TIME-OUT: EQUITY CAN CUT BOTH WAYS

Legal Directions

Port Ballidu Pty Ltd v Frews Lawyers [2018] QCA 110

Introduction

The Queensland Court of Appeal dismissed an appeal where a primary judge had applied a statutory limitation period, by analogy, to a claim for equitable compensation.

This decision addresses the interaction of the general duties provisions of the Corporations Act 2001 (Cth) (the Act) with other laws, the application of a statutory bar to equitable remedies by analogy and the objective of the statutory limitation period set by section 1317K of the Act.

Background

On 28 July 2006, a rogue director of Port Ballidu Pty Ltd (the appellant) fraudulently executed a loan agreement and mortgage over a property owned by the appellant. On 1 August 2006, the solicitors who acted for the lender registered the mortgage. The appellant refused to repay the moneys that were secured by the mortgage and was sued by the lender on 24 December 2007 in separate proceedings (2007 Proceedings). The director went bankrupt around February 2008. During the 2007 Proceedings, and by at least 15 May 2008, the appellant and its solicitors were aware of circumstances to the effect that the lender’s solicitors (the respondents) were knowingly involved in the director’s misconduct. Judgment in the 2007 Proceedings was delivered in May 2010 and although the court accepted that the respondents had engaged in conduct that amounted to ‘statutory fraud’, it found that this fraud could not be ‘sheeted home’ to the lender itself so as to enable the appellant to take advantage of the fraud exception to indefeasibility.

On 31 July 2015, the appellant sued the respondents, making a claim for:

  • equitable compensation for the respondents’ alleged knowing participation in a dishonest breach of equitable duties by the rogue director; and
  • compensation under the Act for the respondents being knowingly concerned in the rogue director’s misleading and deceptive conduct.

The respondents argued that the claims brought against them were time-barred; the statutory claim directly by section 1317K of the Act and the equitable claim by analogy with the statutory limitation period. They therefore sought summary judgment.

Many statutes, including section 1317K of the Act, limit the period of time within which a cause of action may be commenced to six years. In equity, the doctrine of laches provides a court with a discretion to refuse to grant equitable relief if it believes that a plaintiff was unduly slow in commencing proceedings. No specific time frame is mandated for equitable claims; however, a court may adopt a statutory limitation period by analogy where there is sufficient correspondence between the remedy in equity and the remedy at law.

The primary judge found that the appellant was time barred and gave summary judgment for the respondents. The judge held that the appellant’s claim in equity was barred by analogy with the time limitation in section 1317K of the Act. In doing so, the primary judge applied the unanimous decision of the NSW Court of Appeal in
Gerace v Auzhair Supplies Pty Ltd[1] that equity will apply a statutory limitation by analogy, unless there exists a ground which justifies not doing so because reliance by a defendant on the statute would in the circumstances be unconscionable. The primary judge found that no such circumstances existed and declined to apply the broader residual discretion sought by the appellant.

Decision

The sole contention of the appellant on appeal was that section 185 of the Act precludes the application to the appellant’s equitable claim of the statutory limitation in section 1317K of the Act.

Sections 180 to 184 of the Act impose general duties on directors, officers and employees. Sections 181 to 183 of the Act relevantly provide that a person who is ‘involved in’ a contravention of those sections can be in breach of the Act. Section 185 of the Act sets out the interaction that sections 180 to 184 of the Act have with other laws. It provides that:

Sections 180 to 184:

  • have effect in addition to, and not in derogation of, any rule of law relating to the duty or liability of a person because of their office or employment in relation to a corporation; and
  • do not prevent the commencement of civil proceedings for a breach of a duty or in respect of a liability referred to in paragraph (a).

The court’s power to order compensation for a contravention of the Act is created and regulated by various sections, including section 1317K. The appellant submitted that its claim for equitable compensation was made under a relevant ‘rule of law’ such that the application of section 1317K would amount to a derogation of its equitable claim and prevent the commencement of the appellant’s equitable claim. It argued that section 185 therefore precluded the application of section 1317K as a bar to its equitable claim.

The Court of Appeal unanimously held that the appellant’s arguments required a substantial and unjustifiable departure from the statutory language. The court said that while the application of the statutory limitation by analogy may both derogate from the appellant’s equitable claim and prevent the commencement of proceedings to enforce such a claim, it is the equitable principle itself that requires the application of the statutory time limitation, not the statute itself. The court approved of part of the decision of Brereton J in Re Auzhair Supplies Pty Ltd[2] (the first instance decision of Gerace), where the same argument was rejected. There, Brereton J had held that section 185 of the Act preserves general law duties so as to permit the incremental development of the general law, but does not exclude the application by analogy of the statutory limitation period. His Honour went on to state that it was not section 1317K of the Act which prevented the commencement of the proceedings, but the application of the equitable doctrine of laches, albeit informed by section 1317K of the Act.

Comment

This decision clarifies the operation of sections 185 and 1317K of the Act and their interaction with equitable claims. It is also a useful demonstration of the way in which equitable claims seeking to circumvent statutory limitation periods can be defeated by analogy, where there are corresponding remedies between equity and statute.

Further information / assistance regarding the issues raised in this article is available from the author, Jonathan Markowitz, Lawyer, or your usual contact at Moray & Agnew.

[1] See Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181

[2] See Re Auzhair Supplies Pty Ltd [2013] NSWSC 1


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