|
|
Home
| Databases
| WorldLII
| Search
| Feedback
National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
WS NO: 236 of 2001
ODATA LIMITED
Plaintiff
AMBUSA COPRA OIL MILL LIMITED
First Defendant
NATIONAL PROVIDENT FUND BOARD OF TRUSTIES
Second Defendant
Waigani: Kandakasi J
2001 : 12 June
6 July
PRACTICE & PROCEDURE – Interlocutory – Applications to strike out proceedings for failure to disclose cause of action – Such applications can only be granted in the clearest of cases.
CONTRACT LAW – Privity of Contract – subsidiary company agent of parent company if parent is in control – Corporate veil no bar to bringing an action against a parent company which is in fact the major player – Corporate veil may be lifted if fair to do so in all the circumstances of the case.
COMPANY LAW – Corporate veil - Important starting point is the separate legal personality of corporations upon incorporation – Protection of corporate veil available to legitimate or proper use – But not available for those abusing or otherwise seeking to avoid liability – Circumstances in which the corporate veil may be lifted considered – Courts should be ready to lift the veil if fairness, equity and justice so require – s.16 Companies Act 1992.
LEGISLATIONS – Investment Promotion Act 1992 – Foreign enterprises need to obtain certificates under s.25 of the Act before carrying on business in Papua New Guinea – Failure to obtain certificate does not automatically render contracts with foreign enterprises null & void – s.41A only grants a right to the other party to apply for a declaration that such a contract is unlawful and void – Applications under S.41A of the Act has to be considered on their own merits with fairness and equity in mind.
WORDS AND PHRASES – "Carrying on business" - s. 3(1)(a) of Investment Promotion Act 1992 – On its own suggest some physical activity must take place in Papua New Guinea first to give rise to the need to apply for certification under s. 25 – But when read together with other provisions including s.41A no physical activity in the country is required as long as the activity is to be performed wholly or partly in Papua New Guinea.
Facts
The Plaintiff ("Odata") is suing on the basis of a contract between itself and the First Defendant ("Ambusa"). Ambusa was incorporated by the Second Defendant ("NPF") as a subsidiary. That was in association with or in a joint venture with simple village people who knew nothing about the venture or running any business and did not participate in any of the decisions of Ambusa. NPF was fully in control of the Ambusa, including a negotiation of the contract, its signing and eventual termination.
The Defendants by notice of motion seek to dismiss the proceedings. That is on the basis that, Odata has not complied with the requirements for certification as a foreign enterprise before carrying on business in Papua New Guinea under s. 25 of the Investment Promotion Authority Act 1992 and on the on the basis of the doctrines of privity of contract and corporate veil for NPF.
Failing a dismissal of the proceedings, the Defendants asked for security for costs in the sum of K299, 779.33 being two thirds of their estimated costs.
Held
Cases Cited
PNG Forest Products Pty Ltd & Inchape Berhad v. The State and Genia [1992] PNGLR 85 Ronney Wabia v. BP Exploration & Ors N1697
Bougainville Copper Foundation v. Galeva Kwarara [1988-89] PNGLR 110
Graham Rundle v. Motor Vehicles Insurance (PNG) Trust [1988] PNGLR 20
CBS Inc and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (CBS) [1978] PNGLR 66
Pinpar Development Pty Limited v. TL Timber Development Pty Limited N1857
Jacob Luke v John Ralda [1992] PNGLR 549
Kappo Limited v. Hau and Ors (23/05/97) SC520
Fortunaso Limited v. Bank of South Pacific Limited [1992] PNGLR 275
Osprey Industries v. Hallam [1992] PNGLR 557
Yarlett v. New Guinea Motors Limited [1984] PNGLR 156
Reynolds v. Walcott [1985] PNGLR 316
Driver v. Swanson [1977] PNGLR 30
Bank of Hawaii (PNG) Limited v. Papua New Guinea Banking Corporation & Ors (unreported and unnumbered judgement delivered on 8th June 2001)
Other Cases Cited
Hubbuck & Sons Ltd –v- Wilkinson Heywood & Clark Ltd [1899] All ER 244
Dyson v. Attorney General [1910] UKLawRpKQB 203; [1911] 1 KB 410
First City Trust Co. vs. Woodlawn Properties Ltd (1990) (RPR (2d) 259, 272; 80 Sask R 299; 66 DLR 4th, 470
Salomon v. Salomon & Co. Limited (1897) AC 22
Woolfson v.Strathclyde Regional Council 1978 SC (HL) 90,
Tunstall v. Steigmann [1962] 2 QB 593
Chen v. Butterfield (1996) & NZCLC 261,086.
Jones v. Lipma [1962] 1 All ER 442
Gilford Motor Co v. Horne [1933] Ch 935)
Trevor Ivory Ltd v. Anderson (1992) 6 NZCLC 67, 611; [1992] 2 NZLR 517
Creasey v. Breachwood Motor Ltd [1992] BCC 638.
Morris v. Hanley (2000) NSWSC 957 (25 August 2000)
Counsels
Mr. P. Mills for the Defendants/ Applicants
Mr. T. M. Rei for the Plaintiff/Respondent
6th July 2001
KANDAKASI, J: By notice of motion, the Defendants are applying to dismiss these proceedings because they argue that no reasonable cause of action is disclosed against them. They argue that, the Plaintiff ("Odata") did not apply for and get either a certificate or an exemption under section 25 or 26 of the Investment Promotion Authority Act (1992) ("the IPA Act"), from the Investment Promotion Authority ("IPA"). Additionally, the Second Defendant ("NPF") argues that, there is no cause of action against it on the basis of the doctrines of privity of contract and corporate veil. It argues that the contract, on the basis of which Odata is suing is between Odata and the First Defendant ("Ambusa"). Ambusa entered into the contract in its own capacity as a principle and not as an agent of NPF. NPF owns 50% of the shares in Ambusa but that, argues NPF, does not make it a principle of Ambusa on the basis of the doctrine of corporate veil. In the alternative, the Defendants argue for security for costs of K299, 779.33 being two thirds of the Defendant’s solicitor client costs of K449, 669.00 on the basis that, the Odata is a foreign company and that, issues involved are complex and will require the assistance of experts.
Odata in opposing the application, argues that, it was not carrying on because in the country because the contract between itself and Ambusa was terminated at the direction of NPF. Therefore, it argues that, it was not necessary for it to apply for and get either a certificate or exemption under section 25 or 26 of the IPA Act. In any event it says it applied for a certificate under s.25 but did not pursue it because of termination of the contract. On the issue of privity of contract and corporate veil, it argues that, NPF was the brain and mind of Ambusa in that, it directed and controlled the affairs of Ambusa. Effectively therefore, Ambusa was a sham or a front of NPF. Accordingly, Ambusa was an agent of NPF and that the corporate veil is not available for the protection of NPF. Finally in relation to security for costs, it does agree this is an appropriate case for security for costs to be given but argues that the amount should be fixed at K10, 000.00.
Issues
A number of issues are presented for this courts determination. The issues are as set out below:
The first issue is dependent on answers to the 2nd to 4th issues, so I will view that issue in that context. The fifth issue is dependent on a determination of the first four issues. But let me start by saying this. It is well-settled law that, the test to determine whether a reasonable cause of action is disclosed is this. Whether it is plain and obvious from the pleadings that the Court can say at once that, the statement of claim as it stands is insufficient even if proved to entitle the plaintiff to what he asks: see per Lindley, MR., Hubbuck & Sons Ltd –v- Wilkinson Heywood & Clark Ltd [1899] All ER 244 at 247.
This test has been adopted and applied in a number of cases in our jurisdiction as in PNG Forest Products Pty Ltd & Inchape Berhad v. The State and Genia [1992] PNGLR 85 by Sheehan J and Sevua, J in Ronney Wabia v. BP Exploration & Ors N1697. That test was made a bit clearer in Dyson v. Attorney General [1910] UKLawRpKQB 203; [1911] 1 KB 410 by adding that no reasonable cause of action is disclosed if the purported cause of action pleaded is obviously and incontestably bad. With this test in mind, I turn to the second to the fourth issues, starting with the second issue first. But before doing so it is necessary to set out the relevant facts or the background from which these issues arise.
Background/Facts
The relevant background and or facts emerge from the pleadings and the affidavits that have been filed in relation to these proceedings. The relevant affidavits are the affidavits of Haro Mekere sworn on the 24th of May 2000, Rod Mitchell (x 2) sworn on the 19th of April 2001 and 23rd of May 2001, Peter Vincent Mills sworn on the 22nd of May 2001, Gideon Kehara sworn on the 20th of April 2001, Shirley Marjen sworn on the 19th of April 2001, Andrew Wasina sworn on the 6th of March 2001.
Ambusa was incorporated as a subsidiary of NPF (affidavit of Mekere) with a 50 % share interest in association with Ambusa Limited, which had the other 50 % of the shares. Ambusa Limited was a land owner company owned by a group of local landowners in the Bialla area of the West New Britain Province ("the landowners"). Ambusa’s board of directors was made up of Haro Mekere, Robert Kaul, David Copland later replaced by Noel Wright for NPF and a Stanis Valu and Cleophas Cavulu both of Bialla for Ambusa Limited. According to the affidavit of Shirely Marjen’s affidavit, both Stanis Valu and Cleophas reside in the village and that it was difficult to communicate with them. Except for the first ever meeting of the board immediately after incorporation, these men did not attend any board meeting. Hence, all of the subsequent board meetings were constituted by the NPF representatives to the board as employees of NPF. In addition to that, Shirley Marjen was and is the secretary of Ambusa in her capacity as employee and secretary of NPF.
NPF formed Ambusa as a vehicle in association with the landowners through Ambusa Limited to go into the manufacture of copra oil. For that purpose a copra oil mill was required. Through Ambusa, NPF decided to build a copra oil mill in Bialla. Obviously, the landowners as is the case else where in Papua New Guinea, did not know much about running a business let alone a copra oil mill. Therefore, NPF through Mr. Mekere took the lead in negotiations with the Odata for the construction and building of a copra oil mill ready for production (see Mekere’s Affidavit paragraph 8 and annexure "E" to his affidavit). All critical decisions in the negotiations and the project was made by NPF given the position of the landowners whose representative never attended any Ambusa board meetings. This included the holding of board meetings in NPF’s boardroom (see annexure "B" to Mekere’s affidavit) and use of NPF letterhead for correspondence between Odata and Mekere on behalf of Ambusa: see annexure "G" to Mekere’s affidavit.
The negotiations between Odata and Mekere on behalf of Ambusa led to the execution of a written contract on the 4th of November 1998 ("the Contract"). It was a standard "turnkey" agreement. This is a contract used in the construction industry especially in Canada. It is a class of contract in which the contractor contracts to build a project up to 100% complete and hand it over to the other contracting party (the project owner) ready to commence operations: see First City Trust Co. vs. Woodlawn Properties Ltd (1990) (RPR (2d) 259, 272; 80 Sask R 299; 66 DLR 4th, 470 per Noble J at 482 in the DLR report and Canadian Franchise Guide Vol.2.
Despite legal advice from Gadens Lawyers that there was no legal basis to terminate the contract, Odata and NPF terminated the contract because of a NPF board resolution dated 29th October 1999 to withdraw NPF’s commitment to the project. They said they were taking that action because "critical issues relating to the management and the sale and purchase agreement between the contractors and Ambusa ... have not been adequately addressed and wished to see that these issues be properly be addressed to safeguard shareholders interests." It was also because of "Odata’s refusal to deliver full accounts of its operation and activities." The contract was for design, execution and completion of a copra oil milling plant to be built at Bialla, West New Britain Province.
The termination of the contract meant that, Odata could not enter the project area and under take a performance of its obligations under the contract. Consequently, it terminated steps it had taken to apply for certification as a foreign enterprise under s.25 of the IPA Act. It then issued these proceedings to recover damages resulting from the Defendants decision to terminate the contract.
I now proceed to address the issues raised, starting with the second issue concerning the need to carry on business.
Was Odata carrying on business in Papua New Guinea within
the meaning of ss.3 and 25 of the IPA Act?
This is a question that will have to be determined on the evidence before me, and the relevant law. So first, what is the evidence on this? There is no evidence of Odata having entered Papua New Guinea, commenced and carried on business, either in the pursuance of the contract or any other business. Instead, the evidence is that, before Odata could enter the country and perform its obligations under the contract, the contract was terminated. I therefore, find as a matter of fact for the purpose of the application before me that, Odata was not carrying on business in Papua New Guinea.
This leads to the next related question of whether, as a matter of law, Odata was carrying on business in Papua New Guinea? The Defendants argue that, because the contract was to be performed in Papua New Guinea, it was necessary for Odata to apply for and obtain the required certificate or exemption under the IPA Act.
Section 25 of the IPA Act is the provision that requires a foreign enterprise to apply for certification under the Act before carrying on business in the country. There is no dispute here that Odata is a foreign enterprise. Hence this provision applies. The provision reads as follows:
"(1) The Authority may, in accordance with this Part, grant a certificate permitting a foreign enterprise to carry on business in the country.
(2) Subject to Section 26, a foreign enterprise shall not carry on business, unless a certificate has been granted under this Part.
(3) A certificate granted under this Act does not of itself relieve a foreign enterprise from compliance with any other law.
(4) A foreign enterprise which is granted a certificate under this Part shall comply with any law applying to it and such compliance is deemed to be a condition of every certificate issued under this Part."
(Underlining mine)
It is very clear that a foreign enterprise is prohibited from carrying on business in the country unless it has first applied for and has obtained a certificate to do so under the Act. That is however, subject to section 26 of the Act. That provision reads in these terms:
"26. Exemption.
(1) Subject to Subsections (2) and (3), where, in the opinion of the Authority, the activity in which a foreign enterprise intends to engage or is engaged is intended—
(a) primarily for religious, charitable, educational or some other socially useful purpose; or
(b) for a non-profit purpose (other than specified in Paragraph (a)) that is socially desirable and to be encouraged; or
(c) for a combination of any of the purposes specified in Paragraphs (a) and (b), the Authority may, by written notice to that foreign enterprise, exempt that enterprise from any of the provisions of this Act.
(2) Before granting an exemption under Subsection (1), the Authority shall give notice in a newspaper circulating throughout the country that at the expiration of 30 days from the date of publication of the notice it proposes to grant an exemption.
(3) A person may, within 10 working days of the publication of a notice referred to in Subsection (2), object to the proposed exemption by giving written notice to the Authority in the prescribed form.
(4) The Authority shall consider any objection received by it and shall thereafter determine whether or not to grant an exemption within 30 working days of the expiration of the period referred to in Subsection (3)."
There is no issue in this case that, Odata did not meet the requirements to apply for and obtain an exemption under s.26. The only relevance for the mention of this provision is that, Odata was not exempt from the requirements of s.25 of the IPA Act. It was therefore necessary for Odata to apply for and obtain a certificate as required before carrying on business in the country.
Section 3 (1) of the IPA Act defines the phrase "carrying on business" in these terms:
" ‘carrying on business’ includes—
(a) making application for any permit, licence, lease or authority issued for commercial purposes by the State or by a State body; or
(b) administering, renting, managing or otherwise dealing with property as an owner, agent, legal personal representative or trustee whether by a servant or agent or otherwise; or
(c) maintaining an agent, employee or officer for the purpose of soliciting or procuring or entering into orders, arrangements, agreements or contracts (whether conditional or not) whether or not the agent, employee or officer is continuously resident in the country; or
(d) maintaining an office, agency or branch (however described) whether or not the office, agency or branch is also used for one of those purposes by another enterprise; or
(e) undertaking a building, construction or assembly project or an activity numbered 8324 and 8329 in the ISIC that will not be completed
within 6 months; or
(f) a combination of Paragraphs (a) to (e),
but an enterprise shall not be regarded as carrying on business by reason only that it—
(g) is or becomes a party to an action or suit or any administrative or arbitration proceeding; or
(h) effects settlement of an action, suit or proceeding or of a claim or dispute; or
(i) holds meetings of its directors or shareholders or carries on other activities concerning its internal affairs; or
(j) maintains a bank account; or
(k) effects a sale through an independent contractor; or
(l) by an advertisement, solicits or procures an order that becomes a binding contract only if the order is accepted outside the country;
or
(m) creates evidence of a debt or creates a charge on property; or
(n) secures or collects any of its debts or enforces its rights in regard to any securities relating to any such debts; or
(o) conducts an isolated transaction that is complete within a period of days, not being one of a number of similar transactions repeated
from time to time; or
(p) invests any of its funds or holds any real or personal property;"
(Underlining mine)
Since the contract between Odata and Ambusa was for the building of a copra oil mill in Bialla, paragraph (e), is relevant. The Defendants argue that, when this provision and the other paragraphs are read together with the next subsection, (2) Odata is deemed to have carried on business in Papua New Guinea. It was therefore required to apply for and obtain the certificate required. This attracts the application of s.41A of the IPA Act.
Subsection (2) of s.3 of the Act reads:
"For the purposes of this Act, an enterprise shall be deemed to carry on business in the country notwithstanding that the business is carried on partly within and partly outside the country."
This provision makes it clear that, it does not really matter whether the business is carried on partly in Papua New Guinea and partly outside the country. What does matter is the fact that, some activity is taking place in Papua New Guinea. If that happens, then the need to obtain a certificate under s.25, unless exempt under s.26, arises. Section 41 is then available to penalise a foreign enterprise together with their Papua New Guinean associates who fail to meet the requirements of s.25 but are carrying on business in Papua New Guinea. However, of direct relevance for us is s.41A. That provision provides:
"41A. Contract, etc., to be unlawful and void in certain circumstances.
Where a contract, agreement or understanding is entered into between a foreign enterprise and another enterprise and—
(a) that foreign enterprise had not been issued a certificate at the time at which the contract, agreement or understanding was entered into; or
(b) the subject matter of the contract relates to business activities outside of the nature of the activities for which the foreign enterprise is certified to carry on business,
the court may, on the application of that other enterprise or of the Authority, declare the contract unlawful and void."
(Underlining mine)
These consequences are dependent upon whether or not a foreign enterprise is carrying on business in Papua New Guinea. A careful look at the wording in section 3(1)(a)-(d) appears clear to me that something must physically happen in Papua New Guinea. This can either be in part or whole as long as some activity is taking place in Paua New Guinea (see s.3 (2)). In so far as is possible, the operative wording in s.3(1)(e) is "undertaking a building, construction or assembly project or an activity numbered 8324 and 8329 in the ISIC that will not be completed within 6 months." If this provision was read on its own, it gives the impression that in order for a person like Odata, to be deemed to be carrying on business in Paua New Guinea under s. 3(2) it must have been "undertaking the building". That could either be wholly or partly in Papua New Guinea which is going to take more than 6 months to complete. However, when I read s. 3(1)(e) together with paragraphs (a) and s.41A a different meaning appears to emerge from the use of these words in section 41A:
"Where a contract, agreement or understanding is entered into between a foreign enterprise and another enterprise and—
(a) that foreign enterprise had not been issued a certificate at the time at which the contract, agreement or understanding was entered into; or"
Added to this is the fact that the exclusion list in paragraphs (g)-(p) of s.3(1) does not list entering into contracts for the purpose of carrying on the kind of business enumerated under s.3(1)(a)-(f). This in my view means that, it is included in the list under paragraphs (a)-(f). It is a well-settled principle of statutory interpretation that, the express mention of one thing is the exclusion of another. This is often referred to as the expressio unius rei est exclusio alterius rule of statutory interpretation: see Bougainville Copper Foundation v. Galeva Kwarara [1988-89] PNGLR 110 at page 117, for a reference to the rule. It follows therefore, that a foreign enterprise is required to apply for and obtain a certificate under s. 25 of the IPA Act before undertaking any business activity in Papua New Guinea. That includes the signing and or entering into a contract for the purposes of carrying on or undertaking any of the activities listed under s. 3(1) (a)-(f). As a matter of law, Odata could be deemed to have carried on business in Papua New Guinea by virtue of entering into the contract with the First Defendant which was without proper certification under the IPA Act.
What then should be the consequence? Or what should follow on from that? A failure to meet the requirement for certification opens the contract to the risk of being declared unlawful and void under s. 41A of the IPA Act, in addition to any of the other penalties under that Act, such as those under s.41.
I note however, that s.41A only grants a party who has entered into a contract with a foreign enterprise which has not obtained a certificate under the IPA Act a right to apply to the Court for a declaration that the contract is unlawful and void. At the same time, the Court is vested with a judicial discretion to grant such an application. It is settled law that, all discretions vested in a Court has to be exercised on proper principles and after taking into account all of the relevant factors and or facts including the principles of equity: see Graham Rundle v. Motor Vehicles Insurance (PNG) Trust [1988] PNGLR 20 at 24 per Bredmeyer J for a statement of that principle.
In the present case, no application has yet been made to the Court under s.41A. Until such an application is made and is granted, the contract is still valid. If and when an application under s.41A is made, the Court will of course, have regard to the conduct of the parties and the equities of declaring the contract between the parties unlawful and void. Just because the requirements for certification under the IPA Act have not been met, it does not automatically follow that the contract is unlawful and void. If it were to be the case, mandatory words like "shall" could have been use in that section. In these circumstances, I am of the view that, Odata is entitled to bring these proceedings. I therefore reject the application to dismiss or strike out these proceedings on the basis that the requirements for certification under the IPA Act have not been met. I find the arguments on this misconceived ill founded and pre-emptory of a decision under s.41A application which is not even on foot.
Was Ambusa an agent of NPF?
NPF wanted to go into the copra oil milling business. It identified Bialla as the right place to set up that business. It did not however, have the land required for the business. It therefore entered into a joint venture business with the local landowners through their landowner company, Ambusa Limited. This saw the incorporation of Ambusa which was a joint venture company with NPF having 50% of the shares which was fully paid (K400,000.00). The other 50 % of the shares were owned by the landowners in exchange for their land.
The majority of the board of directors of Ambusa came from NPF. The two landowner representatives attended only the first ever meeting of the board. Since then they only existed in name. Through Shirley Marjen, NPF says, the landowner directors were difficult to contact because they were in the village. No landowner was ever involved in the negotiations that led to the contract between Odata and Ambusa. Mr. Mekere of the NPF was the man who conducted the negotiations and signed the contract with Odata in his capacity has executive director of Ambusa, which was a position he held because of his employment with the NPF.
There is no evidence to show that the landowners knew anything about the business they were entering into with NPF. In the absence of any evidence to the contrary, it is clear to me that the landowners did not have the slightest clue about the business. They had no meaningful say and part in the running of the affairs of Ambusa. Everything was run by NPF from its boardroom by NPF employees like Mr. Mekere. Even NPF letterheads were used in communications with Odata: see letter dated 10th September 1998 which is annexure "G" to Mr. Mekere’s affidavit. Finally, the decision to terminate was forced on Ambusa because NPF decided to pull out of the joint venture with the landowners. The reason for that was "critical issues relating to the management and the sale and purchase agreement between the contractors and Ambusa ... have not been adequately addressed and wished to see that these issues be properly be addressed to safeguard shareholders interests." It was also because of "Ambusa’s refusal to deliver full accounts of its operation and activities."
This clearly ran contrary to the fact that, Ambusa was fully controlled and run by NPF with no input whatsoever from the landowners. This included the negotiations with Odata and signing of the contract to its termination. NPF also over looked the fact that the contract between, Odata and Ambusa was for the construction of a copra oil mill under a "turnkey" agreement, which was essentially to construct the mill and hand it over to Ambusa ready for immediate operation. It had nothing to do with any management, sale and or purchase. The contract was not made subject to any of these things.
As evidenced from the legal advice from Gadens to both NPF and Ambusa dated 5th October 1999, (annexure "I" to Mr. Mekere’s affidavit), it was simply a bad investment decision taken by NPF to go into the joint venture with the landowners in the form of Ambusa. NPF therefore decided to pull out of the contract.
In these circumstances, Odata argues that, Ambusa was an agent of NPF. If not, Ambusa was a front or sham for NPF. Therefore the protection of the corporate veil should be lifted to enable it to sue NPF. Odata relies on the judgements in CBS Inc and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (CBS) [1978] PNGLR 66, Pinpar Development Pty Limited v. TL Timber Development Pty Limited N1857 and Jacob Luke v John Ralda [1992] PNGLR 549. It has also referred to the Supreme Court decision in Kappo Limited v. Hau and Ors (23/05/97) SC520
NPF argues that, there is no privity of contract between it and Odata and says and or that Ambusa was not its agent because NPF did not place without any qualification its signature on the contract. Further, on the agency point, it argues that the contract does not make any reference to it in any manner or form and as such the contract can not be relied upon to sue it as a party or an undisclosed principle. It also argues that Ambusa was at all material times a separate legal entity and it should be given the protection accorded to all companies by the principle of corporate veil as enshrined in s.16 of the Companies Act 1997. NPF then relies on the well-known case of Salomon v. Salomon & Co. Limited (1897) AC 22. It then argues that, there should be caution when the Court is asked to pierce the corporate veil and refers to the Kappo Limited v. Hau and Ors (supra). Further, it argues that Odata has misunderstood the import of the cases it relies on and in any event they do not assist Odata. It then refers to the judgement in Fortunaso Limited v. Bank of South Pacific Limited [1992] PNGLR 275 at page 285 and argues that Odata has no cause of action against it. At best, the Defendants agree that Odata’s claim is really that the Plaintiff’s commercial rights are affected by the contract between Odata and Ambusa with no legal rights against NPF.
On the facts, there can be no argument that, Ambusa was an extension of NPF for the specific purpose of going into a copra oil milling business in association with local landowners in Bialla. NPF had virtual control of the joint venture and was instrumental in the negotiation, execution and eventual termination of the contract despite legal advice from Gadens Lawyers. In reality therefore, Ambusa was a front for NPF for all practical purposes.
In Pinpar Development Pty Limited v. TL Timber Development Pty Limited (supra) His Honour Kapi DCJ said:
"Having regard to all the authorities, I accept the principle that a parent company may be liable for the actions of a subsidiary company provided that the subsidiary company was acting as agent of the parent company. Alternatively, where the parent company in truth is in control of the subsidiary company and may or may not use the corporate veil for the purposes of fraud, or as a device to evade a contractual or other legal obligations, the parent company may be liable."
The authorities the Deputy Chief Justice had regard to were the judgement of Pritchard J in CBS Inc and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (CBS) (supra) and Jacob Luke v John Ralda (supra). In the first case Pritchard J said at page 68:
"It may well be that the defendant company, despite its paid-up share capital of K2.00, is both wealthy and profitable. However, I do not think that judges have to go around with their eyes shut and the fact is in this country, as has happened elsewhere, many companies have been incorporated which have become insolvent only to incorporate another and continue trading, leaving the creditors of their previous company (or companies) lamenting. There has been considerable reverence paid by the Courts of many countries to the concept of a company being a legal person in its own right. In this regard I am somewhat of a heretic and in a newly developing country such as ours, when under the Constitution the judges of this Court must develop the rules of the underlying law of this nation in accordance with the principles of natural justice and ensure that such law develops as a coherent system in a manner that is appropriate to the circumstances of the country from time to time. I believe that judges will be more inclined to go behind corporate structures than judges in other countries have been prepared to."
In the second case, His Honour, Mr. Justice Woods dismissed an appeal against a decision of the District Court, which lifted the corporate veil and ordered the appellant to be personally liable. The appellant sold a defective vehicle to the respondent. At no time did the appellant make it know to the respondent that, he was acting for a company, which he owned and managed. His Honour found that, in the particular circumstances of the case, it was fair that the appellant should be made liable and not his company because he failed to let the respondent know that he was acting for and on behalf of the company.
The learned Deputy Chief Justice also had regard to the leading tax book on company law, Modern Company Law 4th Ed. by LC Gower at pages 128 to 129. There the learned author points out that, in some instances, the parent of a subsidiary company may be made liable going by the agency principle and in other instances the parent may not be made liable.
The Supreme Court alluded to the doctrine of corporate veil in Kappo Limited v. Hau and Ors (supra) in these terms:
"It is sufficient for our purposes to simply state that the starting point is the doctrine laid down in Salomon v Salomon & Co Ltd (1897) AC 22. There has been a lack of judicial unanimity with regard to the general principles about the circumstances in which the corporate veil may be lifted: see Briggs v James Hardie & Co Pty Ltd & Others (1989) 7 ACLC 841. We do not have to go into these issues here."
Mr. Mills of counsel for the Defendants ably assisted the Court on the issue of lifting the corporate veil by providing a copy of an extract from the CCH publication on the New Zealand Company Law and Practice. From this the following position emerges:
Our Companies Act is similar to the New Zealand Companies Act. Besides, I consider these principles relevant and appropriate for our jurisdiction in addition to the position already developed (whether obiter dictum or not). Hence I adopt them has proper principles for consideration on the issue of whether or not the corporate veil should be lifted.
In the present case, before getting to any of these principles, NPF argues that, the starting point is that, the contract was between the Odata and Ambusa. The contract makes reference to only Ambusa and Odata and nobody else. All obligations from the provision of land upon which the mill was to be constructed, to the payment of money is referred to as an obligation of Ambusa in its own right and not that of any other party. Nowhere is it referred to as the agent of any other party. Then, it argues that, unless there is something to suggest to the contrary, a person (s) named in the written contract is the real and only principal to the contract. No extrinsic evidence can be allowed to contradict the terms of the contract: Halsbury’s Laws of England, 4th Ed, paragraph 137. The argument therefore, is for me to find that, Ambusa was not acting as NPF’s agent when it entered into and signed the contract with Odata. Instead it was acting in its own capacity as a real party and principle. If it were not for the principles on which the corporate veil can be lifted I would stop at that argument and find for NPF.
However, in equity and in fairness having regard to the particular facts of this case and my findings on them, I am reluctant to grant the result the Defendants are arguing for. I hence, need to find whether the facts of this case place NPF’s position in any of the circumstances in which the corporate veil should be lifted to make it answer Odata’s claim.
The relevant facts as noted are that NPF formed Ambusa as a subsidiary to go into a copra oil milling business. That was in association with local landowners in Bialla to secure the land needed for the business. The landowners come through their landowner company Ambusa Limited with a 50% equity or share interest in Ambusa. Other than that, there is no evidence of them coming up with and or contributing to the required capital, the technical know how in terms of the whole joint venture as a workable business concept and the conduct of the joint venture business including, the marketing of its product. The landowners appear to me, in the absence of any evidence to the contrary, were simple village people with no idea on running a business let along an highly specialised business such as copra oil milling and its marketing. NPF personal were by virtue of their employment with NPF were the brain and arms of the Ambusa. They made all of the important decisions including, the negotiations and concluding and signing the contract and its eventual termination despite legal advice.
Legal advice was that, if the contract was terminated, Odata would be entitled to damages for breach of contract. Although that advice was addressed to Ambusa, the person seeking the advice at the first place and receiving it was Mr. Mekere an officer of NPF and by reason of his employment with NPF an officer of Ambusa. Then on the 25th of May 2001, NPF successfully applied and was given leave to conduct Ambusa’s defence. This confirms with the fact that it was NPF, which ran the affairs of Ambusa from the very beginning.
These facts attracts in my view, a possible application of the 8th factor in the list of factors set out above, that must be borne in mind when consider the issue of whether or not Ambusa’s corporate veil should be lifted. This is in addition to my finding in line with the local authorities to date that, Ambusa was a front for the NPF. Further, Ambusa in my view was an extension of NPF for the particular business interest it set out to venture into in association with local ill-equipped landowners. The landowners provided nothing more than the land required for the project in return for a 50% share with the business being controlled exclusively by NPF. Given these, I am not prepared to allow NPF to hide behind the corporate veil and effectively avoid its liability if any to Odata. From the available material, it seems Ambusa is impecunious and may not be in a position to satisfactorily meet Odata’s claim. There must be some room to prevent an abuse of the corporate veil through conducts such the ones disclosed in this case. The law should be ready and willing to lift the corporate veil in such situations to ensure no unfair advantage is gained through the use of the corporate veil. Indeed s.155(4) of the Constitution empowers the Supreme and National Courts to make such orders as are necessary to do justice. The readiness of the Courts to lift the corporate veil in appropriate cases would in my view, help prevent an abuse of the corporate veil’s protection. It would also provided some basis for people dealing with Papua New Guinean incorporated companies to do so with confidence that the corporate veil will not be used to avoid obligations and or liabilities such companies may assume by their own conduct.
As Pritchard J said in CBS Inc and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (CBS) (supra), judges should not approach the issue with their eyes shut. They should ever be vigilant to detect any possible instance of an attempt at abusing the corporate veil’s protect and make appropriate orders. This is important in a newly developing country such ours, where there is a Constitutional duty on judges of the National and Supreme Courts to help develop the underlying law for the nation in accordance with the principles of natural justice. The onus is therefore, on a judge to determine in each case whether its is appropriate to lift the corporate veil and help develop the rules with fairness and equity as the main guiding principles. On my part therefore, in full appreciation of that duty, I have already expressed the view that, the principles emerging from a survey of overseas authorities should be the guiding principles in addition to the principles already emerging from the few local cases to date.
In a few words, I find that Ambusa was an extension, if not an agent of NPF in fact and in reality. NPF was responsible for the contract between Odata and Ambusa from start to termination. At least in one correspondence this was disclosed to Odata when the letter dated 10th September 2001(annexure "G" to Mr. Mekere’s affidavit) was sent to Odata. This has been carried over into these proceedings by virtue of NPF assuming the conduct of the proceedings on behalf of the Ambusa. Accordingly, I find that Odata does have a cause of action against NPF. Hence I refuse to strike out the proceedings as against NPF. Of course whether, NPF is in fact liable as alleged is a matter for trial and evidence, which is not my concern at this stage.
Security for Costs
Failing an order to strike out the proceedings, the Defendants argue for security for costs to be given in the sum of K299, 779.33 including VAT. This represents two thirds of a an estimated K449,669.00 on solicitor client costs. The Defendants argue that, the claim against them would add up to about K6 million and as such the amount they submit is appropriate.
Further, the Defendants submit that the amount they are asking for is reasonable because the amount claim is large and it is expected that witnesses will be required to view the machinery the subject of the proceedings and to prepare the reports in relation to it. Counsel for the Defendants argue that the trial of the matter would take about two weeks in Port Moresby. Senior Counsel will be engaged at the relevant stages of the proceedings and will incur substantial cost. Counsel also argues that this is an extremely complicated commercial litigation.
Furthermore, Counsel for the Defendants submit that, there has been no delay in bringing the application and that Odata’s claim is not bona fide within the meaning of Osprey Industries v. Hallam [1992] PNGLR 557. There is no undertaking by the Plaintiff’s directors that they will pay any costs if the Defendants are successful in the defence. There does not appear to be a reasonably good prospect of success for Odata within the meaning of Yarlett v. New Guinea Motors Limited [1984] PNGLR 156. Finally, the Defendants accept that the amount to be awarded as security is a discretionary matter for the Court: see Reynolds v. Walcott [1985] PNGLR 316.
The Defendants have provided a list of the cases in which security for costs were ordered with the amount so ordered. At the lower end of the scale is the Driver v. Swanson [1977] PNGLR 30, where the National Court ordered security for costs to be given without specifying the amount in a claim involving K5, 000.00 to K40, 000.00. The next in line is the Yarlett case (supra) where the Court ordered security to be given in the sum of K3, 000.00. There the Court held that two thirds of the total estimate of cost up to the stage that security is awarded should be allowed. This is where the Defendants stand to argue for two thirds of their estimated costs to be given in security in this case.
In other jurisdictions, for example in New South Wales (Australia) sums as high as AUD$115,000 has been ordered to be given in security. This is represented by the case of Morris v. Hanley (2000) NSWSC 957 (25 August 2000), in a commercial litigation only for the first week of trial excluding pre-trial preparation and interlocutory proceedings on application made after the first week.
The Defendants have set out the possible costs in a detailed schedule of costs, which is inclusive of further interlocutory applications and all pre-trial preparation. A substantial part of that is for expert witnesses and costs of senior counsel engagements. There is neither any evidence nor is there any suggestion that Odata is impecunious and as such it will not meet any order for costs should it fail. The Defendant argues that, Odata will not succeed in its claim against them because of the various legal issues raised in this application, which I have already covered. This argument can not be sustained in the light of my findings and rulings in the earlier part of this judgement. The only basis on which the application can be sustained is the fact that, Odata is a foreign company on the basis of which Mr. Rei of counsel for Odata has correctly conceded but not the amount asked for by the Defendants.
As to how much security should be given is a discretionary matter for the Court to decide. An exercise of that discretion is guided by a number of principles, which are set out in the Osprey case (supra) at pages 560-561. These are:
In my view these factors are very important. The first is there to ensure that there is no delay in bringing an application for security for costs. Any delay in bringing such an application may result in the other party proceeding on the basis that there will be no such application and incur costs by taking further steps in the proceedings including a preparation for trial. The concept of acquiescence by conduct in failing to act promptly could operate against a party who fails to exercise its right. Factors two and three in my view, go together. If the Court is satisfied on the basis of some affidavit material in addition to the pleadings that the plaintiff’s claim is one which is likely to succeed, the Court should be slow to ordering security for costs to be given. If however, it decides to make such an order, it should not fix an amount that might effectively prevent the plaintiff from proceeding with its claim. There should in my view, be much more reluctance to order security for costs where on some reasonable basis it becomes clearer to the Court that, the party making the application is responsible for the parties ending up in Court and is using the application to make it difficult for the other party to either proceed with his claim. Given this kind of possibility, the third factor becomes meaningful. Likewise, the fifth and final factor also has meaning because, if there is a cross-claim on the merits and is substantial not just on the pleadings but supported by say affidavit material, it may make sense to order security for cost be given.
In the present case, there is no issue on the first factor. As for the second one, I have already ruled that on the basis of the available material, Odata’s claim is bona fide and there is a reasonable chance of success. There is no issue on the third factor. However, let me reiterate my earlier finding that, NPF is the party that is responsible for landing the parties in Court. Following the orders of the 25th of May 2001, it is now in charge of the defence on its own behalf and that of the Ambusa. It caused a termination of the contract between Ambusa and Odata. It then sought to escape any liability on a technical and strict application of the principles of privity of contract and corporate veil. The Courts are charged with the duty to administer justice according to law but with fairness and with equity. I have ruled against NPF on its application to escape liability. I find there is no substantial or any good cross-claim against Odata apart from asking for orders in the nature already asked for and refused in this judgement.
Further, I am not satisfied that this is a complicated case. It is simply a case of breach of contract and assessment of damages. The statement of claim is short and simple. On the other hand the Defendants have made their defence look long and complicated. However, at a closure look at the defence and cross-claim, it only pleads failures to met Stamp Duty requirements as well as the IPA Act, a denial of Odata’s claim and plead in the alternative that the contract is bad for uncertainty. I have adequately covered the pleadings concerning the IPA Act requirements. There is nothing complicated about this matter. What is clear however, is a very highly technical approach taken by the Defendants through the NPF all aimed at escaping liability.
As noted earlier, a major part of the costs for the Defendants estimate of cost is engagement of senior counsel services. I do not see the need and justification for senior counsel’s involvement. There seem to be a practice adopted by nearly all the big name law firms like the Defendant’s lawyers here to almost, as a matter of course, refer to senior Counsel (QC)for advice and or opinions and even conduct of trials. As I recently said in Bank of Hawaii (PNG) Limited v. Papua New Guinea Banking Corporation & Ors N2095 (unreported and unnumbered judgement delivered on 8th June 2001), "there is neither any evidence nor can I accept that, after more than 20 years of independence Papua New Guinea still lacks experience and competent lawyers of her own".
Whilst it is the prerogative of a party to engage a counsel of its choice, it should not unnecessary go on in a costs running exercise and expect the other side to pay for those costs if it succeeds. A losing party is only liable to pay the winning party’s reasonable costs. I am not satisfied that all of the costs envisaged to be incurred by the Defendants are reasonable and will necessarily be required to be incurred.
For these reasons, I am disinclined to ordering security for costs in the amounts asked for by the Defendants. I am instead prepared, in the exercise of my discretion to fix a sum of K20, 000.00 as reasonable security for cost against Odata. I would order such security be brought into Court within 21 days from today.
In Summary
In summary I find as follows:
On the basis of the above findings I make the following orders:
___________________________________________________________________________
Lawyers for the Applicant/Defendants: Blake Dawson Waldron
Lawyers for the Respondent/Plaintiff: T. M Rei Lawyers
PacLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.paclii.org/pg/cases/PGNC/2001/110.html