[1999] PNGLR 139

PAPUA NEW GUINEA

[national court of justice]

PINPAR DEVELOPMENT PTY LIMITED

V

T L TIMBER DEVELOPMENT PTY LIMITED

waigani: kapi dcj
29 March and 1 April 1999

Practice and procedure – Parties to action – adding cross-defendant – Principles to be applied – Proposed cross-defendant parent company of cross-defendant company – Lifting corporate veil.

Facts

The plaintiff Pinpar Development Pty Limited instituted legal proceedings against T. L. Timber Development Pty Limited for breach of contract. The cause of action arises out of a logging and marketing agreement in respect of logs and sawn timber from Ormand Lako Timber Permit area in the Central Province. The Plaintiff claims that it builds a sawmill at the cost of K751,280.00 and the Defendant breached the terms of the agreement by failing to repay the money as agreed between the parties. The Defendant on the other hand has filed a defence and cross-claim based on a clause of the said agreement as well.

Held

1.	The onus is on the person applying to satisfy the Court that the discretion should be exercised in its favour: Pierce v Motor Vehicle Insurance (PNG) Trust [1988-89] PNGLR 480 followed.

2.	The test for exercising this discretion is whether prima facie there could be a cause of action against the proposed party: CBS and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd [1978] PNGLR 66 applied.

3.	The question is whether Rimbunan in truth is in control of the cross-defendant, or alternatively used the cross-defendant as its agent in respect of the logging and marketing agreement. There is no evidence of any agency agreement between the cross-defendant and Rimbunan.

4.	Prima facie, all factors point to the possibility that Rimbunan may be in control of the cross-defendant and it should be joined as a party.

5.	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.

Papua New Guinea cases cited

CBS and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd [1978] PNGLR 66.
Jacob Luke v John Ralda [1992] PNGLR 54.
Pierce v Motor Vehicle Insurance (PNG) Trust [1988-89] PNGLR 480.

Counsel

S Soi, for the defendant/cross-claimant.
R Bradshaw, with W Neill, for the plaintiff/cross-defendant, Rimbunan Hijau (PNG) Ltd & Timbers PNG Ltd.

1 April 1999

Kapi DCJ. In a writ of summons (WS 1088 of 1996) Pinpar Development Pty Ltd (plaintiff) sued T. L. Timber Development Pty Ltd (defendant) for damages for breach of contract. The cause of action arises out of a logging and marketing agreement in respect of logs and sawn timber from Ormand Lako Timber Permit Area in the Central Province. In accordance with clause 34 of the agreement, the plaintiff agreed to finance and build a sawmill for the defendant. It was agreed that the defendant should repay the cost of construction of the sawmill within 3 years without any interest. The plaintiff claims that it built the sawmill at the cost of K751, 280.00 and the defendant breached the contract by failing to repay the money.

The defendant (cross-claimant) has filed a defence and has brought a counter-claim against the plaintiff. The cross-claim is based on clause 14 of the agreement that the plaintiff (cross-defendant) failed to reimburse the earnings generated from the logging operations to the cross-claimant. The cross-claimant claims that the cross-defendant stopped operating the sawmill and removed the equipment and as a result it suffered damages. 

Counsel for the cross-claimant seeks to join Rimbunan Hijau (PNG) Pty Ltd (Rimbunan) as a party on the basis that it has financial control over the cross-defendant. 

In support of the application to join Rimbunan, counsel for the cross-claimant, rely on evidence that Rimbunan and 15 other companies have taken out insurance cover as a group of companies with MBF Assurance Pty Ltd in respect of legal liability to third party bodily/property damage arising out of operations as logger/timber merchants. 

Counsel for the cross-claimant also relies on evidence that Rimbunan has acted on behalf of cross-defendant in respect of workers compensation for workers employed by the cross-defendant.

Counsel for the cross-defendant also relies on evidence that Rimbunan paid royalties in respect of operations in this particular timber permit area.

In addition, he relies on evidence that during the negotiations of the logging and marketing agreement, the premises of Rimbunan were used for meetings. 

Counsel submits that all these factors go to prove that Rimbunan has financial control of the plaintiff and therefore it should be joined as a cross-defendant.

Counsel for Rimbunan does not dispute that the cross-defendant is a subsidiary company of Rimbunan. He submits that this does not necessarily prove that Rimbunan controls the finances of the plaintiff. He submits that the cross-defendant is a separate legal entity and Rimbunan is in no way responsible for the management and operations of the cross-defendant in respect of the logging and marketing agreement. He submits that counsel has failed to satisfy the Court that the cross-claimant may have a claim against Rimbunan. He relies on CBS Inc and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (CBS) [1978] PNGLR 66.

This is an application to add a party to the cross-claim pursuant to O 5 r 8 (1) (a) of the National Court Rules. Under this rule, a person who is not a party may be added as a party on the basis that he "ought to have been joined as a party". The onus is on the person applying to satisfy the Court that the discretion should be exercised in its favour (Pierce v Motor Vehicles Insurance (PNG) Trust [1988-89] PNGLR 480). The test for exercising this discretion is whether prima facie there could be a cause of action against the proposed party (see CBS and CBS Records Australia Ltd and Bali Merchants Pty Ltd v Ranu Investments Pty Ltd (supra)).

The issue raised by this case highlights the fluid state of the law with regard to rights and liabilities of associated companies. In Modern Company Law 4th Ed. By LC Gower at pages 128 to 129 the author points out that there are authorities, which support the proposition that a parent company is liable for the actions of a subsidiary company, provided it can be proven that the subsidiary was acting as the agency of the parent company. There are equally authorities, which support the proposition, which there need not to be any agency between the companies.

In CBS, Pritchard J was faced with this dilemma and sets out his approach on page 68:

"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 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 same approach was taken by Woods J. in Jacob Luke v John Ralda [1992] PNGLR 549.

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. 

In CBS, Pritchard J. was concerned with joining the General Manager of the defendant company who was alleged to be the man behind the company pulling the strings and in effective control of the company. He held that the General Manager could legally be responsible along with the company and joined him as a party. In Jacob Luke the manager of the company was found liable and he could not hide behind the corporate veil.

In the present case, there is no evidence of fraud or device to evade a contractual or a legal obligation. The question is whether Rimbunan in truth is in control of the cross-defendant, or alternatively, used the cross-defendant as its agent in respect of the logging and marketing agreement. There is no evidence of any agency agreement between the cross-defendant and Rimbunan.

Counsel for the cross-claimant relies on several factors as the basis for seeking to join Rimbunan; that Rimbunan and 15 other subsidiary companies had a common insurance cover in respect of logging operations, that the meetings with regard to the negotiations of the logging and marketing agreement took place in the offices of Rimbunan, that the General Manager of cross-defendant is also a Manager of another subsidiary company of Rimbunan, that Rimbunan acted on behalf of cross-defendant in respect of workers compensation for workers employed by the cross-defendant and that Rimbunan paid royalties in respect of operations by the cross-defendant. I am of the opinion that all these factors point to the possibility that Rimbunan may be in control of the cross-defendant. Whether or not this is so is a matter, which will be determined at the trial. For the purposes of the issue before me, I need only determine whether prima facie there could be a cause of action against Rimbunan. I am satisfied that there could be a cause of action against Rimbunan and it is proper to join it as a cross-defendant and I accordingly order that it be joined. The costs of this application be costs in the cause.

Lawyers for the plaintiff/cross-defendant: Blake Dawson Waldron.
Lawyers for the defendant/cross-claimant: Soi & Associates.