Call of Duty: can lawyers owe a duty of care to a company in liquidation when instructed by its shareholder?

21 September 2018

This week’s TGIF considers the decision in Mujkic Family Company Pty Ltd v Clarke & Gee Pty Ltd [2018] TASFC 4, which concerns a rather novel issue – whether a solicitor acting for a shareholder might also owe a duty of care to the company in liquidation.

What happened?

In 2015, the Supreme Court of Queensland ordered that the corporate trustee of a family trust be wound up.

Shortly after, the sole shareholder (who was also the sole director) and an employee of the company retained lawyers in Tasmania and instructed them bring proceedings under s 482 of the Corporations Act 2001 (Cth) to terminate the winding-up.

Those instructions remained in place until May 2016, when the shareholder engaged new solicitors to act for him in the winding-up termination proceedings. While the winding-up was terminated shortly thereafter on the basis the company was clearly solvent, the delay had significantly increased the liquidator’s costs – and so significantly reduced the assets of the company.

The company, along with the shareholder and the employee, issued proceedings in negligence against their initial lawyers, alleging that they were negligent in failing to promptly or diligently resolve the termination application, with the result that the liquidator incurred extra costs.

At first instance, Holt AsJ ordered that the claim in negligence be struck out on the basis that it was not even arguable that the lawyers owed the company (ie a non-client) a duty of care.

The company, shareholder and employee then appealed that decision to the Full Bench of the Supreme Court of Tasmania.

Applicable legal principles

Generally speaking, pleadings are liable to be struck out if they do not contain a reasonable cause of action, or the pleaded cause of action is futile.[1] It is not appropriate to strike out a pleading if it raises an arguable point of law.[2] As noted rather bluntly in this case, a pleading should only be struck out when it is “bad beyond argument”.

In relation to a solicitors’ duty in negligence to non-clients, the High Court has recognised that lawyers may owe such a duty in certain limited circumstances. However, for a lawyer to owe a duty in negligence to a non-client, it is necessary to demonstrate that the interests of the client and the non-client are the same – or, in the words of the High Court, that interests of the client and the non-client are “coincident”.[3]

The issue

At first instance, Holt AsJ struck out the pleading in negligence on the basis that the personal interests of the shareholder and the employee were not coincident with those of the company. In other words, his Honour held that it was not even arguable that the lawyers could also owe a duty of care to the company.

On appeal, the question for the Full Court therefore was:

Whether it is arguable that a solicitor, in carrying out instructions given by a shareholder of a company in liquidation to terminate the winding up of the company, could owe a duty of care to the company.

The decision

The Full Court allowed the appeal, holding that the “interests of the company and the interests of the other appellants were arguably coincident in the s 482 application”, as they all arguably had an interest in the termination application being determined quickly so that the assets of the company were not depleted by the costs of the liquidation.

Interestingly, the fact that the liquidator had appointed his own solicitor in the s 482 application did not deny the coincidence of interests between the company and the shareholder (and employee).

Further, and perhaps more significantly, the Full Court also mentioned in passing that the interests of the company’s creditors may have also been coincident with those of the company and the shareholder. While not relevant on the facts of this case, these comments potentially open the door to solicitors also owing a duty in negligence to non-client creditors.

Commentary

As the Full Court observed, the question of the solicitor’s duty in this case is a novel issue on which there was no direct authority.

This decision therefore stands for the limited proposition that it is “at least arguable” that the interests of, in particular, the shareholder and the company are sufficiently coincidental to impose upon lawyers a duty of care to the company in respect of an application to terminate the winding up of that company.

We will only receive more definitive guidance on this question if the argument is tested at trial with the benefit of evidence. If it does proceed to trial, it would also be interesting to see if any more is said on the extent to which interests of creditors (both secured and unsecured) are coincident with the company in the s 482 application.

The more immediate consequence is that claims against solicitors (and potentially insolvency practitioners) arguing extended duties of care to non-clients may not be struck out in their early stages. This in turn would mean that issues of duty may need to be decided in a full blown trial, or that more serious consideration be given to settling such proceedings early.

^{[1] Spencer v Commonwealth [2010] 241 CLR 118 at [24].}

^{[2] Agar v Hyde (2000) 201 CLR 552 at [64].}

^{[3] Badenach v Calvert (2016) 257 CLR 440.}