Sons of Gwalia Ltd v Margaretic

HIGH COURT OF AUSTRALIA

GLEESON CJ,
GUMMOW, KIRBY, HAYNE, CALLINAN, HEYDON AND CRENNAN JJ

Matter No S208/2006

SONS OF GWALIA LTD (SUBJECT TO DEED
OF COMPANY ARRANGEMENT)  APPELLANT

AND

LUKA MARGARETIC & ANOR  RESPONDENTS

Matter No S209/2006

ING INVESTMENT MANAGEMENT LLC  APPELLANT

AND

LUKA MARGARETIC & ANOR  RESPONDENTS

Sons of Gwalia Ltd v Margaretic
ING Investment Management LLC v Margaretic
[2007] HCA 1
31 January 2007
S208/2006 & S209/2006

ORDER

In each matter, the appeal is dismissed with costs.

On appeal from the Federal Court of Australia

Representation

B W Walker SC with K J Mony De Kerloy for the appellant in Matter No S208/2006 and the second respondent in Matter No S209/2006 (instructed by Freehills)

T F Bathurst QC with P D Crutchfield for the appellant in Matter No S209/2006 and for the second respondent in Matter No S208/2006 (instructed by Arnold Bloch Liebler)

B A J Coles QC with K M Richardson for the first respondent in both matters (instructed by Jackson McDonald)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Sons of Gwalia Ltd v Margaretic

ING Investment Management LLC v Margaretic

Companies – Winding-up – Proof and ranking of claims – Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares – Relevance of Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 ("Houldsworth") – Whether Houldsworth established a principle of common law precluding a member from proving in the winding-up of a company for damages for misrepresentation inducing the acquisition of shares where the member has not rescinded the contract pursuant to which the shares were purchased and where rescission is no longer available by reason of the company's insolvency – Whether any such common law principle is part of Australian law.

Companies – Winding-up – Proof and ranking of claims – Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares – Whether claim admissible to proof under s 553(1) of the Corporations Act 2001 (Cth) ("the Act") – Whether circumstances giving rise to claim occurred before the "relevant date".

Companies – Winding-up – Proof and ranking of claims – Claim by member against company for damages for misleading or deceptive conduct inducing purchase of shares – Whether claim postponed by s 563A of the Act as a debt owed by the company to the member in that person's "capacity as a member".

Statutes – Construction – Section 563A of the Act – Whether claim postponed as a debt owed by the company to a member in that person's "capacity as a member" – Relevance of history of previous statutory provisions – Relevance of apparent purpose and policy of the Act – Relevance of context of contested provision – Relevance of alternative and foreign statutory provisions – Relevance of coherent approach to construction of corporate insolvency provisions.

Words and phrases – "capacity as a member".

Corporations Act 2001 (Cth), ss 553(1), 563A.

1. GLEESON CJ.   These appeals raise an issue concerning the subordination of what are sometimes called "shareholder claims" to claims of other creditors in the application of the insolvency provisions of the Corporations Act 2001 (Cth) ("the Act"). The resolution of the issue turns upon the meaning and effect of s 563A of the Act, which is in Div 6 (concerning proof and ranking of claims) of Pt 5.6 (concerning winding-up). That section provides:

   "Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied."

2. Section 553, which is also contained in Div 6 of Pt 5.6, provides that, subject to the Division, in every winding-up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company. It is obvious that there are debts that may be owed by a company to a person who is a member of the company which are not owed to the person in the person's capacity as a member. It is equally obvious that, whatever be the precise test according to which the distinction is to be drawn, the subordination effected by s 563A is limited to debts owed to a member as a member, and does not apply to debts owed to a person otherwise than as a member. Debts owed by way of dividends, profits or otherwise to a person in the person's capacity as a member are contrasted with debts owed to, or claims made by, a person otherwise than as a member.

3. The language of s 563A has a long history; a history that goes back before the decision in Salomon v Salomon & Co Ltd[1], to a time when the separateness of a corporation from its members had not been fully recognised, and when the difference between corporations and partnerships was not as distinct as it later became.  Subject to certain exceptions, it was an established rule of partnership law that a partner in a bankrupt firm could not prove in competition with the debts of outside creditors upon a dissolution[2].  Lord Lindley explained the rule as follows[3]:

   "[The creditors of the firm] are, in fact, his own creditors, and he cannot be permitted to diminish the partnership assets to the prejudice of those who are not only creditors of the firm, but also of himself.  If, therefore, a partner is a creditor of the firm, neither he nor his separate creditors (for they are in no better position than himself) can compete with the joint creditors as against the joint estate."

   [1][1897] AC 22.

   [2]Soden v British & Commonwealth Holdings Plc [1998] AC 298 at 308.

   [3]Quoted in Lindley & Banks on Partnership, 18th ed (2002) at 818.

4. Once it became accepted that a company formed under the applicable companies legislation is a corporate entity with a legal existence distinct from that of its members, it followed that the creditors of a company were not also creditors of the members either collectively or individually.  That is an essential aspect of the difference between an ordinary trading company formed with limited liability, and a partnership.

5. There was another, more enduring, influence in company law, reflected in certain decisions said to apply to the present case.  It concerns the law relating to the raising and maintenance of share capital.  Companies Acts, in a variety of ways, have given effect to the principle, also established before Salomon v Salomon & Co Ltd, that the creditors of a company which is being wound up have a right to look to the paid-up capital as the fund out of which their debts are to be discharged[4].  Statutory manifestations of that principle have been modified over the years, and it may be doubted that it reflects the reality of modern commercial conditions, where assets and liabilities usually are more significant for creditors than paid-up capital.  As Lord Browne-Wilkinson said in Soden v British & Commonwealth Holdings Plc[5], it is "wholly irrelevant" to the position of a member who has acquired fully paid shares on the market. 

   [4]Trevor v Whitworth (1887) 12 App Cas 409 at 414.

   [5][1998] AC 298 at 326.

6. To return to s 563A, it assumes that a person's claim, constituting a debt, is admissible to proof against the company. The existence of a liability is the hypothesis upon which the section proceeds. It subordinates that claim if, but only if, the debt is owed to the person in the person's capacity as a member of the company.

7. The principal issue in these appeals is whether the (assumed) liability of the appellant in the first appeal ("the first appellant") to the first respondent in both matters, Mr Margaretic ("the respondent"), is a liability to him in his capacity as a member of that appellant.  The appellant in the second appeal ("the second appellant") is a general creditor of the first appellant.  Both appellants argued that the liability to the respondent is a liability to him in his capacity as a member of the first appellant.  That issue was resolved adversely to the appellants by Emmett J at first instance in the Federal Court of Australia[6], and by the Full Court of the Federal Court (Finkelstein, Gyles and Jacobson JJ) on appeal[7].  Substantially the same issue, arising under a similar statutory provision, was resolved in the same way in the United Kingdom by Robert Walker J[8], the Court of Appeal, and the House of Lords[9], in Soden.

   [6](2005) 55 ACSR 365; (2006) 24 ACLC 244.

   [7](2006) 149 FCR 227.

   [8]Soden v British and Commonwealth Holdings plc [1995] 1 BCLC 686; [1995] BCC 531.

   [9][1998] AC 298.

   The respondent's claim

8. Sons of Gwalia Ltd, the first appellant, was a publicly listed gold mining company. On 29 August 2004, administrators were appointed pursuant to s 436A of the Act. It now appears that, at the time, the shares in the company were worthless. On 18 August 2004, the respondent had bought 20,000 shares in the first appellant at a cost of $26,200. The respondent alleges that, in breach of the stock exchange listing rules, the first appellant had failed to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its gold delivery contracts and that it could not continue as a going concern. The respondent says that he was a victim of misleading and deceptive conduct and that the first appellant contravened s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). He claims to be entitled to compensation, his claim being for the difference between the cost of his shares and their value (nil). There are many other shareholders with similar claims.

9. The proceedings have been brought to test the entitlement of shareholders in the position of the respondent to claim, in competition with other creditors, under a deed of arrangement under Div 10 of Pt 5.3A of the Act which includes a provision which, by reference, incorporates s 563A. The case has been argued on the assumption that the respondent can show one or more of the alleged contraventions of statute, and the consequential damage asserted.

10. Section 563A, like some other provisions of the Act, uses the expressions "debt" and "claim" interchangeably, and argument proceeded upon the basis that a liability for unliquidated damages may be a debt within the meaning of the section. This is a topic that was dealt with in some detail by Emmett J, but it is unnecessary to pursue the matter. Three aspects of the respondent's claim should be noted. First, the amount of the claim is not based on the amount of capital paid up on the shares which the respondent purchased. It is based on the market price of the shares. The company's capital structure, and the paid-up value of its shares, may have had some indirect bearing on the market value of the shares, but the amount paid up on the shares is not an integer in his claim for damages. Secondly, there was no contract between the first appellant and the respondent concerning the purchase of the shares. The claim arises out of harm suffered by reason of conduct of the company that was in contravention of certain statutory norms of behaviour. Thirdly, while the appellants acknowledge that the fact that the respondent was a member of the first appellant at the time he made his claim is essential to their argument concerning the suggested operation of s 563A, that fact is not essential to his claim. His claim would have been the same if he had sold his shares (for example, to crystallise his loss for tax purposes) before he made the claim, or if for some reason his name had never been entered on the company's register of members. The appellants accept that if the respondent had sold his shares before he made his claim, the first appellant's debt would not be owed to him in his capacity as a member. In other words, they accept that s 563A has a temporal aspect.

    A preliminary question

11. Both appellants submitted that principles reflected in the decision of the House of Lords in Houldsworth v City of Glasgow Bank[10] supported their construction of s 563A, but the second appellant also relied upon an argument said to be independent of that section. If the argument is correct, s 563A would have no application to the case, for it only applies where there is a debt owed by a company to a person, and then requires a decision as to whether the debt is owed to the person in the person's capacity as a member.

    [10](1880) 5 App Cas 317.

12. The history of s 563A is set out in the reasons of Hayne J. The section had its origins in s 38(7) of the Companies Act 1862 (UK).  In that Act, and in subsequent United Kingdom and Australian legislation, until relatively recently, it took the form of a qualification (or, perhaps, a qualification upon a qualification) to a general provision concerning the liability of members to contribute in a winding-up.  Broadly stated, the 1862 Act provided that in the event of a winding-up members were liable to contribute to the assets in order to meet the company's liabilities.  In the case of a limited company, no contribution was required beyond the amount, if any, unpaid on the shares.  However, no sum due to any member, in his character of a member, by way of dividends, profits, or otherwise, would be deemed to be a debt of the company payable in competition with general creditors, but such sum might be taken into account in making adjustments as between contributories.  That was still the general scheme of s 360(1) of the Companies (Victoria) Code that was considered and applied by this Court in Webb Distributors (Aust) Pty Ltd v Victoria[11], and of the United Kingdom legislation considered by the House of Lords in Soden. In the Act, s 563A appears in a somewhat different context, and its effect of subordination rather than denial is clearer, but its origins are unmistakable. Section 360(1)(k) provided that "a sum due to a member in his capacity as a member by way of dividends, profits or otherwise shall not be treated as a debt of the company payable to that member in a case of competition between himself and any other creditor who is not a member" but may be taken into account in a final adjustment of rights among contributions. The provision that a sum due was not to be treated as a debt in a case of competition between the member-creditor and other creditors might account for some elision of the issue whether a debt is provable and the issue of its ranking in terms of priorities. However that may be, s 563A clearly distinguishes those issues. It assumes that a certain debt is provable in a winding-up, and postpones it to certain other claims.

    [11](1993) 179 CLR 15.

13. According to the second appellant's argument, there is a principle of common law, emerging from Houldsworth, which precludes a shareholder from proving in a winding-up (or under a deed of company arrangement) for damages for misrepresentation inducing any acquisition of shares unless the shareholder has first rescinded "the membership contract". Once the company has become insolvent or has gone into liquidation or voluntary administration, rescission is not available. If that argument were correct, s 563A could not apply, because it assumes, and subordinates, a liability of the kind which, according to this argument, does not exist. The submission did not make clear what was said to be involved in the notion of the rescission of the membership contract. The respondent in the present case was not a party to any contract with the first appellant providing for the acquisition of the shares in question.

14. The principle in Houldsworth is famously elusive[12].  For present purposes, it is sufficient to observe that, in Webb Distributors, this Court referred to a "proposition which the House of Lords distilled ... from the provisions of the Companies Act 1862" and held that it had "received statutory recognition in s 360(1) of the Code"[13].  There is a chronological curiosity here.  The language of s 360 of the Victorian Code reflected the language of s 38(7) of the 1862 Act.  Houldsworth did not apply that statutory language (of subordination) but turned on a wider principle, and produced a different result, although one that also was unfavourable to the claimant.  Houldsworth was decided in 1880.  The statutory language can hardly be said to reflect the decision in Houldsworth.  It is older than the decision, and it produces a different result. 

    [12]See Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 at 32-33.

    [13](1993) 179 CLR 15 at 33.

15. The difference between denial and postponement or subordination of a claim is not merely technical.  At first sight it may appear puzzling that the majority in Webb Distributors held that s 360(1)(k) of the Victorian Code applied[14], and yet approved a holding "that the shareholders could not prove in the liquidation because they were precluded both from rescinding their contracts and from maintaining actions for damages in respect of their acquisition of the shares"[15].  If there were such a preclusion, then s 360(1)(k) would not have applied.  Presumably, "prove" was taken to mean "prove in competition", but it is not easy to explain the concept of preclusion in the application of s 360(1)(k).

    [14](1993) 179 CLR 15 at 35.

    [15](1993) 179 CLR 15 at 18, 39.

16. Some of the reasoning in Webb Distributors may have prompted the second appellant's preliminary point.  The majority were not disposed to decide "whether Houldsworth is right or wrong"[16], identifying the critical question as being "whether the proposition which the House of Lords distilled in the case from the provisions of the Companies Act 1862 [was] incorporated in the provisions of the Code"[17].  They answered that question:  yes, in part[18]. The scheme of the Act in relation to raising and maintenance of share capital is somewhat different from that of earlier legislation, and very different from that of the 1862 Act. As will appear, Houldsworth was never authority for a principle as wide as that asserted by the second appellant.  The refusal of the majority in Webb Distributors to consider whether the decision in Houldsworth was right or wrong shows that they decided that case by applying s 360(1)(k) of the Code.  They regarded some of the considerations underlying Houldsworth as relevant to the interpretation of s 360(1)(k), operating in addition to the Code. The issue in this case is to be decided upon the true construction of the provisions of the Act and, in particular, s 563A.

    [16](1993) 179 CLR 15 at 33.

    [17](1993) 179 CLR 15 at 33.

    [18](1993) 179 CLR 15 at 33.

    Section 563A

17. The appellants submit that the respondent's claim is for a debt owed to him in his capacity as a member of the first appellant.  In support of that submission they rely both upon arguments of policy related to modern circumstances and upon arguments of historical context.  They also submit that this Court's decision in Webb Distributors requires, or at least supports, that conclusion.

18. As to the first matter, modern legislation, such as that invoked by the respondent in this case, has extended greatly the scope for "shareholder claims" against corporations, with consequences for ordinary creditors who may find themselves, in an insolvency, proving in competition with members now armed with statutory rights. Corporate regulation has become more intensive, and legislatures have imposed on companies and their officers obligations, breach of which may sound in damages, for the protection of members of the public who deal in shares and other securities. This raises issues of legislative policy. On the one hand, extending the range of claims by shareholders is likely to be at the expense of ordinary creditors. The spectre of insolvency stands behind corporate regulation. Legislation that confers rights of damages upon shareholders necessarily increases the number of potential creditors in a winding-up. Such an increase normally will be at the expense of those who previously would have shared in the available assets. On the other hand, since the need for protection of investors often arises only in the event of insolvency, such protection may be illusory if the claims of those who are given the apparent benefit of the protection are subordinated to the claims of ordinary creditors. There is ample precedent for legislative resolution of this policy issue in a manner different from s 563A. For example, in the United States, §510(b) of the Bankruptcy Code provides:

    "510  Subordination

    ...

    (b)      For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock."  (emphasis added)

19. No such provision is to be found in the Act. The contrast between §510(b) and s 563A is obvious. If Parliament were to introduce such a provision, it would need to consider what would be the practical effect upon the rights conferred upon people who deal in shares and securities by legislation of the kind relied upon by the respondent. One thing is clear. Section 563A does not embody a general policy that, in an insolvency, "members come last". On the contrary, by distinguishing between debts owed to a member in the capacity as a member and debts owed to a member otherwise than in such a capacity, it rejects such a general policy. If there ought to be such a rule, it is not to be found in s 563A.

20. The construction argument based on history, and, in particular, "the principle in Houldsworth", overstates the width of that decision, and of others that have followed.  At the commencement of these reasons, reference was made to two possible sources of influence, one relating to partnership law, the other relating to the raising and maintenance of share capital, that might have been at work in Houldsworth.  The case was brought by an investor who acquired from a bank, which was an unlimited company registered under the 1862 Act, an amount of its stock.  The company went into liquidation.  Since it was an unlimited company, the investor became liable to pay calls as a contributory, and the liability was unlimited.  The investor claimed he had been induced by fraud to take up the stock.  Because the winding-up had commenced, he could not claim rescission of the contract of allotment.  He claimed damages against the company for fraud, the damages including his liability on past and future calls.  The claim failed.  It is to be noted that what the investor was attempting to do was, in effect, to obtain from the company reimbursement in respect of his liability to pay calls in the winding-up of the company, in circumstances where he could no longer obtain rescission of the contract of allotment pursuant to which he acquired the shares which exposed him to the liability to pay calls.  In In re Addlestone Linoleum Co[19], Lindley LJ said:

    "The principle on which the House of Lords decided Houldsworth v City of Glasgow Bank was that a shareholder contracts to contribute a certain amount to be applied in payment of the debts and liabilities of the company, and that it is inconsistent with his position as a shareholder, while he remains such, to claim back any of that money – he must not directly or indirectly receive back any part of it".

    [19](1887) 37 Ch D 191 at 205-206.

21. In Addlestone, a company issued, as fully paid, shares which were in truth not fully paid, and a liquidator made a call for the unpaid balance. The shareholders sought to prove in the winding-up for damages measured by their liability on the call. Kay J held that the statutory equivalent of s 563A applied because the shareholders were making their claims in the character of members of the company. Their contracts of subscription for the shares obliged them to pay the money the subject of the call, and they were seeking to neutralise their obligations under those contracts. The Court of Appeal upheld the decision of Kay J adverse to the shareholders, but on the basis of the Houldsworth principle, as explained by Lindley LJ.  That explanation turned upon the inconsistency between the contract of subscription (which could not now be rescinded) and the claim to recover capital which, under the contract of subscription, the claimant remained liable to pay.  It is not fruitful to speculate about the extent to which that perception of inconsistency was affected by either or both of the influences mentioned at the commencement of these reasons.

22. Webb Distributors concerned non-withdrawable shares in a building society which were issued by the building society with certain representations as to the rights attaching to them. The building society was being wound up. The people to whom the shares were issued claimed that they were entitled to damages for misrepresentation, their claims being based on s 52 of the Trade Practices Act 1974 (Cth). For reasons explained by the Court, provisions of the Companies (Victoria) Code were imported into the winding-up.  The Court treated the non-withdrawable shares as though they were shares in a limited company, and the holders as though they had subscribed for such shares.  The damages claimed were based upon the amounts subscribed for the shares.  Section 360(1) of the Code provided that on the winding-up of a company members were liable to contribute to the company's debt, subject to certain qualifications including:

    "(e) in the case of a company limited by shares, no contribution is required from a member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member;

    ...

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

23. Paragraph (k) is the counterpart of s 563A of the Act, although s 563A uses the language of subordination more clearly.

24. The majority in Webb Distributors treated the rationale of Houldsworth, as identified by Lindley LJ in Addlestone, as relevant to the interpretation of s 360(1)(k).  They considered that the claim in the case before them was covered by s 360(1)(k) for the same reasons as Kay J had concluded in Addlestone that the claimants there were subordinated by the corresponding statutory provision[20].  Mason CJ, Deane, Dawson and Toohey JJ said[21]:

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

    [20](1993) 179 CLR 15 at 34.

    [21](1993) 179 CLR 15 at 35.

25. The first sentence in the above paragraph is relied upon by the respondent.  He says it covers the present case.  As to the second sentence, it is important to bear in mind that what was referred to as "the purchase price" of the shares was money paid to the building society which issued the non-withdrawable shares as the consideration for the issue:  in effect, the subscription price.

26. The hypothesis of s 360(1)(k) was that there was a sum due to a member.  The issue was whether the sum was due to the member in his capacity as a member.  It is difficult to reconcile the acceptance of the hypothesis with a proposition that there was a fatal inconsistency between the nature of the claims being made in Webb Distributors and the claimants' position as shareholders.  The approval given by the majority in Webb Distributors to the reasoning of Kay J in Addlestone suggests that, on the issue of the capacity in which sums were due to the claimants, the conclusion that the sums were due to them in their capacity as shareholders was regarded as being reinforced by the idea that they were in substance seeking to recover capital they had subscribed, which was comparable to the attempt by the claimants in Addlestone to avoid paying capital they were liable to contribute.

27. In Soden[22] the House of Lords treated Addlestone and Webb Distributors as standing "on exactly the same footing", that is to say, the protection of creditors from indirect reductions of capital, a consideration relevant to cases of subscription for shares but irrelevant to purchases from third parties of previously issued shares.

    [22][1998] AC 298 at 326.

28. Soden raised the same problem as the present case, and the House of Lords reached the same conclusion as the Federal Court in this case. It is argued for the appellants that, in the application of s 563A of the Act, no valid distinction can be made between the position of a shareholder who claims to have subscribed for shares in a company in consequence of the misleading or deceptive conduct of the company, and that of a shareholder who claims to have purchased shares on the market (or, perhaps, retained shares) in consequence of such conduct. The appellants, it has been noted, accept as valid a distinction between a purchaser who buys shares on the market and then sells them before making a claim against the company, and a purchaser who retains them and makes a shareholder claim. That shows that what is or is not a valid distinction is not to be decided in terms of broad economic equivalence, but must be founded on the terms of the statute. From an economic point of view, there is little difference between the distinction which the appellants accept and the distinction which they reject. However, s 563A requires a line to be drawn between a shareholder claiming in the capacity of a member and a shareholder claiming otherwise than in the capacity of a member. To draw that line it is necessary to analyse the nature of a claim; it is not sufficient to describe its effect on other creditors.

29. In a passage from Webb Distributors quoted above, the majority said that s 360(1)(k) would not prevent claims by members for damages flowing from a breach of a contract separate from the contract to subscribe for shares.  In a footnote, they gave two examples.  The first, In re Dale and Plant Ltd[23], concerned a claim by a managing director, who was obliged by the company's articles of association to be a shareholder, for arrears of salary and breach of his contract of employment.  Kay J thought it "very clear" that s 38(7) of the 1862 Act did not apply[24].  He rejected an argument that s 38(7) was intended to introduce into company law the principle of partnership law referred to at the commencement of these reasons.  The second, In re Harlou Pty Ltd[25], concerned a contract of service which required an employee to purchase shares in a company, and required the company to find a purchaser for the shares on termination of service.  In both of those cases, a member of a company was claiming damages for breach of contract by the company.  In the second case, the contract related to the member's shares in the company.

    [23](1889) 43 Ch D 255.

    [24](1889) 43 Ch D 255 at 257.

    [25][1950] VLR 449.

30. Debts owed to a member by way of dividends or profits are given in s 563A, as in its predecessors, as examples of debts owed by a company to a person in the person's capacity as a member. The claim made in Addlestone has been treated as an example of what is embraced by the term "otherwise".  In Soden, Lord Browne-Wilkinson referred to "the statutory contract" by which he meant the rights and obligations flowing from the United Kingdom counterpart of s 140 of the Act, together with the rights and liabilities conferred and imposed by other provisions of the Act. Section 140 provides that a company's constitution has effect as a contract between the company and each member and between a member and each other member. The concept of statutory contract was discussed by McHugh and Gummow JJ in Bailey v New South Wales Medical Defence Union Ltd[26].  Lord Browne-Wilkinson concluded that an amount owing to a member in the character (capacity) of a member was an amount falling due under and by virtue of what he described as the statutory contract.  To that his Lordship added "claims based upon having paid money to the company under the statutory contract which the member says that he is entitled to have refunded by way of compensation for misrepresentation or breach of contract"[27]. He appears also to have had in mind claims based upon liabilities incurred (even if not discharged) under the statutory contract, and claims (when capable of giving rise to debts within s 563A) advanced by way of relief from obligations imposed by the statutory contract.

    [26](1995) 184 CLR 399 at 433-440.

    [27][1998] AC 298 at 325.

31. What determines the present case is that the claim made by the respondent is not founded upon any rights he obtained or any obligations he incurred by virtue of his membership of the first appellant.  He does not seek to recover any paid-up capital, or to avoid any liability to make a contribution to the company's capital.  His claim would be no different if he had ceased to be a member at the time it was made, or if his name had never been entered on the register of members.  The respondent's membership of the company was not definitive of the capacity in which he made his claim.  The obligations he sought to enforce arose, by virtue of the first appellant's conduct, under one or more of the statutes mentioned in the earlier description of the respondent's claim.

32. The decision in Webb Distributors neither requires nor supports any different outcome. Principles concerning the raising and maintenance of share capital led this Court to conclude that, on the true construction of s 360(1)(k) of the Victorian Code, the claims in that case should be treated as claims for sums due to members in their capacity as members. For the reasons already given it would be wrong to conclude that, on the true construction of s 563A of the Act, the debt owed to the respondent is owed to him in his capacity as a member of the first appellant.

    Conclusion

33. Each appeal should be dismissed with costs.

34. GUMMOW J.   The resolution of the issues in these appeals turns upon the construction of certain provisions of the Corporations Act 2001 (Cth) ("the Act") incorporated in a Deed of Arrangement to which Sons of Gwalia Ltd ("Gwalia") is subject. There is a dispute respecting the application of those provisions to "shareholder claims" by Mr Margaretic, the first respondent. The expression "shareholder claims" is used here to identify claims for damages against a company by a subscriber for, or purchaser of, its shares, where the claimant asserts reliance upon misleading or deceptive conduct of the company or other wrongful act or omission on its part which was causative of that shareholder's loss. ING Investment Management LLC ("ING") is a creditor of Gwalia which is not a shareholder and its interests are adverse to those of Mr Margaretic.

35. The apparently seamless continuity in the reception and development of the common law in Australia is apt to distract attention from the supreme importance of statute law.  In this vein, the submissions presented on these appeals to varying degrees proceeded from an implicit premise which is false.

36. There are no "general principles of company law" applicable in a winding up and to which there must be reconciled those provisions of the Act and its predecessors (beginning with the Companies Act 1862 (UK) ("the 1862 UK Act")[28]) which stipulate a particular system of proof of debts and the ranking of debts and the placement of "shareholder claims" in that system.

    [28]25 & 26 Vict c 89.

37. Further, in any quest to locate such general principles, the older case law is not always a satisfactory guide.  Excessive significance should not be attributed to statements in nineteenth century British cases, decided at a time of endeavours to "flesh out" the developing body of statute law[29] by use of principles derived from a range of sources in the general law.   These sources included the law of agency, partnership, bankruptcy, and trusts.  It later was recognised that some of those endeavours miscarried.  One was the attribution to directors of the character of trustees of the assets of the company, and another the treatment of a company in liquidation as trustee of its assets for distribution among creditors[30].

    [29]See Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592 at 609‑611 [39]-[49]; New South Wales v Commonwealth (2006) 81 ALJR 34 at 72-77 [96]-[124]; 231 ALR 1 at 34-41.

    [30]See, respectively, Clay v Clay (2001) 202 CLR 410 at 430‑431 [41]; Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592 at 611 [48]-[49].

38. In his elaborate judgment in Australasian Temperance and General Mutual Life Assurance Society Ltd v Howe[31], Isaacs J referred both to the gradual development, culminating in Salomon v Salomon & Co[32], of the doctrine that the corporation has a distinct legal personality, and to various arguments which had rested upon the want in a corporation of physical personality.  Isaacs J noted[33] that as counsel Willes J had argued (unsuccessfully) in 1851 that an action for trespass for assault and battery did not lie against a corporation aggregate because a corporation could neither beat nor be beaten in its body politic[34] but that, in 1867, as Willes J he had held in Barwick v English Joint Stock Bank[35] that the fraud of the agent of a corporation was properly described in law as the fraud of the corporation.

    [31](1922) 31 CLR 290 at 308‑312. Isaacs J concluded, in dissent, that a corporation might be a "resident" of a State for s 75(iv) of the Constitution: (1922) 31 CLR 290 at 325.

    [32][1897] AC 22. See Rubin, "Aron Salomon And His Circle", in Adams (ed), Essays for Clive Schmitthoff, (1983) 99 at 99.

    [33](1922) 31 CLR 290 at 311.

    [34]The Eastern Counties Railway Company v Broom (1851) 6 Ex 314 at 320 [155 ER 562 at 564]. The Court of Exchequer Chamber disagreed ((1851) 6 Ex 314 at 325 [155 ER 562 at 566‑567]) but held that the action failed for want of evidence of prior direction or subsequent ratification of the acts of the servants of the railway company of which the plaintiff passenger complained.

    [35](1867) LR 2 Ex 259.

    Differing legislative schemes

39. Legislative schemes may vary in the allocation of risk between investors and creditors and the priorities between them upon insolvency.  Two contrasting examples with respect to "shareholder claims" may be given.  First, the Federal Bankruptcy Code of the United States implements a policy which subordinates claims made by shareholders which arise from the purchase of shares.  It provides (11 USC §510(b)):

    "For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security ... shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock."

40. In In re Telegroup, Inc[36], the Court of Appeals for the Third Circuit said that, in enacting this provision in 1978, the Congress adjudged that, as between shareholders and general unsecured creditors, it is the former who should bear the risk of any illegality in the issue of their stock, should the corporation enter bankruptcy, and that disappointed shareholders should not be able to use fraud and other such claims "to bootstrap their way to parity with general unsecured creditors"[37].  The Court accepted the proposition that[38]:

    "because equity owners stand to gain the most when a business succeeds, they should absorb the costs of the business's collapse – up to the full amount of their investment".

    Hence §510(b) "effectively precludes an equity holder with a securities fraud claim from recovering damages from the debtor's estate for that claim"[39].

    [36]281 F 3d 133 at 141‑142 (2002).

    [37]281 F 3d 133 at 142 (2002).

    [38]281 F 3d 133 at 140 (2002). See Slain and Kripke, "The Interface Between Securities Regulation and Bankruptcy – Allocating the Risk of Illegal Securities Issuance Between Securityholders and the Issuer's Creditors", (1973) 48 New York University Law Review 261 at 286‑287, 294.

    [39]Christensen, "The Fair Funds for Investors Provision of Sarbanes-Oxley:  Is it Unfair to the Creditors of a Bankrupt Debtor?", (2005) University of Illinois Law Review 339 at 348‑349.

41. On the other hand, s 111A of the Companies Act 1985 (UK) appears[40] to reflect a policy which is to the contrary of that in the United States, and which denies any such subordination of shareholder claims.  Section 111A provides:

    "A person is not debarred from obtaining damages or other compensation from a company by reason only of his holding or having held shares in the company or any right to apply or subscribe for shares or to be included in the company's register in respect of shares."

    [40]cf Soden v British & Commonwealth Holdings Plc [1998] AC 298 at 326‑327.

42. The principal provisions of the present Australian legislation in play in these appeals are s 553(1) (describing the debts and claims which may be proved in a winding up), s 555 (providing as the general rule for the equal ranking of proved debts and claims), and s 563A. This states:

    "Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied."

    The provisions of s 563A do not manifest any clear legislative policy seen in the modern legislation in the United States and the United Kingdom. Rather, as Hayne J explains in his reasons, while to some extent s 563A may derive from s 38(7) of the 1862 UK Act, the present legislation has not been marked by any close legislative consideration of the ends sought to be achieved by a provision in the terms of s 563A.

43. To some degree, the submissions on the appeals sought to put in two camps the interests of investors and creditors, in particular the trade creditors who are unsecured.  Those with "shareholder claims" may be seen as in the camp of the shareholders.  But such division into such discrete categories is not fully satisfactory.  For example, while creditors have their own special position in insolvent administrations, large institutional lending may be made, at least in contemporary circumstances, without taking security in its traditional forms.  The reasons for this may reflect the market strength of corporate borrowers at any one period, stamp duty considerations and other matters peculiar to the nature of the project to be funded[41].  However that may be, it would be an oversight to see the issues at stake as no more than attempted "boot strapping" by shareholder claimants to attain parity with the general body of unsecured creditors as understood in the past.

    [41]See, for example, the financing structure considered in Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 80 ALJR 1282 at 1302 [111]-[118]; 228 ALR 301 at 325‑326.

    The present appeals

44. The central issues on the appeals should be resolved in favour of Mr Margaretic and the appeals dismissed.

45. First, upon a proper construction of the Act, Mr Margaretic's claims may be proved in a company winding up pursuant to s 553(1) of the Act. The terms of that provision remove any impediment to claims of this kind. Secondly, Mr Margaretic's claim is not a debt owed to him in his "capacity as a member" of Gwalia, whether by way of dividends, profits or otherwise; the claim is not to be postponed by s 563A of the Act to claims made by "persons otherwise than as members of the company".

46. I agree generally with the reasons given by Hayne J.  What is said in these reasons assumes a reading of what is said by his Honour.

47. In what follows, I deal further with two additional and related points.  The first is the adequacy of the reasons given in Webb Distributors (Aust) Pty Ltd v Victoria[42] and the second is the dependence upon that reasoning of a principle said to be derived from the speeches in the House of Lords in Houldsworth v City of Glasgow Bank[43].

    [42](1993) 179 CLR 15.

    [43](1880) 5 App Cas 317.

48. It also is appropriate to deal in some detail with Houldsworth for a particular reason which emerges from the way in which ING put its case on what would be a threshold issue.  In its written submissions, ING submitted that "the principle in Houldsworth" prevented, as a matter of common law, a shareholder claim such as that of Mr Margaretic arising in the first place, irrespective of statutory issues respecting admission to proof and ranking of claims.  In the course of oral argument, counsel appeared to shift ground but, however that may be, in subsequent supplementary written submissions ING again invoked "the rule in Houldsworth" and its significance for Webb, upon which decision ING relied.

49. As these reasons will seek to demonstrate, in Australia the existence of any such common law "principle" of company law based upon Houldsworth should be rejected.  Further, Houldsworth did not supply the support relied upon for the reasoning in Webb.

    Webb's Case

50. Webb concerned admission to proof, not ranking of claims admitted to proof[44].  However, Gwalia and ING submitted that the reasoning in Webb was determinative of the issues of statutory construction upon which the appeals turned.  Mr Margaretic challenged the applicability of the reasoning in Webb and, alternatively, its correctness.  Gwalia and ING submitted that leave should not be given to re‑open Webb.

    [44]See questions (a) and (b) answered by the Appeal Division of the Supreme Court:  State of Victoria v Hodgson [1992] 2 VR 613 at 616, 631. The appeal to this Court was dismissed: (1993) 179 CLR 15 at 43.

51. The facts of Webb are described in the judgment of Hayne J; it is not necessary to repeat them here.  There is a question whether Webb may be distinguished on the basis that it concerned only claims by shareholders who acquired their shares by subscription, whereas Mr Margaretic purchased his shares from a third party on the market conducted by the Australian Stock Exchange.  A distinction of this nature was drawn by the House of Lords in Soden v British & Commonwealth Holdings Plc[45], and Webb was distinguished on this ground.  Both Gwalia and ING submitted that the distinction was without substance because the reasoning in Webb was equally applicable to claims by "transferee shareholders" as to claims by subscribers, and was intended by the Court to apply to all claims by members.  Mr Margaretic supported the distinction but, as previously indicated, did not shrink from seeking leave to argue the correctness of Webb.

    [45][1998] AC 298 at 326‑327.

52. It is fruitless to pursue narrow factual distinctions of the kind adverted to above. Section 563A of the Act is expressed in terms of the postponement of certain debts. Unless the means by which a person became a member (that is, by acquiring shares by subscription or by transfer) is relevant to the characterisation of the "debt" owed by the company to the person as one owed to the person in his or her capacity as a member or not, the distinction is difficult to maintain as a matter of principle. This especially is so in a context where s 231 of the Act defines "member" without making any distinction of that kind. Therefore, alleged deficiencies in the reasoning in Webb should be grappled with; the decision cannot be put to one side on the basis of factual distinctions of the kind mentioned above.

53. In their joint judgment, the majority in Webb (Mason CJ, Deane, Dawson and Toohey JJ) concluded that the holders of non‑withdrawable shares were not entitled to prove in the winding up of the building societies in respect of their claims in deceit and for misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) ("the TP Act"). This conclusion rested upon four related propositions. The first was that the "principle" on which Houldsworth was decided was that the share capital represents a "guarantee fund" and "protection" to creditors which should not be returned to shareholders other than on a permissible reduction of capital[46].  The second was that this "principle" received statutory recognition in s 360(1) of the Companies (Victoria) Code ("the Code")[47].  The third proposition[48] was that par (k) of s 360(1) of the Code bore the same interpretation as that ascribed to s 38(7) of the 1862 UK Act in In re Addlestone Linoleum Co[49] by Kay J[50]. Those sections were respectively the immediate forebear and the first progenitor of s 563A. The fourth proposition, which depended on the first three, was that[51]:

    "[The TP Act] is not to be seen as eliminating, 'by a side-wind'[52], the detailed provisions established for more than a hundred years to govern the winding up of a company."

    [46](1993) 179 CLR 15 at 32‑33.

    [47](1993) 179 CLR 15 at 33.

    [48](1993) 179 CLR 15 at 34.

    [49](1887) 37 Ch D 191.

    [50]The joint judgment continued ((1993) 179 CLR 15 at 34):

    "The Court of Appeal dismissed an appeal from the decision of Kay J, principally by reference to the decision in Houldsworth. However, Lopes LJ agreed [(1887) 37 Ch D 191 at 206] with the construction placed upon s 38(7) by Kay J. And Cotton LJ, with reference to the applicants, stated [(1887) 37 Ch D 191 at 205] that 'now they come here as shareholders, and in substance retain their shares, and seek to sue the company for breach of the contract under which they took them'."

    [51](1993) 179 CLR 15 at 37.

    [52]See Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 224 per Brennan J.

    Rescission

54. Before turning to examine these propositions, some reference should be made to a proposition which was said in the joint reasons in Webb not to be in issue[53].  It was common ground in Webb that the holder of shares ordinarily loses any right to rescission on winding up.  In Houldsworth itself, Earl Cairns LC had noted that it was admitted and could not have been denied that, after the commencement of the winding up, it was too late for rescission[54].

    [53](1993) 179 CLR 15 at 31.

    [54](1880) 5 App Cas 317 at 322.

55. Shortly before Houldsworth, the Lord Chancellor had emphasised, with reference to Oakes v Turquand and Harding[55], that upon the commencement of winding up "innocent third parties [would] have acquired rights which would be defeated by the rescission"[56].  Later, in Civil Service Co‑operative Society v Blyth[57], Isaacs J repeated the fuller explanation by Fry LJ of the attitude of equity which he gave in 1883 as follows[58]:

    "Now the general principle is that no contract can be rescinded so as to affect rights acquired bonâ fide by third parties under it.  It is true that the creditors and the other shareholders have not acquired direct interests under the contract, but they have acquired an indirect interest.  The shareholders have got a co‑contributory, the creditors have got another person liable to contribute to the assets of the concern."

    Isaacs J also emphasised that, in the case of a contract to take shares, equitable relief was essential and that such a contract was not of a character "that at common law ... is rescindable by the act of the party, that is, by mere repudiation ... [which] itself works avoidance"[59].

    [55](1867) LR 2 HL 325.

    [56]Tennent v City of Glasgow Bank (1879) 4 App Cas 615 at 621.

    [57](1914) 17 CLR 601 at 613.

    [58]In re Scottish Petroleum Co (1883) 23 Ch D 413 at 439.

    [59]Civil Service Co‑operative Society v Blyth (1914) 17 CLR 601 at 613. As to the distinction between rescission as understood at common law and as an equitable remedy, see Alati v Kruger (1955) 94 CLR 216 at 223‑224.

56. In Webb, reference was made[60] to the explanation given by Jessel MR of the unavailability of a remedy of rescission after a company is wound up.  In argument, the Master of the Rolls stated[61] as "doctrine" the proposition that rescission must be impossible after a company is wound up because the company "ceases to exist"; further, he said that this was the meaning of observations by Earl Cairns LC in the then recent decision in Houldsworth.

    [60](1993) 179 CLR 15 at 30.

    [61]In re Hull and County Bank (Burgess's Case) (1880) 15 Ch D 507 at 509‑510.

57. Several points should be made here.  The first is that it since has become clear that a winding up has no immediate effect upon the corporate existence or personality, or upon the powers of the company[62].  Secondly, it is not readily apparent that, when explaining in Houldsworth why the remedy for damages in deceit was not available, Earl Cairns LC relied upon any non‑existence of the corporation.

    [62]Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592 at 598‑600 [3]-[11], 611 [49]; Keay, McPherson's The Law of Company Liquidation, 4th ed (1999) at 218‑219.

58. Thirdly, however, in administering an equitable remedy such as that of rescission, it is proper to take into account both the supervening, albeit indirect, interests of the shareholders and creditors referred to by Isaacs J in Blyth[63], and the changes brought about in the enjoyment of the rights of shareholders and creditors by the administration required by a winding up, even where the claims of creditors will be satisfied.  It is in this context that one may agree with the view of Dixon J in Southern British National Trust Ltd v Pither[64] that the denial of equitable relief to rescind the contract of membership after winding up was inevitable.

    [63](1914) 17 CLR 601 at 613.

    [64](1937) 57 CLR 89 at 114.

59. However, it is difficult in this area to state propositions in absolute terms.  Shortly after Pither, in Elder's Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd[65], Rich ACJ, Dixon and McTiernan JJ held that the plaintiff was entitled to an order for rectification of the register of members and stayed an order for repayment of subscription moneys with interest to enable the plaintiff to prove in the winding up of the company for those moneys.  The proceedings had been instituted six weeks before the lodgment of the winding‑up petition, but at a time when the company was in a hopeless financial position.

    [65](1941) 65 CLR 603 at 619‑620.

60. Whatever be the basis in principle for the rescission cases, they do not dictate any particular conclusion respecting the denial in Houldsworth of the existence of any remedy in damages.  Something more now should be said respecting that case.

    Houldsworth's Case

61. As noted above, the "principle" derived by the majority in Webb from Houldsworth they identified as being that "a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the capital of the company"[66].  The majority had earlier in their reasons set out[67] a passage from the judgment of Lindley LJ in Addlestone[68] in which he stated in similar terms "the principle" on which Houldsworth was decided.  The majority in Webb also accepted the thesis to similar effect advanced by Professor Gower, to which further reference will be made.

    [66](1993) 179 CLR 15 at 33.

    [67](1993) 179 CLR 15 at 31.

    [68](1887) 37 Ch D 191 at 205‑206.

62. Their Honours in Webb acknowledged that the above "principle" could no longer be supported in absolute terms, given provisions in the Code permitting authorised reductions of share capital.  These provisions had their origin in the Companies Act 1867 (UK)[69], s 9 of which had conferred an express power for a company to include in its Memorandum of Association a power to reduce its capital, although subject to confirmation by the court[70].  Prior to the enactment of these provisions, the effect of ss 8 and 12 of the 1862 UK Act appears to have been, in the case of a limited company, to prohibit reductions of capital[71].  In the opinion of the majority in Webb, the statutory provisions for the reduction of capital were "not inconsistent with the Houldsworth proposition" because they proceeded on an acceptance of the reasoning underlying that case; this was that "subscribed capital [is] a protection to creditors"[72].

    [69]30 & 31 Vict c 131.

    [70]See now Div 1 of Pt 2J.1 of the Act, where authorisation by the court is no longer required.

    [71]See the remarks of Lord Herschell in Trevor v Whitworth (1887) 12 App Cas 409 at 415‑416.

    [72](1993) 179 CLR 15 at 33.

63. However, Houldsworth cannot be explained in those terms.
    

    [73](1922) 31 CLR 290 at 308‑312.

    Rather, it is the gradual development of legal thought respecting the nature of corporate personality which Isaacs J later traced in Howe[73] and the use of inapt analogy drawn from established areas of the law which is manifested in Houldsworth.

64. Houldsworth was an appeal from Scotland in a proceeding on an interlocutory plea by the defenders as to the relevancy of the pursuer's action against the City of Glasgow Bank, in liquidation, for damages caused by fraudulent representations which allegedly induced him to take up stock in the Bank.  The procedure adopted in Scotland appears to have been similar to a demurrer.

65. The Bank had been incorporated under the 1862 UK Act as an unlimited joint stock company, but Houldsworth was not decided upon s 38 of the 1862 UK Act, dealing with the liability of members for contributions on a winding up, or upon principles concerning the reduction of capital.  Moreover, Houldsworth was decided at a time when the 1862 UK Act was relatively new and when other areas of law applicable to the relations between members, directors and the company were in a state of fluidity.

66. The Bank had stopped payment on 2 October 1878 and, at an extraordinary general meeting held on 22 October, resolutions were passed for a voluntary winding up; there was a deficiency of some £5 million and this would fall to be made up by calls on shareholders[74].  Houldsworth claimed against the Bank and the liquidators damages in sums representing the price paid for his shares, a call already made and the anticipated amount of further calls to meet the above deficiency in assets.  In that respect, his claim was "for a total relief and indemnification, after the creditors have been fully paid, out of the surplus assets of the company, or out of the private estates of those of his fellow-partners who then remain solvent"[75].

    [74]Houldsworth v City of Glasgow Bank (1879) 6 R (Ct of Sess) 1164 at 1170; 16 Sc LR 700 at 704.

    [75]Houldsworth v City of Glasgow Bank (1879) 6 R (Ct of Sess) 1164 at 1167-1168; 16 Sc LR 700 at 703.

67. The Court of Session accepted the Bank's submissions that, while an action for damages might lie against the fraudulent officials of the Bank, the Bank itself had not authorised their actions, nor had it adopted them except in the sense of getting the benefit of the resulting contract; all the company could be asked to do was to give up the contract[76].  Neither in the Court of Session nor in the House of Lords was the litigation determined by reference to the law respecting admission or ranking of claims in a winding up conducted in accordance with s 38 of the 1862 UK Act.  It is incorrect to say, as was remarked in Webb, that the House of Lords "distilled" a proposition for which Houldsworth is authority "from the provisions of the [1862 UK Act]"[77].  Rather, Houldsworth failed at the threshold; his action in damages did not lie against the Bank.

    [76]See the report of argument in (1879) 6 R (Ct of Sess) 1164 at 1167.

    [77](1993) 179 CLR 15 at 33.

68. Two issues were considered by the House of Lords in Houldsworth.  One, emphasised particularly by Earl Cairns LC[78], concerned the existence of a qualification to what he stated as the general rule that a purchaser of goods who bought under a fraudulent misrepresentation may retain the goods and recover any damages sustained by reason of the fraud[79].  His Lordship held that there was an exception where the plaintiff is a shareholder who retains the shares acquired by reason of the fraud of the agents of the company, but seeks damages against the company.  Such a claim was said by the Lord Chancellor to be[80]:

    "inconsistent with the contract into which he has entered, and by which he wishes to abide; in other words, he is in substance, if not in form, taking the course which is described as approbating and reprobating, a course which is not allowed either in Scotch or English law".

    In one part of his speech, Lord Hatherley spoke in similar terms[81].  In Addlestone, Lindley LJ appeared to regard this as the sole principle for which Houldsworth stood[82].

    [78](1880) 5 App Cas 317 at 323‑324.

    [79]See Clarke v Dickson (1858) El Bl & El 148 [120 ER 463]; Alati v Kruger (1955) 94 CLR 216 at 222.

    [80](1880) 5 App Cas 317 at 325.

    [81](1880) 5 App Cas 317 at 333.

    [82](1887) 37 Ch D 191 at 205‑206.

69. References here to inconsistent positions and approbating and reprobating appear to be to the common law rules requiring choice between alternative remedies, for example, between affirming or avoiding a contract induced by fraud[83].  No such choice was required where the contract for sale of goods was affirmed and damages sought in deceit.  The reason given by Earl Cairns LC for a different principle where shares had been acquired was that recovery of damages would be "inconsistent" with the contract, affirmed by the shareholder.  Analogies with what were seen as principles of partnership law were relied on by the Lord Chancellor as follows[84]:

    "It is clear that among the debts and liabilities of the company to which the assets of the company and the contributions of the shareholders are thus dedicated by the contract of the partners, a demand that the company, that is to say, those same assets and contributions, shall pay the new partner damages for a fraud committed on himself by the company, that is, by himself and his co‑partners, in inducing him to enter into the contract which alone could make him liable for that fraud, cannot be intended to be included.  Any such application of the assets and contributions would not be in accordance but at variance with the contract into which the new partner has entered."

    [83]See the discussion by Viscount Maugham in Lissenden v CAV Bosch Ltd [1940] AC 412 at 417‑418.

    [84](1880) 5 App Cas 317 at 325.

70. That reasoning bears the marks of its time.  So, also, does the ground upon which Lord Selborne and Lord Blackburn particularly relied.  This concerned the extent to which the law of agency rendered a company liable for the fraud of its directors.  An appreciation of what was involved on this branch of the reasoning is assisted by looking to the course of the litigation in Houldsworth.

71. The Lord Ordinary assoilzied (ie, set free or absolved) the defenders[85] on the basis that the case was governed by the decision of the House of Lords in another appeal from Scotland, Western Bank of Scotland v Addie; Addie v Western Bank of Scotland[86].  The pursuer then appealed to the Inner House of the Court of Session[87].  By majority[88], the Inner House dismissed the appeal[89].  Addie was expressly relied upon by two members of the majority[90].  Likewise, all members of the House of Lords relied upon Addie in determining the appeal[91], Lords Selborne and Blackburn very clearly so.

    [85]See Houldsworth v City of Glasgow Bank (1879) 6 R (Ct of Sess) 1164 at 1166; 16 Sc LR 700 at 702.

    [86](1867) LR 1 Sc & Div 145.

    [87]By a reclaiming note, a procedure described in Walker, A Legal History of Scotland, vol 6 (2001) at 534‑535.

    [88]Lord President Inglis, Lord Deas, Lord Mure; Lord Shand dissenting.

    [89]Houldsworth v City of Glasgow Bank (1879) 6 R (Ct of Sess) 1164; 16 Sc LR 700.

    [90]Houldsworth v City of Glasgow Bank (1879) 6 R (Ct of Sess) 1164 at 1175 per Lord Deas, 1177 per Lord Mure; 16 Sc LR 700 at 707, 708.

    [91](1880) 5 App Cas 317 at 326 per Earl Cairns LC, 330 per Lord Selborne, 332 per Lord Hatherley, 337 per Lord Blackburn.

    Addie's Case

72. In Addie, a shareholder had claimed that he had been induced to purchase shares in the bank[92] by false and fraudulent representations of the directors and sought reduction of the deeds of transference of the shares and restitutio in integrum (that is, rescission) or, alternatively, damages.  As later in Houldsworth, the defenders pleaded relevancy.  In the House of Lords, a distinction was drawn between the claim for rescission (from which on the facts the pursuer was disqualified by lapse of time and intervening events[93]) and the action for deceit, which did not lie in any circumstances.  Lord Chelmsford LC said[94]:

    "Where a person has been drawn into a contract to purchase shares belonging to a company by fraudulent misrepresentations of the directors, and the directors, in the name of the company, seek to enforce that contract, or the person who has been deceived institutes a suit against the company to rescind the contract on the ground of fraud, the misrepresentations are imputable to the company, and the purchaser cannot be held to his contract, because a company cannot retain any benefit which they have obtained through the fraud of their agents.  But if the person who has been induced to purchase shares by the fraud of the directors, instead of seeking to set aside the contract, prefers to bring an action for damages for the deceit, such an action cannot be maintained against the company, but only against the directors personally." (emphasis added)

    Lord Cranworth was more explicit.  He said[95]:

    "[T]he true principle is, that these corporate bodies, through whose agents so large a portion of the business of the country is now carried on, may be made responsible for the frauds of those agents to the extent to which the companies have profited from these frauds; but that they cannot be sued as wrong-doers, by imputing to them the misconduct of those whom they have employed.  A person defrauded by directors, if the subsequent acts and dealings of the parties have been such as to leave him no remedy but an action for the fraud, must seek his remedy against the directors personally." (emphasis added)

    Similar opinions had earlier been expressed by each of their Lordships in New Brunswick and Canada Railway and Land Co v Conybeare[96].  That appeal arose from a Chancery suit to rescind for misrepresentation a contract to take up shares.  The suit failed on the facts, but it was said that, if the charge of equitable fraud had been sustainable against the directors, the company would not have been liable for their acts unless it had adopted them.

    [92]The bank had been established as an unincorporated banking co‑partnership but, for the purposes of a voluntary winding up, had been incorporated and registered under the Joint Stock Companies Act 1856 (UK) (19 & 20 Vict c 47), as amended by the Joint Stock Companies Act 1857 (UK) (20 & 21 Vict c 14) and 20 & 21 Vict c 80.

    [93]Addie was decided on 20 May 1867, Oakes v Turquand and Harding (1867) LR 2 HL 325, which in turn was followed by Tennent v City of Glasgow Bank (1879) 4 App Cas 615, was to be decided on 15 August 1867. These cases largely ruled out the rescission remedy in a winding up, as noted earlier in these reasons.

    [94](1867) LR 1 Sc & Div 145 at 157-158.

    [95](1867) LR 1 Sc & Div 145 at 167.

    [96](1862) 9 HLC 711 at 740, 749 [11 ER 907 at 919, 922].

73. At the time New Brunswick and Addie were decided, there was considerable uncertainty as to whether a principal could be rendered liable in deceit for the fraudulent misrepresentations of an agent when the principal neither knew of nor authorised the fraud.  The Court of Exchequer Chamber had divided equally on the question in Udell v Atherton[97].  The Exchequer Chamber subsequently distinguished Udell in Barwick v English Joint Stock Bank[98], where Willes J delivered the sole reasons for himself, Blackburn, Keating, Mellor, Montague Smith and Lush JJ.

    [97](1861) 7 H & N 172 [158 ER 437]. Pollock CB and Wilde B were in favour of the principal's liability, whereas Bramwell B and Martin B were in favour of the principal's immunity.

    [98](1867) LR 2 Ex 259.

74. In New South Wales v Lepore[99], Gummow and Hayne JJ said of Barwick and its later adoption in Lloyd v Grace, Smith & Co[100], that it was thereby established that:

    "the circumstance that the employee who practises a fraud upon a third party does so for the benefit of the employee not the employer, is no answer to the liability of the employer if the employer, whilst not authorising 'the particular act', has placed the employee in a position 'to do that class of acts'; the employer then 'must be answerable for the manner in which that [employee] has conducted himself'[101]".

    Houldsworth and Addie

    [99](2003) 212 CLR 511 at 590 [228]. See also at 613 [304] per Kirby J.

    [100][1912] AC 716.

    [101]Lloyd v Grace, Smith & Co [1912] AC 716 at 733 per Lord Macnaghten, adopting the statement of Willes J in Barwick v English Joint Stock Bank (1867) LR 2 Ex 259 at 266.

75. Barwick was decided on 18 May 1867, after argument in Addie had concluded, and two days before the House of Lords delivered judgment on that appeal.  The matter seems to have been regarded as still unsettled when Houldsworth came before the House of Lords a decade later, as the observations of Lord Blackburn reveal[102].  However, in Houldsworth, the House of Lords is to be regarded as having rationalised Barwick and Addie by confining Addie to the case of persons who had been induced by the directors to subscribe for shares in a corporation.

    [102](1880) 5 App Cas 317 at 339; Lord Blackburn treated Barwick as overruled by Addie.

76. Ashburner, writing in 1902, considered Houldsworth as establishing the "one exception to the rule that the principal is liable for the frauds of his agent committed in the matter of his agency and for the principal's benefit"[103].  Houldsworth was treated in similar terms in the third edition of Kerr's Treatise on the Law of Fraud and Mistake, which also appeared in 1902[104].  But was this "exception" soundly based?  The better view is that it was not.

    [103]Principles of Equity, (1902) at 404.

    [104]At 86.  The same passage appeared at 102 of the sixth edition, Kerr on Fraud and Mistake, published in 1929.

77. Houldsworth sustained the outcome in Addie in the case of these transactions with subscribers by reference to the "contract" into which the shareholder had entered, and which the shareholder must affirm in order to sustain the action.  Mention has already been made of the approach taken, particularly by Earl Cairns LC, in relation to this contract.  It was characterised variously by their Lordships as requiring that the assets of the company should be applied in paying its "antecedent debts and liabilities"[105], that shareholders "should all contribute equally to the payment of all the company's debts and liabilities"[106], and that shareholders should "contribute to make good all liabilities of the co‑partnership as if this incoming partner had been a member of the partnership from the beginning"[107].

    [105](1880) 5 App Cas 317 at 325 per Earl Cairns LC.

    [106](1880) 5 App Cas 317 at 329 per Lord Selborne; cf at 333 per Lord Hatherley.

    [107](1880) 5 App Cas 317 at 337 per Lord Blackburn.

78. It is not easy to discern why an action for damages was inconsistent with the features of the contract whereby shares were taken up.  Nor is it clear why this inconsistency should have prevented the shareholder from claiming that the fraud of the directors was imputable to the company.

79. Accordingly, Houldsworth should not be regarded in Australia as establishing any principle based upon the above reasoning; nor does it establish any exception respecting the responsibility of a principal for the frauds of an agent, stated by Ashburner in the passage referred to above.

80. It is true that acceptance of the doctrine associated with the subsequent decision in Salomon[108] of the endowment of the corporation with a distinct legal personality has not gone without modern criticism.  In a revenue case, Gorton v Federal Commissioner of Taxation[109], Windeyer J remarked upon "the unreality and formalism" engendered in the law by Salomon.  The facts considered in Halloran v Minister Administering National Parks and Wildlife Act 1974[110] were dictated by fiscal considerations[111], and may be a recent example of that tendency, although the steps taken nevertheless had legal efficacy[112].

    [108][1897] AC 22. Professor Sealy writes that the contemporary significance of Salomon lay in the endorsement of the right to claim the benefit of limited liability by what was essentially a single-member company, some years before the private company was accorded formal recognition by the Companies (Consolidation) Act 1908 (UK):  "Modern Insolvency Laws and Mr Salomon", (1998) 16 Company and Securities Law Journal 176 at 176.

    [109](1965) 113 CLR 604 at 627.

    [110](2006) 80 ALJR 519; 224 ALR 79.

    [111](2006) 80 ALJR 519 at 523‑524 [18]-[19]; 224 ALR 79 at 84‑85.

    [112](2006) 80 ALJR 519 at 530 [56]; 224 ALR 79 at 93‑94.

81. The propositions that a corporation has no hands save those of its officers and agents and no mind save the mind of those who guide its activities, and cannot be subjected to the range of punishments visited upon a natural person, in general has not, as Brennan J explained in Environment Protection Authority v Caltex Refining Co Pty Ltd[113], relieved corporations from the attribution of criminal guilt.

    [113](1993) 178 CLR 477 at 514‑515.

82. However, as Caltex decided, the considerations which supported the privilege of individuals against self‑incrimination did not sustain the extension of the privilege to corporations.  They cannot be witnesses or swear or affirm an affidavit.  Nor may the commercial interests of a corporation suffice for protection by a tort based on protection of privacy[114].  But considerations of that nature do not support the outcome in Houldsworth.

    Webb and Houldsworth

    [114]See Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 226 [43], 231 [58], 256‑258 [126]-[132], 279 [190]-[191], 326‑327 [328].

83. Reference already has been made to the reliance upon the thesis of Professor Gower to the effect that the decision in Houldsworth is explicable by the notion that share capital is a "guarantee fund" for creditors[115].  He sought to rationalise what was described as the "anomalous rule" in Houldsworth by reference to later conceptions as to the nature of share capital explained in Trevor v Whitworth[116] and its sequelae.

    [115]The Principles of Modern Company Law, (1954) at 314-315.

    [116](1887) 12 App Cas 409.

84. Section 13 of the Limited Liability Act 1855 (UK)[117] had provided that a company should be wound up once three quarters of its subscribed capital stock had been lost.  But the validity of a proposition such as that of Professor Gower could not have been sustained once the point was reached after the 1862 UK Act that there was no impediment to a company carrying on business even once it had exhausted its original capital through trading.

    [117]18 & 19 Vict c 133.

85. In any event, there is much to be said for the view that a company satisfying its liability in tort to a member should not be characterised as attempting an unauthorised reduction of capital.  The award of damages is not charged upon any fund representing capital.  Large awards may adversely affect the market value of shares in the company, but they do not require any return of capital.

86. What this discussion reveals is that the "principle" attributed by the majority in Webb to Houldsworth, as the first step in their reasoning, reflects the attempt to rationalise that case which is discussed above.  Further, as to the second step in Webb, that concerned with s 360(1) of the Code, this provision did not embody that "principle", any more than it embodied the decision in Houldsworth.  That case, as I have explained, must be understood in the milieu of developing doctrine applicable to company law.  Neither the "principle" attributed to Houldsworth, nor Houldsworth itself, had anything to do with the presently relevant provisions of the Act and the Code. Section 360(1)(k) of the Code cannot have been enacted on the basis that Houldsworth represents an "entrenched rule of company law" which must be regarded as having been "expressly considered and approved" by the legislature[118].  The origins of s 360(1)(k) may be traced to the 1862 UK Act, which preceded Houldsworth.

    [118]cf Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 at 40 per McHugh J (emphasis omitted).

    The construction proffered by Kay J in Addlestone

87. The third proposition upon which the majority judgment in Webb proceeded was that par (k) of s 360(1) of the Code bore the same meaning as that ascribed to s 38(7) of the 1862 UK Act by Kay J in Addlestone[119].  Indeed, it may be said that it was only by the efforts of Kay J in that case that the section was explicitly related to Houldsworth, because Kay J referred to it to bolster his conclusion that the statute barred the claim[120].

    [119](1887) 37 Ch D 191.

    [120]Earlier in his career, Kay J had been counsel for the successful respondents in Houldsworth itself, although the respondents had not been called upon by the House of Lords in that case: (1880) 5 App Cas 317 at 322.

88. In Addlestone, existing shareholders were given the opportunity to take up new £10 preference shares at a discount of 25 per cent to par value, the share certificates reciting that the shares were fully paid‑up.  However, no contract was registered in accordance with s 25 of the Companies Act 1867 (UK)[121].  As a result, the preference shareholders were included in the list of contributories in the winding up of the company.  A call was ordered that they make up the 25 per cent discount in cash.  Having paid the call, the shareholders sought to prove in the winding up for damages "for breach of contract or otherwise" on the basis that the company had failed to issue fully paid‑up shares as promised.  The action apparently proceeded as one for breach of contract, the breach being failure by the company to meet its promise to provide fully paid‑up shares.  The application to have the proof admitted failed.

    [121]30 & 31 Vict c 131.  Section 25 stated:

    "Every Share in any Company shall be deemed and taken to have been issued and to be held subject to the Payment of the whole Amount thereof in Cash, unless the same shall have been otherwise determined by a Contract duly made in Writing, and filed with the Registrar of Joint Stock Companies at or before the Issue of such Shares."

89. Kay J held that the claim was "unquestionably" made by the applicants in the character of members of the company, and that therefore the question was whether it was also for sums due "by way of dividends, profits, or otherwise" for the purposes of s 38(7) of the 1862 UK Act[122].  In this respect, his Lordship said[123]:

    "To determine that it is necessary to consider the scope and intent of [s 38(7)] in the statute.  The obvious analogy is the case of a partner attempting to prove in bankruptcy in competition with the creditors of the firm.  But whether this section is intended to have entirely the same effect or not, it is quite clear from the language of it that a debt due to a member in that character, such as for dividends, directors' fees, or the like, could not be so proved."

    Notwithstanding that, it is not clear that the partnership analogy remains an "obvious" one.  The analogy had suggested itself to Earl Cairns LC in Houldsworth[124], and that case did concern an unlimited company.  References to partnership indicate an incomplete understanding of the separate nature of the personality of the corporate entity from those of the corporators.  At the time Addlestone was decided, partnership law and company law were not distinctly regarded; Lindley's Treatise on the Law of Partnership, including its application to Companies was then in its fourth edition[125].

    [122](1887) 37 Ch D 191 at 197‑198.

    [123](1887) 37 Ch D 191 at 198.

    [124](1880) 5 App Cas 317 at 325.

    [125]The treatise was divided into two parts "each of which should be complete without the other" in the fifth edition, published in 1888:  see Lindley, A Treatise on the Law of Partnership, 6th ed (1893) at v. 

90. The applicable English rule in partnership to which Kay J was referring was that regarded by Lord Eldon as "settled law", namely that a partner "shall not prove in competition with the creditors of the firm, who are in fact his own creditors"[126].  However, the 1862 UK Act was designed as a general statute applicable in England and Scotland, unlike some of the earlier legislation in the field[127], and the law of partnership significantly differed in a relevant respect.

    [126]Ex parte Sillitoe; In the matter of Goodchilds and Co (1824) 1 Gl & J 374 at 382; see Lindley, A Treatise on the Law of Partnership, including its application to Companies, 4th ed (1878) at 1187ff.

    [127]A point made in 1867 by Lord Colonsay in Oakes v Turquand and Harding (1867) LR 2 HL 325 at 377.

235. Courts are empowered by s 233(1) of the Act to make various orders, where oppressive conduct is established:

     "(1)The Court can make any order under this section that it considers appropriate in relation to the company, including an order:

     (a)that the company be wound up;

     (b)that the company's existing constitution be modified or repealed;

     (c)regulating the conduct of the company's affairs in the future;

     (d)for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;

     (e)for the purchase of shares with an appropriate reduction of the company's share capital;

     (f)for the company to institute, prosecute, defend or discontinue specified proceedings;

     (g)authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;

     (h)appointing a receiver or a receiver and manager of any or all of the company's property;

     (i)restraining a person from engaging in specified conduct or from doing a specified act;

     (j)requiring a person to do a specified act."

236. Standing to apply for an order is the subject of s 234, which provides that an application may be made by a member, a person who has been removed from a register of members because of a selective reduction, a person who has ceased to be a member, a transmitee by will or operation of law of a share, or a person whom the regulator, ASIC thinks appropriate, but not a creditor. Interestingly, s 234 is another section which refers to a "member in their capacity as a member" and a related phrase, a "member in a capacity other than as a member". Expressions used more than once in legislation should be given the same meaning throughout in most, if not all, conceivable circumstances. It is possible however to give the expression "member in their capacity as a member" the meaning advanced by either side as to the like phrase in 563A without doing injury to either s 234 or s 563A.

237. Another important right that members now enjoy under the Act is to bring or intervene in proceedings on behalf of a company. Until the introduction of provision for this, the rule in Foss v Harbottle[260] operated, that only the company could be a proper plaintiff in respect of wrongs done to it, members having no personal rights to interfere in the management of the company unless they did so in general meeting, and even then subject to a rule that they not attempt to invalidate otherwise apparently valid actions of directors before a resolution at such a meeting. Subject to some presently non-relevant qualifications, a member, a former member, or a person entitled to be registered as a member, has a right to apply to intervene under s 236 of the Act where they do so with the leave of the court under s 237. That section also provides that an officer or a former officer of the company, with leave, might have the same right, but it can be seen that, in general, the rights conferred are primarily intended as rights of members.

     [260](1843) 2 Hare 461 [67 ER 189].

238. Part 2F.2 is concerned with "class rights".  It provides[261] that if members of a class do not agree to a variation or cancellation of their rights, the holders of no fewer than 10 per cent of the votes in the class may apply to the court to set aside a variation or cancellation of their rights.

     [261]s 246D.  See also, for deemed variations of class rights, s 246C.

239. Earlier I referred to limited liability. Provision for that is made by ss 515 and 516 of the Act. Section 515 provides:

     "General liability of contributory

     Subject to this Division, a present or past member is liable to contribute to the company's property to an amount sufficient:

     (a)to pay the company's debts and liabilities and the costs, charges and expenses of the winding up; and

     (b)to adjust the rights of the contributories among themselves."

     Section 516 states that "if the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or past member".

240. It is also relevant that dividends may only be paid out of profits[262].  That this is so serves to emphasize the continuing importance, relevance, indeed sanctity, of the capital, as opposed to any clearly ascertainable profits generated by it.

     [262]s 254T.

241. It is in the context in particular of the provisions to which I have so far referred that s 563A must be read. What can fairly clearly be discerned from that context is that, up to the point of insolvency, liquidation or administration of a company, its members enjoy superior opportunities, rights and advantages to creditors, yet the latter are no less likely to be disadvantaged by deceptive conduct of a company lying in a failure to comply with the continuous disclosure rules. There can be no doubt that the financial capacity of a company to satisfy its obligations to all of those who deal with or rely on it, is a matter of continuing interest and concern to them. That being so, it seems intuitively, as Kirby J points out[263], to be a more likely construction of s 563A that it means what SOG, rather than Mr Margaretic contends it to mean.

     [263]At [103]-[104].

242. It does appear to me then that the contextual indications are more than mere straws in a breeze sighing in SOG's direction. Shareholders' ample and superior statutory rights, their voluntary abdication of control over their investment in favour of their appointees, the directors, who have large statutory and constitutional discretions and obligations in the application of it, their rights of intervention, their rights to proceed against the directors personally as well as the company in some circumstances, their statutorily mandated limited liability, especially that, and their rights to participate in the bounty of any successes, sit uncomfortably with the notion that s 563A gives them equal billing, on the failure of the company, with ordinary creditors.

     History

243. The history of the Act has been traced by Hayne J[264] and accordingly little of it needs repetition by me. I would make some observations about it, however. I do not think that anything turns upon the relocation of s 563A in a different part of the Act from the location of its precursors in the Acts in which they appeared. And whilst it is certainly true that Salomon v Salomon & Co Ltd[265] did put beyond all dispute the proposition that a company was a different and separate personality from the members of it, the attainment of limited liability had been an object of legislators and the commercial community long before that case.  The United Kingdom 1844 Statute 7 & 8 Vict c 111 did not achieve it, but did lay a foundation for it by drawing, as it did, a distinction between joint stock companies and private partnerships, incorporation by registration rather than by legislation or charter, and establishment of a registrar of companies with whom companies' constitutions and returns were filed so as to become accessible to the public.  That Act did, however, provide that the liability of members should cease three years after transfer of their shares and that creditors must proceed first against the assets of the company[266].

     [264]At [149]-[167].

     [265][1897] AC 22.

     [266]Gower's Principles of Modern Company Law, 4th ed (1979) at 41.

244. According to Gower's Principles of Modern Company Law, public opinion hardened in favour of the extension of limited liability, "particularly when the slump of 1845-1848 drew poignant attention to the consequences of its absence"[267].  The Joint Stock Companies Act 1856 (UK) provided that a company of limited liability could be registered and could operate if seven or more persons signed and registered a memorandum of association.  The use of the word "limited" was required and was regarded as a clear indication of any risk that might attach to dealing with this new form of legal personality.  Perhaps the better way to regard Salomon v Salomon & Co Ltd is not as establishing unarguably merely "limited liability", but, as Gower puts it[268], as bringing home its "implications" to the courts.  As I said in New South Wales v Commonwealth[269]:

     "Given that the United Kingdom 1844 Statute 7 & 8 Vict c 111 allowed creditors to proceed against an insolvent company 'in like Manner as against other Bankrupts'[270], and 'in its corporate or associated Capacity'[271], I think it would be unwise to try to draw too much from the fact of the decision in Salomon v Salomon & Co Ltd[272]."

     [267]4th ed (1979) at 43.

     [268]Gower's Principles of Modern Company Law, 4th ed (1979) at 97.

     [269](2006) 81 ALJR 34 at 234 [843]; 231 ALR 1 at 250-251.

     [270]Section 1.

     [271]Section 2.

     [272][1897] AC 22.

245. One particularly relevant change which occurred in Australia was that effected by the Corporate Law Reform Act 1992 (Cth) which, for the first time in this country, made provision for proof of "all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), ... the circumstances giving rise to which occurred before the relevant date", thereby enabling members of companies to prove in respect of debts or claims of the kind made here.

246. Section 553 reflected the recommendations which had been made in the Australian Law Reform Commission's General Insolvency Inquiry ("the Harmer Report")[273]. The Explanatory Memorandum for the Act of 1992 said this[274]:

     [273](1988), vol 1 at 315 [774].

     [274]At 169-170 [848]-[853].

     "Section 553 of the Corporations Law will be repealed and replaced and proposed sections 553, 553A to 553E and 554A through to 554J inserted into Division 6 of Part 5.6. These sections constitute three Subdivisions:

     .Subdivision A – Admission to proof of debts or claims;

     .Subdivision B – Computation of debts and claims; and

     .Subdivision C – Special provisions relating to secured creditors of insolvent companies.

     The reforms embodied in these provisions reflect the recommendations of the Harmer Report in relation to the making of claims in insolvency. As the reforms relate to matters which under the current law are dealt with under the Bankruptcy Act, and incorporated into the Corporations Law by reference under section 553, the implementation of these reforms has necessitated the incorporation in the Corporations Law of provisions modelled on sections in the Bankruptcy Act. This is in line with the general policy implicit in the Harmer Report that the provisions dealing with insolvency of companies should, as far as practicable, be located within the Corporations Law rather than included by reference.

     As the result of the current application of the Bankruptcy Act provisions, demands in the nature of damages arising otherwise than by reason of contract, promise or breach of trust are not provable in the winding up of a company (Bankruptcy Act, subsection 82(2)).

     The Harmer Report noted that this could result in a number of anomalies, not the least of which is that a set of circumstances can produce both a claim in tort and in contract.  The right to make a claim under the present law may depend merely on a technical distinction between framing the claim in contract or framing it in tort.  The Harmer Report made the point that there was no justification for such a distinction and noted that this could result in significant injustice where a claim could only be framed in tort.  In such cases the claimant would make no recovery at all.  The Harmer Report noted that the only substantial argument against permitting claims for unliquidated damages in tort was the problem of quantification.  The Report noted too that this had not prevented claims for unliquidated damages arising from contract being made.  The claiming of unliquidated damages in tort may presently be made in other jurisdictions (under the Insolvency Act 1967 (NZ) and under the Insolvency Act 1986 (UK)).

     The Harmer Report recommended that claims for unliquidated damages arising from tort should be admissible.  The Report also recommended that to the extent that there may be practical problems in estimating the amount of such claims, the Court be expressly empowered to direct that the quantification be determined in such manner as the Court specifies (by, for example, referring the claim to a specialist tribunal).

     The operation of proposed sections 553 and 554A overcome the effect of subsection 82(2) of the Bankruptcy Act and thereby permit claims in tort which are unliquidated at the time of the winding up to be admissible in the winding up.  Proposed section 554A provides for the determination of the value of debts and claims of uncertain value."

247. The Explanatory Memorandum and the Harmer Report, which recommended[275] the relocation of s 563A in the Act, throw no light upon the meaning to be given to the section, merely stating that the provision should be relocated to that part of the law which deals with priority of creditors.

     [275]At 305 [749].

248. To make provision by legislation for new rights of proof is not necessarily to say anything about the ranking of the debts or claims the subject of them.  That provision represented a marked departure from more than 100 years of legislation which consistently denied such a right.  To provide it, clear and unmistakable language was required and used.  Equally, I would have thought that if the departure and the right said to be conferred by it, for which Mr Margaretic contends, and which the majority and the Full Court of the Federal Court say he should have, were intended by the legislature, it would have used the same sort of clear and unmistakable language as is deployed in s 553, for it is at least as remarkable a departure as that effected by s 553 to promote shareholders, including those with unliquidated claims, to the same rank as ordinary creditors in place of their long-standing position below them.

249. This is so even though, as Kirby J has demonstrated, a verbal formula, much clearer in its terms, to give effect to the result for which SOG contends, could fairly easily be devised[276]. But as is the case with most of the ambiguous provisions in enactments which come to the courts, it is possible to devise, in the course of, and following exhaustive argument and scrutiny by several judges, a better formula to support the meaning contended for by either side. As I have already pointed out, "or otherwise" is an expression of very wide import. The case for Mr Margaretic would be stronger if, for example, s 563A provided as follows:

     "Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits, or other benefits arising directly out of the statutory contract between the member of the company and the company, and not otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied."

     [276]Reasons of Kirby J at [129]-[130].  In the United States of America, the Bankruptcy Code relevantly provides (11 USC §510(b)):

     "[A] claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock."

     Relevant cases

250. The history includes the relevant case law.  Other members of the Court have discussed that.  With respect, I do not entirely agree, however, with the complexion that has been placed upon some of it by the majority.  It is said that one factor which influenced, either unnecessarily or excessively, certainly for modern purposes, the courts in Houldsworth v City of Glasgow Bank[277], In re Addlestone Linoleum Company[278] and latterly in Webb Distributors (Aust) Pty Ltd v Victoria[279] was a preoccupation with the amount and maintenance of paid up capital[280].  It is also suggested that "assets and liabilities" are matters of more significance to creditors than paid up capital[281], and that paid up capital is "wholly irrelevant"[282] to a purchaser of fully paid shares on the market. The assets and liabilities of a company will, it is true, be matters of the greatest concern both to creditors and acquirers of shares. But what, it may be asked, is the connexion between those two, other than that the latter is the product at any time of the use of the other, the paid up capital of the company? The difference between liabilities and assets, members' equity, is the product of, and stands in place of, and assumes the importance of paid up capital, and is the real measure of the worth of the company. It is unnecessary to go into the detail of the provisions for it here, but the law, that is the Act, continues to make elaborate provision for, and limits the circumstances, being circumstances in general of clear solvency only, in which funds may be returned to shareholders, and the company's worth reduced, that is, its paid up capital, sometimes enlarged by capitalization of profits[283], may be returned or reduced[284].  For these reasons, I cannot dismiss as irrelevant the discussion of the courts on paid and unpaid shares in past cases which were concerned primarily with questions relating to access by members to capital, and returns of capital to members of a company.  Whatever criticisms may be made of Houldsworth, this Court accepted in Webb that it did stand for a proposition which the House of Lords had distilled from the provisions of the Companies Act 1862 (UK), and that it had "received statutory recognition in s 360(1) of the [Victorian Companies] Code"[285].  It is true, as the Chief Justice points out[286], that there is a chronological disconformity contained in this statement by some members of this Court in Webb.  But even so, the fact remains that Houldsworth has stood as the law, as to the effect of relevant parts of companies legislation in a relevantly unchanged form from 1880.  As McHugh J said in Webb[287], it must have been applied hundreds of times.  And as the majority put it in Webb[288]:

     "However, the critical question is not whether Houldsworth is right or wrong but whether the proposition which the House of Lords distilled in the case from the provisions of the Companies Act 1862 is incorporated in the provisions of the Code.  That proposition, namely, that a shareholder may not, directly or indirectly, receive back any part of his or her contribution to the capital of the company, cannot now be supported in absolute terms.  A direct return of capital may be effected with the approval of the court having regard, inter alia, to the interests of creditors[289].

     The statutory provisions authorizing the return of capital are not inconsistent with the Houldsworth proposition.  Indeed, they proceed on an acceptance of part of the reasoning which underpinned the decision in that case.  They permit a return of capital to shareholders when it is established to the satisfaction of the court that the return of capital will not prejudice the interests of creditors or when it is consented to by creditors.  Hence, the statutory provisions treat the subscribed capital as a protection to creditors and accept that the capital should not be returned directly to shareholders otherwise than pursuant to a permissible reduction of capital.

     Tadgell J concluded that the principle in Houldsworth received statutory recognition in s 360(1) of the Code and was therefore imported into the windings up of the three building societies by s 121(4) of the Act. In our view, the conclusion reached by his Honour was correct and it draws support from the provisions of s 360(1)(k).

     Section 360 imposes an obligation on members to contribute to the payment of all the liabilities of a company on its liquidation.  Paragraph (e) limits that obligation to the amount unpaid on the members' shares.  Paragraph (k) subordinates sums due to a member in his or her capacity as a member to sums due to non-members." (original emphasis)

     Those provisions concerning reduction of capital referred to in Webb in the joint judgment appear now in a somewhat different form in the Act[290]. But the general proposition that financial capacity and absence of prejudice to creditors are necessary conditions precedent for reduction or return of capital holds true under the Act as it currently reads[291].

     [277](1880) 5 App Cas 317.

     [278](1887) 37 Ch D 191.

     [279](1993) 179 CLR 15.

     [280]Reasons of Gleeson CJ at [5].

     [281]Reasons of Gleeson CJ at [5].

     [282]Soden v British & Commonwealth Holdings Plc [1998] AC 298 at 326.

     [283]s 254S.

     [284]See Ch 2J of the Act.

     [285](1993) 179 CLR 15 at 33.

     [286]At [14].

     [287](1993) 179 CLR 15 at 39-40.

     [288](1993) 179 CLR 15 at 33.

     [289]See s 123 of the Code; s 195 of the Corporations Law.

     [290]ss 256B to 256E.

     [291]See, eg, s 256B(1).

251. Thirteen years have now passed since Webb was decided, yet there have been no relevant statutory interventions to correct or change what it stands for.

252. I do not think that anything turns upon whether the "purchase price" of shares was subscribed to the company or paid to a third party.  The claim in either case is for damages because the underlying circumstances, and therefore the value of the shares were not what they were represented to be.  In each case a claim by a subscriber or transferee still falls within areas of intense concern to creditors, the solvency and the maintenance of the capital of the company, whether in an enhanced or diminished form.  Any participation by members in the funds of a company not postponed to ordinary creditors will inevitably effect a major reduction in the nett funds of the company, however they be described, whether capital, paid up capital, or owners' equity.  Owners' equity is a matter of considerable relevance to both a subscriber and a purchaser of shares from third parties because it is difficult to imagine any prudent purchaser being guided by other than what that appeared to be.

253. This then can be said of the relevant case law.  Apart from Soden v British & Commonwealth Holdings Plc[292], it does not support the position of Mr Margaretic.  Soden itself is in my view open to the criticism that it fails to take due account of the importance of the maintenance of both paid up capital and owners' equity, and therefore the continuing solvency of the company.  On the other hand, Webb does so, and tends to support SOG's position.

     [292][1998] AC 298.

254. In my view therefore, the history, overall, including the absence of relevant legislation to effect a change to render Webb irrelevant or otherwise not binding, favours SOG's position.

     Coherence in the law

255. It is desirable that an Act be read so as to maintain coherence in the law and promote fairness, if a construction to achieve those ends is reasonably available.  The construction contended for by Mr Margaretic does not in my opinion achieve those ends, indeed the contrary.

256. Purchasers in Mr Margaretic's position are not the only ones who have suffered by reason of the failure to disclose by the company.  In addition to creditors, all of the shareholders at the time of the placing of SOG in administration have a fair claim to say that they have been equally wronged.  Most could fairly and honestly say that they decided to hold on to their shares by, and on the faith of the deceptive conduct alleged.  In his Honour's reasons for judgment, Hayne J says[293] that the measure of Mr Margaretic's damages is the difference between the amount that he paid for his shares and the value of the shares on a properly informed market, which is nil. On that analysis, a longer standing shareholder than Mr Margaretic who has held on to his shares might arguably fail because he could not establish any loss. In a properly informed market his shares would also have been valueless: nobody would have wanted to have had any part of them. The consequence of all of that could be a very unfair and incoherent result, although one not stemming directly from the priority provisions of s 563A. It would give only recent purchasers such as Mr Margaretic a very large advantage over other equally wronged, longer term members. It may however be possible to devise a different basis or measure of claim for those members who had held the shares for some time before administration (or liquidation) by resort to the provisions of the Act to which I have referred, and perhaps s 87 of the TPA, which allow courts greater flexibility in framing relief than at common law for deceit or negligent misstatement. Assume that to be so: the result produced could still be quite unfair to creditors for it would mean that most, perhaps all, of the shareholders at the time of the administration would have much the same claim for compensation as Mr Margaretic, thereby placing all, or practically all of the shareholders at that time in competition with the ordinary creditors, a consequence which can be seen to flow from the ranking provisions of s 563A. It is not difficult to imagine a situation in which claims of a large body of shareholders, perhaps most of them, would dilute the creditors' rights to less than a trickle.

     [293]At [175].

257. This tendency, of unfairness and legal incoherence, of the construction contended for by Mr Margaretic provides further reason therefore to reject it.

     Other matters and conclusion

258. The language of s 563A has, as the Chief Justice in his reasons points out[294], a long history.  In my view, that language could and would have been changed if it were intended that creditors should be left to scramble, in competition with the shareholders who paid too much for their shares, for the remains of a company.  It is no answer to SOG's arguments that Mr Margaretic's claim is said not to be based on the amount of capital paid up on the shares which he purchased but rather upon the market price of them.  The market price of the shares depended entirely upon the wrongly induced perception that the paid up capital of the company had produced a position in which the market price of the shares was their true value.  SOG's capital structure in its current form did therefore have the most direct bearing on the apparent market value of the shares.  The fact that Mr Margaretic needed to plead that he was a member of the company may not be decisively against him, but it is a fact that cannot be dismissed as irrelevant.  In that sense, membership of the company does have essentiality to his claim.  Even if he could have found a buyer for his shares in the event, for example, of his wishing to crystallize a loss for tax purposes, he would still have had to have pleaded that he had been a member of the company. So too, an attempt to become a "member of the company" by acquiring shares not as yet registered in his name, would need to be pleaded and would have been a fact essential to a claim of the kind now made by Mr Margaretic. It is unnecessary for me here to form a concluded view about the correctness of SOG's concession, that s 563A has a relevant temporal aspect. Suffice to say, I doubt whether that is so, or so in all relevant circumstances[295].

     [294]At [3].

     [295]cf reasons of Gleeson CJ at [10].

259. In conclusion then, having regard to the scope and objects of the Act, the language used in s 563A itself, the context in which that section appears, the history of the Act, the relevant case law, and the desirability of maintaining coherence and fairness in the law, the construction to be preferred is that advanced by SOG. I would accordingly make the following orders:

     1.The appeals in matters no S208 of 2006 and no S209 of 2006 be allowed with costs.

     2.Set aside the orders of the Full Court of the Federal Court of Australia made on 27 February 2006 and, in their place, order:

     (a)appeals allowed with costs; 

     (b)that orders 2, 4 and 5 made by Emmett J in the Federal Court of Australia on 27 September 2005 be set aside; and

     (c)in lieu thereof, order:          

     (i)that there be a declaration that payment of the claim of the first respondent in each of the matters, being the claim more particularly described in the Agreed Statement of Facts, pursuant to the deed of company arrangement of the appellant in matter no S208 of 2006, dated 30 August 2005, be postponed until all debts owed to, or claims made by, persons otherwise than in their capacity as members of the appellant in matter no S208 of 2006, have been satisfied in full; and

     (ii)that Mr Margaretic pay the costs in the Federal Court of Australia.

260. HEYDON J.   I agree with the orders proposed by Hayne J.

261. Mr Margaretic's claim falls within the expression in s 553 "debts or claims the circumstances giving rise to which occurred before the relevant date" for the reasons given by Hayne J[296].

     [296]Reasons of Hayne J at [168]-[176].

262. Mr Margaretic's claim is not a claim for payment of "a debt owed by a company to a person in [his] capacity as a member of the company" within the meaning of s 563A for the reasons given by Hayne J[297].

     [297]Reasons of Hayne J at [201]-[206].

263. So far as Webb Distributors (Aust) Pty Ltd v Victoria[298] and Houldsworth v City of Glasgow Bank[299] were relied on by SOG and ING in relation to the construction of s 563A, it is not necessary to say more about them than that which Hayne J has said in explaining why they are not determinative[300].  Further, the issue on which the Webb case was decided was whether a claim was provable, whereas the issue on which the SOG appeal is to be decided in relation to s 563A turns on whether a provable claim ranks after or alongside the claims of general creditors.

     [298](1993) 179 CLR 15.

     [299](1880) 5 App Cas 317.

     [300]Reasons of Hayne J at [180]-[190].

264. So far as those cases were relied on by ING in its written submissions in chief in support of a contention that Mr Margaretic's claim was not provable, by reason of a principle which, it contended, had been stated in Houldsworth's case and approved by this Court in the Webb case, it is not necessary to deal with them.  That is because both at the start and at the close of his final address, counsel for ING abandoned that contention.  If that contention was not abandoned, I agree with Hayne J's reasons for rejecting it[301].

     [301]Reasons of Hayne J at [180]-[190].

265. CRENNAN J.   I have had the advantage of reading in draft form the reasons of each of Gleeson CJ and Hayne J.  I agree with their conclusions and with their reasons.  I have also had the advantage of reading in draft form the additional reasons of Gummow J and I agree generally with his Honour's reasons and analysis of what was referred to in argument as a "principle" said to be derived from Houldsworth v City of Glasgow Bank[302]. 

     [302](1880) 5 App Cas 317.

266. Prior to the Companies Act 1862 (UK) ("the 1862 Act") creditors were not entitled to apply for an order for winding up, but they were not restricted from pursuing legal remedies against individual shareholders[303].  In the same period, shareholders induced to take shares by fraud, imputable to the company, were entitled to repudiate their shares, were not liable to be contributories in a winding up[304] and could, as creditors, pursue remedies against individual shareholders.  These possibilities did not continue after the consolidation and reforms[305] encapsulated in s 38 of the 1862 Act ("s 38"). 

     [303]Lindley, A Treatise on the Law of Companies, 5th ed (1889) at 612. 

     [304]Lindley, A Treatise on the Law of Companies, 5th ed (1889) at 79-81.

     [305]Discussed in the reasons of Hayne J at [149]-[167]. 

267. It was decided in Oakes v Turquand and Harding[306] that a shareholder induced to take shares by fraud, imputable to the company, giving rights to rescission and indemnity against the company could not avoid being on the list of contributories by exercising those rights once a winding up had commenced.  This was because s 38 imposed a "statutable liability"[307] on shareholders in respect of creditors, who were not able to pursue remedies against individual shareholders under the 1862 Act.  In Tennent v City of Glasgow Bank[308], Earl Cairns LC considered that the rationale of Oakes v Turquand applied as soon as a company became insolvent, and before a winding up, because of the assumption at that point of "new liabilities" to creditors[309]. 

     [306](1867) LR 2 HL 325.

     [307](1867) LR 2 HL 325 at 350 per Lord Chelmsford LC.

     [308](1879) 4 App Cas 615.

     [309](1879) 4 App Cas 615 at 622.

268. In Houldsworth's Case, Houldsworth accepted that winding up precluded rescission, as decided in Oakes v Turquand.  He then unsuccessfully sought damages in respect of an inducement by fraud to take up shares, such damages to be paid after the creditors were paid, either from the company's surplus or by solvent co-contributories.  It is not clear why Earl Cairns LC decided that £4000 paid by Houldsworth for the stock could not form part of "the debts and liabilities of the company"[310].  However, it is clear at several points that when Earl Cairns LC speaks of Houldsworth's claim as "inconsistent with the contract into which he has entered"[311], he is referring to Houldsworth's contract "as between himself and those with whom he becomes a partner"[312], ie other shareholders.  It is also clear that Lord Selborne's reasons concerned the "contract between the shareholders"[313] and Lord Selborne regarded the action as being, in truth, an action against co-contributories[314], innocent of any fraud.

     [310](1880) 5 App Cas 317 at 325.

     [311](1880) 5 App Cas 317 at 325.

     [312](1880) 5 App Cas 317 at 324.

     [313](1880) 5 App Cas 317 at 329.

     [314](1880) 5 App Cas 317 at 329.

269. Three months after Houldsworth's Case was decided, Burgess's Case[315] came before Sir George Jessel MR.  There, assets in the hands of a liquidator were sufficient to pay creditors and the costs of the winding up.  In resisting being listed by the liquidator as a contributory, Burgess contended that as all creditors' claims had been met, he was entitled to rescind as against other contributories, notwithstanding the winding up order.  The liquidator met that contention with the submission that the decision in Houldsworth's Case barred an action for damages in respect of fraud inducing the purchase of shares, to which the Master of the Rolls responded thus[316]:

     "The doctrine is that after the company is wound up it ceases to exist, and rescission is impossible.  There are then only creditors and co-contributories and no company, and that is the meaning of Lord Cairns' observations in Houldsworth v City of Glasgow Bank."

     He then said in his reasons for judgment[317]:

     "It has been decided by a series of decisions in the House of Lords, commencing with Webb v Whiffin, that the 38th section of the Companies Act is not to be read otherwise than literally, and it is not to be read with reference to the previous liabilities of the shareholders or by analogy to the law of partnership whether of a limited or unlimited character, but it is to be read as imposing new liabilities on the members of the company – liabilities imposed and defined by that section.

     The result, therefore, is this, that the member is liable to contribute to the assets of the company, not only to an amount sufficient for the payment of the debts and liabilities and the costs, but to the payment of such sums as may be required for the adjustment of the rights of the contributories amongst themselves." (emphasis added)

     [315]In re Hull and County Bank (Burgess's Case) (1880) 15 Ch D 507.

     [316](1880) 15 Ch D 507 at 509-510 (footnote omitted).

     [317](1880) 15 Ch D 507 at 511 (footnote omitted).

270. Sir George Jessel MR relied on Oakes v Turquand and Tennent v City of Glasgow Bank as relevant to the first "new liability" as both cases turned on the consideration that it is too late to rescind where innocent third parties after a winding up had acquired rights as creditors under s 38; and he relied on Houldsworth's Case as relevant to the second "new liability" turning on the consideration that it is too late to rescind after a winding up when the rights of contributories inter se fell to be dealt with under s 38[318].  In Southern British National Trust Ltd v Pither[319] Dixon J pointed out that both those considerations influenced the adoption of "the well known rule that a member of a company loses on the commencement of a winding up any right he might otherwise have had to the rescission of his contract of membership".  Citing Burgess's Case, Dixon J regarded the rule as the inevitable result of the legislative provision that on a liquidation "an entire change took place in the relation of creditors and shareholders to the assets and of shareholders inter se"[320].

     [318]Sir George Jessel MR's explication of Houldsworth's Case is supported by s 101 of the 1862 Act as it applies to contributories of an unlimited liability company. 

     [319](1937) 57 CLR 89 at 113.

     [320](1937) 57 CLR 89 at 114.

271. The notion that the "inconsistency" in Houldsworth's position as a shareholder turned on an implied term in the contract between the shareholder and the company, or a "principle" that capital could not be returned to a shareholder, seems to have first been suggested by Kay J in In re Addlestone Linoleum Company[321].  On appeal, it was then repeated by Lindley LJ[322]:

     "[A] shareholder contracts to contribute a certain amount to be applied in payment of the debts and liabilities of the company, and … it is inconsistent with his position as a shareholder, while he remains such, to claim back any of that money". 

     If, however, the "inconsistency" in Houldsworth's position in fact had nothing to do with analogy to the law of partnership on a bankruptcy, but is explicable by reference to the specific provisions of s 38 affecting shareholders inter se, as explained by Sir George Jessel MR, two points, at least, can be made. 

     [321](1887) 37 Ch D 191 at 200.

     [322](1887) 37 Ch D 191 at 206.

272. First, Salomon v Salomon and Co[323] disposes of the conception that an action by a shareholder against a company in respect of fraud inducing the taking up of the shares is, in effect, an action against individual innocent co-contributories.  Secondly, if the significance of Houldsworth's Case for s 38, including s 38(7), was as explained almost contemporaneously by Sir George Jessel MR in Burgess's Case, namely that the legislation "imposed and defined" obligations of and to shareholders, it is difficult to understand why its significance for s 38 was characterised much more widely as turning on a "principle" that share capital represents a "guarantee fund" for creditors which should not be returned to shareholders other than in a lawful reduction of capital.  In any event, the idea that it is "the legislation which defines the obligations owed by and to the members of a company"[324] has remained a constant, notwithstanding critical legislative changes dealing with members' debts which have been described in the reasons of Hayne J. 

     [323][1897] AC 22.

     [324]Reasons of Hayne J at [202].

273. The claims Mr Margaretic makes are not founded on any obligations owed by or to him as a member.  He relies on statutory causes of action not confined to members which are available to "a person who has suffered, or is likely to suffer, loss or damage"[325], as a consequence of conduct in contravention of certain provisions of the Corporations Act 2001 (Cth), such as s 674 and s 1041H. Any obligation on the company to pay compensation to Mr Margaretic for fraudulent misrepresentation inducing him to become a member and occasioning him loss does not answer the description of being owed to Mr Margaretic "in [his] capacity as a member of the company".

     [325]Corporations Act 2001 (Cth), s 1325(2).

     Conclusion

274. In my opinion also, each of the appeals should be dismissed with costs.