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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
WS 1994 of 2005
BETWEEN:
COECON LTD (RECEIVER AND MANAGER APPOINTED)
Plaintiff
AND:
WESTPAC BANK PNG LIMITED
Defendant
Waigani: Hartshorn J
2014: November 13th and 14th
2015: October 13th
CONTRACT LAW – allegations of breach of contract by defendant – plaintiff claims defendant breached banker/client contractual relationship – plaintiff alleges banker failed to take due care when it allowed plaintiffs managing director to withdraw moneys from plaintiffs bank account held by the defendant – defendant relies on the defence of "illegality" or ex turpi causa – principles of ex turpi causa considered - Westpac is able to successfully rely upon the defence of ex turpi causa
NEGLIGENCE – banker-client relationship – plaintiff claims defendant was negligent in the discharge of its duties as the banker - plaintiff is primarily, as distinct from vicariously, liable for the wrongful actions of its managing director – defendant not negligent – proceedings dismissed
Cases cited:
Holman Et Al v. Johnson, alias Newland [1775] EngR 58; (1775) 1 Cowp 341
Stone Rolls Limited (in liquidation) v. Moore Stephens (a firm) [2009] UKHL 39, 1 AC 1391
Tesco Supermarkets Ltd v. Nattrass [1971] UKHL 1; [1972] AC 153
Counsel:
Mr. 1.R. Molloy and Mrs. M. Ai, for the Plaintiff
Mr. A. Mana and Mr. A. Chillion, for the Defendant
TRIAL
13th October, 2015
1. HARTSHORN J: Coecon Ltd (Receiver and Manager Appointed) (Coecon) sues Westpac Bank PNG Limited (Westpac) for breach of contract and/or negligence that resulted in loss and damage. This concerns the operation of an account of Coecon with Westpac and withdrawals from the account by Tim Neville, the Managing Director of Coecon. The withdrawals occurred sometime after notice had been given to Westpac that a Receiver and Manager had been appointed to Coecon. Coecon claims the sum of K 3,174,718. 38.
2. Westpac denies the claims as it contends that proper notice of the appointment of the Receiver and Manager was not given, Westpac did not breach its duty of care to Coecon to exercise reasonable care in dealing with the account and irrespective of any breach of duty, Coecon is barred from making this claim as it is based upon its own illegality that was committed by one of Coecon's directors.
3. In submissions made following the trial, Westpac conceded that it had notice of the appointment of a Receiver and Manager over all of the assets of Coecon, and that in allowing Tim Neville to transact on the "Cattle Account" of Coecon rather than Coecon's Receiver and Manager, Westpac had breached its duty to Coecon to exercise reasonable care in dealing with the account.
4. I will consider Westpac's defence of illegality or "ex turpi causa" first as if it is successful it will be determinative.
5. Westpac contends that a preliminary common sense reaction to Coecon's claim is that it should not succeed for three reasons. The first is that Coecon is seeking to put itself forward as the victim of Tim Neville's fraud when it was, in fact, the perpetrator of the fraud, given that Tim Neville was the motivating mind and will of Coecon. Secondly, Westpac was the target of Coecon's fraud. It was induced into changing signatories to the Cattle Account on 14th February 2001 by an application under seal executed by an existing director. It was deceived into facilitating withdrawals that Coecon knew should not have been made. It is not the law that, in the circumstances, Coecon should be able to bring a claim for compensation for conduct that it had set about deliberately to induce, it is contended. Thirdly, Coecon, the plaintiff, has suffered no loss at Westpac's hands. The commercial entity that loses is Bank South Pacific Ltd (BSP) whose predecessor appointed the Receiver and Manager, which has been deprived of money to which it was entitled, by the actions of Tim Neville and Coecon. Westpac owes no contractual duty or other duty to BSP. If BSP asserts that Westpac owed a duty to BSP to protect it from loss, BSP should be the plaintiff and bring its own action against Westpac, it is contended.
The defence of illegality or "ex turpi causa"
6. The defence of "ex turpi causa non oritur action" is that a plaintiff cannot use the court to obtain a benefit from its own illegal conduct. Westpac relies upon amongst others, the House of Lord's case of Stone Rolls Limited (in liquidation) v. Moore Stephens (a firm) [2009] UKHL 39, 1 AC 1391, for this proposition, and also the case of Holman Et Al v. Johnson, alias Newland [1775] EngR 58; (1775) 1 Cowp 341 in which Lord Mansfield made the following statement of the law at p343:
"The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted. It is upon that ground the Court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis."
7. Westpac contends that:
8. Coecon contends that:
Consideration
9. First, no submission was made that the defence of "ex turpi causa" should not apply in this jurisdiction. As the defence was a part of the common law of England before this country's independence, it is a source of the underlying law pursuant to The Underlying Law Act 2000. I am satisfied that its application and enforcement would not be contrary to the National Goals, Directive Principles and Basic Social Obligations established by the Constitution and would not be contrary to the basic rights guaranteed by Division III.3 of the Constitution.
10. In Stone Rolls (supra), Lord Phillips stated at para 28, that in a claim for compensation for the adverse consequences of wrong-doing, ex turpi causa applies where the wrongdoing is personal, or primary, but not where it is vicarious (see also Lord Walker para 132-136). Secondly, the ex turpi causa defence applies where the company making claim is itself primarily liable because it is a "one-man" company or "sole actor" by virtue of the exception to the adverse interest rule: Lord Phillips para 63-65, Lord Walker para 173-174, Lord Brown para 200-201. Thirdly, by virtue of the opinions of the majority of the House of Lords in Stone Rolls (supra) it is clear that a third party can successfully raise the ex turpi causa defence against a claim by a "one-man" company or "sole actor" for compensation for the adverse consequences of the wrongdoing by its agent.
Whether Coecon is primarily liable and is a "one-man" company or "sole actor"
11. It is in evidence and not in dispute that the shareholders of Coecon are Tim and Peter Neville and that, they also its directors. Further, Tim Neville at all material times was Coecon's Managing Director. It is also not in dispute that the Nevilles still remained the directors of Coecon after the appointment of the Receiver and Manager, albeit with no authority.
12. In Stone Rolls (supra), Lord Walker, in considering whether the claimant company Stone & Rolls Ltd (in liquidation) (S&R) was primarily or vicariously liable for the fraud committed by its director and shareholder, Mr. Stojevic, stated that the present law, that a company can have a dishonest motive attributed to it was clearly explained by Lord Reid in Tesco Supermarkets Ltd v. Nattrass [1971] UKHL 1; [1972] AC 153 at 173, which is as follows:
"I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company."
13. Lord Walker stated that as Mr. Stojevic was the persona of S&R, and was the directing mind and will of the corporation, he concluded that S&R was primarily liable for Mr. Stojevic's fraud.
14. In this instance, as Tim Neville was at all material times the managing director of Coecon, and is a shareholder and director with his brother and there are no other directors or shareholders, I am satisfied that Coecon is primarily, as distinct from vicariously, liable for the wrongful actions of Tim Neville in making the subject withdrawals.
15. Also for the above reasons Coecon can be considered to be a "one-man" company or a "sole actor". In Stone Rolls (supra), Lord Walker at para 163 and Lord Brown at para 200 referred to the following passage in The Mediators Inc v. Manney [1997] USCA2 91; 105 F 3d 822 (1997), a decision of the Second Circuit of the United States Court of Appeals, as stating the principle of the "sole actor", also known as the "one-man" company rule:
"Second, the adverse interest exception does not apply to cases in which the principal is a corporation and the agent is its sole shareholder. As noted, the adverse interest exception is to a presumption that an agent has discharged the duty of disclosing material facts to the principal. Under New York law, where the agent is defrauding the principal, such disclosure cannot be presumed because it would defeat - or have defeated - the fraud. However, where the principal and agent are one and the same, the adverse interest exception is itself subject to an exception styled the 'sole actor' rule. This rule imputes the agent's knowledge to the principal notwithstanding the agents self-dealing because the party that should have been informed was the agent itself albeit in its capacity as principal. Where, as here, a sole shareholder is alleged to have stripped the corporation of assets, the adverse interest exception to the presumption of knowledge cannot apply."
16. Here, as the agent Tim Neville, is also a shareholder, and the Managing Director, and his brother is the only other shareholder and director, I am satisfied that the relationship between Coecon and Tim Neville is similar to that described by Lord Walker in Stone Rolls (supra) at para 161. That is Coecon fits the notion of a "one-man" company as it is either a case of one single dominant director shareholder, even if there are other directors or shareholders who are subservient to the dominant personality, or there are two or more individual directors and shareholders acting closely in concert. In this regard, as to the position of Peter Neville, I note the evidence of the Receiver and Manager Andrew Pini, that he had one or two meetings with Timothy and Peter Neville who were well aware of the appointment of the Receiver and Manager and that they were asked to hand over all of the company's books and records, however, nothing further was provided. From this it can be inferred that Peter Neville was either subservient and left all matters to Tim Neville to attend to, or that he acted closely in concert with him in not providing the books and records requested.
Whether Westpac can raise the "ex turpi causa" defence
17. Westpac is being sued by Coecon in respect of wrongful conduct committed by Coecon's Managing Director. That wrongful conduct occurred, it is contended, because of failures by Westpac. As I am of the view that Coecon is a "sole actor" or a "one-man" company and for the above reasons, is responsible for the actions of its Managing Director, Tim Neville, Westpac is able to raise the "ex turpi causa" defence.
18. As to the contentions of Coecon that when the subject withdrawals were made by Tim Neville he was acting on behalf of himself and not Coecon and that Coecon did not benefit from his actions, the evidence is that the withdrawals were by Tim Neville in his capacity as the Managing Director of Coecon. Further, that none of the funds withdrawn have been given to or have benefited Coecon does not automatically lead to the conclusion that Tim Neville acted for himself. If the funds withdrawn had been given to Coecon, the Receiver and Manager would be entitled to them. Given this, it may be that Tim Neville is purporting to retain the funds on behalf of Coecon. In any event, whether Tim Neville acted on behalf of himself does not detract from Coecon being primarily liable for his actions.
19. As to Tim Neville and Coecon being separate entities, and that he was not acting on behalf of Coecon, again this does not detract from Coecon being primarily liable for Tim Neville's actions.
20. As to Westpac failing in its duty of care, various authorities concerning the defence of "ex turpi causa" allow for the defence to succeed in such circumstances.
21. As to Tim Neville's conduct being the very thing that Westpac was under a duty to prevent, and that if it had properly performed its duty, Tim Neville's conduct would not have occurred, Lord Walker considered and answered the argument that it appears non-sensical to assert that there is a duty, but at the same time "to empty that duty of content", either on grounds of causation or by applying the "ex turpi causa" rule, by giving the following example:
"When the police hold a man in custody they owe him a variety of duties, including the duty to keep him safe from harm (whether from the police themselves, or from other detained persons, or from self-harm). The duty to take precautions against suicide is part of this duty. If a man in a good state of mental health deliberately kills himself while in police custody, his estate may be unable to recover damages, but that does not to my mind drain the police duty of care of all content."
22. So although Westpac has a duty to its customer, when the Managing Director of that customer deliberately sets out on a course of wrongful conduct and takes advantage of Westpac's failure, Westpac although it has the duty, should not be held liable in such circumstances.
23. In regard to the contention that the fraud of a director is not the fraud of the company at least where the director is not benefiting the company, as referred to, it cannot be discounted that Tim Neville made the subject withdrawals for the benefit of Coecon, but has not given the funds to Coecon because the Receiver and Manager remain appointed. Further, I have already found that Coecon is primarily liable for Tim Neville's actions.
24. For the reasons stated, I am satisfied that Westpac is able to successfully rely upon the defence of ex turpi causa, or the illegality defence. Given this it is not necessary to consider the other submissions of counsel. Consequently this proceeding should be dismissed.
Orders
25. The Orders of the Court are:
a) this proceeding is dismissed;
b) the plaintiff shall pay the defendant's costs of and incidental to the proceeding to be taxed if not agreed.
c) time is abridged.
_____________________________________________________________
Posman Kua Aisi Lawyers: Lawyers for the Plaintiff
Allens Lawyers: Lawyers for the Defendant
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URL: http://www.paclii.org/pg/cases/PGNC/2015/242.html