The Crown appeals from judgment No.38 in this lengthy and complex litigation. In that judgment Smellie J, who has dealt with the proceedings throughout, refused the Crown’s application for leave to amend paragraph 25 of its statement of defence, and granted the plaintiff’s application to strike out that paragraph.
The background to the proceedings and to these particular applications is set out in some detail in the judgment of Smellie J, now reported  NZCLC 260,875. A brief summary will suffice for the purpose of this judgment.
On 19 October 1987 the Crown entered into two contracts. By the first it sold its 90% shareholding in NZ Steel ("NZS") to Equiticorp Holdings Ltd ("EHL"). The consideration for the sale was to be the issue of EHL shares of comparable value. The value of both parcels of shares was treated as $327 million. The parcel of EHL shares which passed to the Crown became known as the NZS/EHL parcel. The second contract was with Buttle Wilson Ltd ("BWL"). That company committed itself to either buy or find a purchaser from the Crown of the "NZS/EHL parcel" on 20 March 1988 at a price of $327m.
Also on 19 October 1987 BWL entered into a deed with EHL and two other companies associated with Allan Robert Hawkins, Chairman of EHL. The two Hawkins companies covenanted to find buyers from BWL of the NZS/EHL parcel, or if unable to do so, to buy that parcel between them. EHL covenanted with BWL that it would procure other members of the EHL group to provide the two Hawkins’ companies with the funds necessary to enable them to purchase the NZS/EHL parcel of EHL shares if they were unable to find another buyer. This deed has been referred to as "the takeout deed", and was clearly in breach of section 62 of the Companies Act 1955. The Crown has denied any knowledge of its existence prior to its disclosure on discovery in this proceeding.
The sharemarket crash occurred the following day, 20 October 1987. The EHL shares fell sharply. EHL sought to delay settlement from December 1987 until January 1988, and this was agreed subject to the provision of a guarantee of BWL’s obligations under the second agreement, supported by a mortgage given by EHL over the NZS shares. Settlement took place on 20 January 1988. EHL nominated Equiticorp International Ltd ("E Int") to become the holder of the NZS shares. E Int had been set up as a joint venture by EHL (80%) and Fisher & Paykel Ltd ("F & P") (20%) to hold the NZS shares.
The second contract was due for settlement on 20 March 1988. Just prior to that date, BWL nominated Ararimu Investments Four Ltd ("AI4") to be the purchaser of the NZS/EHL parcel. AI4 is another company associated with Hawkins. It is not part of the Equiticorp Group. The purchase price of $327m was paid by assigning to the Crown some 14 deposits in various banks. By the time settlement took place, the NZS/EHL parcel was worth only some $90m on the market, that is between a quarter and a third of the purchase price.
On 30 June 1988 EHL sold the NZS shares to Feltrax International Ltd ("FIL"), accepting FIL shares in exchange. On 4 October 1988 the FIL shares were sold to a third party, subject to EHL buying back the NZS shares for $200m. In January 1989 both the Equiticorp Group and AI4 were in serious trouble and were placed in statutory receivership, and in April both were placed under statutory management. On 31 August 1989 the statutory managers sold the NZS shares to Helenus Corporation for $225m. After deduction of liabilities and of a fee, this sale yielded approximately $195m.
In November 1989 the statutory managers commenced the present proceedings against the Crown and numerous other defendants. By September 1994 the claims against all defendants other than the Crown had been settled. The trial of the claim against the Crown commenced on 21 November 1994, and is now almost completed. Central to the claims against the Crown is the allegation that the buy back of the NZS/EHL parcel from the Crown by the Hawkins company AI4 was largely funded by companies within the Equiticorp Group. It was accordingly in breach of section 62 of the Companies Act 1955. It is alleged that the Crown had knowledge of this fact at the time. The statutory managers accordingly claim to recover the sum of $327m thus wrongfully paid to and received by the Crown.
Initially, the Crown’s statement of defence merely put the plaintiffs to proof in respect of the damages claimed. On 10 November 1994 an amended statement of defence was filed to the fourth amended statement of claim. It raised for the first time some of the elements of a defence which came to be referred to as "the Helenus defence". The nub of that defence is that if the plaintiffs establish that the Crown was a knowing recipient of Equiticorp funds when AI4 purchased the NZS/EHL parcel, then the quantum of the plaintiffs’ recovery should be reduced by the advantages arising from the holding of the NZS shares, and in particular their subsequent sale for $225m to Helenus.
The plaintiff sought further particulars of this defence. In judgment No.24, delivered on 18 November 1994, Smellie J ruled that an affirmative defence had been raised, and further particulars were required. On 3 August 1995, in judgment No.26, Smellie J recorded an agreed compromise by which the Crown was to apply for leave to amend its pleading so as to plead its affirmative defences, with all necessary particulars. The plaintiffs were given leave to combine any opposition to the Crown’s application with "an application effectively to strike out the proposed new pleading on the ground that no cause of action was disclosed". The Crown duly applied to amend its pleading by substituting a new paragraph 25 for that in its existing statement of defence, and the plaintiffs moved to strike out paragraph 25 as disclosing no reasonable ground of defence.
These applications came before Smellie J in August 1995, and were argued over a period of six days. In judgment No.38 he refused the Crown leave to amend, and allowed the plaintiffs’ motion to strike out paragraph 25 to the extent necessary to exclude the Helenus defence. The appeal is from that judgment.
THE ISSUES IN THE HIGH COURT
The questions of prejudice and delay were canvassed by counsel at some length before Smellie J. He accepted that there was substance in both points of view. Because of the size and length of the case, and the vital significance of the Helenus defence to the quantification of any recovery by the plaintiffs, he considered that if the defence was arguable then leave to amend should be given. The undoubted prejudice to the plaintiffs could be met by appropriate terms. These issues were not raised in this Court, the only issue being whether the proposed amendments disclose an arguable defence.
The Crown contended that the Helenus defence was an arguable defence. It relied on three main arguments. The first was that the two contracts of 19 October 1987, although separate stand alone contracts, were elements of one transaction in that the Crown would not have entered into one without the other. The second argument was based on the maxim "he who seeks equity must do equity". Thirdly, it was contended that the circumstances required the Court to adopt an implied agency, trusteeship or partnership approach. As an alternative to this, it was said the Court should be prepared to "lift the corporate veil", as otherwise the equitable remedy flowing from the single transaction approach would be denied. A fourth argument, adopted as the result of a suggestion from the Judge, was that the mortgage over the NZS shares, which was discharged on settlement on 20 March 1988, could be taken into account in a netting off exercise between restitution of the purchase price of $327m and the proceeds of $225m from the sale of the NZS shares.
Each of these was discussed in turn by Smellie J, and each was rejected. In this Court the argument was differently structured, although covering largely the same ground.
THE PRINCIPLES APPLICABLE TO STRIKING OUT
The principles applicable to the Court’s jurisdiction to strike out a pleading as disclosing no cause of action are well settled. They were restated by this Court in R Lucas & Son (Nelson Mail) Ltd v J B O’Brien  2 NZLR 289 and repeated in Takaro Properties v Rowling  2 NZLR 314. The latter case was referred to by Smellie J in his judgment. More recently the principles were summarised by this Court in South Pacific Manufacturing Co Ltd v NZ Security Consultants & Investigations Ltd  2 NZLR 282. The discretion is one to be sparingly exercised. Striking out is justified only if, on the material before the Court and in the present state of evolution of the common law, the case as pleaded is so clearly untenable that the plaintiff cannot possibly succeed. If disputed questions of fact arise, the case must go to trial. If the claim depends on a question of law capable of decision on the material before the Court, the Court should determine the question even though extensive argument may be necessary to resolve it. As was noted by this Court in CED Distributors(1988) Ltd v Computer Logic (1991) 4 PRNZ 35 at 41 and reaffirmed in Electricity Corporation Ltd v Geotherm Energy Ltd  2 NZLR 641 at 646 and in Miller v CIR (1995) 17 NZTC 12,341 at 12,344-5, there will be occasions where brief affidavit evidence may assist as to background or as to matters not in dispute.
Mr. Williams for the appellant submitted that the Judge had departed from these principles, in that he had made and relied upon findings as to disputed facts. He pointed to a number of examples, of which possibly the most notable is the Judge’s finding (at 260,885):
For all those reasons, my conclusion is that on the balance of probabilities, had the BWL underwrite not been available, the Crown still would have proceeded.
It must be remembered, however, that the Judge was dealing with two applications, both made pursuant to his judgment No.24 delivered shortly before the commencement of trial. One was the application by the Crown to amend its pleadings in the manner proposed. The other was the plaintiffs’ motion to strike out. They were heard together at a stage when the trial had been continuing for the greater part of the year. Judgment No.24 had given leave to the plaintiffs, if they chose, to combine with any opposition to the Crown’s application for leave to amend, "an application effectively to strike out the proposed new pleading on the ground that no cause of action [sic] was disclosed". What was intended by this is not clear. If leave to amend were refused, there would be no new pleading to strike out, and it is unlikely leave would be granted to amend a defence in a manner which did not raise an arguable defence. The plaintiffs’ motion to strike out is equivocal. It seeks to strike out "paragraph 25", which seems to refer to the existing paragraph 25, not the proposed new paragraph 25.
In considering whether leave should be granted to the Crown to amend its defence, Smellie J was clearly entitled to have regard to the position as it existed at that stage of the trial. He was entitled to refer, as he did, to "the broad background as now conceded or established by the evidence". In the section of his judgment dealing with "the prejudice / delay aspect of the application for leave to amend", he was entitled to refer to the passages in the evidence which he was taken through by Crown counsel. He was entitled to use them as he did to find that standing alone, without further qualification, they established "a sound platform" for a particular Crown submission. In Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383, cited by the Judge, this Court recognised that the Judge was entitled to have regard to the evidence already heard at the trial when assessing the risks involved in granting a late amendment.
Smellie J then turned to what he described as "the major issue: viz whether the Helenus defence is arguable". He referred to "the major planks" in the Crown’s contention. The question whether the Helenus defence was arguable or not was relevant both to the Crown’s application to amend, and to the plaintiffs’ motion to strike out. He dealt with them together, and summed up under the heading "Conclusion" as follows:
I have now dealt with all the arguments advanced to persuade me that the Helenus defence is arguable, and that therefore the amendments sought should be granted, albeit on terms, and the plaintiffs’ application to strike out dismissed.
It will be apparent, however, that on each of the four aspects of the argument I have reached the clear view that the Crown cannot succeed. Taken collectively I am satisfied that this defence is unarguable, and indeed hopeless and that the Crown should not be permitted to run it.
Specifically, that means that the application for leave to amend is refused.
On the strike out application the plaintiffs succeed.
It is clear from the judgment that the primary focus of argument was on the Crown’s application for leave to amend. To the very limited extent that the Judge had regard to the evidence, he was entitled to do so in considering whether there should be leave to amend. In so far as the striking out motion was directed to the existing pleading, he was restricted to considering whether there was an arguable case on the pleadings, having regard to any undisputed facts and documents. Smellie J had correctly stated this principle in the opening portion of his judgment.
Mr. Galbraith, for the plaintiffs, did not argue otherwise. He accepted that the Judge was not entitled to rely on evidence and factual findings to justify striking out, but he did not accept that the Judge had done so. He further submitted that even if the Judge had erred in relying on evidence in respect of the striking out motion, the pleading in question should in any event be struck out as being incapable in law of founding any arguable defence.
We turn therefore to the legal issues argued in this Court, and put to one side the Judge’s views on any questions of fact. The legal issues were argued by the Crown under three headings,
general principles relating to equitable remedies,
the "single transaction" analysis and
corporate identity issues.
Mr. Williams submitted that Smellie J had been wrong to reject the Crown’s argument based on the maxim "He who seeks equity must do equity". He submitted that the Judge was also wrong not to accept that there is, or as a matter of policy should be, a general counter-restitutionary principle applicable whenever an equitable remedy is granted. That principle, he submitted, required a successful party to disgorge or to account for any benefits received from the defendant in respect of the same related series of commercial transactions.
The plaintiffs are AI4, which purchased the NZS/EHL parcel of EHS shares, and EHL and certain of its subsidiaries, which funded the purchase by AI4. The plaintiffs claim that the payment of those moneys to the Crown was unauthorised, in breach of duty, illegal, dishonest and fraudulent. A number of grounds are alleged, of which breach of section 62 of the Companies Act is one. The claim is to recover the moneys paid, or to receive equitable compensation for its loss. The causes of action were summarised by the Judge, who categorised the remedies claimed as being equitable compensation in one case, and restitution in all the others. Mr. Williams criticised this classification, but we agree with Mr. Galbraith that the precise classification is immaterial. It is sufficient for Mr. Williams’ argument that the remedies claimed are not solely restitutionary, and this is not disputed. Mr. Galbraith’s submission was that even where equitable compensation is claimed, the Crown cannot claim credit for the benefits received by the plaintiffs from their acquisition of the NZS shares. The payments in question are those made by the plaintiffs for the NZS/EHL parcel of EHL shares, which are now worthless. The Crown, said Mr. Galbraith, is effectively asking the plaintiffs to pay at least part of the price for that acquisition, but the Crown cannot claim in equity what the Companies Act says it cannot have.
Mr. Williams placed particular reliance on the recent joint judgment to the High Court of Australia in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 130 ALR 570. He described the case as having striking similarities to the present case. In that case a company of which the appellant was a director renegotiated credit terms with a supplier. The appellant signed a general guarantee of the company’s indebtedness to the supplier. He claimed that the guarantee had been misrepresented to him by the supplier as referring only to future indebtedness. He sought rescission in equity. The Court held that the appellant had obtained that which he had sought by the guarantee, namely the benefit of further supplies on credit. To grant rescission would not restore the status quo. In such a situation equity would adapt the remedy to achieve "what is practically just for both parties". The Court referred to the maxim "he who seeks equity must do equity". It affirmed the order in the Courts below for rescission of the guarantee only in so far as it related to the company’s prior indebtedness.
The High Court relied on the flexibility of the remedies available to a Court of Equity, which can use its powers to do "what is practically just" when granting the equitable remedy of rescission in circumstances where the parties cannot be restored precisely to their position before the contract: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 per Lord Blackburn at 1278-9. Vadasz involved a single contract, signed on the basis of a misrepresentation as to its scope. By granting rescission in part, the Court left in force a contract of the kind represented, to which the appellant had intended to commit himself and for which he had received the promised consideration. Here the Crown seeks to reduce its liability to refund payments claimed to have been dishonestly and illegally made to it, to its knowledge, by offsetting benefits obtained under an earlier and separate contract.
Mr. Williams submitted that all he had to show was whether it was an arguable proposition that the general principle applied here, and that an arguable proposition of law was sufficient to defeat an application to strike out. We reject that proposition. No authority was cited for it, and the contrary has been stated by this Court in R v Lucas & Son (Nelson Mail) Ltd v J B O’Brien  2 NZLR 289 and in the subsequent cases earlier cited. If a pleading relies on a legal principle which is found, after argument, to be inapplicable in the circumstances pleaded, then the pleading should be struck out.
We see no basis in Vadasz for applying the "clean hands" principle in the present case, nor the other maxim invoked that equity looks to the intent rather than the form. Mr. Williams relied on a passage in the evidence as showing the illegal and dishonest nature of the funding of AI4 by EHL and its subsidiaries. That is the very basis of the plaintiffs’ claim. The plaintiffs, now under the control of statutory managers, seek to recover for the benefit of their creditors and shareholders moneys which were dishonestly and illegally paid to the Crown, on the basis that the Crown received those moneys with knowledge of the impropriety. The dishonesty of the directors who make such a payment has never been regarded in equity as providing a defence to a recipient who has knowledge of the dishonesty. The true substance of the Crown’s contention was in our view aptly described by Mr. Galbraith as being:
that the Crown, which, when faced with a substantial loss on its shareholding in EHL, knowingly and illegally benefited from a transaction in which it was bought out of its shareholding from the assets of the Equiticorp Group, should now be preferred to all other creditors and shareholders of the separate companies involved in these transactions.
Mr. Williams also relied on the recent decision of the House of Lords in Target Holdings Ltd v Redfern (1995) 3 WLR 352. In that case solicitors received loan moneys from a finance company on trust to pay them to the borrower once the borrower had purchased and given security over a particular property. The solicitors in breach of trust paid over the money before settlement. About a month later they obtained the completed security in favour of the finance company. The House of Lords held that the finance company had an accrued cause of action when the moneys were wrongfully paid out, but the quantum of compensation was to be fixed at the date of judgment. It was the amount necessary to put the beneficiary in the position he would have been in but for the breach of trust. If the facts were as assumed, the finance company had obtained precisely what it would have acquired if there had been no breach. It had accordingly suffered no compensatable loss. Its loss on realisation of the security resulted from the fall in the property market since the valuation on which it had relied. The solicitors were held entitled to defend the claim on this basis.
The case appeared to be relied upon by Mr. Williams for the proposition that equitable compensation is designed to put the plaintiff in the position he would have been in but for the wrong complained of, and therefore the Crown should not be required to pay more than the plaintiffs’ loss. That proposition hardly needs authority. But just as in Target the loss due to the fall in value of the property could not be recovered, so in this case the plaintiffs say they do not have to give credit for the benefit obtained by them under the earlier contract by which they exchanged the EHL shares to receive NZS shares.
Mr. Galbraith was in our view correct in his analysis of the contracts. By the first contract, the Crown parted with its NZS shares, and with all the risks inherent in holding 90% of the shares in that company, including the likelihood of a requirement for further capital. Those risks were passed to EHL as purchaser. In exchange, the Crown chose to take a parcel of EHL shares, and to accept exposure to the risks inherent in that investment. EHL having purchased the NZS shares with the risks attached to them, the Crown has no claim to the proceeds from EHL’s later sale of those shares. A similar argument was addressed on behalf of the plaintiffs to Smellie J, who said he found it compelling. We find it equally so.
A number of other arguments were included in the appellant’s written submissions, dealing with equitable restitution, unjust enrichment and equitable compensation. These were dealt with very fully by Smellie J at  NZCLC 260,889 foot to 260,892. He emphasised that recent developments in the law of equity have imported established common law principles, and have not meant a return to the "Chancellor’s foot" approach. As Gummow J said at the end of his contribution to Finn’s Essays on Restitution (1990) at 86 one must identify what is meant by "unjust enrichment" and "restitution", and not allow them to become "mere expressions to rationalise exercises in judicial idiosyncrasy". Smellie J referred to various authorities for the view that equitable jurisdiction is exercised on the basis of well known principles: Campbell Discount Co Ltd v Bridge  1 QB 445 per Holroyd Pearce LJ at 458 and per Harman LJ at 458-9; Bridge v Campbell Discount Co  AC 600 per Lord Radcliffe at 626; Carly v Farrelly  1 NZLR 356 per Mahon J at 367; Armstrong v Jackson  2 KB 822 per McCardie J at 828-9; Kleinwort Benson v South Tyneside Metropolitan Borough Council  4 All ER 972 per Hobhouse J at 984 and Lipkin Gorman v Karpnale Ltd  2 AC 548 per Lord Goff at 578. We respectfully agree with Smellie J. It is not enough for a party to cry "equity" and expect to be compensated. One must identify the relevant principle of equity on which a claim can be properly founded.
THE "SINGLE TRANSACTION" ARGUMENT
The argument for the Crown was that the two contracts entered into by the Crown on 19 October 1987, namely the contract to sell the NZS shares and the contract with BWL for disposal of the NZS/EHL parcel, should be regarded as separate elements of one transaction. The Crown did not contend that the take-out deed made on the same date between BWL and EHL and the two Hawkins companies should be similarly treated as part of the same transaction. The argument was limited to the two contracts in which the Crown was a party. Smellie J went to some trouble to clarify this part of the Crown’s argument, and his judgment (at 260,884) quotes from the record the restatement of it by Mr. Mathieson, who appeared as senior counsel for the Crown. The following passage contains the thrust of the argument:
But what the Crown is saying is that there is one transaction and the argument for it .... is that the proof of the two separate contracts, stand alone contracts, are the elements of one transaction comes from the fact that the evidence shows that the Crown wouldn’t have entered into one without the other and BWL wouldn’t have entered into one without the other .... It is that factual inter-relationship between the separate contracts which means they are to be looked at as one transaction in the same way.
Counsel then relied on the evidence, as did the Judge in dealing with the argument. Smellie J concluded that had the BWL underwrite not been available, the Crown would still have proceeded.
Even if one were to accept the proposition that the two contracts were inter-related in the sense that one would not have been entered into without the other, this would not enable them to be regarded as a single transaction. The position is quite different where two documents, neither of which would be entered into without the other, are made between the same parties at the same time. In such a case the true intention of the parties must be ascertained from construction of the documents to ascertain whether there is one contract or two. If the documents show that separate contracts were intended, they will take effect accordingly. Here the parties are different, and the Crown accepts that they are separate contracts. It says they are inter-related, and are part of one transaction. That may be true, if one uses the word transaction in its wider sense, but it does not enable the Court to ignore their separate nature.
The essence of the argument is that a Court of Equity will ignore such matters in order to do justice. A Court of Equity will certainly look at the true nature of a transaction, and will not be deterred by a sham. There is no principle of equity, however, that empowers the Court to ignore the true nature of a transaction and substitute some other concept. The appeal to "justice" as a reason for such an approach is to a justice which is in the eye of the beholder, is unstructured and unprincipled, and is unreliable. The true principle is that stated by Richardson J in NZI Bank Ltd v Euro-National Corporation Ltd  3 NZLR 528 at 539:
The legal principles are well settled. First the true nature of a transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out. It is not to be determined by an assessment of the broad substance of the transaction measured by the overall economic consequences to the participants. The forms adopted cannot be dismissed as mere machinery for effecting other purposes. At common law there is no half-way house between sham and characterisation of the transaction according to the true nature of the legal arrangements actually entered into and carried out. A document may be brushed aside if and to the extent that it is a sham in two situations. The first is where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition is given to their common intentions. The second is where the document was bona fide in inception but the parties have departed from their initial agreement while leaving the original documentation to stand unaltered. Once it is established that a transaction is not a sham its legal effect will be respected.
That statement is supported inter alia by the judgment of the Privy Council in Chow Yoong Hong v Choong Fah Rubber Manufactory  AC 209, 216-7 and by the more recent cases in this Court to which Richardson J referred. Mr. Williams referred to the "commercial and practical reality of the case" when "stripped of its technical details". We do not think one can arrive at either commercial reality or practical reality without a proper examination of the actual contracts made by the parties. Once these are accepted as genuine, they cannot be disregarded.
A similar appeal in a revenue case to ignore the legal position and regard what was called "the substance of the matter" was firmly rejected by Lord Tomlin in Inland Revenue Commissioners v Duke of Westminster  AC 1, 19. The supposed doctrine, he said, was based on misunderstanding, and the sooner it was dispelled the better it would be for all concerned. In Commissioner of Inland Revenue v Europa Oil (NZ) Ltd  NZLR 641 the Privy Council similarly rejected an appeal to "substance", and emphasised the importance of the actual contractual arrangements made: see per Lord Wilberforce delivering the judgment of the majority at 648 and 649, and per Lord Donovan and Viscount Dilhorne in their dissenting judgment at 654.
In any event, the treating of the two separate contracts of 19 October 1987 as one transaction would not overcome the Crown’s problem. The subsequent sale of the NZS/EHL parcel to AI4 was not until March 1988. It was a separate contract involving another party. It is that purchase which was funded illegally and gives rise to the present proceeding. If the Crown is found to have entered into that sale with knowledge of the illegality, it cannot claim credit for the value of the NZS shares which it sold some months earlier.
CORPORATE IDENTITY ISSUES
The third branch of the Crown’s argument was that Smellie J was wrong to hold there was no arguable defence based on treating the particular company which acquired the NZS shares as the implied agent, trustee or partner of other members of the Equiticorp Group who are the present plaintiffs. This argument was advanced in the High Court in association with the request that the Court should "lift the corporate veil" so as not to be prevented from doing justice. In support of this, Mr. Williams referred to the evidence as showing that Mr. Hawkins as chairman and chief executive virtually decided which company in the group should be used for a particular acquisition or transaction. That may be so, but it is not suggested that he acted without prior or subsequent authorisation from the relevant board, or that the transaction was not properly documented in the accounts of the company, with any funding within the group being similarly authorised and recorded.
It is not unusual in a group of companies for acquisitions to be approved by the board on the basis that it is left to the chief executive to decide which wholly owned subsidiary is the appropriate repository. That decision will be made within the framework of any general policy. It does not of itself involve the subsidiary becoming an agent or trustee for the holding company, nor for any other member of the group. Nor does it provide any basis for implying a partnership. The normal intention will be for the particular company designed to acquire and become the owner of the asset in its own right, and for any intercompany funding to be properly recorded and documented.
The mere fact of acquisition by a subsidiary and the fact that the choice of which subsidiary is left to the chief executive, cannot on its own be sufficient to prevent the documents taking effect according to their tenor. If they do not suggest any intention to acquire as agent, or to establish a trust or partnership, then additional facts would be necessary before such an intention could be inferred. To seek to draw such an inference from the mere fact that companies are part of a group with decisions made by the same chief executive or the same directors, is to ignore the separate legal personality of each incorporated company, and the principles established in Salomon v Salomon  AC 1. The particulars proposed to be pleaded are quite inadequate, even, if proved, to support a conclusion that any relationship of agency, trust or partnership was created.
Counsel relied on the passage in the judgment of Lord Denning MR. in Wallersteiner v Moir  3 All ER 217 at 237-238, in which he found that certain companies, while distinct legal entities, were the agents of the plaintiff. Lord Denning said:
There was no evidence before us of Liechtenstein law. I will assume, too, that they were distinct legal entities, similar to an English limited company. Even so, I am quite clear that they were just the puppets of Dr Wallersteiner. He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures - for whose doings he should be, and is, responsible.
These were essentially findings of fact made on affidavit evidence in an interlocutory proceeding. Buckley LJ expressly disassociated himself from them at 241, and Scarman LJ avoided making similar findings: see at 253, 254. If Lord Denning’s statement implies that where an individual has complete control of a company it is his agent, then it is in direct conflict with what was said by Lord Herschell in Salomon v Salomon  AC 1 at 42-43:
As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him. In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs. Here, it is true, Salomon owned all the shares except six, so that if the business were profitable he would be entitled, substantially, to the whole of the profits. The other shareholders, too, are said to have been "dummies," the nominees of Salomon. But when once it is conceded that they were individual members of the company distinct from Salomon, and sufficiently so to bring into existence in conjunction with him a validly constituted corporation, I am unable to see how the facts to which I have just referred can affect the legal position of the company, or give it rights as against its members which it would not otherwise possess.
In Lee v Lee’s Air Farming Ltd  NZLR 325 the Privy Council acknowledged that the position may be an artificial one, but said it was one which the House of Lords had so clearly upheld in Salomon and reaffirmed in EBM Co Ltd v Dominion Bank  3 All ER 555, 563 that it should be maintained. In Trevor Ivory Ltd v Anderson  2 NZLR 517 this Court held that the principal of a one-person company carrying on business as a consultant was not liable for the negligent performance of its consulting services in the absence of an assumption of personal liability. In the present case the Crown has pleaded that the EHL directors, and in particular Hawkins, had effective control of the group and transferred funds between companies to meet their liquidity requirements. That is commonplace in a group situation, but it does not create the relationship of principal and agent.
Smellie J referred also to Maclaine Watson v Department of Trade  3 All ER 257 (CA);  3 All ER 523 (HL), and to the judgment of Kerr LJ in the Court of Appeal at 310. Referring to Salomon, Kerr LJ said:
The crucial point on which the House of Lords overruled the Court of Appeal (see  2 Ch 323) in that landmark case was precisely the rejection of the doctrine that agency between a corporation and its members in relation to the corporation’s contracts can be inferred from the control exercisable by the members over the corporation or from the fact that the sole objective of the corporation’s contracts was to benefit the members. That rejection of the doctrine of agency to impugn the non-liability of the members for the acts of the corporation is the foundation of our modern company law.
An alternative argument was put forward on the basis of the attribution principle applied in the recent decision of the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission  3 NZLR 7. That case was concerned with the attribution to a company of the knowledge of its employees. Two of Meridian’s employees had caused it to acquire a substantial stake in a listed company. By section 20 of the Securities Act 1978, Meridian was required to notify the Stock Exchange and the company as soon as it knew, or ought to have known, of the acquisition. The Privy Council held that in the particular circumstances the knowledge of the two employees was to be attributed to the company.
It is not easy to see how this principle has any relevance to the present case. It was suggested that the Court should in the present case "fashion a special rule of attribution" to apply the rules relevant to equitable claims for restitution or compensation as between individuals. We could then ignore the different companies involved and treat the two contracts as "a single economic transaction". The Meridian case provides no justification for that. The attribution of knowledge to a company does not remove its separate identity. To describe separate contracts as "a single economic transaction" is no more than a description. As Goff LJ said in Bank of Tokyo Ltd v Karoon (Note)  AC 45 at 64:
(Counsel) suggested beguilingly that it would be technical for us to distinguish between parent and subsidiary company in this context: economically, he said, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.
Finally, counsel invoked what was said to be "the corporate veil principle". The phrase "to lift the corporate veil" is a description of the process by which in certain situations the Courts can look behind the corporate facade and identify the real nature of a transaction and the reality of the relationships created. It is not a principle. It describes the process, but provides no guidance as to when it can be used. If the apparent transactions are a sham, the Court must look behind them to ascertain the true position. The contracts in the present case were accepted as genuine separate contracts between different parties, and the acquisition by AI4 of the NZS/EHL parcel was under a third and subsequent separate contract again involving different parties. Mr. Williams disclaimed any desire to "collapse separate commercial contracts and risks, and collapse a number of companies with different creditors and shareholders into one hotchpotch", as Mr. Galbraith put it. If one has regard for the separate identity of the companies involved, and the separate nature of the contracts, there is no way in which the value of the NZS shares acquired by EHL can be set off against the subsequent loss by AI4, and by the companies which funded it, in using the moneys of EHL subsidiaries to purchase the NZS/EHL parcel.
In the result, we reject all the arguments put forward on behalf of the Crown, and dismiss the appeal. The respondents are entitled to costs, which are allowed in the sum of $10,000 together with disbursements, including the reasonable costs of travel and accommodation of two counsel, as approved by the Registrar.
Bank of Tokyo Ltd v Karoon (Note)  AC 45; CED Distributors(1988) Ltd v Computer Logic (1991) 4 PRNZ 35; Commissioner of Inland Revenue v Europa Oil (NZ) Ltd  NZLR 641; Chow Yoong Hong v Choong Fah Rubber Manufactory  AC 209; Electricity Corporation Ltd v Geotherm Energy Ltd  2 NZLR 641; EBM Co Ltd v Dominion Bank  3 All ER 555; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218; Inland Revenue Commissioners v Duke of Westminster  AC 1; Lee v Lee’s Air Farming Ltd  NZLR 325; Maclaine Watson v Department of Trade  3 All ER 257 (CA);  3 All ER 523 (HL); Meridian Global Funds Management Asia Ltd v Securities Commission  3 NZLR 7; Miller v CIR (1995) 17 NZTC 12; NZI Bank Ltd v Euro-National Corporation Ltd  3 NZLR 528; R Lucas & Son (Nelson Mail) Ltd v J B O’Brien  2 NZLR 289; Salomon v Salomon  AC 1; South Pacific Manufacturing Co Ltd v NZ Security Consultants & Investigations Ltd  2 NZLR 282; Takaro Properties v Rowling  2 NZLR 314; Target Holdings Ltd v Redfern (1995) 3 WLR 352; Trevor Ivory Ltd v Anderson  2 NZLR 517; Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 130 ALR 570; Wallersteiner v Moir  3 All ER 217
Authors and other references
Finn’s Essays on Restitution (1990)
A R Williams QC and K L Clark for Appellant (instructed by Crown Law Office,
A R Galbraith QC, H D Winklemann and A I C Denton for Respondents (instructed by Hesketh Henry, Auckland)
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