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CBS Inc, CBS Records Australian Ltd, Bali Merchants Pty Ltd v Ranu Investments [1978] PNGLR 66 (11 April 1978)

Papua New Guinea Law Reports - 1978

[1978] PNGLR 66 - CBS Inc, CBS Records Australian Ltd, Bali Merchants Pty Ltd v Ranu Investments 

[1978] PNGLR 66

N128

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

C.B.S. INC. AND C.B.S. RECORDS AUSTRALIA LIMITED AND BALI MERCHANTS PTY. LTD.

V

RANU INVESTMENTS PTY. LTD.

Waigani

Pritchard J

4 April 1978

11 April 1978

PRACTICE AND PROCEDURE - Parties to actions - Adding defendant - Principles to be applied - Action seeking protection of “pirated” cassette recordings - Proposed defendant managing director of defendant company - Lifting corporate veil - Principles of natural justice - Rules of the Supreme Court (Queensland, adopted) O. III r. 11.[lv]¹

COMPANIES - Directors - Liability of - Whether could be properly added as defendant in passing off suit - Lifting the corporate veil - Principles of natural justice.

On an application under O. III r. 11 of the Rules of the Supreme Court (Queensland adopted), to add the managing director of the existing defendant company, as a defendant in an action seeking injunctions restraining the defendant from selling and dealing in certain radio cassettes, alleged by the plaintiffs to be “pirated”, damages and other ancillary orders:

Held

(1)      On an application under O. III r. 11 of the Rules of the Supreme Court (Queensland adopted), the only matters to be taken into account are:

(a)      whether prima facie there could be a cause of action against the proposed defendant.

(b)      whether it is proper in a legal sense to join the proposed defendant, as a defendant.

(2)      Taking into account, the nature of the cause of action, its novelty in Papua New Guinea, the principle that infringement of copyright in a dramatic work can be by a person who directs, counsels or aids another in so performing the work, (Falcon v. The Famous Players Film Company, Limited and Ors. [1926] 1 K.B. 393) as analogous to a managing director dictating company business, the principle of lifting of the corporate veil in appropriate circumstances particularly where the device of incorporation is used to some illegal or improper purpose, and bearing in mind the requirement of the Constitution that the courts develop the rules of the underlying law in accordance with the principles of natural justice, the proposed defendant is a person who could be legally responsible with the defendant company and can properly be joined as a defendant.

(3)      Accordingly, the proposed defendant should be joined as defendant.

Application (Summons)

This was an application pursuant to O. III r. 11 of the Rules of the Supreme Court (Queensland adopted) to add as a defendant to proceedings, the managing director of the defendant company.

Counsel

G. B. Evans, for the plaintiffs.

M. J Wright, for the defendant.

Cur. adv. vult.

11 April 1978

PRITCHARD J: This is an application by the plaintiffs to join one Edward Kwan, who is alleged to be the managing director of the defendant company, as a defendant in this action. The application is made under O. III r. 11 of the Rules of the Supreme Court (Queensland adopted) under which the Court is empowered to add as a defendant any person whose presence before the Court may be necessary in order to enable the Court effectually and completely to adjudicate upon and settle all the questions involved in any cause or matter. This action is brought by the plaintiffs against the defendant company seeking injunctions restraining the defendant from selling and dealing with radio cassette tapes which the plaintiffs claim are “pirated”, damages for the defendant having “pirated” the said tapes and other ancillary orders. Having commenced the action the plaintiffs initially applied for an interim injunction which was refused by Raine, Acting C.J (as he then was) on 3rd February last on the basis that his Honour, at that point of time, was not satisfied that the plaintiffs had suffered irreparable loss and that generally speaking the application was premature.

The plaintiffs now apply to add Mr. Kwan as a defendant on the basis that he is jointly and severally liable with the defendant company. The plaintiffs have caused searches to be made at the office of the Registrar of Companies and these searches disclose that the defendant company has a nominal capital of K10,000 and a paid-up capital of only K2.00, the shareholders being Mr. Kwan and one Kalama Vagi. Mr. Kwan is disclosed to be a director. The plaintiffs have also caused searches to be made against two other companies, Magna Agencies (P.N.G.) Pty. Ltd. and Kayco Electrical Pty. Ltd. These two companies also have a nominal capital of K10,000 and a paid-up capital of only K2.00. In each instance Mr. Kwan is one of the two shareholders, he is a director and he is the manager. The plaintiffs’ application proceeds on the basis that if they are successful in their action against the defendant company the result could well be meaningless because Mr. Kwan could readily transfer the activities of the defendant company to one of the other two companies abovementioned. The plaintiffs claim that it is Mr. Kwan who is behind the activities of the defendant company and that it is only a shield behind which he and his activities are protected.

Mr. Wright, counsel for the defendant, has put to me that before this application can succeed the plaintiffs must establish that they have a cause of action against Mr. Kwan and that circumstances exist which would entitle the plaintiffs to the equitable relief which they seek against him. He goes on to argue that the plaintiffs should establish at this point of time the four necessary ingredients which are fundamental to the granting of the relief sought by them. These ingredients are set out on pp. 448-449 of the textbook Equity — Doctrines and Remedies by Meagher, Gummow and Lehane (Butterworths, Australia, 1975). I do not believe that in an application of this type, to add a defendant, I should have to embark on a consideration of the merits of the action itself. I consider that the only matters I should take into account are whether prima facie there could be a case against Mr. Kwan and, secondly, whether it is proper (in the legal sense) to join him as a defendant. Mr. Wright further puts to me that it is completely irrelevant that Mr. Kwan is a director of two other companies of a financial structure similar to that of the defendant company and with this argument I do agree. He says also that there is nothing sinister about the fact that the defendant company has a paid-up capital of only K2.00. The only significance of these matters in my mind is to indicate clearly how easy it is for a person to incorporate a company with virtually no cash capital at all. It is this possibility or rather the possibility that any order made or judgment given against the defendant company could be worthless, which the plaintiffs also rely on in seeking to join Mr. Kwan as a defendant.

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 with little or no asset backing and have gone into receivership. It is a fact that individual persons have caused companies to be 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.

The general concept of the separate personality of a company and its entity as distinct from its shareholders was established by the House of Lords in Salomon v. Salomon and Co.[lvi]². In Gore-Browne on Companies (42nd ed. 1972 at p. 6) the author says “Notwithstanding the principle of Salomon’s case there are certain situations where the courts have shown themselves willing to ‘lift the veil of incorporation’, that is to ignore or set aside the separate legal personality of a company. It is not possible to formulate any single principle as the basis for these decisions, nor are all the decisions, as to when the separate legal entity of the company must be respected or when it may be disregarded, entirely consistent with one another. It is well established that the courts will not allow the corporate form to be used for the purposes of fraud, or as a device to evade a contractual or other legal obligation.”

In Palmers’ Company Law (22nd ed. 1976 at p. 153) it is said “The legal fiction that the company is, as Cave J put it, ‘a legal persona just as much as an individual’ is subject to obvious natural limitations which were pointed out poignantly by counsel in the days of James II when asking ‘can you hang its common seal?’“ The author goes on to say “modern practice, in deference to the reality of economic facts, has frequently admitted exceptions to it in which the veil of corporateness is lifted”. At p. 160 the learned authors under the sub-heading “Looking behind the company as legal persona. Lifting the veil” go on to say that “the courts are more inclined, in appropriate circumstances, to lift the veil of corporateness where questions of control are in issue than where a question of ownership arises.” The authors go on to give some 10 examples of this concept, one of which is where the “device of incorporation is used for some illegal or improper purpose”.

This concept was considered by Russell J in Jones and Anor. v. Lipman and Anor.[lvii]³ His Honour there referred to the case of Gilford Motor Co., Ltd. v. Horne[lviii]⁴ where Romer L.J said “this defendant company was formed and was carrying on business merely as a cloak or sham for the purpose of enabling the defendant, Horne, to commit the breach of covenant that he entered into deliberately with the plaintiffs”. Russell J went on to say in his own judgment (at p. 445) “the defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity ... an equitable remedy is rightly to be granted directly against the creature in such circumstances”. Although the Gilford Motor Co., Ltd. case talks about the formation of a company as a cloak or sham I personally see no distinction whatsoever between a company incorporated for such purpose and a company already in existence which is utilized for the identical purpose. There is no evidence before me on this application indicating that the defendant company is a cloak or sham protecting Mr. Kwan in his activities. However, the plaintiffs quite clearly are suggesting this and whether or not they can prove it when this action eventually comes to trial is another matter altogether.

This action is a novel one in Papua New Guinea. In the interlocutory judgment of Raine J on 3rd February abovementioned, his Honour referred to the case of Hexagon Pty. Ltd. v. The Australian Broadcasting Commission[lix]⁵ where even in Australia with its copyright legislation the concept of “unfair competition” was described as an extension of the doctrine of passing off or, possibly, a new and independent cause of action. To what extent this type of law will be developed in Papua New Guinea and indeed to what extent it is appropriate to the circumstances of this country will no doubt be a matter for the trial judge in this action to decide.

There is one other consideration which I believe can be taken into account on this application. In Falcon v. The Famous Players Film Company, Limited and Ors.[lx]⁶ it was held that copyright in a dramatic work is infringed not only by a person who without the consent of the owner actually performs the work in public, but also by a person who directs, counsels or aids another in so performing the work. Admittedly this decision turned on the construction of the provisions of the English Copyright Act 1911 but I believe a valid comparison can be made when one considers the managing director of a company dictating its business policy. A company is not unlike a puppet which appears on stage for the public to see. However in every case behind the scenes there is a person manipulating the strings who is in fact exercising control. The plaintiffs here claim that Mr. Kwan is such a person. If he is, it is up to them to prove it at the hearing of this action.

For all the above reasons I am satisfied that Mr. Kwan is a person who could legally be responsible along with the defendant company and that it is proper in the legal sense that he should be joined as a defendant and I accordingly order that he be so joined. The costs of this application will be the defendants’ costs in the cause. In other words if the defendants succeed the costs will be paid by the plaintiffs and if the plaintiffs succeed there will be no costs payable in respect of this application.

Orders accordingly.

Solicitors for the plaintiffs: Gadens.

Solicitors for the defendant: Craig Kirke & Wright.

[lv]The effect of O. III r. 11 is set out at p. 67.

[lvi][1897] A.C. 22.

[lvii] [1962] 1 All E.R. 442.

[lviii][1933] Ch. 935.

[lix](1975) 7 A.L.R. 233.

[lx] [1926] 1 K.B. 393.