- Unreported Judgment
SUPREME COURT OF QUEENSLAND
No BS1527 of 2004
MITCHELL FRANK JAKEMAN
DAVID CHARLES HAWKINS
HER HONOUR: There are two applications before the Court: (a) an application by the plaintiff to dispense with the defendant's signature on the request for trial date; and (b) an application by the defendant to join defendants to the counter-claim and for leave to file and serve a further amended defence and counter-claim. It was common ground that the defendant's application is the only impediment to the proceeding's being ready for trial and so that application was heard first.
Mr Couper QC appeared for the plaintiff, Mitchell Frank Jakeman, and for the proposed defendants to the counter-claim, John Martin Speedy, Barry Lee Jakeman and Varsity Apartments Pty Ltd ACN 095 290 252 ("the second company"). Mr Hackett appeared for the defendant, David Charles Hawkins.
The plaintiff, the defendant, Speedy and B.L. Jakeman entered into a joint venture to acquire, develop and sell certain land ("the original agreement"). Varsity (Qld) Pty Ltd ACN 096 778 559 ("the first company") was the corporate vehicle for the joint venture. The shares in the first company were held equally by the joint venturers either personally or through companies controlled by them. The first company entered into a contract to purchase the land. The plaintiff has sued the defendant for moneys owing pursuant to the original agreement.
The defendant alleges that the original agreement was varied and that pursuant to the agreement as varied ("the new agreement"):
(a)the defendant transferred his shares in the first company to the plaintiff to be held on trust for the defendant;
(b)the plaintiff as trustee was obliged to preserve, maintain and maximise the value of the shares;
(c)the plaintiff would deduct any money owing by the defendant to the plaintiff pursuant to the original agreement from the money or value the plaintiff received from holding or dealing with the shares in accordance with the joint venture; and
(d)any surplus money or value received or held by the plaintiff from holding or dealing with the shares would be paid or assigned by the plaintiff to the defendant.
By the proposed counter-claim, the defendant alleges that:
(a)the plaintiff, Speedy, B.L. Jakeman and the first company owed him fiduciary duties;
(b)in breach of those fiduciary duties, the plaintiff, Speedy and B.L. Jakeman, caused the first company to be released from the contract to purchase the land and caused the new company (in which the shareholders were the plaintiff, Speedy, B.L. Jakeman and one, Pongrass, through companies controlled by them, but the defendant was not a shareholder) to enter into a contract to purchase the land, to complete the new contract, and to develop the land;
(c)in consequence of the breaches of fiduciary duties, the defendant suffered loss measurable by the diminution in the value of his shareholding in the first company at the time of the new agreement calculated by reference to the value of the contract to purchase the land and the estimated development profit.
Mr Couper QC submitted that the joinder should not be allowed because the proposed amended counter-claim must fail. At the heart of his argument was the contention that the alleged loss is the first company's loss, and so it is not recoverable by the defendant who is the beneficial owner of shares in that company.
In Thomas v. D'Arcy  1 Qd R 666, the Court of Appeal confirmed that a shareholder in a company is not entitled to claim or recover damages comprising a diminution in the value of the shareholding reflecting loss of or injury to the assets of the company, as to which the company is the only proper plaintiff.
In Johnson v. Gore Wood & Co  2 AC 1 at 35-36, Lord Bingham formulated three propositions which were approved by the Court of Appeal:
"(1)Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2)  Ch 204, particularly at pp 222-223, Heron International, particularly at pp 261-262, George Fischer, particularly at pp 266 and 270-271, Gerber and Stein v. Blake, particularly at pp 726-729.
(2)Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v. Sheard  1 QB 192, 195-196, George Fischer and Gerber.
(3)Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v. Sheard, at pp 195-196, Heron International, particularly at p 262, R P Howard, particularly at p 123, Gerber and Stein v. Blake, particularly at p 726. I do not think the observations of Leggatt LJ in Barings at P 435B and of the Court of Appeal of New Zealand in Christensen v. Scott at p 280, lines 25-35, can be reconciled with this statement of principle."
Mr Hackett submitted that the proposed counter-claim came within the second proposition and possibly also the third.
Mr Couper QC submitted that the case sought to be pleaded by the defendant was really one of fraud on a minority, that the majority shareholders had caused the company to divest itself of its assets and had misappropriated those assets to themselves. See Burland v. Earle  AC 83 at 93; Cook v. Deeks  AC 554 at 564; and see Corporations Act sections 199A, 199C.
As McPherson JA explained in Thomas v. D'Arcy at 672 citing Wedderburn in (1958) Cambridge Law Journal at 93-94, 'Fraud on a company' would be a more accurate expression than 'fraud on a minority', as the loss is the company's and a shareholder may sue in respect of it only derivatively. In such proceedings the company must be joined as a party both to ensure it is bound by the judgment and to ensure that any assets recovered or their value are accounted for to it and not the individual shareholder.
In response, Mr Hackett said he did not assert that the facts constituted a fraud on a minority and that whether such a cause of action was open on the facts of this case was a matter for trial. He stressed that his client was complaining about breaches of obligations as joint venturers.
I think that the facts alleged do fall within the concept of fraud on a minority and that, accordingly, the claim is the first company's claim and not the defendant's. As Mr Couper QC submitted, it was central to the defendant's case that the decision of the company to divest itself of its assets was an improper one and one brought about by the plaintiff, Speedy and B.L. Jakeman.
Mr Couper QC argued his case on the assumption that the plaintiff, Speedy and B.L. Jakeman, owed the defendant fiduciary duties, although he clearly did not concede that that was so. But even on the assumption of their owing the defendant a discrete duty or duties, he submitted, the proposed counter-claim could not succeed because the loss claimed was a company loss. I accept that submission. As Williams JA said in Thomas v. D'Arcy at 678:
"What the appellant cannot do, suing on the breach of the separate duty owed to him, is recover by way of damages losses which in reality are or are reflective of the losses sustained by the companies."
In the same case, White J said at 679:
"Where separate duties are owed to a company and an individual who happens to be a shareholder in the company, it is the nature of the damages sought to be recovered which is important. If no matter how pleaded the damages are merely reflective of losses sustained by the company, they may not be recovered by the individual. It is that characteristic which will be determinative."
I am satisfied that the proposed counter-claim must fail. Accordingly, I dismiss the defendant's application filed 19 June 2006. On the plaintiff's application filed on 10 February 2006, I order that the defendant's signature on the request for trial date be dispensed with. I will hear the parties on costs.
HER HONOUR: I order the defendant to pay the plaintiff's costs of and incidental to both applications including reserved costs to be assessed on the standard basis.
- Published Case Name:
Jakeman v Hawkins
- Shortened Case Name:
Jakeman v Hawkins
 QSC 289
25 Sep 2006
No Litigation History