the information required by the notice should not be given. S743 empowers the Court to excuse a contravention of any of the provisions, inter alia, of Pt6.8.
Sections 721 and 743 do not, of course, necessarily have the effect of relieving a foreign corporation from the obligation imposed by Pt6.8 to comply with a secondary notice duly served upon it, even if compliance would infringe the secrecy laws of the country in which the corporation carries on business. But the sections allow a foreign corporation caught between the conflicting demands of two legal systems to apply to be exempt from compliance with the notices or to be excused for non- compliance. They also allow the ASC and the Court to take account of the particular circumstances of each case. It is both unrealistic and unduly rigid to assume that cases fall into one of two classes: those in which disclosure infringes foreign secrecy laws and those in which it does not. As the evidence in the present case shows, disclosure may involve a risk of prosecution that varies considerably, depending on the certainty or uncertainty of the legal position under foreign law and the attitude of the law enforcement authorities in another country. Similarly, the nature of any dilemma facing a foreign corporation caught between two legal systems can vary. In some cases the dilemma may arise by reason of circumstances completely beyond the corporation’s control. In others, the dilemma may have been occasioned by deliberate business practices adopted by the foreign corporation in relation to Australian securities, in full knowledge of the requirements of Australian law. In my view, s721 and s743 suggest that Parliament contemplated that questions of the kind raised in the present case should be resolved, not by limiting the reach of Pt6.8 of the Corporations Law, but by use of the flexible mechanisms established by these sections. I think that this conclusion is consistent with the direction in s109H of the Corporations Law that
“[i]n the interpretation of a provision of this Law, a construction that would promote the purpose or object underlying the law (whether that purpose or object is expressly stated in the Law or not) is to be preferred to a construction that would not promote that purpose or object.”
ENFORCEMENT AND PRESCRIPTION JURISDICTION
In the course of his detailed and helpful argument, Mr White distinguished between the jurisdiction of a state to enforce its laws and the jurisdiction to prescribe laws. He referred to Federal Trade Commission v Compagnie de Saint-Gobain-Pont-A-Mousson 636 F2d 1300 (1980), in which the Court of Appeals for the District of Columbia pointed out (at 1316) that, although a state’s prescriptive jurisdiction is not strictly limited by territorial boundaries, the enforcement jurisdiction by and large continues to be strictly territorial. The prescriptive jurisdiction may be exercised, with respect to conduct outside the United States, if the conduct has “substantial effect” within the United States: Restatement of the Foreign Relations Law of the United States, Third, vol.1, s402(1)(c). This is the case, for example, where actions in apparent violation of anti-trust laws take place outside the United States but have effects within that country.
The distinction drawn by Mr White is recognised as a matter of international law. However, it does not alter the fact that domestic legislation, as a matter of construction, can authorise the extraterritorial exercise of the enforcement jurisdiction. FTC v Saint-Gobain-Pont itself was concerned with purported service of a subpoena to France by an agency investigating possible anti-trust violations. The subpoena was served by registered mail. The Court held that this mode of service was not authorised by the governing legislation. But the decision was reached because no clear congressional intent could be discerned to authorise a mode of service other than the “customary and legitimate methods of compulsory service commonly employed by American courts” (at 1323). Had such an intent been discerned, a different result would have been reached (at 1315, 1324). The Court was also influenced by the fact that the FTC was attempting to exercise the enforcement jurisdiction of the United States before it had been established that prescriptive jurisdiction was available (at 1317) – that is, before it had been shown that a violation of the anti-trust laws of the United States, having effect in the United States, had taken place.
In the present case, the Commonwealth Parliament and the Parliament of New South Wales have prescriptive jurisdiction over shares held in an Australian corporation: Restatement Third, s402(1)(b) (the laws with respect to interests in things present within the territory); Williams and Humbert Ltd v W and H Trade Marks (Jersey) Ltd [1986] AC 368, at 428, 431; PE Nygh, Conflict of Laws in Australia (6th ed. 1995), 488-489. If it is correct to characterise Pt6.8 in general, and s722 in particular, as an exercise of the enforcement jurisdiction, it is taking place in circumstances where the legislatures enacting the scheme embodied in the Corporations Law do have prescriptive jurisdiction. The circumstances are therefore different from those in issue in FTC v Saint-Gobain-Pont.
ATTORNEY-GENERAL v HEINEMANN
Mr Lindsay relied on the decision of the High Court in Attorney-General (United Kingdom) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30 (“the Spycatcher Case”) to support the ASC’s contention that Leumi and EBC were required to comply with the secondary notices notwithstanding that to do so exposed them to a risk of contravening Swiss law. In the Spycatcher Case the High Court held that a foreign State could not enforce in Australia an obligation of confidentiality owed by a member or former member of its security service by restraining publication of a book written by that member. The principal judgment (Mason CJ, Wilson, Deane, Dawson, Toohey and Gaudron JJ) applied the rule, based partly on “international comity and expediency” (at 41), that prevents (at 43)
“enforcement outside the territory of the foreign sovereign of claims based on or related to the exercise of foreign governmental power”.
Mr Lindsay sought to equate the submission by Leumi and EBC, that they were not bound to comply with the secondary notices, with an attempt to enforce the public laws of Switzerland in Australia. In my view, the Spycatcher Case was concerned with very different issues to those arising in the present case. In this case, the Swiss authorities are not seeking to enforce in Australia any governmental claims. The issue is whether Leumi and EBC can rely on the risk of contravening Swiss law as a reason for not complying with the secondary notices. Those notices were issued in Australia, but served in Switzerland (whether by fax or by courier) and require a Swiss corporation to comply with Australian law. Whether the Swiss corporations are bound by the notices is to be determined by the process of statutory construction to which I have referred.
SELF-INCRIMINATION
Mr Conti relied on an additional argument to support the proposition that the Corporations Law does not require compliance with a secondary notice, where the recipient is a foreign corporation and compliance would contravene foreign law. He contended that nothing in s719 or (presumably) s722, was intended to abrogate the privilege against self-incrimination. While he acknowledged that Australian law does not recognise the privilege against self-incrimination for corporations (Environment Protection Authority v Caltex Refinery Co Pty Ltd (1993) 178 CLR 477), the Swiss corporations could act only through natural persons. These persons would be at an appreciable risk of being subjected to criminal sanctions if they assisted EBC (or Leumi) to comply with the secondary notices. Mr Conti contended that the better view is that the privilege extends to self-incrimination under foreign law: see McNicol, Law of Privilege (1992), 215-223; Adsteam Building Industries Pty Ltd v The Queensland Cement and Lime Co Ltd (No.4) [1985] 1 Qd R127 (S Ct Qld/McPherson J). In the latter case, which was decided before EPA v Caltex, it was held that a Swiss corporation was entitled to claim privilege from producing a class of documents, the contents of which disclosed shareholdings in another Swiss corporation. The privilege from non-disclosure arose because the disclosure would or might expose the party making the disclosure to a penalty under the Swiss Penal Code.
Mr Conti’s argument raises several difficult questions. First, it is not settled in Australia whether the privilege against self-incrimination protects a person from self-incrimination under foreign law. In Adsteam v Queensland CLC, McPherson J held that it did, at least in the context of discovery in civil proceedings between subject and subject (at 145). There have been decisions to the contrary (see, for example, In re Atherton [1912] 2 KB 248, at 255-256, per Phillimore J) and other Australian authorities are inconclusive: Commissioner of Australian Federal Police v Cox (1989) 87 ALR 163 (FCA/Morling J), at 167; FF Seeley Nominees Pty Ltd v El Ar Initiations (UK) Ltd (1990) 96 ALR 468 (SCt SA/Zelling AJ), at 471-474.
Secondly, it is not entirely clear that the privilege applies where it is the very act of disclosure that constitutes or might constitute an offence under foreign law, as distinct from a disclosure that exposes the person to the risk of prosecution for an antecedent offence. McPherson J regarded the former situation as covered by the privilege. The modern rationale for the privilege, as stated by Mason CJ and Toohey J in EPA v Caltex, at 498, is that it protects
“the individual from being confronted by the ‘cruel tri-lemma’ of punishment for refusal to testify, punishment for truthful testimony or perjury”.
This formulation is consistent with the privilege applying to a compulsory disclosure which is itself an offence under foreign law, but I do not think that the proposition has yet been clearly established.
Thirdly, if the privilege were available in the present case, it would be necessary to consider the effect of the privilege on Leumi and EBC. As I have noted, EBC is not affected by the Swiss Banking Law. Both Leumi and EBC are bound by art.273 of the Swiss Penal Code, but the degree of risk of contravening art.273 varies according to whether the customers are or are not Swiss domiciliaries. There is also some risk, although I consider it slight, that disclosure by Leumi and EBC of the information required by the secondary notices would make them liable as aiders and abetters of any breach by the ASC of art.271.
I do not think it is necessary to resolve these issues. The duties imposed by Pt6.8 of the Corporations Law on a corporate shareholder are imposed on the corporation itself. As Mr Conti acknowledged, the privilege against self-incrimination, assuming it applies where the risk of incrimination arises under foreign laws, is not available to a corporation. I have previously held that, as a matter of construction, a foreign corporation is required to comply with a secondary notice received by it, notwithstanding that the compliance creates a risk of the corporation contravening foreign law. I have reached this conclusion largely because the legislative scheme created by Pt6.8 would be severely hampered, and perhaps rendered unworkable, if a foreign corporation were to be exempted from the statutory requirements. In my opinion, the legislative intent underlying the scheme created by Pt6.8 would be equally undermined if a foreign corporation did not have to comply with a secondary notice because compliance would create an appreciable risk of prosecution, under foreign law, for some of the corporation’s officers and agents. It is clear that a corporation which is required to make disclosure by Australian law cannot rely on the privilege against self-incrimination to defeat that obligation. In my opinion the fact that disclosure may place some other people at risk of prosecution under foreign law is not sufficient to warrant reading down the duties imposed by Pt6.8 and, in particular s722, of the Corporations Law. Accordingly, I reject the argument based on the privilege against self-incrimination.
VII WAS SERVICE OF THE SECONDARY NOTICE IN SWITZERLAND AUTHORISED BY THE CORPORATIONS LAW?
THE SUBMISSIONS
Leumi and EBC submitted that, whatever view was taken of the scope of s722 of the Corporations Law, s719 should not be construed so as to permit the ASC to “give” a secondary notice to a Swiss corporation, where the giving of the notice violated or might violate Swiss law. They contended that, whether a notice was “given” by fax or by delivery in Switzerland, the ASC was in breach of art.271. Insofar as the notices had been sent to Leumi and ASC by fax, the argument accepted, contrary to other submissions made by Leumi and EBC, that service of secondary notices by fax is ordinarily permissible under the Corporations Law.
Leumi and EBC acknowledged that s110D expressly applied Chapters 1 and 6 of the Corporations Law to acts outside Australia. However, they argued that s719 should not be read as authorising acts outside Australia which were or might be illegal under Swiss law, as infringing Swiss sovereignty. It followed from their argument that the purported service of the secondary notices was invalid. They also argued that a secondary notice served on a Swiss corporation in contravention of Swiss law could not be said to be “received” by the corporation for the purposes of s722 of the Corporations Law. Thus the duty created by s722, which requires a person receiving a secondary notice to comply within two business days of receipt, was not enlivened.
I have previously found that service of a secondary notice on a Swiss corporation in Switzerland, by means of a courier, is likely to contravene art.271 of the Swiss Penal Code. I have also found that service of secondary notices in Switzerland, by means of faxes sent from Australia, might contravene art.271, but that the risk of a successful prosecution under Swiss law is less than where service is actually effected by delivery of the documentation in Switzerland.
THE QUESTION OF CONSTRUCTION
As with the duty to comply with secondary notices, the question of whether service of secondary notices can be effected on a foreign corporation in contravention of foreign law is to be determined by a process of construction of the legislation. That process must take account of the principles of statutory construction to which I have already referred. Those principles mean that an Australian court will not lightly construe legislation as authorising service of notices or other documents outside Australia, in contravention of the law of another country. The legislation governing service of documents sometimes makes it clear that service cannot be effected in a foreign country in breach of that country’s laws. An example is RSC 0.11, R6(3), applied in Ferrarini SpA v Magnol Shipping Co Inc (The “Sky One”) [1988] 1 Ll LR 238 (QBD/Staughton J). Compare the language of FCR, O.8, R5, which does not make it entirely clear whether service of court process must be effected in accordance with the law of the place of service. Sometimes the legislation contemplates service in another country, but does not specifically state whether service in breach of the local law is authorised. The question is then whether, having regard to the principle that legislation should be construed in conformity with principles of international comity, there is sufficient indication of a legislative intent that service on a foreign corporation is authorised, even in breach of foreign law.
In my opinion there are two main factors which suggest that the Australian legislatures enacting the Corporations Law intended s719 to authorise the giving of a secondary notice to a foreign corporation, even if to do so contravenes or might contravene foreign law.
First, I have already concluded that the legislative intention is to impose a duty on foreign corporations to comply with s722, even if to do so contravenes foreign law. It is but a short step to conclude that a notice may be given to such a corporation, even if the giving of the notice contravenes foreign law. I accept that resolving one issue does not necessarily resolve the other, since the different foreign laws may promote different interests. Secrecy laws, for example, are likely to protect commercial or economic interests. Provisions such as art.271 of the Swiss Penal Code are intended to protect the sovereignty of the country enacting the law.
However, the rationale for applying s722 to corporations such as Leumi and EBC is that, if this step were not taken, the regulatory scheme for listed Australian companies, created by Pt6.8 of the Corporations Law, could be readily avoided by the use of foreign nominee corporations in jurisdictions with stringent secrecy laws. A similar rationale can be applied to the question of service. While a notice could be “given”, for example, to a Swiss corporation in conformity with the requirements of Swiss law, the practicalities are that the giving of such a notice is unlikely to be achieved within the short period that in my view Pt6.8 contemplates. In the present case no party adduced evidence of the requirements of service under Swiss law. I would not be prepared to infer from the material before me that service of secondary notices could be arranged in Switzerland in accordance with Swiss law within a short period (say, two to three weeks). I did not understand Mr White or Mr Conti to suggest otherwise.
I do not think that significant delays in “giving” secondary notices to foreign corporations are consistent with the objectives of Pt6.8. The time limits specified in Pt6.8 for compliance are very short indeed, reflecting the perceived need for extremely swift responses to ensure that the market for Australian securities is properly informed and that uninformed transactions do not take place. If a notice could only be given in accordance with the requirements of foreign law, the regulatory structure inevitably would encounter formidable difficulties. The facts of Re North Broken Hill Holdings Ltd, in which a chain of companies was interposed between the registered shareholder and the beneficial owner, illustrates the nature of the difficulties.
It is true, as Mr White suggested, that it is open to regulators to enter into memoranda of understanding (MOUs) with foreign regulators, providing for a framework for investigative assistance and exchange of regulatory and investigative information. Evidence was adduced of media releases which noted the entry into such MOUs by the ASC with its counterparts in the United Kingdom, Hong Kong, the United States and France. The precise scope of the MOUs, and their impact (if any) on the service of Australian documents in jurisdictions outside Australia, was not, however, explored in the evidence.
It may well be that the cause of bilateral relations would be assisted by agreements between regulators or treaty arrangements governing issues of the kind involved in the present case. But the fact that MOUs might be entered into and (although this was not established in the evidence), that some MOUs might provide for service of documents by Australian regulators in foreign countries, does not determine the scope of Pt6.8 of the Corporations Law. That must be decided by a process of statutory construction, having regard to the purpose of the statutory scheme.
Mr White also pointed out that, in addition to serving documents in accordance with the requirements of Swiss law, Australian regulators may seek assistance from the authorities in other countries under treaty arrangements contemplated by Australian legislation. The objects of Mutual Assistance in Criminal Matters Act 1987 (Cth) include facilitating the provision and obtaining of international assistance in criminal matters by means such as obtaining evidence and documents, restraining dealings in property liable to forfeiture and the service of documents: s5(a),(c),(h),(k). A treaty was concluded between Australia and Switzerland on Mutual Assistance in Criminal Matters on 25 November 1991, and came into effect on 31 July 1994: Australian Treaty Series 1994, No.7. The Mutual Assistance in Criminal Matters (Switzerland) Regulations, Reg4, applies the Act to Switzerland, subject to such limitations and qualifications as are necessary to give effect to the Treaty between Australia and Switzerland.
In my view, the Treaty between Australia and Switzerland has little bearing on the proper construction of the Corporations Law. The Treaty is confined to granting of mutual assistance in “investigations or proceedings in respect of offences the punishment of which falls or would fall within the jurisdiction of the judicial authorities of the Requesting State” (art.1).
The Requested State is to effect service of a document required to be served by the law of the Requesting State in connection with any investigation of an offence or proceeding (art.17(1)).
Pt6.8 of the Corporations Law is not concerned exclusively or even primarily with the investigation of offences or proceedings in respect of offences. The principal object of the Part is to promote an informed market in Australian securities. No doubt secondary notices are sometimes served in the course of investigations. But in many cases secondary notices will not be served in the course of any criminal investigation, but simply in order to obtain information considered necessary to inform the market. In these circumstances, I do not think that the fact that assistance is available in connection with the investigation of criminal offences lifts the construction that otherwise should be placed on s719 of the Corporations Law.
I should note that at least one practice book refers to service of Australian documents in Switzerland being governed by the Convention Regarding Legal Proceedings in Civil and Commercial Matters, signed in London on 3 December 1937: N Williams, Civil Procedure Victoria, para17.09.20. Australia acceded to the Convention on 11 February 1940, pursuant to art.9 (see Australian Treaty List, Australian Treaty Series No.1, at 135). However, the Convention does not deal with service of documents.
The second factor suggesting that a notice may be served on foreign corporations in contravention of foreign law is that the regulatory scheme established by Pt6.8 of the Corporations Law applies, relevantly, to shareholdings in Australian listed companies. The maintenance of an informed market in the trading of shares in such companies is plainly a matter of great economic significance for Australia. The giving of secondary notices to shareholders in Australian companies by the ASC is an integral part of the scheme. The legislation contemplates that secondary notices can be given to foreign corporations, even if they do not conduct business in Australia. If there were any doubt about this, it is removed by s110D, which specifically applies the provisions in Chapter 6, including s719, to “all bodies corporate…whether formed or carrying on business…in Australia or not” (emphasis supplied). S110D also applies the provisions of Chapter 1, including s109X and s109Y (which deal with service of documents), to foreign corporations. It seems to me that the legislative intention is that foreign corporations holding shares in Australia listed companies should be liable to be given secondary notices in the same expeditious manner as Australian shareholders.
I appreciate that s110D does not expressly deal with the case where the giving of a notice by the usual means contravenes foreign law. But in applying Pt6.8 to all corporations, foreign or otherwise, the legislature must have been aware that some foreign countries, whose corporations are active in the Australian securities market, prohibit the service of documents otherwise than in accordance with their own domestic rules. In my opinion, the better view is that the legislatures enacting the scheme embodied in the Corporations Law intended that the notice could be “given” to foreign corporations by the same speedy and relatively informal means as apply to local shareholders. This intention should be given effect notwithstanding the presumption against Australian laws authorising conduct overseas that may contravene foreign law. In the next section of this judgment I express the view that secondary notices ordinarily can be given by fax. I think that this mode of service can be used in relation to Swiss corporations holding shares in Australian listed companies, even in circumstances where there is some risk that service by this means contravenes Swiss law.
VIII WAS SERVICE OF THE SECONDARY NOTICES BY FAX AUTHORISED BY THE CORPORATIONS LAW?
THE ARGUMENTS It will be recalled that, on 20 April 1995, the ASC transmitted secondary notices by fax to Leumi and EBC in Switzerland. Leumi admitted in its pleadings that it had received the fax on that date, although denying that that constituted the giving of a notice under s719(1) of the Corporations Law. EBC denied the allegation made in ASC’s further amended statement of claim, that the ASC duly gave EBC a secondary notice on 20 April 1995 by means of the fax sent on that date to EBC in Switzerland. However, EBC’s faxed reply to the ASC, of 21 April 1995, acknowledged receipt of the fax sent by the ASC on 20 April 1995. I infer from this acknowledgment that the fax of 20 April 1995 was received at EBC’s offices in legible form at about the time it was sent by the ASC. The ASC contended that, in those circumstances, notices had been “given” both to Leumi and EBC on 20 April 1995, within the meaning of s719(1) of the Corporations Law. Alternatively, the ASC argued that Leumi and EBC had “received” the secondary notices for the purposes of s722(1), and thus their respective obligations to comply with the notices were enlivened.
Leumi and EBC argued that service of a secondary notice on a foreign corporation could be effected only in accordance with the modes of service authorised by s109X(1)(b) of the Corporations Law. The requirements of that sub-section were not complied with, at least until subsequent service of the original secondary notice by courier. This was because transmission of a message by fax could not be said to constitute “leaving” the document at the recipient’s office. Clearly the document had not been sent by post. Thus, no secondary notice had been “given”. Nor had such a notice been received by Leumi since only notices that had been duly given were capable of being received and the admission on the pleadings was confined to receipt of the fax.
THE AUTHORITIES
The Corporations Law does make some reference to service by fax. S747(1), for example, allows a document to be served on a securities exchange by sending to the exchange “by telegraph, telex, facsimile service or other similar means of communication”, a message to the effect of the document. However, the Corporations Law does not specifically address the question of whether service of documents by fax is generally authorised. This is somewhat curious. The technology, although relatively recent, is utilised widely, if not universally, in commercial transactions, especially in international dealings, although it is no doubt being supplanted for some purposes by other means of electronic communication. It might be thought sensible for those responsible for reviewing the Corporations Law (and, for that matter, other legislation relating to service) to consider the issue. In the meantime, the question, to adopt the language of Woolf LJ in Hastie and Jenkerson v McMahon [1990] 1 WLR 1575 (CA), at 1579, is whether the Corporations Law prevents advantage being taken of the progress in technology which enables a notice to be served on a foreign corporation by fax. The efficacy of service by fax is increasingly being recognised by courts, although of course everything must depend on the particular language of the statute or rule under consideration. In Hastie and Jenkerson v McMahon, the Court of Appeal held that the transmission of a list of documents by fax to opposing solicitors constituted good service, it having been conceded that the solicitors had received a copy in clearly legible form before a deadline for service of the list had passed. The Court construed the rule of court, specifying the means by which “service of any document…may be effected”, as permissive rather than mandatory or exhaustive. Woolf LJ (at 1579) observed that
“[t]he purpose of serving a document is to ensure that its contents are available to the recipient and whether the document is served in the conventional way or by fax the result is exactly the same.”
See also Sharpley v Manby [1942] 1 KB 217; Stylo Shoes Ltd v Prices Tailors Ltd [1960] Ch. 396. In Hastie and Jenkerson v McMahon, Woolf LJ observed (at 1579) that special considerations applied to writs and other documents used to initiate legal proceedings: see The Supreme Court Practice, 1995, 10/1/3.
In NM Superannuation Pty Ltd v Hughes (1992) 27 NSWLR 26 (SCt NSW/Cohen J), the rules of a superannuation fund provided for a company to terminate the fund by giving the trustee notice in writing. Cohen J held (at 35-36) that a notice had been given in accordance with the rules where the company sent the notice by fax and the fax was received in the offices of the trustee. His Honour noted that the rules did not require the notice to bear a signature or seal and therefore he did not have to decide whether a fax would be proper service if the document to be served did have to be signed or sealed (at 35). The decision of Cohen J was affirmed on appeal, sub nom Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 65 (NSWCA), although the question of service was not addressed.
THE CONSTRUCTION ISSUE
In the present case, it is clear that s109X(1)(b) of the Corporations Law does not prescribe exhaustively the modes of serving a notice on a foreign corporation. S109X(2)(a) specifically contemplates that another provision of the Corporations Law might authorise the service of a document, otherwise than as provided in s109X(1). The question is then whether s719(1) authorises the giving of a secondary notice to a foreign corporation by fax.
S719(1) must be read in context. The objectives of Pt6.8 of the Corporations Law have been referred to elsewhere in this judgment. Those objectives, together with the stringent time constraints imposed by s721 and s722 on the recipient of a notice, suggest that service of a notice by fax was within the contemplation of the legislature. The giving of a notice by fax is a means of achieving more or less instantaneous communication of the contents of the document. Where an inquiry is made under Pt6 of the Corporations Law, time may well be of the essence, if the objective of maintaining an informed market is to be achieved. The legislation recognises that swift responses to inquiries are required if the statutory scheme is to be effective, by imposing an obligation to respond to a notice (or to seek an exemption) within two business days of its receipt.
Insofar as a secondary notice is directed to a foreign corporation, service by fax may pose fewer risks, under laws such as art.271 of the Swiss Penal Code, since the transmission is initiated outside the country in which the corporation is located. As I found earlier, the risk of a successful prosecution under Swiss law is less where service is effected by fax than where it is effected by delivery in Switzerland.
More importantly for present purposes, however, the language used in Pt6.8 supports the conclusion that a secondary notice can be given by fax. S717 provides that a secondary notice is a “written notice addressed to a person” requiring certain particulars of shares in which he or she has a relevant interest. S717 does not state, for example, that the notice must be signed or sealed in a particular manner. S722 imposes an obligation to comply with the notice upon a person who “receives” the notice, unless a request for exemption is made under s721. The use of the word “receives” strongly indicates that the object of s719(1), in providing for a secondary notice to be “given”, is to ensure that the person to whom it is addressed actually receives its contents. This in turn suggests that a notice may be “given”, for the purposes of s719, even if the mode of service utilised for a foreign corporation is not one of those specified in s109X(1)(b).
I do not think that the fact that s747(1), to which I have referred earlier, specifically mentions service by fax in a particular context detracts from the construction of s719 I have adopted. The question is what meaning should be accorded to the words “give to the other person a secondary notice”, having regard to the context, including the terms of s722. Nor do I think that cases such as Racecourse Totalizators Pty Ltd v Hartley Cyber Engineering Pty Ltd (1989) 7 ACLC 902 (SCt Vic/O’Bryan J), which concern service of statutory demands, assist in this case, since they depend on different statutory provisions.
In my opinion, a secondary notice can be “given” under s719(1) of the Corporations Law by fax. However, I agree with the holding in Hastie and Jenkerson v McMahon, that it is necessary for the person or body giving the notice to establish that a legible copy was printed at the recipient’s premises. This is necessary because the purpose of a notice requirement is to ensure that the recipient is advised of the contents of the notice. Generally speaking, a notice is not “given” (if one of the modes specifically authorised by the Corporations Law is not utilised) unless the recipient receives the contents of the notice in legible form.
AN ORIGINAL DOCUMENT?
Leumi and EBC argued that a notice could not be given by fax because, as a matter of construction, what was required was service of an original, signed document. It is true that a statute may require that a document be signed or sealed by a particular person or officer and that the absence of such a signature or seal might render the document invalid. This was held to be the case with a summons given by a justice “under my hand and seal”: Electronic Rentals Pty Ltd v Anderson (1971) 124 CLR 27, at 41-43, per Windeyer J, with whom Barwick CJ and Owen J agreed. However, a requirement that a document be “signed” by a solicitor has been held to be satisfied by the solicitor stamping the document with a rubber stamp containing a facsimile representation of his signature: Goodman v J Eban Ltd [1954] 1 QB 550.
The Corporations Law defines a “secondary notice” simply as a written notice addressed to a person requiring the person to give…a written statement” setting out certain particulars relating to shares: s717. S719(1) specifies the circumstances in which the ASC may give a secondary notice in relation to shares, but does not provide for any particular form of notice to be employed. The Corporations Regulations, reg6.8.01(4), state that, for the purposes of s719(1), a notice “may be in accordance with Form 609″. Form 609 makes provision for the notice to be “signed for the Australian Securities Commission by (name)”.
In my view, none of these provisions detracts from the conclusion that s719(1) of the Corporations Law authorises a secondary notice to be given by fax, as long as the notice is received in legible form by the recipient. The Corporations Law itself does not require the secondary notices to be signed or sealed. A written notice, which is all that s717 relevantly requires, ordinarily can be given by fax, as NM Superannuation v Hughes illustrates. Reg6.8.01(4) is permissive, not mandatory, in its terms. Although the prescribed form, which was followed by the ASC in this case, provides for a signature, a non-mandatory form cannot control the question of statutory construction. The question is whether the Corporations Law contemplates that secondary notices can be given by fax. In any event, I think that a notice, duly signed on behalf of the ASC, can be “in accordance with Form 609″ even though the notice is given to the recipient by fax. The original notice was signed and the document reproduced at the offices of Leumi and EBC and (as I infer) contained an exact reproduction of the signature.
It follows from what I have said that Leumi and EBC were each given secondary notices by the ASC, within the meaning of s719(1) of the Corporations Law, on 20 April 1995. In any event, I think that they “receive[d]” the secondary notices, within the meaning of s721 and s722 of the Corporations Law on that day, since each received a legible faxed copy of the secondary notices issued by the ASC on 18 April 1995.
IX WERE THE SECONDARY NOTICES INVALID BY REASON OF ANY PRE-JUDGMENT BY THE ASC?
Mr White argued that, at the time the ASC gave the secondary notices to Leumi and EBC (assuming that they were otherwise valid), it had already determined the attitude that it would take to any request by the Swiss Corporations for relief under s721(1) of the Corporations Law. The ASC had therefore prejudged any such request that might be made by Leumi or EBC, and it was unable to give genuine consideration to their claims for relief.
The prejudgment by the ASC was said to be evidenced by the terms of the letter of 26 April 1995, which was faxed by the ASC to Leumi in Switzerland. In that letter, the ASC warned Leumi that if a satisfactory response to the secondary notice was not received by 4pm on 28 April 1995, the ASC intended to institute proceedings in the Federal Court to enforce compliance. The letter included the following paragraph:
“Further, the Commission does not accept that Swiss Secrecy Regulations are sufficient reason not to provide the information required under the above Notice”.
In addition, Mr White relied upon two paragraphs in Policy Statement 86: Beneficial Ownership Notices, issued by the ASC on 31 October 1994, as amended. The express purpose of the statement (para1) is to set out:
“principles and policy considerations which will influence the exercise of discretionary powers conferred on the ASC by Pt6.8 and the enforcement of notices issued under that Part”.
The two paragraphs cited by Mr White from the policy statement are as follows:
“32. The only grounds on which complete relief will normally be granted are those set out in s727(c) and (d), that is, that the information already appears on a register kept by the company or that the notice was frivolous or vexatious. Difficulty in complying with the notice within the time required is not a special reason, unless there are circumstances special to the applicant’s shareholding in the company.
…
52. Where the defaulting recipient is an overseas person or corporation, orders sought will usually deal with the relevant shares, including the vesting of the shares in the ASC under s613(1)(e). The orders may also include remedial orders listed in s613(1)(a)-(g). The ASC may seek orders under s742 even if the law of another jurisdiction prevents a person from complying with Pt6.8.”
Mr White contended that the principles of procedural fairness, including the rules as to alleged bias, apply to a decision to issue a secondary notice under s719(1) of the Corporations Law. Mr White cited in support of this proposition Little v Minister for Land Management (1992) 77 LGRA 346 (SCt Qld/Shepherdson J), at 370-371. That case concerned a notice of resumption, which serves a very different function from that performed by a secondary notice issued under the Corporations Law. Moreover, the Queensland legislation was quite different from that governing the giving and enforcement of secondary notices. Furthermore, the declaration made by Shepherdson J. relating to the effect of bias on the part of the Minister, was set aside on appeal, albeit it on other grounds: Little v Minister for Land Management [1995] 1 QdR 190 (Qld CA), at 202. Mr White’s argument also assumed that the effect of prejudgment by the ASC would be to render the decision to give the secondary notices to Leumi and EBC void – compare Wade, Administrative Law (6th ed. 1988), 331 ff; Craig v State of South Australia (1995) 131 ALR 595 (HCt), at 600. Neither Leumi’s cross-claim nor EBC’s cross-claim sought orders setting aside or otherwise attacking the decision by the ASC to give the secondary notices to Leumi and EBC.
I am prepared to assume, without deciding, that Mr White is correct on the issues to which I have referred in the previous paragraph. I also assume, contrary to the conclusions I reach later, that the letter of 26 April 1995 and the paragraphs in the Policy Statement show that the ASC prejudged any application for relief that might have been made by Leumi and EBC under s721(1) of the Corporations Law. Even so, I cannot see how such a prejudgment could invalidate the decision to give the secondary notices to Leumi and EBC. That decision was made in the exercise of the ASC’s powers under s719(1). Those powers are conditional upon the existence of circumstances specified in the sub-section. In particular, the ASC can act only if it receives information, pursuant to a primary or secondary notice previously given in relation to particular shares in a company, that (relevantly) another person has a “relevant interest” in any of the shares. If the ASC prejudges what it will do in response to a request, not yet made, under s721(1), the prejudgment may taint any decision ultimately made by the ASC to reject the request. But the prejudgment does not, in my view, taint the interior decision to give a secondary notice to a person who has been identified as having a relevant interest in the shares. That decision is quite distinct from the rejection of a request under s721 and is made on the basis of quite different criteria.
I therefore reject the argument that the secondary notices given to Leumi and EBC were invalid by reason of prejudgment or bias on the part of the ASC.
X DID THE ASC FAIL TO CONSIDER PROPERLY REQUESTS MADE BY LEUMI AND EBC UNDER S721?
BACKGROUND
S721(1) of the Corporations Law allows a person to lodge a written request that it should not have to give the information sought in the secondary notice, provided the request is lodged “before the end of 2 business days after the day on which the notice is received”. Leumi argued that it made a request to the ASC to the effect that it should not be required to give the information sought in the secondary notice, by means of its fax of 27 April 1995. Since, as I have held, Leumi received the secondary notice by fax on 20 April 1995, its request was not lodged within the period specified by s721(1). Therefore, unless the period of two business days is extended, there was no occasion for the ASC to consider whether the request should be granted. However, Leumi argued that the period of two days should be extended pursuant to s1322(4)(d) of the Corporations Law. This sub-section permits the court to make an order extending the period for doing any act under the Law. The power is not to be exercised unless the court is satisfied that no substantial injustice has been or is likely to be caused to any person: s1322(5).
It is appropriate to consider Leumi’s arguments on this issue, for two reasons. First, if Leumi’s arguments are correct, it may be able to secure an extension of time for lodging the request. Secondly, if I am wrong in concluding that Leumi received a secondary notice by fax on 20 April 1995 for the purposes of s722, it did not receive a secondary notice until it was served by courier on 24 April 1995. Mr Lindsay conceded that Mr Leumi’s fax of 27 April 1995, having regard to time differences and local holdings, was given within two working days of Leumi receiving the secondary notice. Accordingly, if Leumi did not receive the secondary notice until 24 April 1995, and if Leumi’s fax of 27 April 1995 constituted a “request” for the purposes of s721(1), the request was made within the two day time limit. Accordingly, I need to consider whether Leumi did make a request for the purposes of s721(1) and, if so, whether the ASC’s decision to refuse the request should be set aside or regarded as invalid.
EBC adopted Leumi’s arguments on this issue, although its circumstance are not identical. EBC replied to the ASC’s faxed secondary notice, which was sent on 20 April 1995, on the next working day, namely 21 April 1995. If EBC’s fax was a “request”, for the purposes of s721(1), it was made within the two day limit. Accordingly, it is also necessary to consider whether the EBC’s fax of 21 April 1995 was a “request” for the purposes of s721(1) and, if so, whether the ASC’s decision should be set aside or regarded as invalid.
DID LEUMI MAKE A REQUEST?
I shall deal first with Leumi’s fax of 27 April 1995. This fax drew the ASC’s attention to Leumi’s status as a Swiss Bank and its obligations to maintain secrecy under Swiss law. Leumi stated that it would “clearly and seriously infringe applicable Swiss law” if it furnished the information required by the ASC “as per the said notice”. The final paragraph of the fax reads as follows:
“We trust that you and the Commission understand our position which is in compliance with applicable Swiss law and appreciate your and the Commission’s comprehension.”
The Corporations Law does not define “request” as defined in s721(1). Nor is a form of request prescribed. Mr White submitted that, in these circumstances, the fax should be read as, in substance, a request that the ASC not require Leumi to give the information sought in the secondary notice. He contended that the references in the fax to Swiss law were capable of being read as “special reasons set out in the request”.
The Macquarie Dictionary defines “request” as:
“1. the act of asking for something to be given, or done, esp. as a favour or courtesy; solicitation or petition… 2. that which is asked for… 4. to ask for, solicit (something), esp. politely formally… 6. to make request to, ask, or beg (a person, etc) to do something.”
Both Mr White and Mr Lindsay appeared to agree that the question was really one of impression. In my view, it is not appropriate to take a strict view of what constitutes a request for the purposes of s721(1). The recipient of a notice is bound, under the terms of legislation, to respond extremely swiftly to the secondary notice. A recipient of a notice in a foreign country may find it difficult, whether because of unfamiliarity with Australian laws or language problems, to frame its responses precisely and with clear reference to the applicable legislation.
Although the fax of 27 April 1995 is somewhat ambiguous, it is capable of being read as a request to the ASC to be relieved from the obligation to provide the information sought in the secondary notice. The last paragraph of the letter, in particular, can be construed as asking the ASC to exercise whatever powers might be available to excuse Leumi from complying with the secondary notice, because of Leumi’s obligations under Swiss law. I think the benefit of any doubt in this respect should be given to Leumi. This is particularly so because the ASC’s fax of 26 April 1995, whether or not it amounted to a pre-judgment, was not calculated to draw Leumi’s attention to its entitlement to make a request under s721(1). Accordingly, I think that the letter should be construed as a request by Leumi that for special reasons (Leumi’s obligations under Swiss law) it should not have to give the information sought by the ASC in the secondary notice.
DID EBC MAKE A REQUEST?
In my opinion, however, EBC is in a different position. It relies exclusively on the fax of 21 April 1995 to the ASC. That fax was terse and to the point. It asserted that
“[d]ue to Swiss secrecy regulations we cannot, however, provide the requested details about the ownership of subject shares.”
This response contains nothing to suggest that EBC was asking the ASC to exercise its powers to excuse EBC from its obligations to comply with a secondary notice. The fax, in substance, simply constituted a refusal to provide the information. I think it would require considerably more than a sympathetic reading to convert the refusal into a request to the ASC to exempt EBC from its obligation to provide the information sought in the secondary notice. It follows that EBC has never made a request to the ASC pursuant to s721(1) of the Corporations Law.
PRE-JUDGMENT BY THE ASC
Mr White did not clearly specify whether he was arguing that the ASC was actually biased in relation to any requests under s.721(1) made by Leumi, or that there was a reasonable apprehension of bias on the part of the ASC. He contended, however, that the letter of 26 April 1995, from the ASC to Leumi, showed that the ASC had prejudged the issue of whether Leumi should be relieved from the obligation to comply with the secondary notices. He also contended that, regardless of the state of mind of the decision-maker, Mr Goldie, it was the corporate mind of the ASC that had to be assessed to determine whether the issue had been prejudged.
The statement on which Mr White relied was made in a letter signed by Mr Dumas on behalf of the ASC. Mr Dumas had previously signed letters to Leumi as an investigator, located in the ASC’s regional office in Sydney. Mr Dumas was not, however, the decision-maker in relation to what the ASC accepted, for the purposes of making decisions, were requests made by Leumi and ASC pursuant to s721(1). Mr Goldie, a senior lawyer employed by the ASC, was given that task. He did so under delegation from the ASC, presumably made pursuant to s102 of the Australian Securities Commission Act 1989 (Cth). The uncontradicted evidence was that Mr Goldie had not been involved either in the investigation conducted by the ASC into the ownership of shares in OAP or in the application by the ASC to the Federal Court. The determination made by Mr Goldie specifies the documents he took into account. These do not include the letter of 26 April 1995 from the ASC to Leumi and EBC. Nor was there any suggestion that Mr Goldie was subject to a direction from the ASC, when making his decision to reject the requests made by Leumi and EBC under s721(1).
In these circumstances, I do not think it can be said either that Mr Goldie was actually biased in making his decision, or that a reasonable by-stander would entertain a reasonable fear that his mind was so prejudiced in favour of a conclusion already formed that he would not alter that conclusion irrespective of the evidence or arguments presented to him: Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70, at 100, per Gaudron and McHugh JJ. It is not enough to say, as Mr White did, that the ASC has a corporate mind and that if there is a reasonable apprehension of bias about one decision-maker within the ASC it must affect all others acting on behalf of the ASC. Laws v Australian Broadcasting Tribunal demonstrates that, independently of the doctrine of necessity, this is not necessarily the case: at 83-84, per Mason CJ and Brennan J.
Furthermore, the comment in the letter of 26 April 1995, although purporting to be made on behalf of the ASC, was not prepared in response to a request by Leumi or EBC (or anyone else) pursuant to s721(1). The letter does not address that question. Its terms are consistent with the ASC simply expressing a view that the scope of s719 of the Corporations Law is not limited by reason of the “Swiss Secrecy Regulations”. This, of course, is an issue that has been debated at length in these proceedings and was doubtless at the forefront of Mr Dumas’ mind. It must be remembered that by 26 April 1995 Leumi had not responded at all to the secondary notices and EBC had responded in a manner that amounted (as I have held) simply to a refusal to supply the information sought in the secondary notices. In that context, I do not think that the letter would suggest to a reasonable by-stander that the fresh decision-maker was incapable by reason of prejudice, of considering fairly the evidence and submissions presented to him in relation to any request that might be made under s721(1) of the Corporations Law.
I do not think that there is any substance in the contention that paras. 32 and 52 of Policy Statement No.86 amounted to a prejudgment that prevented the decision-maker considering the particular circumstances of Leumi and EBC. Para32 states that “normally” complete relief will only be granted only in specified circumstances. This plainly does not rule out a different approach if the circumstances are unusual. Indeed, it is not clear that para32 is intended to apply to a request by a foreign corporation; certainly para32 would not prevent a decision-maker, taking account of the particular circumstances affecting a foreign corporation that considered itself constrained by foreign law from complying with a secondary notice.
Para52 merely refers to the orders that the ASC may seek. The statement that the ASC “may seek orders under s742 even if a law of another jurisdiction prevents a person complying with Pt6.8″ is not inconsistent with the ASC considering the particular circumstances of a foreign corporation making a request pursuant to s721(1).
I should add that Mr Conti, for EBC, adopted Mr White’s arguments, relying on a statement in a fax from the ASC to EBC, sent on 26 April 1995, which was in substantially the same terms as the fax from the ASC to Leumi. Having regard to my finding that EBC made no request under s721(1), it is not necessary to consider EBC’s position separately. However, I would reach the same conclusion as I have in relation to Leumi.
ALLEGED FAILURE TO TAKE INTO ACCOUNT RELEVANT CONSIDERATIONS
Mr White submitted that the decision-maker, Mr Goldie, failed to take into account relevant considerations. Mr White identified these as:
* the potential criminal consequences under Swiss law for Leumi and its officers; * the fact that the power sought to be exercised by the ASC involved the extra-territorial application of the Corporations Law, so as to require actions in Switzerland which violated Swiss law;
* the national interest of Switzerland in being able to provide reliable guarantees of confidentiality;
* the possibility of obtaining judicial assistance from Switzerland pursuant to treaties; and
* the reasonableness of EBC’s conduct.
The reasons given by Mr Goldie have been set out earlier. They were brief. The reasons state that Mr Goldie considered, among other documents, Leumi’s letter of 27 April 1995, the letter from Leumi’s solicitors of 21 June 1995 (in which Dr Schurmann’s opinion on Swiss law was enclosed) and the letter from the solicitor of 28 June 1995, responding to the ASC’s invitation of 22 June 1995 to make further submissions in respect of Leumi’s request under s721(1).
Leumi did not seek a statement of reasons from Mr Goldie, as it was presumably entitled to do under s13(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth). Had such a statement been obtained, there may have been an opportunity to analyse more fully Mr Goldie’s reasoning process in reaching his conclusion. Moreover, Leumi took no other steps to challenge the statement by Mr Goldie that he had considered the matters referred to in the documents enumerated in his determination. Each of the points about which Mr White complains was made, in one form or another, in the documentation to which Mr Goldie referred. There is no reason to doubt that Mr Goldie took those matters into account, as he said he did. If some of the issues raised by Mr White were not canvassed in depth in the submissions made by Leumi, that was because Leumi did not avail itself fully of the opportunity to put forward arguments in support of its request pursuant to s721(1) of the Corporations Law.
In these circumstances, I do not think that Leumi has made out its contention that Mr Goldie failed to take into account relevant considerations in making his decision. The challenge to that decision therefore fails.
XI DID LEUMI AND/OR EBC CONTRAVENE THE SUBSTANTIAL SHAREHOLDER PROVISIONS?
APPLICATION OF S709
It was common ground that neither Leumi nor EBC had lodged substantial shareholder notices with the ASC. If Leumi and EBC were substantial shareholders in OAP at the relevant time, and if s709(1) of the Corporations Law applied to them, they have each contravened s709(1). It is therefore necessary to consider whether they have required to comply with s709(1), notwithstanding that they were foreign corporations. Because of the conclusions I have reached in relation to the contraventions by Leumi and EBC of Pt6.8 of the Corporations Law, I state my conclusions on this aspect of the case more briefly.
Mr White argued that, as a matter of construction, s709(1) and the regulations prescribing the particulars to be included in a substantial shareholder notice (Corporations Regulations, reg1.0.3, Form 603) and the specifying documents to accompany the notice (reg6.7.01), could not apply to Leumi. He put this on two bases. First, a regulation making power cannot be exercised to prescribe that acts committed abroad by foreigners will be an offence: Air-India v Wiggins [1980] 1 WLR 815 (HL). Secondly, a regulation cannot validly impose an obligation to reveal information, the disclosure of which violates Swiss law. Mr Conti adopted this argument.
In my view, each of these contentions fails because it is the legislation itself, rather than the regulations, that defines the acts or omissions that constitute offences under Australian law. S709(1) imposes the obligation upon a substantial shareholder to give a written notice in accordance with the section. S709(3) provides that the notice shall include inter alia, the prescribed particulars of the voting shares in the company in which the substantial shareholder or its associate has a relevant interest. Having regard to the terms of s110D, it seems to me that s709 contemplates that foreign corporations will be required to provide particulars as to beneficial ownership of the shares in which they or their associates have relevant interests. I also think that s709 contemplates that foreign corporations must provide particulars as to beneficial ownership of the shares (unless excused by the Court under s.743), even though to do so will or might infringe foreign law.
As with Pt6.7, the history of Pt6.8 of the Corporations Law supports this construction of s709. The forerunner to Pt6.7 of the Corporations Law was Pt4, Div.3A (s69A-s69N) of the Uniform Companies Acts. This legislation commenced on 1 March 1972 and implemented the recommendations of the Eggleston Committee. That Committee was influenced by legislation in the United States and Great Britain requiring disclosure of substantial shareholdings in listed companies. The Eggleston Committee gave reasons for requiring disclosure. (Company Law Advisory Committee to the Standing Committee of Attorneys-General, Second Interim Report (Parl Pap 43, 1969), para4,para6):
“4. Reasons for requiring disclosure: Legislation such as that referred to above is, in our opinion, justified by the consideration that in the case of companies whose shares are traded on stock exchanges, shareholders are entitled to know whether there are in existence substantial holdings of shares which might enable a single individual or corporation, or a small group, to control the destinies of the company, and if such a situation does exist, to know who are the persons on whose exercise of voting power the future of the company may depend. The Acts, of course, do make provision for the registration of shareholders, but it has always been possible to conceal the identity of the person beneficially entitled by vesting the shares in a trustee. Indeed, the English Act of 1862 expressly provided that no notice of any trusts should appear on the register (see now s156(4) of the Victorian Act); this provision no doubt originated in a desire to relieve the company from the necessity of determining whether particular dealings were in breach of trust, although the objective could have been achieved in other ways. At all events, it is now a common practice for investors to have their shares registered in the name of nominees, sometimes for purposes of concealment, but in many cases merely for convenience in dealing with the shares, for example, in the case of investors who are permanently or frequently absent from Australia. In other cases, shares are registered in the name of trustees under wills or settlements. The introduction of a requirement that all beneficial interests should be disclosed would lead to an enormous amount of paper work much of which would be pointless. We think, however, that the figure of 10 per cent which has been adopted in the United States and in the United Kingdom is a reasonable one, and that provision should be made substantially along the lines of the United Kingdom legislation for the disclosure of interests giving rise to control of voting power where this reaches the 10 per cent level.
…
6. Territorial operation of legislation: We think it is important that the legislation should be so expressed as to leave no doubt that the obligation of disclosure is intended to apply to persons resident, or companies incorporated, outside the jurisdiction, as well as to persons or corporations within the jurisdiction. We do not intend that there should be any discrimination against foreign investors, and indeed we do not consider that our terms of reference contemplate that we should make any distinction between Australian and overseas investors. Questions of foreign control of Australian companies, such as gave rise to the ordinance recently brought into force in the Australian Capital Territory, are therefore outside our field, and have played no part in the formulation of our recommendations. If, however, the legislation were so worded that it could be read as subject to a territorial limitation, so that a beneficial owner outside the jurisdiction of a State or Territory could claim that the obligation to give notice of substantial holdings did not apply to him, such persons would be able to gain control of companies by stealth in circumstances in which residents could not. We realise, of course, that the enforcement of the provisions against non-residents may be difficult, but we indicate below certain sanctions of non-compliance which, although they may not be fully effective, will we think, discourage any individual or company, whether resident or non-resident, from ignoring the provisions.”
From the outset, in accordance with the proposals of the Eggelston Committee, Pt4, Div.3A was expressed to apply, inter alia, to all bodies corporate, whether incorporated or carrying on business in Australia or not and to all acts done or omitted to be done, whether in Australia or not: see, eg Companies Act 1961 (NSW), s69B.
Legislation requiring disclosure by substantial shareholders was retained in the 1981 Code: Pt4, Div.4 (s134-s146). The Corporations Law substantially adopted the Code provisions, except that the threshold for a substantial shareholding was reduced by 10 per cent to 5 per cent.
The history of what is now Pt6.7 of the Corporations Law supports the view that it is intended to apply to foreign corporations, even if disclosure of beneficial ownership of the shares would or might infringe foreign law. The Eggleston Committee specifically rejected the notion that a territorial limitation should be incorporated in the legislation. It also focussed on beneficial ownership of shares in Australian companies, in keeping with its concern that the market should be aware who has the power “to control the destinies of the company”. These factors strongly suggest that the scheme now incorporated in Pt6.7 would be at risk of being rendered ineffective if non-residents are able to avoid the disclosure provisions on the ground that compliance would or might breach foreign laws. As with Pt6.8, the legislation allows a foreign corporation caught between two legal systems to apply to the Court for relief pursuant to s743 of the Corporations Law.
SUBSTANTIAL SHAREHOLDER: LEUMI
The next question is whether Leumi and EBC were substantial shareholders in OAP and therefore within s709(1) of the Corporations Law. On the evidence, I do not think that Leumi was a “substantial shareholder” in OAP for the purposes of s709(1). This is because Leumi was a “bare trustee” of the shares held by it, within the meaning of s39(b) of the Corporations Law and thus had no “relevant interest” in the shares. I am also satisfied, on the evidence, that Leumi acted on behalf of the beneficial shareholders in the performance of the functions attaching to a professional capacity or a business relationship, within the meaning of s16(1)(a) of the Corporations Law. Since there is no other basis for a finding that Leumi is an “associate” of its clients in relation to the OAP shares held by it, no such finding can be made.
In Corumo Holdings Pty Ltd v C Itoh Pty Ltd (1991) 24 NSWLR 370 (NSW CA), one issue was whether a Mr Stapleton, who held a share in a company as trustee, was a “bare trustee” for the purposes of s8(8)(a)(iii)(B) of the Companies (New South Wales) Code 1981, the predecessor to s39(b) of the Corporations Law. The terms of the trust required Mr Stapleton to vote in respect of the share and execute notices, transfers and other instruments as directed by I Ltd and to pay all dividends and other benefits to I Ltd, or as directed by it. Meagher JA, with whom Samuels JA agreed, held that Mr Stapleton was a bare trustee (at 398-399):
“A “bare trust” is one in which the trustee has no active duties to perform and is usually contrasted with a trust where there are such active duties. A recent discussion of the topic may be found in Gummow J’s judgment in Herdegen v Commissioner of Taxation (Cth) (1988) 84 ALR 271. In that case, his Honour points out that the precise nuances of the phrase must depend on the context in which it is found. As a matter of strict logic a person in Mr Stapleton’s position would theoretically have been in a position where he had an active independent duty to perform in some circumstances, for example, if he found himself so situated that he had a vote at a formal meeting and C Itoh had declined to instruct him how to exercise his vote. But, as a matter of strict logic, almost no situation can be postulated where a trustee cannot in some circumstances have active duties to perform. The applicants would have the phrase confined to situations where the trustee was immediately bound to transfer the share to his beneficiary. But this, in my view, is too narrow a construction, and would result in reading down the phrase so that it applied only to situations which almost never occur. Bearing in mind the evident statutory purpose, and particularly bearing in mind that s230 imposes criminal penalties for its breach, I think the expression must be related to situations where a trustee is no more than a nominee or cypher, in a commonsense commercial view. The purpose of the exception contained in the sub-subparagraph is to disregard, so far as the category of “persons” having “relevant interests” in the shares in question all persons who, in a practical sense, have no say in the utilisation of the powers attaching to those shares. Where one remembers that C Itoh was not only the beneficial owner of Mr Stapleton’s shares in JC No 7 and JC No 100 but was the only other shareholder in both companies, the prospect of Mr Stapleton ever voting independently of C Itoh must be remote indeed.”
Dr Belser’s evidence leads to the following conclusions concerning Leumi’s role in relation to the shares held by it in OAP:
* Leumi acts exclusively on instructions in selling the shares, voting or dealing with dividends. It has no independent discretion. Any dividends received are paid to client accounts.
* The Safe Custody Regulations, which govern the legal relationship between Leumi and its clients under Swiss law, require Leumi to act on instructions from the clients in relation to shares. The only relevant qualification to this is that, if an allotment of new securities is offered to holders of existing securities, and no instructions are received, Leumi “will make the best possible utilisation of these rights”.
Mr Lindsay relied on the transcript of a private examination of Mr Rivkin by the ASC, pursuant to the Australian Securities Commission Act 1989, s19, to counter this evidence. In the examination Mr Rivkin, a stockbroker, referred to Leumi and EBC as fund managers. Mr Rivkin also said that he had been told by Mr Imfeld of Leumi (and Dr Fundulus of EBC) that Leumi (and EBC) could not reveal details of clients even if the clients requested that the information be disclosed. The context in which these comments were said to have been made was not, however, explored in Mr Rivkin’s examination. Mr Rivkin also stated that he did not know in what capacity Leumi (or EBC) operated in relation to OAP shares. There was evidence in the proceedings before me that a small proportion of Leumi’s business consisted of portfolios managed on a discretionary basis.
In the absence of cross-examination of Dr Belser, I do not consider that the extracts from Mr Rivkin’s examination justify me in rejecting or departing from Dr Belser’s evidence. Nor do I think that Mr Rivkin’s statement in his examination to the effect that he received instructions from Mr Imfeld in relation to the purchase of OAP shares is inconsistent with Leumi being a bare trustee of the shares in OAP, in the sense described by Meagher JA in Corumo Holdings Ltd v Itoh.
Dr Belser’s evidence, together with other evidence not in dispute, seems to me to establish that Leumi acted on behalf of the beneficial shareholders in the performance of the functions attaching to a business relationship. Leumi is a bank. Leumi is permitted to carry on business in Switzerland, subject to the provisions of the Swiss Banking Law. Leumi had a business relationship with the beneficial shareholders of shares in OAP. One of Leumi’s functions in the course of that relationship was to carry out the instructions of the shareholders: cf. Heine Management Ltd v Australian Securities Commission (1994) 12 ACLC 138 (SCt Vic/Hayne J), at 153. Mr Lindsay did not suggest that, if there were a business relationship, Leumi was not acting in the proper performance of its functions arising from the relationship.
SUBSTANTIAL SHAREHOLDER: EBC
The evidence concerning the shares held by EBC is much less detailed. The only evidence adduced by EBC was a statement, on information and belief, by Ms Chang, a solicitor, as follows:
“I have been further informed by Dr Fundulus by telephone on Friday 10 November 1995, and verily believe that in relation to all of the Offset shares the long established practice of EBC is to act in accordance with the instructions of its clients previously provided, and that EBC does not, consistent with that practice undertake commitments compromises or concessions in relation to its clients’ affairs without instructions. Dr Fundulus informed me and I verily believe that consistent with such practice, all dealings with the Offset shares have only been made pursuant to specific instructions of the clients.”
In my opinion, this evidence is insufficient to establish that EBC was a bare trustee in relation to the OAP shares. The “long established practice” described by Ms Chang does not demonstrate that EBC, to use Meagher JA’s language, was merely a nominee or cypher in a commonsense commercial view, having no practical say in the utilisation of the powers attached to the shares. The evidence does not address the nature of the legal relationship between EBC and the beneficial owners; nor does it detail whether EBC exercises any discretion in relation to voting rights. The exercise of such rights does not seem to me to be encompassed by the phrase “dealings with the Offset shares”, at least without further elaboration or explanation. It follows that EBC cannot bring itself within s39(b) of the Corporations Law and that it had a relevant interest in the shares held by it: Corporations Law, s31. I therefore conclude that EBC contravened s709 of the Corporations Law by failing to give a notice to the ASC within two business days of becoming aware of its relevant interest in the shares. It is unnecessary to consider whether EBC is an associate of its clients for the purposes of the Corporations Law.
XII SHOULD LEUMI AND/OR EBC BE EXCUSED FROM THEIR CONTRAVENTIONS UNDER s743?
THE ARGUMENTS
S743(1) empowers the Court, on the application of an interested person, to excuse a contravention of a provision of Chapter 6 of the Corporations Law if it is satisfied, in all the circumstances, that the contravention should be excused. S743(3) provides that the circumstances to which the Court “may have regard” in deciding whether a contravention should be excused include
“the contravention having been due to the person’s inadvertence or mistake, to the person not having been aware of a relevant fact or occurrence or to circumstances beyond the control of the person”.
It is clear that the circumstances specified in s743(3) do not exhaust the factors that may be taken into account in a particular case. Leumi and EBC argued that, if their submissions as to construction of the legislation were rejected, questions of international comity should nonetheless be taken into account in considering whether their breach of s722 should be excused. Mr Conti, in particular, argued that it was not appropriate to consider the conduct of any party other than the corporation on whom the secondary notice had been served. The notices had been served only upon Leumi and EBC and it was their officers and agents who were at risk under Swiss law if they complied with the secondary notices. The Swiss corporations should not face the dilemma of either having to commit an offence in Switzerland or being penalised for failing to comply with the Corporations Law. Moreover, Mr Conti submitted that, if the ASC was to conduct an investigation into suspected criminal offences, such as a contravention of Pt6.7 of the Corporations Law, it should do so in accordance with the treaty arrangements described earlier in this judgment.
Both Leumi and EBC contended that they had taken all steps available to them under Swiss law to comply with the secondary notices served on them. The fact that their clients had declined to consent to disclosure did not detract from the conclusion that the Swiss corporations had contravened s722 by reason of circumstances beyond their control.
Mr Lindsay submitted that it was “of central importance” in the case that persons claiming an interest in OAP through Leumi and EBC had deliberately chosen to acquire and maintain shares in an Australian company, but to decline to provide information that, but for Swiss law, they would be required to furnish to the Australian authorities. He pointed out that (as is the case) there was undisputed evidence to the following effect:
* Dr Beker, a Swiss lawyer acting for Leumi, had personally given notice to the “relevant clients” of Leumi with respect to the secondary notice received by it on 24 April 1995. He had received express instructions not to disclose to the ASC the information sought in the notices.
* Dr Fundulus had communicated by telephone with EBC’s clients whom he “presumed” to be the beneficial owners of the shares held by EBC in OAP. All clients had informed him that they did not agree to the release of the information to the ASC.
* EBC and Leumi were regularly were sent ANZ Nominees’ “Custody Services Newsletter” which, on occasions, summarised the requirements of Australian law relating to the reporting of substantial shareholdings and the tracing of beneficial ownership in shares held in Australia companies.
Mr Lindsay argued that this evidence showed that Leumi and EBC were aware of the requirements of Australian law. Moreover, their clients had refused to exercise the choice available to them under Swiss law, to instruct Leumi and EBC to make the disclosures sought in the secondary notices. Accordingly, the Court should not permit Leumi or EBC or their customers to circumvent the policy favouring the maintenance of an informed market.
EXERCISE OF DISCRETION
In my view, the fact that the recipient of a secondary notice is at risk of violating the law of a foreign country by complying with the notice is an important factor to consider in the exercise of the discretion conferred by s743(1) of the Corporations Law. In general, Australian courts should strive, so far as is consistent with Australian legislation, to avoid a situation where an individual or corporation is caught between the conflicting requirements of Australian law and foreign law: compare Bank of Crete SA v Koskotas (No.2) [1992] 1 WLR 919 (Ch D/Millett J), at 926. In particular, if a foreign corporation finds itself unable to comply with the requirements of Australian law, because it has been unavoidably placed in a position where to do so would conflict with the law of the country in which it does business, an Australian court would regard this as a very powerful reason to excuse a contravention of Australian law.
It is also appropriate, in my view, to take into account that enforcement of the Australian law violates or might violate principles of international law or comity. I have previously held that, as a matter of construction, the Corporations Law requires a foreign corporation to comply with a secondary notice given under s719(1), even where compliance places the corporation at risk of contravening foreign law. However, that does not mean that principles of international comity should be ignored in the exercise of a statutory discretion to excuse a contravention of s722 of the Corporations Law. It is no light matter for Australian laws to be enforced in circumstances which infringe the legislative policies of other countries, even if those laws advance legitimate regulatory objectives in Australia.
In the present case, there are additional factors that favour Leumi and EBC being excused for what would otherwise be a contravention of s722. Both have endeavoured to obtain the consent of their clients to the release of the information sought in the secondary notices. Leumi provided information to the ASC in respect of 80,000 shares in OAP that it held as principal. I accept that the requests made by Leumi and EBC to their respective clients were made in good faith and that they would have acted on their clients’ instructions to divulge the information sought, had those instructions been received. I did not understand Mr Lindsay to suggest that either Leumi or EBC was party to a deliberate attempt to circumvent Australian laws. In any event I would reject such a suggestion. The evidence showed, for example, that both Leumi and EBC were long-standing clients of ANZ Nominees. EBC had purchased shares in OAP before about 1990 on the recommendation of Mr Rivkin, a stockbroker. This is not a case where the evidence suggests that either Leumi or EBC has courted legal impediments to the production of the information: compare Securities and Exchange Commission v Banca Della Svizzera Italiana 92 FRD 111 (1981) (US Dist Ct, SDNY), at 117; Minpeco SA v Conticommodity Services Inc 116 FRD 517 (1987) (US Dist Ct, SDNY), at 528. Moreover, I am not in a position to assess the motives of the beneficial owners of the shares held by Leumi and EBC, since there is no evidence as to who the beneficial owners are or what prompted them to acquire their shares.
Despite the factors suggesting that Leumi and EBC should be excused for their contravention of s722 of the Corporations Law, in my view they are outweighed by other factors. First, Leumi and EBC each holds over 15 per cent of the issued capital of OAP. Leumi’s shareholding totals 16.97 per cent of the issued capital. EBC’s shareholding, if the BB Nominees parcel (which was the subject of a separate secondary notice) is ignored, totals 21.57 per cent. I accept for these purposes that Leumi and EBC do not hold the shares beneficially (even though EBC is a “substantial shareholder” for the purposes of s709(1)) and that it is possible that no single beneficial shareholder holds more than 5 per cent of the issued stock. Nonetheless, the beneficial ownership of over 38 per cent of the issued capital of a listed company is a matter of considerable importance to an informed market. The policy underlying Pt6.8 of the Corporations Law strongly suggests that contraventions relating to such significant shareholdings should not lightly be excused.
In this connection, Mr Conti submitted that the market was adequately informed, despite the failure of Leumi and EBC to comply with the secondary notices, because of the take-over offers made by Fobiti and Arklow. But the fact that these offers have been made, following the contraventions of s722, does not necessarily demonstrate that the market is fully informed. Nor, to the extent that the market is better informed, do the take-over offers show that Leumi or EBC are responsible for the improvement. The market for OAP shares includes persons who are contemplating or might contemplate making further offers. They still do not know who controls the shares held by Leumi and EBC. Furthermore, the evidence does not suggest any connection between Leumi and EBC and the take-over offers. The fortuitous advent of those offers, although perhaps having considerable importance for the form of relief, does not diminish the significance of the contraventions of s722 having regard to the policy underlying Pt6.8 of the Corporations Law.
Secondly, although this is not a case of bad faith, I do not regard Leumi and EBC as being placed in a predicament that is wholly beyond their own control. Under Swiss law it was open to Leumi and EBC, if they chose, to acquire shares in Australian stocks, only on behalf of persons or corporations prepared to waive the secrecy provisions. The point has been made in American cases that art.47 of the Swiss Banking Law and art.273 of the Swiss Penal Code are intended primarily to protect rights of commercial privacy rather than some broader public interest (Minpeco v Conticommodity at 525). The cases also suggest that hardship to Swiss corporations could be avoided if they obtained waivers prior to trading for customers’ accounts: Minpeco v Conticommodity, at 527. Neither Leumi nor EBC adduced evidence to explain why such a course was not feasible or appropriate. I appreciate that, as I have found, compliance with the secondary notices exposes Leumi and EBC to a risk of prosecution for aiding and abetting the ASC’s breach of Swiss law by serving the notices in Switzerland. However, I have also found that the risk of a successful prosecution on this ground is small.
Thirdly, the fact that a contravention of Pt6.8 is not excused does not necessarily mean that a foreign corporation should be subjected to an order under s742(2)(e) directing it to do an act in contravention of Swiss law. The appropriate course may be (and, in the present case, for reasons I will give, is) to limit the relief available to the ASC, so that neither Leumi nor EBC is compelled by a court order to provide the information sought in the secondary notices. Limiting the relief in these proceedings does not alter the fact that the foreign corporation has contravened Pt6.8. Nor does it prevent consequences flowing from the corporation’s contravention of Pt6.8. It does, however, avoid the result that an Australian court directs a Swiss corporation to act in breach or possible breach of Swiss law.
A fourth factor affects only EBC’s submission that its contravention of s722 should be excused under s743 of the Corporations Law. I have found that EBC would not be at appreciable risk of a successful prosecution under art.273 of the Swiss Penal Code if it chose to reveal the beneficial shareholdings of non-Swiss domiciliaries in OAP. It has made no offer to do so. (Leumi’s position in relation to art.273 is the same as EBC’s. However, Leumi, unlike EBC, is subject to art.47 of the Swiss Banking Law.)
I should add two further comments on this aspect of the case. First, I think that Mr Conti is correct in submitting that attention should be focussed on the conduct and position of Leumi and EBC, as the recipients of the secondary notices, rather than on what Mr Lindsay described as the deliberate conduct of the beneficial owners of the shares. I do not know what motivated those shareholders to refuse to waive the secrecy requirements of Swiss law. I am not prepared to find that their refusal stems from any desire to avoid Australian laws. Even so, for the reasons I have given, the contravention by Leumi and EBC of Pt6.8 of the Corporations Law should not be excused.
Secondly, I do not think that EBC should be excused for its contravention of s709(1). The factors I have identified in relation to the contraventions of s722 apply to its failure to lodge substantial shareholder notices.
XIII WHAT RELIEF SHOULD BE GRANTED? THE SUBMISSIONS
The ASC, as I have previously noted, seeks declaratory relief and orders that Leumi and EBC comply with the secondary notices and that the shares held for them be vested in the ASC. Some of the submissions were directed to the proposition that to vest the shares in the ASC absolutely would amount to the confiscation of shares worth many millions of dollars for a contravention that carries a penalty of a fine of $ 2,500 and/or imprisonment for six months: Corporations Law, s1311(3); Schedule 3. However, Mr Lindsay made it plain that the ASC is not seeking orders that deprive the beneficial owners of their entitlement to the shares or to the proceeds of sale of the shares. Rather, the ASC seeks orders limiting the entitlement of Leumi and EBC to deal with or obtain the benefit of the shares, unless and until each remedies its failure to comply with s722 and s723 of the Corporations Law. As I understood him, Mr Lindsay relied on s742(2) and s613(e) as the source of the power to make orders of this kind.
Mr White, on behalf of Leumi, pointed out that in May 1995 Leumi had offered to agree to an order that would enable the shares to be disposed of in the market over a period of about six months. Given the take over offers made by Fobiti and Arklow, Mr White contended that, on an appropriate undertaking by Leumi to instruct ANZ Nominees to sell the shares pursuant to a current or future take-over offer, no remedial orders should be made. Mr White again stressed the need to take into account considerations of international comity and the co-operative actions of Leumi, within the constraints imposed by Swiss law. He also argued that, if the shares were vested in the ASC without any directions that they be disposed of, there could well be “unfair prejudice” (within the meaning of s742(2)) to other shareholders of OAP. This was because the unavailability of 38% of the shares to an offeror might reduce the price the offeror was prepared to pay. Mr White further suggested that the offerors would be unfairly prejudiced if they were prevented from acquiring 100 per cent of the shares in OAP.
Mr Conti, for EBC, adopted Mr White’s submissions on this issue. As I followed him, Mr Conti also argued that orders conditioning release of the shares or the proceeds of their sale upon EBC disclosing the information sought in the secondary notices, would constitute unfair prejudice to the officers and agents of EBC, who would be exposed to the risk of prosecution under Swiss law.
Mr Oakes, on behalf of OAP, submitted that, since there were now two competing bids for the shares in the company, the overriding objective should be to ensure that the market is “efficient”. Mr Oakes said that one purpose of the take-over provisions now contained in Chapter 6, is to ensure “that the acquisition of shares in a company takes place in an efficient, competitive and informed market”: Gjergja v Cooper [1987] VR 167 (SCt Vic/FC), at 215, per Ormiston J. The uncertainty created by the freezing orders or by vesting the shares in the ASC, without directing their disposal, was inimical to an efficient market. For this purpose Mr Oakes relied on an opinion given, without challenge, by the Chief Executive Officer of OAP, Mr Anstee. Mr Anstee expressed the view that the injunctions restraining sale of shares held by Leumi and EBC were inhibiting the operation of an efficient market. Mr Anstee also said that uncertainty surrounding the frozen shares could have a depressing effect on the share price, although he expressed this opinion before Arklow’s take-over offer of 14 November 1995 and Fobiti’s revised offer of 17 November 1995. Mr Oakes contended that OAP was unfairly prejudiced by the freezing orders and the orders proposed by the ASC because it had an interest in the take-over activity being conducted quickly and without uncertainty.
Mr Muddle, for Arklow, submitted that it was inconsistent with the maintenance of an informed market that uncertainty should surround 38 per cent of OAP’s share capital. Any orders should therefore facilitate the sale of the shares to the highest bidder, but, if otherwise appropriate, quarantine the proceeds of sale by requiring payment to be made to the ASC. Mr Muddle argued that any order which prevented or hindered sale of the shares to the highest bidder would be unfairly prejudicial to Arklow, since it would be deprived of its ability to achieve its stated intention of acquiring all shares in OAP. There was evidence, which I accept, that Fobiti also wished to acquire 100 per cent of the shares in OAP and would be prevented from doing so if the shares were not available to the market. Accordingly, Mr Muddle submitted that Fobiti would also be unfairly prejudiced if the shares were not available to the market.
THE RELIEF
The relief granted in the circumstances of the present case must take into account several matters. First, s744(2) provides that an order cannot be made under s742 if the Court is satisfied that the order would unfairly prejudice any person. This is a statutory directive which must be followed. Secondly, the orders should advance the principal objective of Pt6.8, namely, to create and maintain an informed market for shares in listed Australian companies. Thirdly, the orders should intrude to the least extent feasible upon principles of international comity, including the principle that a foreign corporation and its officers and agents should not be required, by orders made by an Australian court, to perform acts that would or might infringe foreign law.
S744(2) of the Corporations Law uses the term “unfair prejudice”. The fact that a person is prejudiced by an order does not establish, of itself, that the order is unfair: Waldron v MG Securities (Australasia) Ltd [1975] VR 508 (SCt Vic/Pape J), at 532; Gjergja v Cooper, at 173-174, per McGarvie J, at 218-219, per Ormiston J It is also not necessarily the case that if an “innocent person” is prejudiced by an order, that prejudice is unfair: Gjergja v Cooper, at 174. Whether it is or not may depend upon whether the order is essential to give effect to the relevant legislative policy and whether evidence is presented as to the precise nature of the prejudice said to have been suffered.
In the present case, I consider that each of the competing bidders for shares in OAP would suffer unfair prejudice if orders were made under s742 preventing the shares presently held by Leumi and EBC from being available for sale to the highest bidder. This would be the case, for example, if the shares were vested in the ASC, to be held by it until disclosure was made by Leumi and EBC of the information sought in the secondary notices. On the evidence there is nothing to suggest other than that the offers have been made in good faith and for genuine commercial motives. No suggestion has been, or could be, made that either of the offerors holds shares in OAP, other than those disclosed in their Part C Statements. Neither is responsible for the fact that 38 per cent of the company’s share capital is held by Swiss corporations, or that the beneficial shareholders refuse to consent to those corporations providing information to the ASC. The offerors each wish, for their own valid commercial reasons, to acquire 100 per cent of the share capital in OAP.
It is true that both Fobiti and Arklow were aware at the time they made their respective offers that the shares in OAP had been the subject of injunctions and that the ASC was seeking orders, inter alia, that the shares be vested in it. But Fobiti and Arklow and, for that matter, any other bidder, are entitled to expect that they can operate in a market unimpeded by orders that might lock up a substantial proportion of OAP’s share capital for a considerable period. If the orders sought by the ASC were made, without ensuring that the shares are available to the market, the shares could be effectively frozen for a considerable period. Accordingly, I think that any order made under s742 which fails to facilitate the sale of the shares held by Leumi and EBC to the highest bidder, would unfairly prejudice Fobiti and Arklow. Such an order therefore cannot be made.
Mr Lindsay did not press for an order directing Leumi and EBC to comply with the secondary notices. To comply with such an order would expose the corporations and their officers to the risk of prosecution under Swiss law. In my view, any relief should be confined to declaratory relief and to orders affecting the shares or the proceeds of their sale. The shares, for the purposes of international law, are located within Australia.
The next question is whether it is sufficient to make orders that have the effect of ensuring that the shares will be sold, or whether the shares and the proceeds of sale should be vested in the ASC (or, in the case of the proceeds, paid into court) until the information sought in the secondary notices is provided.
Had the takeover offers not been made by Fobiti and Arklow, there would have been much to have been said for the latter course of action. The market remains less than fully informed if the identity of the beneficial owners of the shares held by Leumi and EBC is not known. The value of the shares is such that freezing them or the proceeds of their sale would be very likely to produce the information sought in the secondary notices. Moreover, the information might be provided in a way that does not infringe Swiss law. This would be the case, for example, if the beneficial owners of the shares instructed Leumi and EBC to comply with the secondary notices. Of course, in determining whether the shares or the proceeds of sale should be frozen until the information was provided, it would be necessary to take into account the open offer from Leumi and EBC, on the instructions of their clients, to sell the shares.
The present case is, however, unusual because of the competing take over offers and the strong likelihood that one of these two bidders, or some other bidder who chooses to enter the fray, will succeed in obtaining control of the company if the Leumi and EBC shares are made available for purchase by the highest bidder. The availability of those shares to the bidders, although not establishing a perfectly informed market (since the identity of the beneficial shareholders is not known to the market), would remove the major source of uncertainty in the market and clarify what is to happen to the 38 per cent of shares held by Leumi and EBC. Making those shares available for purchase by the highest bidder is likely as a practical matter to lead to the best price being realised for shareholders and to overcome any unfair prejudice that otherwise would be experienced by bidders for the company. To vest the shares in the ASC indefinitely, pending disclosure of the information sought in the secondary notices, would continue uncertainty and create a risk of further unfair prejudice to the bidders and, indeed, to other shareholders seeking the best price for their shares.
An alternative is to allow the shares to be sold and to freeze the proceeds of sale until the identity of the beneficial shareholders is made known. This would not be an entirely futile exercise, since it would emphasise the importance of compliance with the disclosure provisions in Pt6.8 of the Corporations Law. But care must be taken not to make orders designed to punish those who, rightly or wrongly, might be suspected of sheltering behind Swiss secrecy laws. That is not a purpose for which the powers conferred by s742 should be exercised. It is, however, appropriate to take into account the degree of culpability of Leumi and EBC in their contraventions of s722 of the Corporations Law: Metals Exploration Ltd v Samic Ltd (1994) 181 CLR 109, at 126, per Mason CJ, Gaudron and McHugh JJ.
If the proceeds of sale were effectively frozen until disclosure was made, the policy underlying Pt6.8 of the Corporations Law would be vindicated. But the probabilities are that any disclosure would be made after all shares in OAP had been acquired by one or other of the bidders. To my mind this would smack of punishment of the beneficial shareholders rather than pursuing the objectives underlying Pt6.8 of the Corporations Law. I do not think that the degree of culpability of Leumi and EBC is such as to warrant freezing the proceeds of sale. Their actions have been prompted by genuine concerns about the operation of Swiss law. Even though I have found that the predicament they are facing did not entirely arise out of circumstances beyond their control, they have not acted dishonestly or in a manner that can be characterised as reckless. They have raised in these proceedings matters of considerable importance and complexity that have not previously been determined by Australian courts.
I have taken into account the finding I have made that EBC has contravened s709, as well as s722, of the Corporations Law. However, I do not think that this should result in different orders made in relation to EBC’s shareholding than in relation to Leumi’s shareholding.
The question is which orders best give effect to the statutory objectives, having regard to all other relevant circumstances that should be taken into account in exercising the discretion conferred by s742(2) of the Corporations Law. In the unusual circumstances of the present case, I think it is appropriate to make orders to the effect of those suggested by Leumi and EBC. The suggested orders are as follows:
LEUMI:
“That the first respondent instruct the third respondent to sell to the highest bidder on any day up to and including the last remaining date for the acceptance of any offer now current (whether or not subsequently varied or extended) for the shares of the eighth respondent (“the shares”) or of any other offer made or announced during the term of any offer now current or any variation or extension thereof (“the relevant date”), any part of the whole of the parcel of the shares held by the third respondent such that by the relevant date the third respondent has disposed of the shares held by it for the first respondent.
In this order “any other offer” means an offer for all or part of the shares:
(i) whether or not subsequently varied or extended; and
(ii) whether by Part A Statement, Part C Statement or by any other kind.”
EBC:
“Order that the Second Respondent instruct each of the Third, Fourth, Fifth, Sixth and Seventh Respondents severally (the “EBC Nominees”) to sell to the highest bidder on any day up to and including the last remaining date for the acceptance of any offer now current (whether or not subsequently varied or extended) for the shares of the Eighth Respondent (“the shares”) or of any other offer made or announced during the term of any offer now current or any extension or variation thereof (“the relevant date”), any part or the whole of the parcel of the shares held by each of the EBC Nominees respectively such that by the relevant date each of the EBC Nominees has disposed of the shares held by it for the Second Respondent.
In this Order “any other offer” means any offer for all or part of the shares:
(i) whether or not subsequently varied or extended; and
(ii) whether by Part A Statement, Part C Statement or by any other bid.”
It will be necessary to continue or to make orders to ensure that the shares held by Leumi and EBC are not disposed of, save in accordance with directions of the kind proposed by Leumi and EBC. In addition, the ASC is entitled to appropriate declaratory relief.
I direct the ASC to bring in draft minutes of order. I shall hear the parties on costs.
ORDER:
MINUTES OF ORDER
THE COURT DIRECTS THAT:
1. The applicant bring in short minutes of order giving effect to these reasons for judgment.
2. These proceedings be re-listed for any further argument as to the form of orders and submissions relating to costs.
NOTE:Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules
Representation:
Mr G Lindsay SC, instructed by Mr Peter Stepek,
Regional General Counsel of the Australian Securities
Commission, appeared for the applicant.
Mr RW White and Ms PP Wines, instructed by
Atanaskovic Hartnell, Solicitors, appeared for the
first respondent.
Mr RA Conti QC and Mr F Kunc, instructed by Freehill
Hollingdale and Page, Solicitors, appeared for the second
respondent.
Mr M Oakes SC, instructed by Landerer and Company,
Solicitors, appeared for the eighth respondent.
Mr WG Muddle, instructed by Minter Ellison,
Solicitors, appeared for the ninth respondent.
AUSTRALIAN SECURITIES COMMISSION v BANK LEUMI LE-ISRAEL (Switzerland) and ORS
No. NG 973 of 1995
FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
1996 AUST FEDCT LEXIS 854; BC9604332
21 May 1996, heard;
18 September 1996 , delivered
CATCHWORDS: [*1] CORPORATIONS LAW – remedial orders under s741(1), s742(2) – factors which may
to be taken into account – orders compel conduct which may be in breach of
foreign law – culpability of those in breach of relevant provisions – effect
of orders on beneficial owners of shares – whether a general rule that in
cases of non compliance with a secondary notice the appropriate order is only
one for peremptory sale of shares to which notice relates – whether order
under s742(2) dealing with proceeds of sale of shares is an order “in
relation” to shares – whether a secondary notice under s719 may be given by
fax – meaning of “give” – whether s109X definition of “give” applicable -
court’s power to excuse contravention of Pt6.8 under s743 – matters to be
taken into account
WORDS AND PHRASES – “in relation to any of the shares” under s742(2) of the
Corporations Law – whether an order dealing with the proceeds of sale of
shares is an order “in relation” to shares – “give” under s719 of the
Corporations Law – whether notice may be given by fax
Corporations Law s6(1), s9, s109H, s109X, s110D, s220, s459, s577, s613(1),
s708, s709, s710, s711, s717, s718, s719, s720, s721, s722, s723, s741(1),
s742(2), [*2] s743, s744(2), s744(6), s744(9), s747, s1322(4)(d), s1324(2),
s1341(2)
Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270 at 282, 283;
Brunswick NL v Blossomtree Pty Ltd (1992) 7 WAR 226 at 234, 235;
House v R (1936) 55 CLR 499 at 505; Pottinger v George (1967) 116 CLR 328 at
337;
Rowell v Pratt [1938] AC 101 at 106;
Metals Exploration Ltd v Samic Ltd (1994) 181 CLR 109 at 127, 128;
Workers’ Compensation Board (Q) v Technical Products Pty Ltd(1988) 165 CLR
642 at 653, 654;
Jackson v Sterling Industries Ltd (1987) 162 CLR 612 at 619, 621, 625, 643;
Racecourse Totalizators Pty Ltd v Hartley Cyber Engineering Pty Ltd (1989)
15 ACLR 457;
Re Mannum Haulage Pty Ltd (1974) 8 SASR 451;
CFC Corporation Pty Ltd v Lanier (Australia) Pty Ltd (1993) 116 FLR 456;
Vicbar Pty Ltd v Development Constructions (Newcastle) Pty Ltd (1995) 13
ACLC 1,220;
Pacific Capital Ltd v BBC Hardware Ltd (1995) 13 ACLC 1,652;
Hastie and Jenkerson v McMahon [1990] 1 WLR 1575;
NM Superannuation Pty Ltd v Hughes (1992) 27 NSWLR 26
JUDGES: LOCKHART, FOSTER and LEHANE JJ
Lockhart J:
I agree with the reasons for judgment of Lehane J and the orders proposed by him. Foster J:
I am in agreement with the orders proposed by [*3] Lehane J, and with his Honour’s reasons for judgment. Lehane J:
This appeal raises questions relating to the provisions of the Corporations Law (the Law) providing for the disclosure of substantial shareholdings in Australian companies and for ascertaining the identity of persons, other than those whose names appear in the register of members, holding beneficial interests in such shares. STATUTORY BACKGROUND
a) SUBSTANTIAL SHAREHOLDINGS
Pt6.7 of the Law provides for the disclosure of substantial shareholdings in listed companies. It is unnecessary to describe its complex provisions in detail. It is sufficient to say that s708 provides that a substantial shareholding is (unless another percentage is prescribed) an entitlement to at least 5% of the voting shares of a listed company. “Entitlement” to a share is defined by reference to the concept of “relevant interest”: a complex concept, now familiar in Australian corporate law, defined in Division 5 of Pt1.2 of the Law. A substantial shareholder of a company is a person who has a substantial shareholding in it.
S709 requires a substantial shareholder of a company to give the company a notice informing it of certain particulars [*4] relating to the shareholder and the interest of the shareholder in the company’s shares. The notice is to be given within two business days after the shareholder becomes aware of the interest giving rise to the substantial shareholding. Then, under s710, a substantial shareholder is required to notify the company of changes in the shareholder’s entitlement. Finally, if a person ceases to be a substantial shareholder, notice of that is to be given to the company under s711. (b) UNDERLYING BENEFICIAL INTERESTS
Pt6.8 provides a mechanism by which the identity of persons holding interests in shares in a listed company may be discovered. The mechanism involves the giving of what are described as primary notices and secondary notices. The relevant definitions, in s717, are as follows:
“primary notice”, in relation to shares in a company, means a written notice addressed to the holder of the shares requiring the holder to give to the body giving the notice a written statement setting out:
(a) full particulars of the holder’s relevant interest in the shares and of the circumstances because of which the holder has that interest; and
(b) so far as is known to the holder:
(i) [*5] full particulars of the name and address of every other person (if any) who has a relevant interest in any of the shares;
(ii) full particulars of each such interest and of the circumstances because of which the other person has that interest; and
(iii) full particulars of the name and address of each person (if any) who has given to the holder of the shares relevant instructions in relation to any of the shares and of those relevant instructions, and the date or dates on which those relevant instructions were given;
“relevant instructions”, in relation to shares, means instructions or directions:
(a) in relation to the acquisition or disposal of the shares; (b) in relation to the exercise of any voting or other rights attached to the shares; or
(c) in connection with any other matter relating to the shares;
“secondary notice”, in relation to shares in a company, means a written notice addressed to a person requiring the person to give to the body giving the notice a written statement setting out:
(a) full particulars of any relevant interest that the person has in any of the shares and of the circumstances because of which the person has that interest; and
[*6]
(b) so far as is known to the person:
(i) full particulars of the name and address of every other person (if any) who has a relevant interest in any of the shares;
(ii) full particulars of each such interest, and of the circumstances because of which the other person has that interest; and
(iii) full particulars of the name and address of each person (if any) who has given to the person to whom the notice is addressed relevant instructions in relation to any of the shares and of those relevant instructions, and the date or dates on which those relevant instructions were given.
S718 provides for the giving of primary notices. A primary notice may be given either by the Australian Securities Commission (the Commission) or by the company. The Commission may act of its own motion; alternatively, the company, or one of its members, may request the Commission to give a notice in relation to particular shares and, if that happens, the Commission is obliged to give a primary notice to the holder of those shares unless the Commission considers that in all the circumstances it would be unreasonable to do so.
S719 deals with the giving of secondary notices. Again, those notices [*7] may be given by the Commission or by the company whose shares are in question. In either case, the notice may be given if a primary notice, or an earlier secondary notice, reveals that a person has a relevant interest in, or has given relevant instructions in relation to, shares. Again, the Commission may of its own motion give a secondary notice and, unless in all the circumstances it considers that it would be unreasonable to do so, must give such a notice if requested to do so by the company concerned or one of its members.
S720 authorises the Commission to provide to a company information received by the Commission as a result of giving a primary or secondary notice relating to the company’s shares; if the notice was given at the request of the company or a member, the Commission must give the information to the company or member except to the extent that the Commission considers that it would be unreasonable in all the circumstances to do so.
The Commission is empowered by s721, on request by a person who receives a primary notice or secondary notice, to excuse the recipient from providing information sought by the notice, to permit the information to be provided in a particular [*8] form or to determine that information will not be passed on to the company or a member. A request for the exercise of that power must, however, be made before the end of two business days after the day on which the notice was received (the Court has power to extend that period under para1322(4)(d) of the Law) and it is to be exercised only where the Commission “is satisfied that there are special reasons” for the exercise of the power. The obligations of the recipient of a notice, both where it has lodged a request under s721 and where it has not, are provided for in s722 and s723, as follows:
COMPLIANCE WITH NOTICES
722 (1) [Comply within two days] A person who receives a primary notice or secondary notice in relation to shares in a company shall, unless before the end of 2 business days after the day on which the person receives the notice the person lodges a request under subs721(1) in relation to particular information that the notice requires the person to give, comply with the notice before the end of 2 business days after that day.
722 (2) [Notify company of compliance] Where a company gives to a person a primary notice or secondary notice in relation to shares in [*9] the company, the person shall, forthwith after lodging a request under subs721(1) in relation to particular information that the notice requires the person to give, notify the company in writing of the request.
Consequences of Commission’s decision on a request
723 Within 2 business days after the day on which the Commission notifies a person of its decision on a request that the person lodged under subs721(1) in relation to a primary notice or secondary notice in relation to shares in a company, the person shall:
(a) if the Commission has given to the person pursuant to the request a certificate under subs721(2):
(i) except as provided in the certificate, comply with the notice;
(ii) if the company gave the notice and the certificate states that specified information need only be given to the company in a specified form – give the information to the company in that form; and (iii) if the company gave the notice – give a copy of the certificate to the company; or
(b otherwise – comply with the notice.
Those provisions may serve various functions. For instance, they may be used by the Commission in aid of its powers to investigate possible corporate wrongdoing. [*10] It is evident, however, and authority confirms, that the primary purpose of the provisions is to maintain an informed market in listed shares of Australian companies (Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270 at 282, 283; Brunswick NL v Blossomtree Pty Ltd (1992) 7 WAR 226 at 234, 235). That object explains the very short times set for compliance and explains also the necessity for the provisions to have (under s110D of the Law) extraterritorial operation: they would have little practical value if they could be circumvented simply by holding shares through a nominee incorporated and resident outside Australia and carrying on no business in Australia. So much is not now in controversy between the parties.
(c) REMEDIES
Pt6.10 of the Law gives the Court power to make certain orders where there is a breach of obligations under Pt6.7 or Pt6.8. subs741(1) deals with defaults by substantial shareholders. It provides:
741 (1) [Possible orders] Where a person (in this section called the “substantial shareholder”) is, or at any time after the commencement of this Chapter has been, a substantial shareholder in a company and has contravened s709, s710 or s711, the Court, [*11] on the application of the Commission or of the company, whether or not the contravention continues, may make such order or orders as it thinks just, including (without limiting the generality of the foregoing):
(a) a remedial order; and
(b) for the purpose of securing compliance with any other order made under this section, an order directing the company or any other person to do or refrain from doing a specified act.
subs742(2) provides for orders which may be made where there is a contravention of s722 or s723, as follows:
742 (2) [Such orders in relation to the shares as the Court thinks just] On the application of:
(a) the Commission;
(b) the company; or
(c) a member of the company who was entitled, or members of the company who were together entitled, to not less than 5% of the total voting rights of all the members having at the date of the notice a right to vote at general meetings of the company;
the Court may make in relation to any of the shares such order or orders as it thinks just, including, but without limiting the generality of the foregoing:
(d) a remedial order; and (e) for the purpose of securing compliance with any other order made under [*12] this subsection, an order directing the company or any other person to do or refrain from doing a specified act. subs613(1) tells us what remedial orders are:
613 (1) [Interpretation] A reference to a remedial order, in relation to the Court, is a reference to any one or more of the following orders:
(a) an order restraining the exercise of any voting or other rights attached to shares;
(b) an order directing a body corporate not to make payment, or to defer making payment, of any amount or amounts due from the body corporate in respect of shares;
(c) an order restraining the acquisition or disposal of, or of an interest in, shares;
(d) an order directing the disposal of, or of an interest in, shares;
(e) an order vesting in the Commission shares or an interest in shares;
(f) an order directing a body corporate not to register the transfer or transmission of shares;
(g) an order that an exercise of the voting or other rights attached to shares be disregarded;
(h) an order cancelling an agreement or offer relating to a takeover scheme or takeover announcement, or a proposed takeover scheme or proposed takeover announcement, or any other agreement or offer [*13] in connection with the acquisition of shares;
(j) an order declaring an agreement or offer relating to a takeover scheme or takeover announcement, or a proposed takeover scheme or proposed takeover announcement, or any other agreement or offer in connection with the acquisition of shares to be voidable. Subs744(2) provides that the Court is not to make an order under any of a number of sections, including s741 and s742, if it is satisfied that the order would unfairly prejudice any person. S743 limits the orders which the Court may make, where it is satisfied that in all the circumstances a contravention ought to be excused, to orders restraining the exercise of voting or other rights attached to shares or that an exercise of such rights be disregarded.
Finally, the Court is given wide powers under Pt9.5 of the Law. Particularly, subs1324(2) empowers the Court by mandatory injunction to enforce compliance with requirements of the Law.
FACTS
In April 1995 each of the third to seventh respondents was a shareholder in the eighth respondent (OAP). During that month the Commission gave a primary notice to each of those shareholders in relation to its shares in OAP. The information [*14] which they gave in compliance with those notices revealed that 4,038,600 shares in OAP (16.97% of its issued capital) were held on behalf of the first respondent (Leumi) and 5,293,771 (22.25% of OAP’s issued capital) on behalf of the second respondent (EBC).
Leumi and EBC are both incorporated in Switzerland. Leumi is a bank and EBC is a finance company. Each, as part of its business, holds securities on behalf of other persons. Neither carries on business in Australia. Each held its interest in the OAP shares on behalf of other persons. The primary Judge held that Leumi was a bare trustee whose relevant interest in the OAP shares was to be disregarded, by virtue of s39 of the Law, and was accordingly not a substantial shareholder of OAP. His Honour also held, however, that EBC was not a bare trustee, was a substantial shareholder and had breached its obligation to give a notice under s709. Neither of those conclusions is now challenged.
In April 1995 the Commission sent secondary notices to both Leumi and EBC. In the case of Leumi, a secondary notice and a covering letter were sent by fax to Leumi’s office in Zurich. The transmission was sent and received on 20 April 1995, [*15] though Leumi said that it was not received by an officer having responsibility for the matter until May. The original notice and covering letter were sent by courier and were delivered to the Zurich office on 24 April 1995. On 27 April 1995 Leumi faxed a letter to the Commission. The letter claimed that:
… we are subject to Swiss law, in particular Swiss Secrecy Regulations. Therefore … our bank would clearly and seriously infringe applicable Swiss law by furnishing you with the statement required by the Commission as per the said notice.
…
We trust that you and the Commission understand our position which is in compliance with applicable Swiss law and appreciate your and the Commission’s comprehension.
Leumi claimed that letter amounted to a request, under s721 of the Law, that for special reasons the information sought should not be given to the Commission. The Commission denied that the letter constituted such a request. If the secondary notice was effectively given by fax, the letter was in any event too late. If the notice was not effectively given by fax but was effectively given when delivered by the courier, then if it could be read as a request of the relevant [*16] kind it was made within time. Without prejudice to its contention that Leumi had not made an effective request under s721, the Commission asked its delegate to make a decision under that section on the assumption that a request had been made. The delegate decided that the request should be refused and that decision was notified to Leumi’s solicitors on 6 September 1995.
A further secondary notice was given to Leumi in October 1995, but there is no issue in this appeal relating to that notice.
A similar course was followed in relation to EBC. A secondary notice was given by fax, to its address in Switzerland, on 20 April 1995; the original was sent by courier and was delivered in Switzerland on 24 April 1995. On 21 April 1995 EBC sent a fax to the Commission acknowledging the fax of 20 April and stating simply that:
Due to Swiss secrecy regulations we cannot, however, provide the requested details about the ownership of subject shares.
Again, the Commission took the position (with some evident justice) that fax from EBC did not constitute a request under s721 of the Law but nevertheless submitted it for consideration by the Commission’s delegate on the unadmitted assumption [*17] that it was such a request. The delegate refused the request on 5 September and EBC was notified of his refusal on 6 September.
Neither Leumi nor EBC has provided the information sought by the secondary notices. At a meeting between the Commission and EBC’s solicitors in May 1995, and subsequently by letter, EBC offered to sell the shares in OAP held for it on terms acceptable to the Commission. It may be inferred that the offer was not accepted.
In October and November 1995 two competing takeover offers were made for all ordinary shares in OAP. Both were made by way of PtC statement. One of the offerors was the ninth respondent, Arklow Pty Ltd. The offers, each having been extended, were open until 28 and 29 December 1995 respectively.
THE PROCEEDINGS
The Commission commenced proceedings in the Court in which it sought relief against Leumi and EBC. The relief was sought on the basis that each had failed to comply with the secondary notices given to it and that each also, being a substantial shareholder in OAP, had failed to give the notice required by subs709(1) of the Law. The Commission sought declarations accordingly and consequential relief including orders requiring [*18] Leumi and EBC to comply with their obligations under the Law and orders vesting in the Commission the shares in OAP held on behalf of Leumi and EBC. The primary Judge (Sackville J) summarised the issues between the parties in the following list of questions, which I shall number so that I may conveniently refer to them later:
1. Were Leumi and EBC obliged to comply with the secondary notices, having regard to the secrecy provisions of Swiss law?
2. Was service of the secondary notices on Leumi and EBC in Switzerland authorised by the Corporations Law, having regard to the provisions of Swiss law governing service of documents in Switzerland?
3. Was service of the secondary notices by fax authorised by the Corporations Law?
4. Were the secondary notices invalid by reason of any prejudgment of issues by the ASC?
5. Did the ASC fail to consider properly requests made by Leumi and EBC under s721 of the Corporations Law?
6. Did Leumi and/or EBC contravene the substantial shareholder provisions of the Corporations Law?
7. Should Leumi and/or EBC be excused from any contraventions, by reason of s743 of the Corporations Law?
8. Assuming Leumi and EBC have contravened [*19] the Corporations Law, what relief should be granted to the ASC?
His Honour answered questions 1, 2 and 3 “yes” and questions 4, 5, and 7 “no”. He answered question 6 “yes” as to EBC and “no” as to Leumi. No issue arises in the appeal as to questions 1, 4, 5 or 6. Particularly, there is no appeal against his Honour’s conclusion that Leumi and EBC were obliged to comply with the secondary notices or his decision that Leumi did not, but EBC did, contravene the substantial shareholder provisions of the Law.
As for question 8, his Honour made the following declarations:
2. Leumi contravened s722(1) of the Corporations Law, in that Leumi, having received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995.
3. EBC contravened s722(1) of the Corporations Law in that EBC, having received on 20 April 1995 a Secondary Notice dated 18 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 20 April 1995. [*20]
4. EBC contravened s722(1) of the Corporations Law in that EBC, having received on 24 April 1995 a Secondary Notice dated 20 April 1995 under s719(1) of the Corporations Law, in relation to shares in OAP, failed to comply with the Secondary Notice before the end of two business days after 24 April 1995.
5. EBC contravened s709(1) of the Corporations Law in that EBC, being a substantial shareholder in OAP, failed to give a written notice to OAP before the end of two business days after the day on which EBC became aware of the relevant interest or interests by reason of which EBC was a substantial shareholder in OAP.
His Honour ordered that Leumi and EBC each dispose of its shares by instructing its nominees to sell them to the highest bidder under an offer current at the date of his orders or made or announced before midnight on 27 December 1995, such that all the shares were to be sold in that way not later than the last day for acceptance of any of those offers. (We were told that all the shares have now been sold as contemplated by those orders). Certain ancillary relief was granted, the terms of which do not matter for present purposes. What does matter is that his Honour [*21] declined to make orders requiring either Leumi or EBC specifically to comply with its obligations under the Law or “freezing” the shares or their proceeds of sale by vesting them in the Commission conditionally, i.e. pending compliance by Leumi and EBC with the secondary notices.
THE APPEAL AND THE CROSS APPEALS
By its amended notice of appeal the Commission appeals against his Honour’s refusal to make orders enforcing compliance by Leumi and EBC with the secondary notices and by EBC with its obligation to give notice of its substantial shareholding. Disregarding matters no longer pressed by the Commission, the Commission seeks, in addition to the orders made by the primary Judge, orders enforcing the obligations of disclosure of Leumi and EBC under s722 and of EBC under s709 of the Law and (on the basis that the shares have now been sold in accordance with the primary Judge’s order) orders vesting the proceeds of sale of the shares in the Commission pending compliance by Leumi and EBC with their respective obligations of disclosure under the Law. Leumi and EBC have both filed notices of contention in which they seek to uphold his Honour’s decision “to the effect that the shares [*22] in question be directed to be sold and the proceeds of sale not be frozen” on the basis that the Court has no power to make orders to freeze or direct the disposition of the proceeds of sale of the shares as a sanction for contravention of s722 or s723 of the Law. Both Leumi and EBC have cross appealed. Leumi’s cross appeal is from the declaration that Leumi, having received a secondary notice on 20 April 1995, failed to comply with it before the end of two business days after 20 April 1995 and his Honour’s refusal to extend the period for Leumi to lodge a request under para721(1)(a) of the Law. The grounds are that his Honour erred in holding that the Law authorises service of a secondary notice by fax and that he erred in declining to consider Leumi’s application under para1322(4)(d) of the Law to extend the time for making a request under s721 of the Law. The relief sought by Leumi is principally an order setting aside the declaration which I have mentioned and substituting one that Leumi, “having lodged a request under s721(1)(a) of the Corporations Law in respect of a Secondary Notice dated 18 April 1995 given to it on 24 April 1995, or alternatively on 20 April 1995, in relation [*23] to shares in OAP, and having been advised by the Australian Securities Commission on 6 September 1995 that such request was refused, failed to comply with the Secondary Notice before the end of two (2) business days after 6 September 1995″; and, secondly, if it be held that service by fax was authorised, an order extending the time for lodging a request under s721.
EBC cross appeals on the same bases as Leumi, but goes further. EBC contends that his Honour erred in construing s719 of the Law as authorising service of a secondary notice in Switzerland by fax or by courier; it also asserts that his Honour erred in holding that there was not a real and appreciable risk that EBC and its officers and agents would contravene certain provisions of Swiss law if they complied with the notice and that, on that basis, his Honour was wrong in refusing to exercise his discretion under s743 to excuse EBC’s contraventions (assuming EBC to have been guilty of contraventions). Accordingly, EBC seeks orders setting aside both the declarations – those numbered 3 and 4 in his Honour’s order – as to EBC’s failure to comply with s722 and, alternatively, an order that EBC’s contraventions be excused [*24] under s743. Senior counsel for Leumi indicated that if EBC were to succeed on the grounds of appeal not raised in Leumi’s own notice of appeal, Leumi would seek to amend its notice so as to rely on those grounds as well.
In summary, the issues in the appeal and the cross appeals, common to Leumi and EBC, are as follows:
1. Was his Honour right in declining to make orders specifically enforcing compliance by Leumi and EBC with their obligations under the Law?
2. Was his Honour right in refusing an order vesting the shares or their proceeds, conditionally or otherwise, in the Commission?
3. Has the Court power to make an order vesting in the Commission the proceeds of sale of shares, or otherwise to “freeze” those proceeds?
4. May a secondary notice under s722 be given by fax?
The additional grounds on which EBC relies give rise to the following further issues: 5. Does s719 of the Law authorise the giving of a secondary notice in a manner which infringes the law of the place where the notice is given?
6. Should his Honour have held that there was a real and appreciable risk that EBC, if it complied with the secondary notice, would breach article 271 of the Swiss [*25] Penal Code?
7. Should any contraventions of s722 have been excused under s743?
Some of those issues involve a consideration of provisions of Swiss law canvassed in detail before his Honour. It is convenient to consider those matters before turning to the issues which I have identified.
SWISS LAW PROVISIONS
His Honour was referred to three provisions of Swiss law and the Commission, Leumi and EBC each tendered expert evidence as to their effect.
Two of the provisions impose obligations of secrecy. Article 273 of the Swiss Penal Code penalises a person “who tries to discover a manufacturing or business secret in order to give it to a foreign government or individual, or to a foreign company, or to the agents of any of the above” or gives such a secret to such a body or person. His Honour held that there was a real and appreciable risk that article would be held to prohibit EBC or Leumi from giving information in response to the Commission’s notices to the extent that those holding interests in their OAP shares are Swiss domiciliaries. His Honour held that there was also a small risk that Leumi or EBC would be in breach of the article if information were disclosed as [*26] to the interests of non-Swiss domiciliaries in the shares. In either case, his Honour held, there would be no breach if the clients of Leumi and EBC authorised or consented to disclosure of the information. His Honour’s conclusions as to article 273 are not challenged.
Article 47 of the Swiss Banking Law prohibits a bank or its officers from divulging secrets entrusted to them. His Honour held that article applies to Leumi (which is a bank) but not to EBC (which is not). His Honour held that the provision by Leumi of the information required by the secondary notice would constitute a breach of article 47 by Leumi and its officers who provided the information, if Leumi’s clients had not consented to its provision. Swiss law neither requires a bank in such circumstances to seek its clients’ consent to the provision of information nor prohibits a bank from seeking consent. There was a conflict of expert evidence as to whether there is a general practice among Swiss banks to seek their clients’ consent to the disclosure of information in circumstances such as these; on the evidence his Honour was unable to find that there is any such general practice. Again, his Honour’s conclusions [*27] as to article 43 were not challenged.
Article 271 of the Swiss Penal Code is a provision of a different character. It provides, among other things, that a person “who, without authorisation, carries out, on Swiss territory, actions which fall within the province of the public authorities, [and] any person who carries out such acts for a foreign State, individual, or organisation, [and] any person who sanctions such acts, shall be punished by imprisonment or, in serious cases, “reclusion” (apparently, a particular form of imprisonment). The questions which arise are whether service of the notices, by fax or by courier, breached article 271 and whether, if they provided information in compliance with the notices, Leumi and EBC, and their officers, would be punishable as aiders and abettors. His Honour held that service by courier was likely to have breached the article; that there was a risk that service by fax breached the article, but that the risk of a successful prosecution was significantly less in the case of service by fax than where documents are served by courier; and that there was some risk that Leumi and EBC would, if they complied with the notices, be liable as aiders [*28] and abettors but that the risk of prosecution for aiding and abetting was, on the evidence, although not fanciful, not real and appreciable. Again, his Honour held that there was no appreciable risk of prosecution of Leumi or EBC or their officers if they obtained their clients’ consent before making disclosure. EBC challenges his Honour’s conclusion that the risk of prosecution based on aiding and abetting cannot be described as real and appreciable.
ISSUES ON THE APPEAL
1. Was his Honour right in declining to make orders specifically enforcing compliance by Leumi and EBC with their obligations under the Law?
His Honour dealt with this issue as follows (Appeal Book p1329): Mr Lindsay did not press for an order directing Leumi and EBC to comply with the secondary notices. To comply with such an order would expose the corporations and their officers to the risk of prosecution under Swiss law. In my view, any relief should be confined to declaratory relief and to orders affecting the shares or the proceeds of their sale. The shares, for the purposes of international law, are located within Australia.
Senior Counsel for the Commission submitted that his Honour was wrong [*29] in suggesting that the Commission did not press for orders directing Leumi and EBC to comply with the notices. The Commission says that its claims for orders requiring disclosure lie at the heart of the proceedings.
That latter statement seems, with respect, somewhat to exaggerate the position. In a passage to which senior counsel for the Commission directed us (Appeal Book p1166) the following exchange occurs:
HIS HONOUR: … I note by the way that in your written submissions you refer to the proposition that the ASC did not intend to abandon their claim for orders for the provision of information required by the [Law] to be disclosed. I had not understood you to abandon it, I had not understood you to press it very strongly which is what I had intended to say, but having made your position clear I do not think there is really anything more that needs to be said about that.
MR LINDSAY: I agree with that, your Honour, thank you.
That exchange took place in the course of argument as to the form of the orders to be made; that is to say after delivery of his Honour’s judgment. In any case, I would not interfere with his Honour’s exercise of his discretion in this respect. [*30] If (as his Honour found) it was possible to grant other relief which was likely in substance to compel disclosure without necessarily requiring Leumi or EBC (or their officers) to act in breach of Swiss law, his Honour’s decision was one which was, at least, clearly open to him. If, as I think (for reasons which will appear), that was not possible, the same conclusion results from considerations relevant to the second issue arising on the appeal, to which I shall now turn.
2. Was his Honour right in refusing an order vesting the shares or their proceeds, conditionally or otherwise, in the Commission?
As has been seen, the Court may make a “remedial order” where there is a breach of an obligation to lodge a notice of a substantial shareholding or to comply with the requirements of a secondary notice; and one of the remedial orders which may be made is an order vesting in the Commission shares or an interest in shares. Before the primary Judge, the Commission sought orders vesting in the Commission the shares in OAP held on behalf of Leumi and EBC on the basis that the shares or, if the Court should order their sale, the proceeds of sale would be “frozen” unless and until the [*31] disclosures required by the Law were made.
His Honour declined to make an order vesting the shares pending disclosure, for the reason that such an order would unfairly prejudice the two bidders for all the issued shares in OAP and therefore (s744(2)) could not be made. Particularly, his Honour held that there was nothing in the evidence to suggest that the offers were made otherwise than in good faith and for genuine commercial motives and that, although each bidder knew that the shares in OAP had been the subject of interlocutory injunctions and that the Commission was seeking vesting orders, they were entitled to expect that they might operate in a market unimpeded by orders which might lock up a substantial proportion of OAP’s share capital for a considerable period. Having thus formed the conclusion that any relief granted must be such as would ensure the sale of the shares to the highest bidder, his Honour proceeded to consider whether, subject to that condition, an order should be made vesting in the Commission the shares or their proceeds pending disclosure.
Having held that making the shares available for purchase by the highest bidder would, as closely as was practically [*32] possible, achieve the statutory object of establishing an informed market, lead to the best price being realised for shareholders and overcome any unfair prejudice which would otherwise be experienced by bidders, the primary Judge considered (on the assumption that he had power to make such an order) the alternative of allowing the shares to be sold and then freezing the proceeds of sale until the identity of the beneficial shareholders should be made known. This, he held, would not be an entirely futile exercise, since it would emphasise the importance of compliance with the disclosure provisions in Pt6.8 of the Law. But in the end his Honour declined to make such an order. His reasoning appears in the following passage (Appeal Book p1332):
But the probabilities are that any disclosure would be made after all shares in OAP had been acquired by one or other of the bidders. To my mind this would smack of punishment of the beneficial shareholders rather than pursuing the objectives underlying Pt6.8 of the Corporations Law. I do not think that the degree of culpability of Leumi and EBC is such as to warrant freezing the proceeds of sale. Their actions have been prompted by genuine [*33] concerns about the operation of Swiss law. Even though I have found that the predicament they are facing did not entirely arise out of circumstances beyond their control, they have not acted dishonestly or in a manner that can be characterised as reckless. They have raised in these proceedings matters of considerable importance and complexity that have not previously been determined by Australian courts.
The Commission accepted that in deciding upon the appropriate remedy the Judge exercised a discretion of a kind which the Court will review only in accordance with the well-known principles stated in House v R (1936) 55 CLR 499 at 505. The Commission contended, however, that the Judge’s exercise of discretion, applying those principles, could not stand. In essence the Commission’s complaint was, as I understood it, that in circumstances where the Judge recognised that it was possible to make an order which would in practical effect ensure the provision of the information required by the notices and thus promote the principal object of the provisions of the Law, the refusal to make such an order would both set at nought the statutory purpose in this particular case (because the [*34] market would remain uninformed) and, perhaps more importantly, encourage others in the future to evade the statutory objects by holding shares in Australian companies through foreign institutions bound by foreign secrecy laws. As an aspect of that general submission, the Commission argued that the Judge was wrong, having had regard to Swiss law in considering the construction of the provisions, to have regard to it again in connection with the exercise of his discretion as to remedy. The Commission submitted also that the Judge failed to take into account, or at least to give appropriate weight to, the investigatory objects of the provisions, particularly in circumstances where (as was the case) the giving of the notices was instigated by the Australian Stock Exchange in the course of an investigation which it had commenced into dealings in shares in OAP. Additionally, the Commission contended that the Judge was mistaken in the way in which he took into account the position of the ultimate beneficial owners: it was they, the Commission said, who were “calling the shots”; it was their refusal to consent to disclosure which led to the breaches by Leumi and EBC. As counsel for the Commission [*35] put it in their written submissions:
The undisclosed identity of those persons lies at the heart of the obligations of disclosure for which the Corporations Law provides. Those persons are the ones who make the ultimate decision as to whether or not to permit disclosures to be made. They are the ones who ultimately benefit from share dealings made by Bank Leumi and EBC as their agents. It makes no sense to ignore this. To do so is to undermine the intent of the Corporations Law.
The Judge was wrong, therefore, so it was said, in regarding an order the effect of which was to compel disclosure as a form of “punishment” which it was not the object of the provisions to impose. The Judge, the Commission argued, was preoccupied with a perceived need to enable the shares to be sold and failed to take other essential matters into account.
Although those submissions have obvious force, I am persuaded by the argument for Leumi and EBC that the primary Judge’s discretion did not miscarry. First, his Honour had a discretion as to remedy, albeit one to be exercised judicially: there is a range of possible remedies, of which those are to be selected which are appropriate to the circumstances [*36] of the case. Secondly, the circumstances were unusual in that, at the time when his Honour had to consider what remedy was appropriate, there were two competing bids for all the shares in OAP by parties evidently unrelated to those who held interests in the shares covered by the notices.
Thirdly, I do not think that the criticism can be sustained that the Judge took account of irrelevant matters or failed to take account of essential ones. It is, in general terms, unexceptionable, as an exercise of discretion, to refuse specific relief if that relief would compel a breach of the law: see, eg, Pottinger v George (1967) 116 CLR 328 at 337. Indeed, in Rowell v Pratt [1938] AC 101 at 106, Lord Wright said bluntly that a judge “cannot compel a man to commit a criminal offence”. I cannot think it is a wrong exercise of discretion to take into account that specific relief, or relief having a similar practical effect, may compel conduct which is in breach of foreign law; thus I think that the Judge was right in having regard to Swiss law in considering the appropriate remedy: to do so in my view is not, as the Commission contended it was, to give Swiss law primacy over Australian law. [*37] It is clear that his Honour took into account the primary object of the disclosure provisions: he considered that in the particular circumstances their primary object would be adequately served, having regard to the other considerations to which he referred, by an order for sale to the highest bidder without an order freezing the shares or their proceeds. It is clear also (Appeal Book p1281) that he took into account – albeit in a somewhat different context – the possible investigatory object of the provisions but, rightly in my view, regarded that as a subsidiary object. His Honour was clearly right in taking into account the degree of culpability of Leumi and EBC (Metals Exploration Ltd v Samic Ltd (1994) 181 CLR 109 at 127, 128) and I can see no basis for interfering with his findings on that subject. Finally, I do not think his Honour’s treatment of the position of the ultimate beneficial owners (“ultimate wrongdoers” as counsel for the Commission described them) discloses error. There was no evidence as to who they were (which distinguishes this case from, for instance, Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270), where they were resident or domiciled or what their [*38] grounds or motives may have been for refusing their nominees permission to disclose their identity. Certainly, there was no basis for a conclusion that they had, so far as Australian or any other law was concerned, any obligation to permit disclosure. I do not think his Honour was wrong in taking account, as a discretionary matter going to remedy, of the fact that an order he was asked to make might punish those persons, by depriving them of their interest in the shares or their proceeds, for (and during the continuation of) failure to make a disclosure which their nominees, but not (for anything that appears) they themselves, had an obligation to make.
I think, therefore, that we should not interfere with the exercise by the primary Judge of his discretion as to remedy. Two things should, however, be emphasised: one is that the existence of the two offers for the shares in OAP was an important consideration in this case and made it somewhat unusual; secondly, there were a number of other discretionary considerations which led his Honour to conclude that, having made declarations, the only consequential relief required was an order that the shares be sold. I would not assent to [*39] the general proposition, put to us in argument by counsel for Leumi, that in most cases of non compliance with a secondary notice the appropriate order will be (only) one for a peremptory sale of the shares to which the notice relates. It is not, I think, as counsel described it, impermissibly to “conflate” obligation with remedy to say that the evident policy of the Law is that the identity of beneficial owners of shares in Australian listed companies should, if required by a notice given under the Law, be disclosed, not that such a holder should generally be able to avoid the obligation of disclosure, where it is required, by prompt sale. For instance (and it should be stressed that this is only an example) an order for sale of a large parcel may well, despite whatever publicity the proceedings may receive, be highly disruptive to the market in the shares concerned unless the sale takes place over a substantial period; but if nevertheless disclosure is not made, and is not compelled, during that period the market remains uninformed and the policy of the Law is not given effect. Again, a nominee company which is fully aware of the requirements of Australian law and of the remedies [*40] available for breach may not evoke much sympathy if it persists in a practice of acquiring Australian shares on behalf of clients without obtaining instructions which would permit disclosure of their identity if required. That is to say no more than that the question, what is the appropriate remedy, is a discretionary one which in each case will have to be answered having regard to the particular circumstances; there is in my view no general rule.
3. Has the Court power to make an order vesting in the Commission the proceeds of sale of shares, or otherwise to “freeze” those proceeds?
This is the issue raised by the notices of contention filed by Leumi and EBC. On the view which I have taken concerning his Honour’s exercise of discretion as to remedy, the answer to the question does not affect the outcome of the appeal. I think I should, nevertheless, consider it: it raises a short point of statutory construction. Whereas s741 provides simply that where a substantial shareholder fails to notify the existence, alteration or cessation of its substantial shareholding the Court may make orders, including remedial orders, subs742(2) provides that where the recipient does not comply [*41] with a primary or secondary notice the Court may in relation to any of the shares make orders, including remedial orders. The question which therefore arises is whether an order dealing with the proceeds of sale of shares – eg vesting them in the Commission or requiring their payment into Court, in either case pending compliance with secondary notices – is an order “in relation to” the shares.
It is necessary to take into account some other provisions of the Law. I have already set out subs613(1) which gives content to the phrase “remedial order”. subs744(6) provides that an order under s742 may include such ancillary or consequential provisions as the Court thinks just and reasonable. subs744(9) applies where shares are vested in the Commission, eg by a remedial order made under s742: the Commission is empowered, “subject to any directions of the Court”, to get in, sell or otherwise dispose of or deal with the shares; and s577 applies, so that the Commission is required to deal with the proceeds of sale as unclaimed moneys under Pt9.7: thus (subs1341(2)), if someone claims to be entitled to the proceeds, and the Commission is satisfied as to the entitlement, then the Commission [*42] is required to pay them to the claimant.
Counsel for Leumi submitted that there was no power to make an order to the effect that the proceeds of a sale of shares be held by the Commission pending compliance with the secondary notice. It is not an order “in relation to” the shares. He cited Workers’ Compensation Board (Qld) v Technical Products Pty Ltd (1988) 165 CLR 642 for the proposition that though the phrase “in respect of” (and similarly “in relation to”) has a wide meaning, it “gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends” (per Deane, Dawson and Toohey JJ at 653, 654). Counsel for the Commission, on the other hand, stressed the width of the words “in relation to” and argued that an order in relation to the proceeds of sale of shares was an order in relation to the shares themselves; in addition, he pointed to the power in subs744(6) to make ancillary orders and submitted that an order vesting proceeds, in the way the Commission sought, could be justified under that provision.
The matter is very much one of impression. There is, I think, no doubt that an order vesting the shares might be [*43] coupled with a direction that the Commission exercise its power to sell the shares vested, eg by accepting the highest current offer: that is clearly enough an order of the kind contemplated by para744(9)(a). If such a sale is made, then the Commission will receive the proceeds and will be required to deal with them in the way the Law provides. I find it difficult, however, to see that an order that the proceeds should, instead, be retained and not disbursed until a secondary notice is complied with is properly to be described as an order ancillary to one either vesting the shares or directing their sale; and I do not think that such an order can be justified independently as one “in relation to” the shares. Matters might well be different where, in a proper case, a mandatory order was made requiring compliance with a secondary notice: where such an order was made, a further order requiring, pending compliance, that shares be sold and their proceeds be paid into Court, or that the proceeds of sale of shares directed to be vested in the Commission not be disbursed, could I think be justifiable as ancillary to the mandatory order enforcing compliance with the Law.
Those conclusions [*44] are, perhaps, reinforced by a consideration of submissions made on behalf of Leumi on a closely related matter, but going principally to discretion. Counsel for Leumi submitted, and I agree, that the primary function of the Court is to make orders finally disposing of matters or controversies, and that it would generally be an inapt use of judicial power to make conditional orders of the kind sought requiring the supervision by the Court of future conduct. Accepting the general correctness of that, there is, as counsel conceded, an exception in cases where a mandatory order requiring compliance with the Law is made. Given that a construction of the provisions is open which would not permit an order “freezing” proceeds except where a mandatory order requiring compliance is made, I think those further considerations support its adoption as the construction to be preferred.
Counsel for the Commission suggested that a “freezing” order might alternatively be justified on the basis of the jurisdiction of the Court to grant a Mareva injunction: Jackson v Sterling Industries Ltd (1987) 162 CLR 612. It is clear, however, that a Mareva injunction is not available in that way as, in effect, [*45] final relief. It is available only to achieve a more limited and interim purpose: Jackson at 619 per Wilson and Dawson JJ, 621 per Brennan J, 625 per Deane J and 643 per Gaudron J. 4. May a secondary notice under s719 be given by fax?
S719 provides that the Commission or a company may “give” a secondary notice. S722 imposes obligations on a person who “receives” a secondary notice. Pt6.8 does not itself include any provision as to the way in which a secondary notice is to be given. In coming to the conclusion that a secondary notice may be given by fax, provided at least that it is actually received by the person to whom it is directed, his Honour relied on the very short time limit within which the provisions require, in order to keep the market fully informed, information to be given; the absence of a provision requiring a secondary notice to be executed or signed in any particular way; and the fact that the provisions impose obligations on one who “receives” a notice as opposed to one to whom a notice is “given”. There are obvious considerations of convenience favouring a construction, if one is open, which would permit the giving of a notice by fax.
The difficulty lies [*46] in s109X of the Law. That section reads as follows:
109X (1) [Application of section] For the purposes of any provision of this Law that requires or permits a document to be served on a person, whether the expression “serve”, “give” or “send” or any other expression is used, the document may be served:
(a) on a natural person:
(i) by delivering it to the person personally; or
(ii) by leaving it at, or by sending it by post to, the address of the place of residence or business of the person last known to the person serving the document; or (b) on a body corporate other than:
(i) a company; or
(ii) a recognised company; or
(iii) a registered body;
by leaving it at, or sending it by post to, the head office, a registered office or a principal office of the body corporate.
109X (2) [Operation of other provisions or court powers] Nothing in subs(1):
(a) affects the operation of any other provision of this Law or any other law of the Commonwealth or of this or another jurisdiction that authorises the service of a document otherwise than as provided in that subsection; or
(b) affects the power of a court to authorise service of a document otherwise than [*47] as provided in that subsection.
109X (3) [Service on director or secretary] In addition to the methods of service referred to in subs(1), a document may be served on, or delivered to, a director or secretary:
(a) in their capacity as a director or secretary; or
(b) for the purposes of a proceeding in respect of conduct they engaged in as a director or secretary;
by leaving it at, or posting it to, the alternative address notified to the ASC under subs242(1), subs242(2) or subs242(8).
Leumi and EBC are, of course, bodies corporate to which para(1)(b) of the section applies. A secondary notice is a “document” for the purposes of the section: see the definition in s9. It is a document which a provision of the Law permits to be given to, and thus, for the purposes of the section, to be served on a person. Therefore the section is to be read, as it applies to the secondary notices given to Leumi and EBC, as providing that a secondary notice may be given to Leumi or EBC by leaving it at, or sending it by post to, the head office, a registered office or a principal office of Leumi or EBC, as the case may be.
S220 of the Law deals with the service of documents on a company: [*48] ie, broadly speaking, one incorporated under the Law or under legislation which it replaced. subs220(1) provides that:
A document may be served on a company by leaving it at, or by sending it by post to, the registered office of the company.
S109 and s220 are thus similarly expressed. It is well established that s220 provides exclusively for the service of documents, eg particularly statutory demands under s459E. Counsel referred to such cases as Racecourse Totalizators Pty Ltd v Hartley Cyber Engineering Pty Ltd (1989) 15 ACLR 457, Re Mannum Haulage Pty Ltd (1974) 8 SASR 451, CFC Corporation Pty Ltd v Lanier (Australia) Pty Ltd (1993) 116 FLR 456, Vicbar Pty Ltd v Development Constructions (Newcastle) Pty Ltd (1995) 13 ACLC 1,220 and Pacific Capital Ltd v BBC Hardware Ltd (1995) 13 ACLC 1,652. We could not, it was contended, apply to s109X a construction different from the well established construction of the substantially identical words in s220. To do so would, further, leave subs109X(2) with little, if any, work to do. It should also be noted that the Law expressly provides for the service of certain documents by fax: s747, dealing with the service of documents on a securities [*49] exchange. Those are powerful considerations. Nevertheless, it must be borne in mind that s109X has effect for the purposes of the Law except so far as the contrary intention appears (subs6(1)): there is, therefore, a question whether a contrary intention appears in Pt6.8. Additionally, s109H must be kept in mind. It provides:
109H In the interpretation of a provision of this Law, a construction that would promote the purpose or object underlying the Law (whether that purpose or object is expressly stated in the Law or not) is to be preferred to a construction that would not promote that purpose or object.
When one compares the provisions of Pt6.8 with, for instance, those of Pt5.4, it is evident that the latter provisions, so far as they relate to the service of documents and their receipt, are drawn with much greater precision than the former. Particularly, subs 459E(1) permits a person to “serve” on a company a demand; events which may follow the service of a demand, and time limits applicable to them, are consistently described by reference to the time when the demand was “served”: see eg, s459(2)(a)(ii), s459F(b), s459G(1), s459G(2), s459Q(a). The contrast with Pt6.8 is [*50] quite striking. Whereas s718 and s719 authorise the Commission or a company to “give” a notice, s721 and s722 speak of action which may, or must, be taken by a person who “receives” (rather than “is given”) a notice. Then, subs721(3) refers to a refusal “by written notice to the person”; subs 722(2) speaks of a requirement to “notify the company in writing” of a request; and s723 speaks of the day on which the Commission “notifies a person of its decision on a request”. Additionally, the verb “give” and various derivatives of it are used in Pt6.8 in contexts where clearly s109X is not, or may not be, applicable: see, eg, the opening words of the definitions of “primary notice” and “secondary notice” in s717 (“to give to the body giving the notice”), para721(1)(a) and para721(1)(c) and para721(2)(d), para721(1)(e) and para721(1)(f). Additionally, if the construction for which Leumi and EBC contend is right, different requirements, as to giving a notice, apply according to whether or not the person to whom it is given is one to whom s109X applies. It was suggested to us, somewhat surprisingly perhaps, that whereas an Australian company may be given a notice by fax because s109X does [*51] not apply and s220 also does not apply (presumably because the notice is “given” not “served”), neither a natural person nor a foreign corporation may be given a notice by fax. In the end, I think that in the context of the provisions, and given their evident purpose, s109X is inapplicable: the intention that it should not apply sufficiently appears.
Authorities cited by his Honour (Hastie and Jenkerson v McMahon [1990] 1 WLR 1575 and NM Superannuation Pty Ltd v Hughes (1992) 27 NSWLR 26) establish clearly enough that there is nothing in the nature of facsimile transmission which excludes it as a means of giving or serving a document.
Accordingly, in my view, a primary or secondary notice may be given by fax. I agree, however, with the view of the primary Judge that time limits and obligations consequent on the giving of a notice are enlivened, when it is given by fax, only upon actual receipt of the notice in full and in legible form. Because of my conclusion that the primary Judge’s decision as to the appropriate remedies should not be disturbed, it is unnecessary for me to consider the further submission of counsel for Leumi as to an extension of time under s1322(4)(d). [*52]
5. Does s719 of the Law authorise the giving of the secondary notice in a manner which infringes the law of the place where the notice is given?
This is the first of the additional points in EBC’s notice of cross-appeal. It arises because his Honour held that service by courier infringed, and service by fax possibly infringed, article 271 of the Swiss Penal Code. His Honour’s conclusion that the obligations imposed on the recipient of a secondary notice apply extraterritorially is not challenged and, in my view, is clearly right: and that is so whether or not compliance by the recipient would breach a requirement of foreign law. As his Honour recognised, however, it is a different question whether s719 permits the giving of a secondary notice, including by an Australian regulatory authority, where the giving of it may infringe foreign law. As his Honour pointed out, the interests protected by the Swiss provisions inhibiting disclosure (the protection of private and commercial confidences) are different from the interest (the integrity of a foreign government’s sovereignty within its own territory) protected by article 271. EBC argued that the considerations relied upon by the [*53] primary Judge – particularly considerations relating to the short time limits required if the statutory scheme were to be effective – were not sufficient to displace the presumption that s719 should not be construed so as to permit breach of the laws of another sovereign state. The solution, counsel for EBC said, was for government to make suitable arrangements with foreign sovereigns to ensure that notices may be given speedily without infringing local law.
In my view that submission should be rejected. Once it is accepted – as, for the reasons given by the trial Judge, in my view it must be – that s722 operates extraterritorially so as to impose obligations on foreign corporations, even where performance of the obligations would result in breach of local law, it is, as his Honour says, but a short step to conclude that a notice may be given under s719 to a foreign corporation in the same way as it can be given to a local corporation, even though the giving of it may infringe the law of the place where the notice is received. Indeed it is not easy to see by what precise process of construction a different result could be reached: particularly, a result which differentiated between [*54] the giving of notices in jurisdictions which permitted that to be done in the way contemplated by s719 and the giving of them in jurisdictions which did not. Once again, it is a matter of construing the provisions in the light of s110D (which, unless a contrary intention appears, gives them application to all bodies corporate, whether formed or carrying on business in Australia or not) and s109H (which requires the Court to prefer a construction that would promote the purpose or object underlying the provisions to one that would not). The purpose of the provisions is the maintenance of an informed market; plainly the legislature thought it necessary, for the promotion of that object, to provide for a very quick mechanism for giving notices and responding to them. In my opinion the Judge was right in holding that s719 authorises the giving of a notice even where to do so may infringe the law of a foreign country. 6. Should his Honour have held that there was a real and appreciable risk that EBC, if it complied with the secondary notice, would breach article 271 of the Swiss Penal Code?
This is a somewhat narrow point, involving a finding, on expert evidence, as to Swiss law. A [*55] conclusion favourable to EBC would have no practical consequences, given the conclusions I have already reached, unless it led in turn to a conclusion favourable to EBC on the next and final issue, which, as senior counsel for EBC frankly told us, he approached “with some misgiving or concern”.
Be that as it may, the issue is whether it should be held that there is a real and appreciable risk that EBC and its officers or agents would contravene article 271 as aiders and abettors if EBC complied with the secondary notice. The only one of the three experts who dealt with this matter explicitly, as it relates to the secondary notices, was Dr Peter Nobel, who gave evidence for EBC and whose qualifications, as the Judge said, are impressive. Dr Nobel swore two affidavits, dated 28 July 1995 and 15 November 1995 respectively. In his first affidavit, Dr Nobel expressed the view that the employees or agents of the Commission who were involved in sending the secondary notice to EBC by mail (sic) or facsimile breached article 271. He added that the Swiss Federal Court had held that the term “aiding and abetting” “denotes any action, assistance or preparation which facilitates the punishable [*56] activity and is therefore to be punished as a completed offence”; here, Dr Nobel said, the “punishable activity” was the sending of the notices; accordingly it was his opinion “that officers, employees and agents of EBC who provide information to the [Commission] in answer to the Notices could be held in breach of article 271 of the Swiss Penal Code, as aiders and abettors”.
In his second affidavit, Dr Nobel answered a number of specific questions which had been put to him. They included the question “what is the degree of possibility of EBC’s officers, employees and agents being held in breach of Article 271 and/or Article 273 PC?”. Dr Nobel answered this question shortly: he said
In my opinion there is a real and appreciable risk of liability. That risk is not merely a fanciful one.
He then referred to the likelihood of publicity of any charge and the undesirable consequences of that publicity. There was then a further question which was directed to ascertaining Dr Nobel’s views about the effect of a particular decision of the Swiss Federal Court and his agreement, or otherwise, with what other experts said as to the likelihood that persons in Switzerland answering interrogatories [*57] might be held liable as aiders and abettors. In answer to that question, Dr Nobel described the decision in some detail: it was one relating to the liability of a Zurich lawyer who instructed his assistant to help with the taking of evidence for the purpose of Australian proceedings. Dr Nobel then said this:
As this judgment does not relate to the status of witnesses or persons answering notices in any way [the statement of the Commission's expert] is in my opinion misleading. The case does indicate the seriousness with which breaches of Article 271 are treated by the Swiss courts. In the light of the Federal Court’s very broad definition of the term “aiding and abetting” quoted above (“any action, assistance or preparation which facilitates the punishable activity”), I am of the opinion that the judgment creates the real and appreciable risk that Article 271 could also be applied to witnesses or persons answering notices. That risk is not fanciful.
In the light of that and other evidence Sackville J found that there was some risk that Leumi and EBC, and their officers and agents, would contravene article 271 as aiders and abettors if they complied with the secondary notices. [*58] His Honour continued (Appeal Book p1254):
However, it is necessary to have regard to the lack of authoritative guidance on this issue under Swiss law and the rather general character of Dr Nobel’s reasoning on this point. I think that the risk of a prosecution based on aiding and abetting, although not fanciful, cannot be described as real and appreciable. If the disclosure to the ASC were made with the authority of the clients of Leumi and EBC, I think that the risk of prosecution of the Swiss corporations, or their servants or agents, as aiding and abetting any contravention by the [Commission] of art 271, is not appreciable.
Two things are evident, I think. One is that his Honour was dealing with a slightly different question from that posed to Dr Nobel. The other is that, as it related to the issue with which his Honour was concerned, his Honour was justified in describing the reasoning of Dr Nobel as rather general in character. That, no doubt, is simply a consequence of the particular questions he was asked. I would not disturb his Honour’s finding on this issue. 7. Should any contraventions of s722 have been excused under s743?
I have already mentioned the diffidence [*59] with which senior counsel for EBC approached this matter in his oral submissions. In my view the Judge’s decision not to excuse the contraventions he found was well within the permissible bounds of judicial discretion and, for what it may be worth, was in my view right. His Honour recognised a number of factors which weighed in the balance in favour of EBC (and Leumi): particularly, that it is no light matter to enforce Australian laws in circumstances which infringe the legislative policies of other countries and that, on the evidence, there could be no suggestion that EBC (or Leumi) had acted in bad faith or with the deliberate object of circumventing Australian law. The force of the former consideration was, however, considerably reduced by the possibility (and, as it turned out, the actuality) of taking it into account on the question of remedy. The force of both was outweighed by the significance, in relation to the policy of Pt6.8, of the very substantial proportion of the issued capital of OAP controlled by each of EBC and Leumi. S743 does not state exhaustively the matters to be taken into account on an application to excuse a breach; the considerations which his Honour took [*60] into account were relevant and important. CONCLUSION
The result of my conclusions on the issues arising on the appeal and cross-appeals may be shortly stated: the appeal and both cross-appeals should be dismissed, in each case with costs.
ORDER:
1. The appeal be dismissed with costs.
2. The cross appeal of the first cross-appellant be dismissed with costs.
3. The cross appeal of the second cross-appellant be dismissed with costs.
NOTE: Settlement and entry of orders is dealt with in O36 of the Federal Court Rules
Representation:
Counsel for the appellant: Messrs GC Lindsay SC and GO Blake
Solicitors for the appellant: PJ Stepek
Counsel for the first respondent: Messrs DF Jackson QC and RW White
Solicitors for the first respondent: Atanaskovic Hartnell
Counsel for the second respondent: Messrs RA Conti QC and F Kunc
Solicitors for the second respondent: Freehill Hollingdale and Page
AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD v HUNTER BNZ FINANCE LTD July 11, 2008
Posted by islamicbanker in CASES.add a comment
AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD v HUNTER BNZ FINANCE LTD
SUPREME COURT OF VICTORIA
APPEAL DIVISION
1990 VIC LEXIS 1017; [1991] 2 VR 407
12-13 September, 20 November 1990, heard
20 November 1990, delivered
CATCHWORDS: [*1] Conversion – Cheque – Measure of damages – Subsequent payments to drawer – Whether payments should be taken into account to reduce damages. Appeal – Arguments not advanced in court below – Whether appellate court should allow new contentions for conclusions of fact to be advanced.
HEADNOTES:
A company proposed to acquire computer equipment by way of lease finance. It entered into a lease of equipment with the plaintiff who drew a cheque for $ 131,250 made payable to the supplier of the equipment. The cheque was collected by a finance broker who delivered it to a director of the proposed lessee for on-delivery to the supplier. The director deposited the cheque in another company’s account with the defendant bank which collected the cheque on behalf of the customer who had no entitlement to the cheque. No computer equipment was ever supplied. For some months after execution of the lease, payments were received by the plaintiff, as though pursuant to the lease, totalling $ 109,620.28.
The plaintiff sued the defendant for conversion of the cheque. The trial judge decided that the defendant was liable in conversion and formed the view that the plaintiff was entitled to recover, as damages, [*2] the full amount of the cheque without deduction for the payments received by the plaintiff. On appeal against the decision as to quantum: Held, dismissing the appeal: (1) By the whole court. Before a payment or benefit could be taken into account in reduction of damages for conversion, whether or not the payment or benefit was made or given by the converter or from funds resulting from the conversion, it must be established that the payment or benefit was not made or received collaterally to the commission of the tort, or that it not be res inter alios acta. In the present case there was no clear evidence as to the circumstances under which the payments were made or the source of the payments. There was therefore no basis for any reduction of the damages to which the plaintiff was, prima facie, entitled.
Associated Midland Corporation Ltd. v Bank of New South Wales [1983] 1 NSWLR 533 and Australia and New Zealand Banking Group Ltd v AMEV Finance Ltd (1989) ATR 80-228, referred to.
(2) By Fullagar J. An appellate court would not allow contentions for conclusions of fact to be put for the first time on appeal which, if put earlier, would have led the other side to adduce further [*3] evidence relevant to the existence or non-existence of such facts, particularly where the existence of such facts was denied on the pleadings and depended on a minute analysis of documents which were marked only for identification and not received into evidence at the trial.
JUDGES: MURPHY (1), FULLAGAR (2) and VINCENT (1) JJ
JUDGMENTS: Murphy and Vincent JJ: This is an appeal from a judgment of Tadgell J reported at [1990] VR 41 given in favour of the respondent/plaintiff in an action in the Commercial Causes List and arises in the following circumstances.
In May 1985, a company known as Comrie Pty Ltd (Comrie), through a finance broker, made a proposal of what might fairly be described as a standard kind to enter into a lease financing transaction with the respondent which is a finance company.
Under the proposal, the respondent was to buy certain items of computer equipment from a company named Detente Systems (Detente), which it would then lease [*4] to Comrie, which would pay monthly rental for their use. The respondent, assuming that Comrie was acting in good faith, accepted the offer and, in consequence, drew a cheque on the Commonwealth Trading Bank endorsed “not negotiable a/c payee only” for $ 131,250 and made payable to Detente Systems or bearer.
The amount was that set out in an “invoice” which had been provided to the respondents by Comrie for the goods, the purported subject of the proposed lease. Among the curious features connected with the transaction is the apparently undisputed fact that the amount shown in this document, which had been prepared by Detente in the anticipation that a sale would be effected, had been altered after its presentation to Comrie. However, the most significant fact concerning the use of the document is that there was no business dealing taking place or apparently contemplated between Comrie and Detente at the time. Comrie had earlier indicated to Detente that it did not wish to proceed with the transaction to which the invoice in its original form referred. Perhaps not surprisingly, when considered against this background, instead of the proceeds of the respondent’s cheque finding their [*5] way into the bank account of Detente, they were credited in fact to the account of a further company, Western Orient Pty. Ltd., a customer of the appellant bank. The precise circumstances under which this diversion took place did not emerge from the evidence adduced in the course of the hearing and, in particular, the nature of the connection between Comrie and Western Orient never became clear, although it was accepted that a Mr Bacich, who represented Comrie in its dealings with the respondent, was a director of both companies at the relevant time.
The exact details of the conversion and associated fraudulent activity are not relevant for present purposes as it has not been denied that a wrongful conversion of the cheque took place, nor that Comrie had been involved in fraudulent activity to ensure that the conversion remained undetected. Although, of course, no goods were ever delivered by Detente to Comrie, the respondent was not aware of this fact and, as it received the agreed monthly instalments in accordance with what it believed to be bona fide arrangements, no suspicions were apparently aroused for some time. A total sum of $ 109,620.28 was so received in this fashion. [*6] It was not until these payments became irregular and eventually ceased that the true situation became apparent and the conversion was discovered. The respondent instituted proceedings against the appellant which the learned trial judge decided, was in the circumstances liable to it as a converter of the cheque. No challenge has been made in the course of the present hearing to this finding. His Honour also formed the view that the respondent was entitled to recover, as damages, the full amount of the cheque.
It is this decision as to quantum with which the present proceeding is concerned. The question presented for determination is whether it was open to his Honour so to decide, or whether the correct application of principle in the particular circumstances of the matter before him required that the payments received by the respondent be taken into account in the assessment of the damages to be awarded to the respondent.
In support of its challenge to this decision, before this court the appellant has placed reliance on only two of the grounds set out in the notice of appeal, namely: “5. That the learned trial judge ought to have deducted lease payments totalling $ 109,620.28 [*7] paid to the respondent by or on behalf of Comrie Pty Ltd from the amount payable to the respondent as damages for the conversion of the cheque. “6. In particular the learned trial judge was in error in his statement of the following: ‘In the circumstances I know of no principle on which it might be contended, or even contemplated, that the payments that have been received by the plaintiff could be taken into account in reduction of the damages to which prima facie the plaintiff is entitled.’ “
Senior counsel acting on the appellant’s behalf submitted, in effect, that the respondent should not have been placed by the making of an award of damages in a better position as a consequence of the conversion than it would have been if no tort had been committed. He asserted that the actual loss sustained by the respondent was the balance remaining after the amount received as purported rental payments was deducted from the amount of the cheque.
It was submitted that these payments were so connected with the conversion, as they were made to conceal its occurrence, that the conclusion was, for practical purposes, irresistible that a benefit was received by the respondent as a result of [*8] the commission of that tort. The payments could not, the argument proceeded, therefore be considered to be “collateral” to it or res inter alios acta. In that circumstance, there existed no reason of policy why that benefit should not be taken into account.
It is well established that in an action for conversion the courts proceed on the basis that prima facie the loss sustained by a plaintiff in consequence of the commission of this tort is the value of the property at the time of the conversion, and damages will be assessed accordingly. If a defendant desires to contest this position, that party has the burden of setting aside this prima facie figure for the amount of damages and of showing that an award for a smaller amount should be made. Mere evidence of receipt of moneys by the plaintiff, even from the defendant, will not be sufficient for this purpose: see Associated Midland Corporation Ltd. v Bank of New South Wales [1983] 1 NSWLR 533, at p. 537. In a carefully expressed judgment in that case Mahoney JA, at p. 550, outlined the relevant principles to determine which events that occur after the happening of a conversion may reduce the damages otherwise payable. “Thus, [*9] where the defendant has paid what the plaintiff himself would have had to pay in respect of the goods, that payment may reduce the damages: Peruvian Guano Co Ltd v Dreyfus Brothers and Co [1892] AC 166, at 174; Hill v Ziymack (1908) 7 CLR 352, at 358. And a defendant may be able to claim a deduction for what he has spent in improving the goods: see Thomas v Robinson [1977] 1 NZLR 385 and the cases there referred to. It is not every subsequent payment by a convertor which is to be taken into account.”
Mahoney JA recognised two bases, one in law and one in equity, which may produce such a reduction in damages. The first of these acknowledges that situations may exist where a converter defendant may properly rely upon a legal right to reclaim some of the money paid to the plaintiff, whilst that which arises in equity is concerned with the possibility of the unjust enrichment of the plaintiff.
It would appear that underlying the development of both the legal and equitable principles in this area, is a concern of the courts that the basis upon which the measure of damages in cases of this type is assessed, should reflect in general terms the approach of [*10] the law to the assessment of damages sustained in consequence of the commission of other tortious acts. This is directed to the provision of reasonable compensation for injury and loss and attempts to place the injured party as far as possible in the position in which that party would have been had the tortious act not been committed.
Although senior counsel for the appellant initially raised the possibility that Tadgell J may have fallen into error in his consideration of the principles which are applicable to the assessment of damages in a case of this type, it is clear from the extent and substance of references to them in the judgment of his Honour that this contention could not be sustained and the suggestion was soon abandoned. The substantial challenge before the court was really directed to the view of the evidence adopted by him.
In the present matter, Tadgell J. was of the opinion that the evidence before him was deficient in a number of respects. Indeed, for example, he considered that it did not disclose the position with sufficient clarity to enable a finding to be made as to whether or not Comrie itself made any payments to the respondent at all, although it would [*11] not appear that any issue had been raised in the course of the proceedings concerning this aspect. However, perusal of the material made available to this court strongly suggests that this fact was conceded.
If the correctness of his finding on this aspect was determinative of the appeal, .it may well have been successful. However we suspect that his Honour was not at that point attempting to do more than to emphasise the general inadequacy of the material before him. In any event, we are satisfied, on the basis of other findings made by him and which were clearly open on the evidence, that a more substantial obstacle lies in the path of the appellant. The fact that funds which it is claimed should be taken into account in reduction of damages may have been provided by someone who was not a party to the conversion does not, as his Honour clearly recognised, necessarily preclude their being taken into account for this purpose, nor is it necessary for a defendant to show that any such payments were made from funds which had been obtained by reason of the conversion: see Associated Midlands Corporation Ltd., at pp. 551-2.
However, there is a requirement that before a payment [*12] or benefit can be so taken into account it must be established that the payment or benefit was not made or received collaterally to the commission of the tort, or that it not be a res inter alios acta. The adoption of such an approach by the courts represents the application of the principle of compensation for loss occasioned by the commission of the wrongful act. Payments made by or on behalf of a converter in satisfaction of obligations independently owed to a plaintiff who claims damages for conversion have been on this basis excluded from consideration: Lloyds Bank Ltd. v Chartered Bank of India, Australia and China [1929] 1 KB 40.
Similarly, whether a plaintiff was entitled to retain moneys received by it from or on behalf of a converter, or whether they could possibly be reclaimed by the tortfeasor or some other person, can assume relevance in this context. Obviously, in a situation where a plaintiff was not able to retain money received by it, there would almost certainly be no proper justification for taking that money into account in determining the actual loss suffered.
The learned trial judge directed attention to this issue in his judgment. [*13] He expressed the view that, in the absence of any clear evidence as to the circumstances under which payments of money were made to the respondent, the nature of the relationship which existed between Comrie and Western Orient Pty Ltd the precise role played by Mr Bacich and whether or not a claim for repayment of the money could be made perhaps by the liquidator of Comrie Pty Ltd, no proper basis had been established for any reduction of those damages to which the respondent was, prima facie, entitled.
In dealing with this issue he adverted to the possibility that perhaps the payments were not to be regarded as collateral to the conversion by virtue of the existence of independent obligations arising under a leasing arrangement between Comrie and the respondent, but found himself unable to reach an appropriate finding on the matter. In Australia and New Zealand Banking Group Ltd v Amev Finance Ltd (1989) ATR 80-228, the Supreme Court of Western Australia was confronted with a somewhat similar situation, in that it had to decide whether rental and other payments made pursuant to a purported lease could be taken into account so as to reduce the amount of damages payable by the defendant. [*14] The question to be determined was whether those funds were sufficiently connected with the conversion of the cheque to justify the reduction of the amount of the loss. The court adopted the approach of Mahoney JA. in the Associated Midlands Corporation Case when dealing with this issue.
In his judgment, Malcolm CJ. made the following observation, at p. 68,400: “It is necessary to look at the amounts received by the respondent with these considerations in mind in determining whether they are sufficiently connected with the conversion to be brought to account, or merely collateral or ‘res inter alios acta’. “As to the instalments of rental, in my opinion, the learned trial Judge rightly concluded that these were sums paid by Kierle to the respondent as consideration for possession of the coach under the lease agreement. In Lloyds Bank v Chartered Bank (supra) at p. 61, it was held that the damages will not be reduced where the converter of a cheque used the proceeds to repay his own debt to the plaintiff. A fortiori the damages will not be reduced where the convertor makes a repayment of his own debt to the plaintiff from other sources. The payments of [*15] rental were made by Kierle to the respondent on account of the lease agreement quite independently of the conversion of the cheque. There was no evidence to connect these payments with the conversion. Such payments were of no significance in the calculation of the respondent’s loss as a result of the conversion, because they were payments made by Kierle in discharge of his liability under the lease: cf. Parry v Cleaver [1970] AC 1 at p. 13 per Lord Reid; and see the Associated Midland case at p. 553 per Mahoney JA. As the payments extinguished an independent liability of Kierle to the respondent they could not be regarded as a ‘plus’ in the respondent’s account in respect of the conversion, but only in the respondent’s account in respect of the lease transaction. “
The court in that situation decided that the lease payments were collateral to the transaction relating to the conversion and that the amount recoverable as damages should not be discounted by reason of them having been made.
The difference between the circumstances in the present case and those before the court in AMEV is that, for practical purposes, no evidence whatever was adduced in the present case in relation [*16] to the question. Tadgell J. found himself unable to decide whether, when considered against a background of blatantly fraudulent activity, there had been any lease at all, although he doubted that there had been a lease. Being so constrained, his Honour could not then resolve the issue as to whether any such lease, and thus any payment under it was collateral or not.
The critical consideration is that it is for the appellant to demonstrate that the trial judge fell into error in not finding that the damages should be reduced on one of the accepted bases. Yet, since Tadgell J. on the foundation of the evidence adduced before him, found himself, at p. 49, unable to “… determine from the jumble of evidence on which the defendant must rely whether or not the plaintiff might be called on to repay any or all of the payments it has received”, it was not possible for him to make any such determination.
It was sought by Mr Mandie QC. who appeared on behalf of the appellant to argue in this court that Comrie was particeps criminis with Bacich, and provided the mechanism by which he was able to obtain money by deception and then to conceal his fraudulent behaviour. Bacich constituted, [*17] he submitted, the driving force behind Comrie, and it should be inferred from the material put before the learned trial judge that Comrie sent cheques signed by Bacich to the finance company, as part of the scheme to conceal from the finance company the fact that goods had not been supplied by Detente. The submission continued that the liquidator of Comrie could not be in a better position to recover the moneys than Comrie itself. Comrie being a co-conspirator in an illegal activity or a converter could not have hoped to recover the payments so made by way of “rent”. Setting to one side any questions of law which may be seen to arise in this context, this argument was not advanced in the court below and the matter was not the subject of close investigation nor precise evidence. Had it been raised in the court below the attention of counsel would have been directed to the issue and further evidence would undoubtedly have been led upon it. The learned trial judge was entitled to find as he did and in our view the objection by Mr Dove is correct and the matter should not be permitted to be raised now on this appeal for the first time.
In order to succeed before this court the appellant [*18] needs to establish that the prima facie right of the respondents to the whole amount of the cheque had to be discounted on the basis of recognised principles. They have failed to do so in our opinion.
We would dismiss the appeal.
Fullagar J.: I have had the advantage of reading in draft form the joint judgment prepared by the other members of the court, and I agree with them that the appeal must be dismissed, and substantially for reasons which they give. I desire however to emphasise certain aspects of the case.
What follows by way of summary of facts was written before I discovered something that we had not been told, namely that the reasons for judgment of the learned judge were reported before the hearing of this appeal: see [1990] VR 41.
This is an appeal from a judgment of Tadgell J. given in favour of the respondent/plaintiff in an action in the Commercial List. The respondent claimed in the action against the appellant/defendant damages for conversion of a cheque and other relief. The cheque was for $ 131,250 and dated 9 May 1985 and drawn by the respondent on its account with the Commonwealth Trading Bank at Melbourne and payable to Detente Systems (of Concord [*19] NSW) and crossed “not negotiable a/c payee only”. The cheque was on 10 May 1985 deposited at a Melbourne branch of the appellant bank for collection on behalf of Western Orient Pty Ltd which was a customer of the appellant. The appellant bank on the same day presented the cheque for payment at the respondent’s bank which debited the respondent’s account with the amount of the cheque, and the proceeds were credited to the account of Detente Orient Pty Ltd and the appellant.
The statement of claim however went far beyond these facts, and alleged, inter alia, that the cheque was given for the purchase of goods by the respondent from Detente Systems, that a lease of the goods was made between the respondent as lessor and Comrie Pty Ltd on 9 May 1985, that Comrie cancelled the order of the respondent for the goods, and that the agreement for lease was “rendered futile”. The real circumstances which led to the drawing of the cheque sued upon by the respondent are referred to in the joint judgment. By the statement of claim the respondent claimed that it had suffered loss and damage particularised as: ‘(a) proceeds of the cheque $ 131,500, (b) lease payment $ 187,620.48 less $ 109,620.28 [*20] being lease payment purportedly made under the agreement.” There followed the following paras 9 and 10 of the statement of claim: “9. In the premises the plaintiff claims damages for conversion in the sum of $ 131,500 together with damages for loss of the agreement. “10. Alternatively, the said sum of $ 131,500 is payable to the plaintiff by the defendant as money had and received by it to the use of the plaintiff.”
It is next to be observed that, by its defence dated 11 October 1988, the appellant denied that the cheque was given for the purchase of any goods by the respondent and denied that there was any agreement to lease the goods.
Well into the trial counsel for the appellant sought leave to amend the defence and this was refused. At the end of the trial leave was again sought and refused. In my opinion this appellate court must treat as entirely correct these exercises of his Honour’s discretion in refusing leave to amend. The amended defence sought to add paragraphs which referred to termination of the very lease the existence of which is denied in earlier paragraphs, and sought to add further paragraphs as to which no factual foundations whatsoever had been laid at [*21] the trial.
Not long before the close of the respondent’s case, which involved the calling of several witnesses viva voce, counsel for the appellant sought to “have tendered officially in evidence both books of documents, the original that was filed and the second that was filed by the plaintiff. This was a large mass of documents and the learned trial judge refused to do more than mark them for identification unless and until the appellant could demonstrate that they were relevant. A careful perusal of the transcript pages tendered in this appeal by Mr Dove. QC. for the respondent does not disclose that the appellant ever demonstrated the relevance of this mass of documents, and nearly all of them remained merely marked for identification at the end of the trial, and properly so.
It was said by Mr Dove on this appeal, and not denied by Mr Mandie QC. for the appellant, that these documents never were formally admitted into evidence. It is in my opinion plain that they were never demonstrated to his Honour to be relevant to any issue raised by the pleadings, or even to any issue sought to be raised by the amendments sought to the defence.
However, it is now apparent that, after [*22] the respondent had obtained judgment for damages for conversion equal to the amount of the cheque, Queen’s Counsel must have conducted a fine-tooth-comb examination for the defendant of the mass of documents which had been unsuccessfully tendered, and found in them a strong foundation for the following propositions: (1) The $ 109,620, which evidence at the trial showed was paid to the respondent by someone, was in fact paid by Comrie Pty Ltd; (2) 50 per cent of the shares in Comrie Pty Ltd were held by Mr Bacich and wife; (3) Mr Bacich was one of only two directors of Comrie Pty Ltd and was the active controller of that company.
Mr Mandie then argued on this appeal for the conclusions of fact that the acts of Bacich were the acts of Comrie, that Comrie had paid the $ 109,620 to the respondent and for the conclusion of law that Comrie was tainted with the fraud of Bacich. If these contentions were accepted, it was said to be clear that Comrie could not receive back the $ 109,620 from the respondent because ex turpi causa non oritur actio: since Comrie was merely the alter ego of the fraudulent Bacich, Comrie was a fraudulent payer of the $ 109,620 for the purpose of defrauding the [*23] respondent and so could not recover the money from the respondent as money had and received or otherwise. Accordingly, the respondent would be “unjustly enriched” by the latter sum if it could retain it and yet at the same time recover the full amount of the cheque, without deduction, as charges for conversion. Accordingly, it was said the damages must be reduced, from the face value of the cheque, by the deduction of the $ 109,620. These contentions on appeal involve the assertion of a lease agreement the existence of which is denied by the appellant on the pleadings before the trial judge and which his Honour felt unable to find existed; they involve a close examination of a mass of documents which were (in my opinion correctly) never accepted into evidence; worse still, the reason why the documents were never accepted into evidence was because counsel for the appellant at the trial at no stage demonstrated to the trial judge by evidence or otherwise that they were relevant. If these contentions had been raised at the trial they would undoubtedly have involved the legal advisers of the respondent in further investigation not only of the documents but of the surrounding facts, [*24] and it is impossible to say what the result of such an investigation would have been, and the results may well have included the calling of further evidence. In passing, it is no answer for the appellant to say, as Mr Mandie said, that there is no obligation upon a defendant to plead matters going only to the quantum of damages. In the first place I think his proposition is too broad if it is intended to cover all cases and, secondly. I know of no case on the subject of pleading that allows a party to put in diminution of damages a set of facts the existence of which it has unequivocally denied on the face of its own pleading. But the real vice in the appellant’s position on appeal is that the respondent was not at the trial given the chance to test or meet the factual case now sought by the appellant to be made upon a post-trial examination and analysis of the “jumble of documents’ which the learned judge rightly refused to accept into evidence.
Despite occasional modern dicta in the High Court which might be construed as extending to the contrary, I think there are some circumstances where an appellate court may permit – at risk as to costs – the putting of an argument of law [*25] which has not been put below: cf. Huppert v Stock Options of Australia Pty Ltd (1965) 112 CLR 414, especially at pp. 420-30, per Taylor J. But the gravest injustice would be likely to ensue, irreparable by any order as to costs, if an appellate court allowed to be put on appeal contentions for conclusions of fact which were never put below and which, if put, might well have led the other side to adduce further evidence relevant to the existence or non-existence of such facts. Even more remote from the likelihood of reception on appeal is a contention for the existence of facts which suffers from the last-mentioned defect, where the existence of those facts has been and is effectively denied on the pleadings of the party seeking to raise their existence on appeal, and where the argument for the existence of those facts depends upon a minute analysis of documents which at the time were marked only for identification and were expressly rejected from evidence on good grounds.
For these reasons, which in the end may not do much more than lend emphasis to some of the reasons in the joint judgment of Murphy and Vincent JJ., I would agree with them that the appeal [*26] must be dismissed with costs.
ORDER:
Appeal dismissed.
Solicitors for the appellant: Dunhill Madden Butler
Solicitors for the respondent: Fernon and Ludescher
J TSALANIDIS BARRISTER-AT-LAW
ANDRE ET CIE., S.A. v. J. H. VANTOL, LTD. July 11, 2008
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ANDRE ET CIE., S.A. v. J. H. VANTOL, LTD.
QUEEN’S BENCH DIVISION
[1952] 2 Lloyd’s Rep 282
HEARING-DATES: 21, 22, 23, 24 July 1952
24 July 1952
CATCHWORDS:
Contract – Sale of goods (c.i.f.) – Breach by sellers – Unascertained goods sold by description – Notification of shipment received by sellers – Delay in passing on declaration to buyers – Some delay admitted – Fall in market price – Measure of damages – Remoteness – London Oil and Tallow Trades Association Contract (Coconut Oil).
HEADNOTE:
Sale of 250 tons coconut oil, c.i.f. Genoa, shipment March/April, 1951, sellers having purchased oil from Cingalese shippers – Contract under L.O.T.T.A. terms requiring by Clause 8:
Declaration: The name of the steamer or steamers, marks and full particulars to be declared by shippers to buyers in writing with due dispatch, but not later than [40 days] after the expiry of the contract time for shipping . . . such declaration to be passed on without delay. Should a declaration not be made prior to the steamer’s arrival at port of discharge, sellers shall guarantee buyers against any expenses occasioned by such delay and furnishing proof, if required, that the oil was bought by them prior to the arrival of the steamer.
Shipment from Ceylon notified by shippers to sellers on Apr. 28 – Documents (including bill of lading dated Apr. 27) received by sellers on May 14 – Admitted delay by sellers in passing on declaration, buyers not receiving declaration until May 23, which was after date of ship’s arrival – Fall in market price – Goods resold by buyers at loss – Claim against sellers – Arbitration – Award of substantial damages to buyers – Appeal by sellers to Appeal Board – Submission by sellers that as they had provided guarantee required by Clause 8 they were under no further obligation to buyers; also, that damages claimed by buyers did not directly result from sellers’ breach in failing to pass on declaration without delay and were too remote – Contention by buyers that their loss was a foreseeable consequence of sellers’ delay in passing on declaration – Findings of Appeal Board: that sellers were in a position to pass on shippers’ declaration on May 14, 1951, and that, having regard to the bill of lading date, they were in breach in failing to do so by cable direct to buyers; that sellers’ failure to do so resulted in a delay of eight days; but that the loss claimed by buyers was directly due to the fall in market price and to no other cause, and that such loss was not reasonably foreseeable at the date of the contract as likely to flow from sellers’ failure to pass on the declaration without delay and did not naturally and directly flow therefrom and was too remote – Buyers awarded costs – Case stated – Purpose of Clause 8 – Effect of breach – Measure of damages recoverable – Right of Court to interfere with findings of arbitrators – Function of arbitrators. – Held, that the provision by sellers of a guarantee under. Clause 8 did not preclude buyers from recovering damages for a breach of that clause, and that sellers were in fact in breach in delaying the passing on of the declaration to buyers; but that the arbitrators had applied the proper legal principles for the assessment of damages, and that their finding that the loss claimed by buyers was solely due to the fall in market price and was not reasonably foreseeable at the date of the contract as likely to flow from sellers’ failure to pass on the declaration without delay, was a conclusion of fact which they were entitled to come to on the evidence before them and was unassailable; and that accordingly buyers were entitled to no more than nominal damages – Award of Appeal Board upheld – Sellers awarded cost of argument.
CASES-REF-TO:
Bailey (T. D.), Son & Co. v. Ross T. Smyth & Co., Ltd., (1940) 67 Ll.L.Rep. 147; 45 Com. Cas. 292;
British Columbia Saw-mill Company, Ltd. v. Nettleship, (1868) L.R. 3 C.P. 499;
Hadley v. Baxendale, (1854) 9 Ex. 341;
Mehmet Dogan Bey v. G. G. Abdeni & Co., Ltd., [1951] 2 K.B. 405; [1951] 1 Lloyd’s Rep. 433;
Royal Greek Government v. Minister of Transport, (1949) 83 Ll.L.Rep. 228;
Taylor & Sons, Ltd. v. Bank of Athens, (1922) 27 Com.Cas. 142;
Victoria Laundry (Windsor), Ltd. v. Newman Industries, Ltd., [1949] 2 K.B. 528.
INTRODUCTION:
This was an appeal, by way of case stated, from an award of the Appeal Board of the London Oil & Tallow Trades Association, brought by J. H. Vantol, Ltd., of London, E.C., buyers, against Andre et Cie., S.A., of Lausanne, sellers of a cargo of 250 tons of Ceylon white coconut oil shipped from Colombo to Genoa under a c.i.f. contract of Mar. 9, 1951. The Board’s award in favour of the sellers reversed the award of an umpire in favour of the buyers which was made after arbitrators had disagreed.
COUNSEL:
Frank Soskice, Q.C., and Michael Lee appeared for the buyers; Eustace Roskill represented the sellers.
According to the case stated, by a contract dated Jan. 12, 1951, No. 06064 (SMC 7523), Andre et Cie., S.A., sold to Fratelli Pozzani, Rusconi & Co. (hereinafter called Pozzani), of Milan, 250 tons of 2240 1b. each, 10 per cent. more or less, Ceylon white coconut oil max. 1 per cent. F.F.A. at £ 179 10s. per 1016 kilos, c.i.f. Genoa, shipment from Ceylon to Genoa March/April, 1951.
By a contract dated Feb. 27, 1951, No. 617/552/B/1, Pozzani sold to J. H. Vantol, Ltd., about 250 tons of 2240 1b. in bulk, 5 per cent. more or less, naked white Ceylon F.A.Q. coconut oil max. 1 per cent. F.F.A. at £ 187 10s. c.i.f. Genoa, shipment from Ceylon to Genoa March/April, 1951. This contract was indorsed:
By the present contract sellers surrender all the rights accrued to them from contract No. 06064 of Jan. 12, 1951, of Messrs. Andre, of Lausanne. Buyer to arrange the change of destination.
On Mar. 8, 1951, Pozzani wrote to Andre et Cie.’s brokers, Saroc, Milan, informing them that contract No. 7523 had been “ceded to Messrs. J. H. Vantol,” who would get into direct touch withAndre et Cie. in Lausanne for its execution. Pozzani asked the brokers for that reason to request their principals to follow the instructions which they might receive from Vantol “on that score.”
On Mar. 9, 1951, Pozzani wrote to Andre et Cie. referring to “the verbal agreement which has been made to-day with Saroc, Milan,” thanking them for having agreed to substitute for their (Pozzani’s) firm as buyers of the contract No. 7523, dated Jan. 12, “the firm of J. H. Vantol of London” and requesting them to establish a new contract for the firm of Vantol at the price of £ 187 10s., “all the other conditions of the above-mentioned contract remaining unchanged and we remaining responsible for the due fulfilment” and “from this difference please deduct 10s.” which would remain in Andre et Cie.’s favour.
On the same day, viz., Mar. 9, 1951, by contract No. 06064 (SMC 7539) Pozzani accordingly resold to Andre et Cie. the oil comprised in contract No. 06064 (SMC 7523) at £ 187, and by contract No. 06086 (SMC 7540) Andre et Cie. sold to Vantol, Ltd., 250 tons of 2240 1b. each, 10 per cent. more or less, Ceylon white coconut oil max. 1 per cent. F.F.A. at £ 187 10s. per 1016 kilos c.i.f. Genoa, shipment from Ceylon to Genoa March/April, 1951.
On Feb. 27 and Mar. 1, 1951, Vantol, Ltd., had entered into the following four contracts with different buyers for the sale of white Ceylon coconut oil, all c.i.f. Marseilles:
No. 6178: About 100 tons, shipment about end March.
No. 6179: About 50 tons, shipment about end March.
No. 6180: About 150 tons, shipment end March.
No. 6185: About 100 tons, shipment March and/or April, 1951.
Contract No. 7540 was on the printed form of contract for coconut oil issued by the London Oil and Tallow Trades Association, and the sale was thereby expressed to have been made according to the Rules of the Association.
Rule 3 provided:
The date of the bill of lading shall be deemed prood of the time of the time of shipment in the absence of evidence to the contrary.
Among the terms and conditions of the contract was the following:
8. The name of the steamer or steamers, marks and full particulars to be declared by shippers to buyers in writing with due dispatch, but not later than the following periods after the expiry of the contract time for shipping: In the case of oil shipped from the Dutch East Indies other than Java, Padang or Macassar 60 days, Australasia, Philippine Islands, Japanese or Chinese ports 50 days, and for all other ports 40 days, such declaration to be passed on without delay. Should a declaration not be made prior to the steamer’s arrival at port of discharge, sellers shall guarantee buyers against any expenses occasioned by such delay and furnish proof, if required, that the oil was bought by them prior to the arrival of the steamer.
The contract provided for arbitration in London according to the rules for arbitration indorsed thereon.
The circumstances leading up to the reference and the material facts contained in the correspondence or admitted by the parties were that on Apr. 28, 1951 (there having at this date been no tender of delivery by Andre et Cie. of the goods the subject of the said contract), the shippers, M. S. Hebtulabhoy & Co., of Colombo, cabled to Andre et Cie. as follows: “79/26 17610 no sellers shipped Monroe three one four half tons regret steamer loaded short see letter.” The cable did not give the bill of lading date. On May 9, 1951, Pozzani wrote to Saroc, Milan, that Vantol, Ltd., had “again asked” them (Pozzani) for the tender on the parcel of 250 tons and saying that they would feel obliged if Saroc would request their house in Lausanne (i.e., Andre et Cie.) to transmit to them (Pozzani) the required tender which they would immediately pass on to Vantol, Ltd. On the same date, Andre et Cie.’s agents in London, European Grain Agency, Ltd., took up and paid for the documents for the shipment of 314.517 tons, and on May 10, they wrote to Andre et Cie. enclosing the documents, including the bill of lading dated Colombo, Apr. 27, 1951. These documents reached Andre et Cie. in Lausanne not later than May 14. On May 14, Pozzani again wrote to Saroc renewing their demand “to ask Andre et Cie. for the particulars of this shipment of the parcel in question.” On May 19, Andre et Cie. telegraphed to Saroc allocating ex the steamship President Monroe (bill of lading dated Apr. 27), 90 tons to a contract between Andre et Cie. and Messrs. Resolgras, of Genoa, and 225 tons to contract No. 7540 with Vantol, Ltd. (By contract No. 6181 dated Feb. 28, 1951, the benefit of the contract with Messrs. Resolgras had been surrendered to Vantol, Ltd.).
The President Monroe entered Marseilles on May 20 and arrived at Genoa on May 21, 1951. On May 22, 1951, Saroc sent to Vantol’s brokers in Genoa, Messrs. Carosio & Co., a letter from Andre et Cie. headed “Appropriation,” tendering “in total fulfilment of the above contract [SMC 7540] about 225 tons Ceylon white coconut oil in bulk per s.s. President Monroe bill/s of lading dated Apr. 27, 1951,” and on the same date the tender was transmitted by Messrs. Carosio & Co. in a letter to Vantol, Ltd., who received it in London on May 28. On May 22, Messrs. Carosio & Co. sent the following cable to Vantol, Ltd.:
Pozzani informing having received appropriation from Andre 225 tons contract 6175 and 90 contract 6181 both bulk President Monroe.
Vantol, Ltd., cabled in reply as follows:
RYC 22 Regret unwilling accept your cable as sellers tender stop such a tender would be invalid as LOTTA contract stipulates dispatch declaration without undue delay stop you and your sellers were well informed by us that we need the goods for Marseilles and we did since middle of March everything in order to obtain information regarding shipment your sellers and their sellers did everything to frustrate this business and consequences must be borne by them stop contract 6181 provides for drums and view sellers unbelievable attitude we stick strictly to contract terms drums.
In a letter dated May 29, acknowledging Messrs. Carosio & Co.’s letter of May 22, Vantol, Ltd., wrote as follows:
You and sellers were fully aware that we had bought these goods for Marseilles, and that we did not need them for Genoa, and this formed part of the contract.
Since 27th February we have been in continuous touch with Andre’s London house, urgently requesting them to give us a declaration of steamer, which would enable us to change destination to Marseilles . . .
We believe that sellers had some motive in delaying the declaration. We are, therefore, not willing to take up the documents until we get an indemnity from sellers, holding us fully indemnified against all expense and losses caused to us by sellers’ attitude and by sellers’ act, therely making it impossible for us to arranse shipment to Marseilles . . .
On June 4, European Grain Agency wrote to Vantol, Ltd., calling upon them to take up and pay for the documents, to which Vantol, Ltd., replied on June 5 as follows:
Dear Sirs,
225 tons and 89.517 tons Ceylon White Coconut oil ex s.s. President Monroe.
We have received your letter of the 4th instant and protest most strongly against the contents.
We have telephoned you repeatedly since March asking for a speedy declaration in order that we can tranship the goods to Marseilles. Your replies have always been:
“We have referred the matter to our principals,” or “We have asked Lausanne” and other similar evasions.
When we asked you to change the destination you replied that according to information received this could not be done easily as the tank contains 300 tons, of which 50 tons are sold to a consumer in Italy who does not wish to resell, and 250 tons to us.
All the information given to us was incorrect, and you and your principals have done everything possible to frustrate our business.
We do not wish to have long altercations and have, therefore, asked the opinion of our friend Mr. N. E. Neter. He has advised us, as we informed you on the telephone, that for the 225 tons we have a contract with Messrs. Andre & Cie, and that for the 89.517 tons we have no contract.
We are willing to take up the documents for the 225 tons under reserves.
We do not believe that your tender is good, and we intend to claim the difference between to-day’s price and the contract price, and to hold Messrs. Andre responsible for all expenses and charges incurred. If necessary we will take the matter to arbitration.
You have promised to pass this proposition on to your principals and have agreed to withdraw your unjust threat of sale against us.
Kindly let us have your principals’ reply in due course.
Yours faithfully,
J. H. Vantol, Ltd.
Vantol, Ltd., ultimately agreed on receiving Andre et Cie.’s “guarantee” for expenses incurred, as per Clause 8 of the contract, to take up and pay for the documents “under reserves.” Andre et Cie.’s guarantee was contained in their letter to Vantol, Ltd., dated June 11, 1951, and on the same date Vantol, Ltd., took up and paid for the documents “under full reserves subject to adjustment on delivered weights and subject to arbitration,” Vantol, Ltd., maintaining their objection that “the shipment was invalid not being made with due despatch as required by Clause 8 of the relative contract.” Vantol, Ltd., later resold the oil, the subject of the contract, at a heavy loss.
On Aug. 10, 1951, the umpire to whom the dispute was referred published his award as follows:
I find that sellers [Andre et Cie.] did not pass on the declaration to buyers [Vantol, Ltd.] with due dispatch as required by Clause 8 of the contract and I award that sellers shall pay to buyers forthwith the sum of £ 4500 as damages for such breach.
The sellers appealed to the Committee of Appeal of the London Oil and Tallow Trades Association.
The sellers contended that they were not liable to the buyers for the amount awarded by the umpire or for any amount, it being submitted:
(a) That the sellers guaranteed the buyers against any expenses occasioned by the delay in passing on the declaration referred to in Clause 8 of the contract, but were not required by the buyers to furnish proof that the oil was bought by them prior to the arrival of the steamer at Genoa.
(b) That the sellers, having furnished such guarantee, were upon the true construction of Clause 8 of the contract under no further liability to the buyers for the loss (if any, which the sellers denied) sustained by the buyers by reason of the sellers’ failure to pass on the declaration without delay, since Clause 8 upon its true construction excluded all liability other than for the expenses occasioned by the delay which were the subject of the guarantee.
© That if, contrary to the sellers’ submissions under sub-pars. (a) and (b) hereof, Clause 8 did not exclude such other liability, the buyers had failed to show that they had suffered any damage flowing naturally and directly from the sellers’ failure to pass on the declaration without delay and that any damages payable to the buyers should be nominal.
(d) That the damages (if any) recoverable fell to be determined in accordance with Sect. 53(2) of the Sale of Goods Act, 1893, and that such damages were nominal.
(e) That until the date or dates of the bill or bills of lading were notified to the sellers by the shippers, “full particulars” had not been declared by the shippers to the sellers in writing or at all because such date or dates formed part of the full particulars required by the contract.
(f) That accordingly the sellers could not properly “pass on” the shippers’ declaration, since a purported declaration omitting the date or dates of the bill or bills of lading and so passed on would not comply with the sellers’ obligations to the buyers under the contract.
(g) That until European Grain Agency took up the documents on May 9, 1951, they had no knowledge of the bill of lading date.
(h) That until the sellers received such documents they had no knowledge of the bill of lading date; that consequently until they received them they could not pass on the declaration; and that thereafter they were entitled to a reasonable time in which to do so.
(i) That they admitted delay between May 14 or 15 and May 19, when they in fact passed on the declaration, and (subject to their submissions under sub-pars. (a) and (b) hereof) that they were liable to the buyers to pay any damages naturally and directly flowing from such failure.
(j) That the buyers notwithstanding the refusal contained in their cable dated May 22, 1951, to accept the declaration, took up and paid for the documents tendered to them in London, but under reservation of their right to claim damages in respect of the late declaration.
(k) That if, contrary to the submissions in sub-par. (i) hereof, the date of the receipt of such declaration was relevant, the delay in passing on the declaration did not exceed about 14 days.
(l) That the buyers could have resold, but did not resell, the goods the subjectmatter of the contract c.i.f. Genoa at any time between Mar. 9, 1951, when the contract was made, and the discharge of goods following the arrival of the vessel at Genoa.
(m) That the receipt of the declaration was in no way a necessary prerequisite to the resale of the goods c.i.f. Genoa.
(n) That the goods could at any time from Mar. 9, 1951, onwards have been resold c.i.f. Genoa without the prior receipt of such declaration, but the buyers chose to refrain from so doing.
(o) That the only difference in the position before and after the declaration was passed on was that before such passing on the buyers could only resell the coconut oil c.i.f. Genoa, March/April, 1951, shipment, without being able to specify the name of the carrying vessel or the bill of lading date, whereas after such passing on they could have resold coconut oil c.i.f. Genoa from a named ship with a specific bill of lading date.
(p) That the buyers called no evidence before the Board of Appeal to show that there was at any material time any difference in the value of coconut oil sold c.i.f. Genoa without the name of the ship and the bill of lading date being specified, and the value of coconut oil sold c.i.f. Genoa with the name of the ship and the bill of lading date specified, and that there was in fact no difference between those values.
(q) That the buyers had therefore suffered no damage because the true measure of damage for the sellers’ failure to pass on the declaration without delay was the difference on the day of the failure so to pass on the declaration between the value of coconut oil sold c.i.f. Genoa without the name of the ship and the bill of lading date being specified and the value of coconut oil sold c.i.f. Genoa with the name of the ship and the bill of lading date specified.
(r) That the measure of damage contended for by the buyers, namely, the difference in the market value of coconut oil sold c.i.f. Genoa on the day upon which the sellers failed to pass on the declaration without delay and the day upon which such failure was remedied was not the true measure of damage; that such difference was due solely to the fall in the market between those two dates and not to any such failure on the part of the sellers; that such damages (if any) were not reasonably foreseeable as the consequence of the sellers’ failure to pass on the declaration without delay, did not naturally and directly flow therefrom and were too remote and were irrecoverable.
(s) That in view of the admission of buyers’ Counsel before the Board of Appeal that he could not rely upon certain contracts into which the buyers had entered for the sale of coconut oil to Marseilles (which contracts were for different quantities to a different port and – with one exception – for a different, shipment period) in support of the buyers’ claim for damages, those Marseilles contracts were irrelevant to the issue to be determined.
(t) That in any event the coconut oil the subject of the contract could only have been discharged at Marseilles if (a) the sellers, who at all material times held the bills of lading, and the shipowners had consented thereto, (b) the sellers, who at all material times held Treasury and/or Bank of England permission under the Exchange Control Act, 1947, to sell the coconut oil to Italy as the country of destination, had secured permission to change the destination, and © the buyers had secured the like permission.
(u) That there was no evidence that the sellers or the shipowners would have consented or that the requisite Exchange Control Act permission would have been forthcoming.
(v) That the buyers’ attempt to prove a custom regarding assistance to be afforded by a seller to a buyer to change the destination failed and was abandoned by the buyers’ Counsel before the Board.
(w) That the evidence sought to be adduced by the buyers as to the ultimate fate of the coconut oil (which was in fact railed to Germany from Genoa and accepted by a firm called Aldag in satisfaction of certain other contracts entered into by the buyers with Aldag in May, 1951, for the sale of coconut oil c.i.f. Rotterdam, May/June/July, 1951, shipment) was totally irrelevant to the issue, and that the fact that as a result of incurring heavy rail and wagon demurrage charges this transaction showed a loss to the buyers was equally irrelevant.
(x) That the loss alleged to have been suffered by the buyers was due solely to the fall in the market value of coconut oil between March and June, 1951, and more particularly in May, 1951, and was irrecoverable, and that the buyers were only entitled to nominal charges.
The buyers contended before the Board that the sellers either deliberately or negligently withheld the declaration from the buyers between Apr. 29 and May 28, 1951, and that thereby they were in breach of Clause 8 of the contract and were liable for such damage as might fairly and reasonably be considered as arising naturally from that breach, it being submitted by the buyers:
(a) That European Grain Agency and the sellers knew of the buyers’ desire to change the destination of the oil from Genoa to Marseilles throughout March, April and May, 1951.
(b) That for a buyer to change the destination of goods the subject of a c.i.f. contract was a common practice in the oil and tallow trades; that the seller would normally do all he could to help the buyer to achieve this purpose; but that he was not bound in law or by trade custom to do so.
© That at no time during March, April or May, 1951, did the sellers or their agents, the European Grain Agency, refuse to assist the buyers to change the destination.
(d) That the sellers, through Mr. Juster (a director of European Grain Agency), indicated to the buyers in April and May that the sellers would assist the buyers to achieve their desire to change the destination of the oil to Marseilles.
(e) That a definite request by the buyers to the sellers to change the destination of the oil from Genoa to Marseilles could not be made by the buyers until the declaration had come into their hands and the name of the ship known.
(f) That directly such a definite request was made by the buyers, the sellers through the European Grain Agency could have and would have given a definite and immediate answer whether their necessary assistance would be given to effect the change.
(g) That immediately such an answer had been given by the sellers to the buyers, the buyers if the sellers had offered their help in changing the destination to Marseilles could have profitably appropriated the oil to the Marseilles contracts; if the sellers’ answer had been to refuse their help to change the destination of the oil, they could have resold the oil forthwith c.i.f. Genoa.
(h) That the cable declaration of the shippers was in the sellers’ hands on Apr. 28, 1951, and that they could have and should have passed it on without delay by cable direct to the buyers in London on Apr. 28, and at latest by Apr. 29, 1951.
(i) That the buyers once the declaration had been received by them could have settled the destination of and appropriated the oil to the Marseilles contracts or resold it at Genoa by May 4, 1951, at the latest.
(j) That there was ample evidence to be derived from the knowledge of the sellers of the buyers’ desire to change the destination, and from the repeated requests of the buyers for information as to the declaration, that the declaration was deliberately withheld from the buyers; that it was significant that the sellers finally made the declaration on May 19, 1951, and gave it to their agents instead of to the buyers, whereas the ship entered Marseilles on May 20. That declaration was therefore made too late to enable the buyers to change the destination of the oil to Marseilles.
(k) That by the sellers’ withholding of the declaration the buyers were prevented from reselling c.i.f. Genoa between May 1 to 4, 1951, and could only resell the oil at Genoa after it had been discharged in that port at the end of May.
(1) That the market price of the oil at Genoa on May 1 to 4, 1951, was about £ 180 to £ 185, whereas at the end of May, 1951, it had dropped to about £ 160.
(m) That the buyers resold the oil to Aldag in August, having incurred a loss owing to the lower price then obtainable from Aldag and from demurrage and transport charges of more than £ 4500.
(n) That the bill of lading date was by Rule 3 of the contract of Mar. 9, 1951, only evidence of the date of shipment; that if the date or fact of shipment within the contract period was known, the date of the bill of lading was immaterial; and that the date and fact of shipment of the oil within the contract period was contained in the shippers’ cable declaration of Apr. 28, 1951.
The Board of Appeal found that
(a) The sellers guaranteed the buyers against any expenses occasioned by the delay in passing on the declaration.
(b) The sellers were not required by the buyers to furnish proof that the oil was bought by them prior to the arrival of the steamer at Genoa.
© The bill of lading date was material for the purpose of the shippers’ declaration required by Clause 8 of the contract, whether or not the date or fact of shipment within the contract period was known, and the declaration was accordingly not complete without the date or dates of the bill or bills of lading
(d) The sellers’ agents, European Grain Agency, knew of the buyers’ desire to change the destination of the oil from Genoa to Marseilles, but there was no evidence that the sellers themselves knew of that desire and not sufficient evidence to support the buyers’ submission (d).
(e) There was no trade custom requiring a seller to assist a buyer to change the destination of goods the subject of a c.i.f. contract, although it was a common practice in the trade for a seller so to assist a buyer. There was no evidence that the sellers or their agents would have refused to assist the buyers to change the destination if a formal request to do so had been made, but there was not sufficient evidence to support the buyers’ submission © . No formal request to change the destination was in fact made either to the sellers or their agents.
(f) The buyers’ submission (e) was not supported by any evidence and there was not sufficient evidence to support their submission (f).
(g) There was no evidence that European Grain Agency knew the bill of lading date until May 9, 1951, or that the sellers knew the date until May 14, 1951.
(h) The buyers were aware of the contents of the declaration of May 19 not later than May 23, 1951.
(i) The buyers’ submission (j) that the sellers deliberately withheld the declaration from the buyers until it was too late to enable them to change the destination of the oil to Marseilles was not supported by the evidence.
(j) The buyers could have resold the goods the subject-matter of the contract at any time after the date thereof, namely, Mar. 9, 1951, on c.i.f. Genoa terms.
(k) In regard to the Marseilles contracts dated Feb. 27 and Mar. 1, 1951, the Board found:
(i) Those contracts were all for different quantities from the contract quantity and with one exception were for different shipment periods; (ii) the documents tendered and accepted by the buyers under the Mar. 9, 1951, contract could not have been used to discharge the buyers’ obligations under the Marseilles contract; (iii) the sellers (who owned the goods and held the bill of lading at all material times) would not necessarily have consented to Marseilles discharge and there was no evidence that the shipowners would have so consented; (iv) permission under the Exchange Control Act, 1947, would have been required both by the sellers and the buyers to change the destination, and there was no evidence that such permission would have been granted; (v) there was no evidence that the sellers had any knowledge of the Marseilles contracts on Mar. 9, 1951; (vi) the buyers’ attempt to prove a custom regarding assistance to be afforded by a seller to a buyer relating to change of destination failed.
The Board further found:
(1) The sellers owned the oil and held the bill of lading at all material times until June 11, 1951, when the buyers took up and paid for the documents.
(m) There was no evidence of any difference on the day on which the sellers ought to have but did not pass on the declaration or at any material time in the value of coconut oil sold c.i.f. Genoa without the name of the ship and the bill of lading date being specified and the value of coconut oil sold c.i.f. Genoa with the name of the ship and the bill of lading specified.
The Board were requested to state the following questions for the opinion of the Court:
(1) Whether upon the facts found and upon the true construction of the contract the buyers were entitled to recover any damages from the sellers.
(2) If Question (1) was answered in the affirmative, whether on the facts found and upon the true construction of the contract, the measure of damage contended for by the buyers was correct.
(3) If Question (1) was answered in the affirmative, whether on the facts found and upon the true construction of the contract the measure of damages contended for by the sellers was correct, and, if so, the sellers were accordingly only liable for nominal damages.
The Board awarded:
(a) (1) That the sellers were in a position to pass on the shippers’ declaration on May 14, 1951, and that, having regard to the bill of lading date, they should have done so on that date by cable direct to the buyers.
(2) That the sellers’ failure to pass on the declaration resulted in a delay of eight days, that is to say, from May 15 to May 23.
(3) That the loss claimed by the buyers was nevertheless directly caused by the fall in the market price and was due to no other cause.
(4) That the loss claimed by the buyers was not reasonably foreseeable at the date of the contract as likely to flow from the sellers’ failure to pass on the declaration without delay and did not naturally and directly flow therefrom and was too remote.
The Board further awarded:
(b) In the event of the Court deciding that the buyers were not entitled to recover any damages from the sellers, the umpire’s award should be set aside.
© In that event the Board directed that the buyers should pay (i) the costs, charges and expenses incurred by them and also those incurred by the sellers with reference to the arbitration before the Board and (ii) the fees, costs and expenses mentioned in par. 21 below.
(d) In the event of the Court deciding that the buyers were entitled to recover any damages from the sellers and that the measure of damages contended for by the buyers was correct, the Board assessed the damages at £ 1125.
(e) In the event of the Court deciding that the buyers were entitled to recover any damages from the sellers and answering Question (3) in the affirmative, the Board assessed the damages at one farthing.
(f) In the event specified in heading (d), the Board awarded that the umpire’s award should be varied accordingly and directed that the sellers should pay (i) the costs, charges and expenses incurred by them and also those incurred by the buyers with reference to the arbitration before the Board, and (ii) the fees, costs and expenses mentioned in par. 21 below.
(g) In the event specified in heading (e), the Board awarded that the umpire’s award should be varied accordingly and likewise directed that the sellers should pay (i) the costs, charges and expenses and (ii) the fees, costs and expenses aforesaid.
Par. 21 of the case provided that the fees, costs and expenses referred to were the fees, costs and expenses of and incidental to the hearing of the arbitration and the drawing, making and publishing of the award amounting to a total of £ 393 15s.
PANEL: Before Mr. Justice SELLERS.
JUDGMENTBY-1: Mr. Justice SELLERS
JUDGMENT-1:
Mr. Justice SELLERS: By this award in the form of a special case stated by the Board of Appeal of the London Oil and Tallow Trades Association, the Court is asked to answer three questions, which, in substance, are whether the buyers, Messrs. J. H. Vantol, Ltd., are entitled to recover any damages from the sellers, Messrs. Andre et Cie., and, if so, whether they are only nominal damages, as the sellers contend, or substantial damages based on the difference in market price, as the buyers contend. A breach of contract is admitted, and the question of damages is and was the only issue.
The contract between the parties was dated Mar. 9, 1951, whereby Messrs. Andre et Cie. sold to Messrs. J. H. Vantol, Ltd., 250 tons of 2240 1b. each, 10 per cent. more or less, Ceylon white coconut oil, maximum 1 per cent. F.F.A. at £ 187 10s. per 1016 kilos c.i.f. Genoa, shipment from Ceylon to Genoa March/April, 1951. That contract was on a well-known form of the London Oil and Tallow Trades Association, being the appropriate form for a contract for coconut oil. The form, subject to amendment, seems to have been, on its face, in use since March, 1914. That form contains Clause 8 relating to declaration. The whole of the clause is set out in the case, and need not be re-read by me in this judgment.
The dispute has arisen in these circumstances, just to state them very briefly: they are fully set out in the award. In fact, the goods were shipped – indeed, they were 10 per cent. less than the 250 tons contemplated in the contract, but were within the contractual margin – before the end of April and therefore within the contractual time. The bill of lading was dated Apr. 27, 1951. The notification of the shipment of some goods under this contract was made by the sellers’ shippers in Ceylon, the sellers not themselves being the shippers but being situated in Lausanne, and shipment was intimated to the sellers by a cable of Apr. 28, 1951, in these terms, as far as they are material:
Shipped Monroe three one four half tons regret steamer loaded short,
which meant that the shippers had put 314 1/2 tons on board the President Monroe. That was all the information given by the shippers at that time; and the complaint which has been made in this case by the buyers is that that information sent from the shippers to the sellers, who were their buyers at that date, was not passed on, as it was said it should have been passed on, in accordance with the provisions of Clause 8 of the contract. The arbitrators have found that the information was not called to be passed on by the sellers until May 14, and even then it was not communicated to the buyers, on the finding of the case, until a cable of May 22. It is that delay in the communication of which the buyers complain and which they rightly allege was a breach of contract. That period of delay is not in dispute as far as the sellers are concerned.The period is in dispute by the buyers, who say that the delay was much longer on a proper appreciation of the facts and interpretation of the contract, and that the delay ran from a very much earlier period after the shippers had given a notification; but, whether the delay be for that shorter period, as found in the case, from May 14 to May 29 or for a longer period, the real issue in the case has been what damage, if any, are the buyers entitled to for that admitted breach of contract.
It becomes necessary, I think, at the outset, before considering the express questions which the Court is asked to answer in this case, to consider the nature and intent of Clause 8. I think the effect of the clause is as was submitted by learned Counsel for the sellers. It is to appropriate the goods to the contract.
Reference was made to the case of T. D. Bailey, Son & Co. v. Ross T. Smyth & Co., Ltd., (1940) 45 Com.Cas. 292, * where Lord Wright deals with a clause not in precisely similar terms, but generally of the same effect, which does not seem to be set out in the case but which, through the good services of learned Counsel, was supplied to the Court from some source which was available. I think the original contract was put in. It was refferred toin one way and another, and I think that the passage in which Lord Wright deals with this matter is appropriate to the clause in this case, where he says, at the bottom of p. 298 *1:
The notice of appropriation under an ordinary c.i.f. contract is not intended to pass and does not pass the property. Where, as here, the sale is of unascertained goods by description, there are, at that stage, no goods to which the contract can attach. The seller is free to appropriate to the contract any goods which answer the contract description. This he does by the notice of appropriation, which specifies and defines the goods to which the contract attaches.
* (1948) 67 Ll.L.Rep. 147, quotes an extract from the clause at p. 148.
n1 (1940) 67 Ll.L.Rep., at p. 154.
I think that is primarily the purpose of Clause 8 in this case. Having regard to the submissions of learned Counsel for the buyers, I think it is proper to notice that this is a c.i.f. contract as a whole and that, under such a contract, the obligation on the seller is not one of delivering the goods to the custody of the buyer, but it is to place the goods on board the ship for the destination specified in the contract and within the period specified, and then in due course to tender the documents to the buyer. Of course, in the ordinary course, delivery does come about, but the obligation on the seller is as I have stated.
The questions of law which have been submitted to the Court are three. They are followed by the finding of the arbitrators in reference to them. The first question is:
Whether upon the facts found and upon the true construction of the contract the respondents [buyers] are entitled to recover any damages from the appellants [sellers].
I think I can put that on one side at the outset. It never was a major matter of controversy here, but it was said – and this brings me at once to Clause 8 and a full consideration of it – that Clause 8 provides its own remedy for a breach and, on the finding of fact in this case, the sellers have done all that they were required to do under this particular provision. It is provided by the latter part of Clause 8:
Should a declaration not be made prior to the steamer’s arrival at port of discharge, sellers shall guarantee buyers against any expenses occasioned by such delay and furnish proof, if required, that the oil was bought by them prior to the arrival of the steamer.
The sellers have here provided such a guarantee, the circumstances being that the steamer did arrive on May 21, the day before the declaration was made; but, when it is suggested that that is the sole remedy and right of the buyers, I am not prepared to uphold that contention. That is a particular obligation in those particular conditions, but there may be a breach of this clause. Although the last part of it does not apply, there may be a breach although the steamer in fact arrives after the declaration has been made. There may then be delay and, if damages accrue and can be proved, then I think they can be recovered. I do not think that learned Counsel’s submission on that point should be upheld, and the answer to the first question is clearly, I think, that the buyers are entitled to recover damages if they can establish that any damages have been incurred. Unless they can show something which is a material damage, then the only remedy that they can get is purely nominal damages.
The next two questions deal with that position. The whole issue in this case, as far as I can see it, or the main issue, subject to that small point I have just dealt with, first in the original arbitration and then before the Appeal Board of the London Oil and Tallow Trades Association, was the question as to whether the buyers, on the true application of the law to the facts of this case, establish that damages have accrued, some substantial measure of damages have accrued, from the breach of contract. That is dealt with, as I say, by the next two questions. They are put in this way: “If Question (1) be answered in the affirmative,” as I have already answered it, the question is
Whether on the facts found and upon the true construction of the said contract, the measure of damage contended for by the [buyers] is correct.
The measure of damage contended for by the buyers, put broadly, is that, by reason of this breach which has been alleged, they have lost a substantial sum of money because, they say, if the notifi cation had been given in due time, the goods could have been sold. Because the notification was not given, they were not sold, and by the time the information was available, the market had dropped and there was a substantial difference in the market price between the two dates, whatever they may be, whether the dates are properly those as found by the arbitrators or whether they are over a longer period. I think the longer period would carry a greater measure of damage. The third question is the corollary to that. It is simply whether the sellers are right in saying in this case the damages should be only nominal.
Now, the approach to this question, I think, has been conveniently indicated in two cases which are quite of recent times, where the matter has been considered by two of my more immediate predecessors sitting in this Court. I was referred to a recent decision of Mr. Justice McNair in Mehmet Dogan Bey v. G. G. Abdeni & Co., Ltd., [1951] 2 K.B. 405; [1951] 1 Lloyd’s Rep. 433. There the learned Judge had been invited to consider various lines of authority dealing with the question as to how far a Court could interfere and what was the scope of the inquiry where arbitrators had come to conclusions; and the matter came up for consideration, as it does in this case and it does so often, on a case stated. After considering the two lines of authorities advanced on the respective sides, Mr. Justice McNair, in a passage on pp. 411 and 441 of the respective reports, puts the matter in this way:
The apparent inconsistency between the expressions of opinion in the four cases referred to above as being relied upon by Mr. Mocatta and the speeches in the Monarch Steamship case * [which was, of course, a case in the House of Lords] to which I have referred can, in my judgment, be resolved if it is accepted, as I think it must be, that it is the function of the Judge to direct the jury as to the meaning of the terms “natural and direct consequences” or “reasonably foreseeable consequences” and whether a particular head of damage is capable in law of being a consequence falling within these phrases, and to direct them whether there is any evidence that a particular consequence is a consequence falling within these phrases; it is then for the jury to find as a fact whether a particular head of damage is such a consequence and the jury’s conclusion on that point (subject to there being evidence to support it) is final.
* [1949] A.C. 196; (1948) 82 Ll.L.Rep. 137.
Then, dealing with the particular facts of that case, the learned Judge, on pp. 412 and 441 of the respective reports, puts the matter in this way. He makes some other observations intervening. Then he continues:
If this conclusion as to the effect of the authorities is correct, then in my judgment the findings of the arbitrator in par. 22, sub-pars. (3), (4) and (5), are findings of fact conclusively determining the issue in this case against the owner; the form of the findings and the citation of authorities in the case negativing any misdirection in law. I may add that, if this dispute had been tried in the Commercial Court, as it might have been, with the assistance of a City of London Special Jury, I can imagine no question more proper to be put to such a jury than the question whether this particular form of loss, namely, damages resulting from the devaluation of the pound sterling, was reasonably foresseable by commercial men on July 8, 1949, and if the jury properly directed had answered the question in the negative, as the arbitrator did here, then their verdict would not, in my judgment, be open to challenge.
I think it will be seen that those words are very appropriate when one is considering the issues which have developed in this case.
The other reference which I would make is to a passage of similar effect in a decision of Mr. Justice Devlin in Royal Greek Government v. Minister of Transport, (1949) 83 Ll.L.Rep. 228, where, at p. 238, the learned Judge makes these observations:
So the matter comes down to this, that the arbitrator has selected one cause in preference to another as the proximate or direct cause. I cannot see that any question of law is involved in this selection. . . . All conclusions of fact . . . are for the arbitrator. What is reasonable is always a question of fact. The arbitrator is the person whom the parties have chosen, as they are entitled to do, to apply finally the standard of common sense; and common sense is, I believe, the only test that can be applied to the choice between several causes, all of which are sufficient in law. In my judgment, an arbitrator’s finding on causation, unless he can be shown to have misdirected himself on some principle of law or on some point of construction, or to have acted on insufficient evidence, is conclusive.
I apprehend that when the learned Judge said “insufficient evidence” it would really have to be “acted on no evidence at all”; but, so long as there is some evidence, it is for the arbitrator, as I see it, to assess.
In those circumstances, approaching the matter in that way and in order to answer these questions and consider whether the facts as found by the arbitrators should stand, it seems to me to be necessary to consider, first, approaching the matter in that way, whether the tribunal of fact here, the Board, have considered the matter properly from a legal approach. They had the advantage of having in front of them two learned Counsel very well versed in issues of this character, and I understand that the relevant authorities on the law applicable to damages for breach of contract were referred to. The main burden of learned Counsel’s forceful submission on behalf of the buyers (who appeared in this Court in the role of appellants attacking the case as it stands) was that the Board of Appeal had not dealt sufficiently with the questions of law which arose, but had omitted to apply their minds to what, for convenience, has long been referred to as the damages which might be recoverable under the second head of damage set out in Hadley v. Baxendale, (1854) 9 Ex. 341.
The law on this matter has been very conveniently reviewed and assembled and analysed in a recent case in the Court of Appeal of Victoria Laundry (Windsor), Ltd. v. Newman Industries, Ltd., [1949] 2 K.B. 528, in the judgment of the Court which was given by Lord Justice Asquith, as he then was. That judgment, I understand, was referred to in detail before the arbitrators, and the question is whether they have approached the matter properly in arriving at their findings.
There does not seem to be any doubt that the Board were asked to find, on the facts in this case as they were put before them (very largely, I think, on documents, although some witnesses were called), that damages flowed under the first head of the rule which is always applied in these cases; that is, it was said that the damages here were such that they flowed naturally or in the ordinary course of things from the breach of contract in not giving a notice in due time. That is really the principle which is set out in the appropriate section of the Sale of Goods Act, 1893, Sect. 53(2), to which I apprehend reference was also made:
The measure of damages for breach of warranty [and this was treated as a breach of warranty throughout] is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.
Under that heading, the award makes this finding; it is the fourth of the findings to which they come:
That the loss claimed by the [buyers] was not reasonably foreseeable at the date of the contract as likely to flow from the [sellers'] said failure to pass on the declaration without delay and did not naturally and directly flow therefrom and was too remote.
I would be prepared to hold that that was a finding relative to this first limb of the Hadley v. Baxendale rule, the first head of damage.
This question was developed in the illuminating judgment of Lord Justice Asquith. He analyses from the cases the position under the first rule, and he puts it in this way (sup., at p. 529):
In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach.
Then he says:
What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach. For this purpose, knowledge “possessed” is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the “ordinary course of things” and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subjectmatter of the “first rule” in Hadley v. Baxendale.
On the facts, applying those principles of law, the Board of Appeal have come to the conclusion which I have just read. If that is the sole ground on which the buyers’ claim for damages can be placed and was placed, then the answer to Question 2 must clearly be that the measure of damages claimed by the buyers for some subs antial damages is incorrect and that the sellers are right when they say that only nominal damages should be given.
That would answer the third question; but there has been called into consideration the question raised by Sir Frank Soskice, in his submissions on behalf of the buyers, as to whether in this arbitration it was open to the buyers to make a claim under the second head in Hadley v. Baxendale, sup., and whether they did so, and, if they did so, whether it has been properly dealt with by the tribunal, because, of course, when one is considering Question (2), a question of law, it is wide enough to embrace any measure of damage which the buyers can advance and substantiate.
The second limb of the rule is that where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach should be such as may fairly and reasonably be considered as flowing not only naturally or in the ordinary course of things, but may be such as are reasonably supposed to have been in the contemplation of both the parties, at the time when they made the contract, as the probable result of the breach of it. In analysing that proposition further in his judgment, Lord Justice Asquith, having referred to British Columbia Saw-mill Company, Ltd. v. Nettleship, (1868) L.R. 3 C.P. 499, points out that that
annexes to the principle laid down in Hadley v. Baxendale a rider to the effect that where knowledge of special circumstances is relied on as enhancing the damage recoverable that knowledge must have been brought home to the defendant at the time of the contract and in such circumstances that the defendant impliedly undertook to bear any special loss referable to a breach in those special circumstances.
I need not do more than just say that that aspect of damage is still further developed in the Victoria Laundry case in the judgment.
Now, I am satisfied that those propositions of law were placed before the arbitrators and therefore it was for them to consider as issues of fact the problems which do arise. That they have considered the issues of fact is clear from their findings, because there is another finding, No. 3:
That the loss claimed by the buyers was directly caused by the fall in the market price and was due to no other cause.
Learned Counsel for the buyers submitted that that was an irrelevant finding and one which threw some light on the next one, No. 4, where they found that the damages did not reasonably flow from the breach and in some way made the second finding of no proper effect or unsatisfactory. It may be that it was not a vital finding, one that the loss flowed from a fall in the market price, but it was one that it was quite appropriate to give and one, it seems to me, which showed that the tribunal were applying their minds to the right question. It may be that it was brought about by a reference being made in the course of the arbitration to some observation of Mr. Justice McCardie in Taylor & Sons, Ltd. v. Bank of Athens, (1922) 27 Com.Cas. 142, where he says at the top of p. 147:
It is vital to observe that the loss must result from the breach of warranty, as distinguished from a loss through having entered into the contract. It does not extend, I think, to a case where the loss results not from the breach of warranty but from an unfortunate or improvident bargain which the buyer may have made. Market falls are not generally due to a vendor’s default. A buyer cannot, I think, save perhaps in very exceptional circumstances, attribute to his seller a loss which, in substance and in fact, arises not from the seller’s breach, but from a fall in market values.
Therefore, it seems to me that, approaching the matter in that way, that was a finding to which they were quite entitled to come. It is not for this Court to consider the questions of fact or what may have affected the mind of the tribunal, but unless it can be pointed out that there is no evidence on which such conclusion could be drawn, the decision of the tribunal, properly directed, must stand; and the questions of law which are asked here as to whether the damages contended for are correct, on one side or the other, do depend so much on the view which the tribunal of fact takes of the particular circumstances. It seems to me that there is nothing at all to have prevented the tribunal of fact coming to the conclusion even on this very broad issue which was objected to so much, where they find that the cause of the buyers’ loss was the fall in the market, on quite a broad contemplation of the facts of the case. This contract had been entered into on Mar. 9, 1951, and the buyers had the whole of March and the whole of April in which to resell the goods. It was not contemplated that they would be anything other than intermediaries and would apply the goods to whatever commitments they had entered into, to which they were appropriate; but, if they made other sales, they did not apparently appropriate these goods to them, nor did they resell them. What prompted them to do that in March and April, I do not know. I do not know whether the arbitrators knew; but they did not do it, and in the meantime, when May came along, the market had fallen, or it fell by May 1, I think. The figures are given in the case as a schedule. It went up again for a few days. They did not sell then. It may well be that some other factor did prompt them not to sell and that the breach of contract had got nothing to do with it. That is a broad way of approaching it; but, whether that be right or whether there are other considerations, it would be quite impossible for this Court, I think, to say that both those were not findings of fact to which the tribunal of fact could properly come.
Now, the other question, of course, if it was a claim properly advanced under the second rule in Hadley v. Baxendale, sup., does not seem to have been answered. When Mr. Roskill got up to reply for the sellers, he took exception to this matter being raised because it is not set out as one of the questions of law in the case specifically. I think it is probably embraced by the second question, but it is not indicated in detail and there is no finding relative to it.The submission was that the claim was made before the tribunal, at any rate as it was finally left, on the one head of claim, and so it would appear in the submissions which are set out in the case. Par. 17 of the case sets out the submissions of the buyers, and it commences in this way:
The [buyers] contended before us that the [sellers] either deliberately or negligently withheld the declaration from the [buyers] between the 29th April and the 28th May, 1951, and that thereby they were in breach of Clause 8 of the contract and are liable for such damage as may fairly and reasonably be considered as arising naturally from the said breach.
That does seem to me to relate, and relate only, to the damages which were recoverable under Sect. 53(2) of the Sale of Goods Act or the first rule in Hadley v. Baxendale, sup.; but in the detailed submission in support of those broad contentions, there are other matters raised which would or might be applicable to a claim framed for damages in special circumstances, as I have indicated, brought home to the parties at the outset of the contract, when the contract was entered into, as being matters which might give rise to special damages if there was a breach of contract. It is quite significant that at no time, as I understand it, was the claim for damages based on any other ground than a difference in the market price. The case which would appear to have been raised was that, before the contract was entered into and during the currency of the contract, it was known to the sellers that the buyers had some commitments in Marseilles, they had made some contracts there – four of them, I think; they are set out in par. 8 of the case – and that they might wish (indeed, they did so desire, so it is said) to meet these contracts by the purchase which they were making from the sellers in this case. That seems to have been dealt with by the evidence, but it becomes clear, if I may put it in this way, that there was really nothing in it. The case could not be made. The facts were all against it. There was some attempt to raise some sort of custom which required the sellers to give delivery, not at Genoa, which was the contractual port, but at Marseilles. It does not develop during the case, and there was a finding in the case that there was no such custom. While, as is often done, the place of destination was altered as a matter of practice, there was no legal obligation to do so; and, on the face of it, when one is looking at what was affecting the minds of the buyers as to the use to which they were going to put these goods and what might happen in the event of a breach of contract, it seems to me that it was well open to the tribunal of fact to say that they never showed any firm intention at all of utilizing these goods for Marseilles. If they wanted them for that, why did they contract for Genoa? They had all the time that I have said, March and April, in which to do something with them. They did nothing, and then they turn round and say: “Oh, we cannot fulfil those contracts because you have not given us the information in time.” That, I think, as it was raised, became a matter which Mr. Lee could not carry any further; and, having heard the two learned Counsel about the matter, I am far from satisfied that it remained an issue before the tribunal as to whether any damages could be recovered under the second limb. I think the position was that, although it was hoped to make some claim under that, the facts were too overwhelming to support it and the claim was not proceeded with further.
I think it would be quite wrong for this Court, in those circumstances, to send this matter back and to ask a question of the tribunal on a matter which is left in that state. Indeed, I think that before it could be sent back there would have to be some findings of fact on the evidence already before the tribunal which would in some way support a claim under the second head in Hadley v. Baxendale, sup. I cannot find one fact which would give any support to it, and there are a number of facts which would seem to me to negative it and make it impossible. I will not refer to them in any detail. Although learned Counsel in his submission frequently said that of course the buyers could have resold, he submitted that it had no materiality. I think the finding which the tribunal made in their Finding (j),
The [buyers] could have resold the goods the subject-matter of the contract at any time after the date thereof, namely the 9th March, 1951, on c.i.f. Genoa terms,
was quite an important finding.I think it does throw some light on this question as to whether the breach of contract of the sellers brought about any conduct on the buyers’ part which resulted in loss; and there is a further finding which they make:
There was no evidence that the [sellers] had any knowledge of the Marseilles contracts on the 9th March, 1951.
There are other matters, too, other findings of fact, but I feel it would be quite wrong, as I have said, to leave that matter open. Therefore, the damages in this case fall to be assessed, if they have to be assessed at all, under the first head of claim; and the tribunal of fact, applying the right principles of law, have come to the conclusion that no loss has been shown by the buyers which would entitle them to any more than nominal damages. That is the fourth finding in the award, a finding both in fact and in law on these questions.
Therefore, the answer to Question (2) is that, on the true construction of the contract and on the facts found, the measure of damage contended for by the buyers is incorrect and that the arbitrators were right in finding only nominal damages. On that finding of nominal damages in the award, the arbitrators have made the sellers nevertheless pay the whole costs of the arbitration and, I think, of the appeal. I think that shows that the Board here were applying their minds quite carefully to the circumstances of the case. As far as I have been able to ascertain in all that has been said in this case – it has been found that it was not done deliberately, but, if it is not deliberate, there is a great deal of negligence – there was no reason given why the sellers did not pass on this information earlier. I do not doubt that that gave rise to a good many doubts in the mind of the buyers, but, in breach of contract, the motive of a party is really not material, and I think it was well dealt with by the Appeal Board making that order with regard to costs.
That really answers the three questions which were put to the Court; but a good deal was said in the course of the case about the extent of the delay if the period of delay became at all material. I do not think I need say very much about that. The only answer, I think, that was given by the sellers for delaying up to a period was that when they got their notification from the shipper that goods had been shipped, it did not give the date of the bill of lading. Therefore, they said they could not properly pass it on. It was submitted before this Court that the date of the bill of lading was a material matter and that the declaration could not be made by the seller appropriating these goods to the contract until the date of the bill of lading was known and was given. It is not without significance, as was pointed out, that when eventually the seller does come to give the notification, he makes no reference even then to the bill of lading date. It is in one of the findings that on May 22 the cable of that date does not give the date of the bill of lading. Reliance was placed, on this issue, on the Rules of the Association to which this contract was subject, that
the date of the bill of lading shall be deemed proof of the time of shipment in the absence of evidence to the contrary.
It was a small point which arose in the case, and the finding of fact, perhaps a little curiously, is that Clause 8 which requires that the name of the steamer, marks and full particulars should be declared by the shippers to the buyers, does require (so it is found in the case) that the date of the bill of lading shall be given, because it is said it shall be given under the “full particulars.” As a matter of construction of the clause, I should have thought that was doubtful, but I do not decide the point now. I think there is a good deal of obscurity about this matter, as to the declaration, and I should want further information before I gave a final opinion upon it. The arbitrators seem to have taken the view, both in fact and in law, that the sellers were justified at any rate in not giving a declaration before May 14. They are familiar with the type of declaration which is required, and it may be that they are right about it.
I think that there is another business aspect which may or may not have been considered by the arbitrators in relation to that; that is, that the notification by the shipper was for a different quantity – 314 1/2 tons, I think – and, I suppose, that having been notified, it was then only Apr. 28. There were still two days to go. The sellers in this case, the buyers from Ceylon, were entitled to decide whether they would appropriate that to this contract or to some other, and I suppose there must be some delay while they decide as to their appropriation. However, I do not think I need say anything more about that, and in this case the sellers were not the shippers. Under Clause 8, the shippers have to notify the buyers, and the buyers under that clause could not be Messrs. Vantol in this case, because they were not in contractual relationship with the parties, and I think the material part of the clause which has to be applied here, in considering the approach, is that when the sellers get the declaration, then such declaration is, under Clause 8, to be passed on to the buyers without delay. They did not do that and, on the findings to which I have come, it is not material to say whether they could have done it still earlier than has been found in the case. On that matter, I should not myself have felt at present at liberty to interfere with the way in which the case deals with that question.
In those circumstances, the Court having answered the questions submitted to it in a way which I think supports entirely the view which the Board took of this case, the right order is that, in the event of this case not being proceeded with, the decision arrived at as a final view by the Appeal Board should stand; that is, that the award shall stand as the award of a farthing damages against the sellers in favour of the buyers, and that the sellers should pay the costs, charges and expenses incurred by them and also by the buyers. That order will stand; and, as regards the costs of this hearing, they must be the costs of the sellers.
DISPOSITION:
Mr. ROSKILL: The formal order, I apprehend, will be that the Court answers the three questions “Yes,” “No,” “Yes, damages nominal,” and upholds the award set out in par. (e). Then (g), which is the one which deals with the costs, follows automatically.
Mr. Justice SELLERS: Yes.
Mr. ROSKILL: The only other matter is, in addition to the costs of the arguments. I am told that my learned friend’s clients paid the cost of setting down, so I do not have to ask for that, but there is the cost of transfer. Nobody ever quite knows whether that is included in the costs of the argument.
Mr. Justice SELLERS: That must be included. You can have it.
Mr. ROSKILL: There is one other small point, lest it be thought I did not correct something in your Lordship’s judgment. Your Lordship did say, towards the end, accepting something, I think, that Sir Frank said for the first time in the reply, that when my clients made the appropriation they did not pass on the bill of lading date. I do not want to reopen a controversial matter, but, with great respect to Sir Frank and your Lordship, I think that is based on a misreading of the facts on page 5 of the award. *
* See left-hand column of p. 284 ante.
Mr. Justice SELLERS: I thought it was a telegram from Pozzani.
Mr. LEE: Sir Frank never in fact said, as my learned friend will recollect, that the sellers did not include the bill of lading date. It was the telegram from Carosio, the brokers, which was received by the buyers, which did not contain the bill of lading date. That was treated by the Board of Appeal as the receipt by the buyers of the declaration.
Mr. ROSKILL: If I may say so, you are half right, but not completely right, if you look at (h) on page 5. n2
n2 See last paragraph of left-hand column of p. 284 ante.
Mr. Justice SELLERS: That is a letter which did not come until the 28th.
Mr. ROSKILL: That goes from Saroc, who are my brokers in Milan, to Carosio, who were Vantol’s brokers in Genoa. That specifies the bill of lading date. On the same date, the tender was transmitted by Carosio in a letter to Vantol, who received it in London on the 28th.
Mr. Justice SELLERS: The date which was found as the date of breach was the 22nd.
Mr. ROSKILL: Yes, but Carosio were not my agents. I do not want to argue the point.
Mr. LEE: My learned friend is rather beating the air. If one looks at page 19 n3 in the findings of the Board of Appeal, one sees they say that the period of the breach ended on the 23rd, because they then became aware of the contents of the declaration of May 19, but when it came into the hands of the buyers it did not contain the bill of lading date.
n3 See p. 288 ante.
Mr. Justice SELLERS: It is a very minor point, and it is a question of fact.
Mr. LEE: They cannot say that the bill of lading date was material as far as the buyers are concerned.
If your Lordship would just hear me on the question of costs. I have a somewhat uphill task asking for the costs of this matter, but I do put it in this way. The award was made in the form of a special case. Apparently the respective solicitors got together on the telephone and it was intimated by those instructing my learned friend that the sellers proposed to do nothing about it at all. In order to achieve any sort of finality, it was necessary for the case to be set down by one or the other; so the buyers set it down in order to achieve finality. It was not the buyers, of course, who asked for the award to be stated in the form of a special case in the first event. It was my learned friend. In those circumstances, we had to come to the Court.
Mr. Justice SELLERS: They were in quite a happy position, I suppose. If nothing happened, they had not to pay any damages. What is the effect of that, Mr. Lee? If it had remained dormant, you would have got all your costs. You would have got no damages, but you would at least have got your costs, would you not?
Mr. LEE: That is the way I put it, that because of the sellers’ inaction in the matter, or proposed inaction in the matter, we were forced to set the matter down.
Mr. Justice SELLERS: You could have left it there, I think. It has finality in its terms, has it not, in the event of not proceeding with it: “In the event of this award, so far as stated in the form of a special case, not being set down for hearing by the Court within” a period “then our award shall stand”; and that award gives you mightly little in the way of compensation, but it does give you all your costs.
Mr. LEE: For that I am grateful.
Mr. Justice SELLERS: Having regard to the tribunal’s finding, I think it was a correct way, but it was an unusual and generous way of dealing with the buyers.
Mr. LEE: Only what was, in our respectful submission, justified by the facts; but that is neither here nor there.
Mr. Justice SELLERS: I think you had, on the fact of it, some form of grievance about it, if you have no remedy. I think I must give the costs to the sellers.
SOLICITORS:
Baddeley, Wardlaw & Co.; Richards, Butler & Co.
