Associated Entity: What Doest it Mean in Defamation?

Free Consultation

We encourage you to schedule a 15-minute consultation with our defamation lawyers to discuss your situation and explore potential strategies. Your reputation is a valuable asset; let us assist you in safeguarding it.

Executive Summary

Under section 9 of the Defamation Act 2005 (Qld) (the Act), a corporation has no cause of action in relation to the publication of a defamatory matter about the corporation unless it was an excluded corporation at the time.

Section 9(2) stipulates that a ‘corporation is an excluded corporation if –

(a)  the objects for which is it formed do not include obtaining financial gain for its members or corporators [example – non-for-profit organisations]; or

(b)  it has fewer than 10 employees and is not an associated entity of another corporation;

and the corporation is not a public body.

Within this article, our defamation lawyers will consider and breakdown what is an 'Associated Entity' of another corporation.

What is an ‘Associated Entity’?

Schedule 5 of the Act defines an ‘Associated Entity’ to have the same meaning given in the Corporations Act 2001 (Cth) (Corporations Act), section 50AAA.

Section 50AAA of the Corporations Act provides the following meaning to ‘Associated Entity’:

(1)  ‘One entity (the associate) is an associated entity of another entity (the principal) if subsection (2), (3), (4), (5), (6) or (7) is satisfied.

(2)  This subsection is satisfied if the associate and the principal are related bodies corporate.

(3)  This subsection is satisfied if the principal controls the associate.

(4)  This subsection is satisfied if:

(a)  the associate controls the principal; and

(b)  the operations, resources or affairs of the principal are material to the associate.

(5)  This subsection is satisfied if:

(a)  the associate has a qualifying investment (see subsection (8)) in the principal; and 

(b)  the associate has significant influence over the principal; and

(c)   the interest is material to the associate.

(6)  This subsection is satisfied if:

(a)  the principal has a qualifying investment (see subsection (8)) in the associate; and

(b)  the principal has significant influence over the associate; and

(c)   the interest is material to the principal.

(7)  This subsection is satisfied if:

(a)  an entity (the third entity) controls both the principal and the associate; and 

(b)  the operations, resources or affairs of the principal and the associate are both material to the third entity.

(8)  For the purposes of this section, one entity (the first entity) has a qualifying investment in another entity (the second entity) if the first entity:

(a)  has an asset that is an investment in the second entity; or

(b)  has an asset that is the beneficial interest in an investment in the second entity and has control over that asset.

Therefore, in considering the above:

1.  Section 64A of the Corporations Act defines an ‘Entity’ as:

a. ‘reference to a natural person, a body corporate (other than an exempt public authority), a partnership or a trust;

b. includes, in the case of a trust, a reference to the trustee of the trust. Therefore, the inference is that the trust and trustee are one entity.’

2. For section 50AAA(2) of the Corporations Act to apply, the associate and the principal need to be related body corporates:

a. Section 50 of the Corporations Act defines a ‘related body corporate’ to mean:

‘where a body corporate is:

(a) a holding company of another body corporate; or

(b) a subsidiary of another body corporate; or

(c) a subsidiary of a holding company of another body corporate, the first – mentioned body and the other body are related to each other.’

b. Section 46 of the Corporations Act defines a subsidiary to mean:

‘A body is a subsidiary of another body corporate if, and only if:

(a) the other body-

(i) controls the composition of the first body’s board; or

(ii) is in a position to cast, or control the casting of, more than one – half of maximum number of votes that might be cast at a general meeting of the first body; or

(iii) hold more than one – half of the issued share capital of the first body (excluding any party of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b) the first body is a subsidiary of a subsidiary of the other body.’

c. Section 48 of the Corporations Act sets out the matters to be disregard:

(1)  This section applies for the purposes of determining whether a body corporate (in this section called the first body) is a subsidiary of another body corporate. 

(2)  Any shares held, or power exercisable, by the other body in a fiduciary capacity are treated as not held or exercisable by it.

(3)  Subject to subsections (4) and (5), any shares held, or power exercisable:

(a)  by a person as a nominee for the other body (except where the other body is concerned only in a fiduciary capacity); or

(b)  by, or by a nominee for, a subsidiary of the other body (not being a subsidiary that is concerned only in a fiduciary capacity);

are treated as held or exercisable by the other body.

(4)  Any shares held, or power exercisable, by a person by virtue of the provisions of debentures of the first body, or of a trust deed for securing an issue of such debentures, are to be disregarded.

(5)  Any shares held, or power exercisable, otherwise than as mentioned in subsection (4), by, or by a nominee for, the other body or a subsidiary of it are to be treated as not held or exercisable by the other body if:

(a)  the ordinary business of the other body or that subsidiary, as the case may be, includes lending money; and

(b)  the shares are held, or the power is exercisable, only by way of security given for the purposes of a transaction entered into in the ordinary course of business in connection with lending money, not being a transaction entered into with an associate of the other body, or of that subsidiary, as the case may be.

(6)  Any shares in the first body that are MCIs, and any powers exercisable by a person by virtue of such shares, are to be disregarded.’

3. For section 50AAA(3) of the Corporations Act to apply, the principal needs to be in control of the associate. 

4. For section 50AAA(4) of the Corporations Act to apply, the associate needs to be in control of the associate and the operations, resources or affairs of the principal are material to the associate.

5. For section 50AAA(5) of the Corporations Act to apply, the associate has a qualifying investment (refer to section 50AAA(8) above) in the principal, has significant influence over the principal and the interest is material to the associate.

6. For section 50AAA(6) of the Corporations Act to apply, the principal has a qualifying investment (refer to section 50AAA(8) above) in the associate, has significant influence over the associate and the interest is material to the principal.

If any of the section 50AAA(2) – (6) apply, then the corporation will be considered an ‘Associated Entity’ under section 9(2)(b) and will therefore, not be an excluded corporation under the Defamation Act.

Relevant Case Law

In Jones v Aussie Networks Pty Ltd [2014] QSC 126 (the Jones Case), the Supreme Court undertook an in-depth consideration of section of the Defamation Act and the relevant sections under the Corporations Act (set out above).

The considerations arose following an Application by the Plaintiff, Jones, seeking to add Australian Shareholder Centre Pty Ltd (ASC), being a corporation, as a second Plaintiff to the proceedings and add an individual as a second Defendant. The Defendant (Aussie Networks) opposed the joinder of ASC on the basis that ASC was a corporation and is therefore prohibited under section 9(1) of the Defamation Act.

In considering this issue, the Court stated the following (at [6] – [21]):

[6] An ‘excluded corporation’ is defined in s9(2) as covering two classes of corporations that are not public bodies. The first is where ‘the objects for which it is formed do not include obtaining financial gain for its members or corporators’: s9(2)(a)). The applicant does not suggest that ASC falls within this category. However, the applicant contends that ASC is an ‘excluded corporation’ under s9(2)(b).  This second category allows a corporation to sue if it ‘employs fewer than 10 persons and is not related to another corporation’.

[7] Although the evidence does not yet conclusively prove that ASC does have fewer than 10 employees, some evidence about this by way of affidavit has been provided and, in any event, the respondent does not admit or contest this in relation to satisfying the first requirement of s9(2)(b). 

[8] The central issue is rather whether ASC is, in the words of s9(2)(b), related to another company called Torque Securities Pty Ltd (‘Torque’), which holds all of ASC’s issued share capital of 100 ordinary class shares in its capacity as trustee for the beneficiaries of a trust called the Jinx Trust. 

[9] Section 9(4) of the Defamation Act says that, for the purpose of determining whether corporations are related for the purposes of s 9(2)(b), s 50 of the Corporations Act 2001 (Cth) applies. That section sets out three discrete questions or tests: whether the corporation is a holding company of another body corporate (s 50(a)); or, a subsidiary of another body corporate (s 50(b)); or, a subsidiary of a holding company of another body corporate (s 50(c)).

[10] A ‘holding company’ is defined in s 9 of the Corporations Act as ‘a body corporate of which the first body corporate is a subsidiary’. ASC does not, on the available evidence, hold property for Torque as a subsidiary company to meet this definition under ss 9 and 50(a); indeed, the converse appears to be the case. The applicant has also adduced evidence to show that there is no relationship falling within s 50(c): namely, that ASC is not a subsidiary of a holding company, in terms of s 9, or of another body corporate.

[11] The remaining question is whether ASC is a subsidiary of Torque under s50(b). Section 46 of the Corporations Act provides that a corporation is a subsidiary of another corporation if:

(a) the other body:

(i) controls the composition of the first body’s board; or

(ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b) the first body is a subsidiary of a subsidiary of the other body.

[12] The applicant has produced evidence that s 46(b) is not a matter for concern: there is no evidence that ASC and Torque are in a corporate structure with another company acting as ultimate holding company.

[13] This leaves the applicant with the onus of showing that s 46(a) does not apply. Although the three limbs of s 46(a) are independent, they are all satisfied because Torque holds all of ASC’s share capital – i.e., in excess of the minimum amount of share capital, set at 50%, required under s 46(a)(iii). Further, Torque’s 100% ownership would theoretically allow it to control ASC’s board and the voting at its general meeting (s 46(a)(i)-(ii)). ASC must therefore be seen as a subsidiary of Torque under the Corporations Act, which in turn means that it is a related corporation for the purposes of s 9 of the Defamation Act.

[14] But the applicant says that is not the end of the matter, and points to s 48 of the Corporations Act as containing an important qualification to the definition of related corporations in s 46. Section 48 relevantly provides:

(1) This section applies for the purposes of determining whether a body corporate (in this section called the first body) is a subsidiary of another body corporate.

(2) Any shares held, or power exercisable, by the other body in a fiduciary capacity are treated as not held or exercisable by it.

[15] The applicant submits that this section should apply where the shares are held by the corporation in a ‘fiduciary capacity’ for any party, rather than strictly to the related entity – and that, it says, is the case here. A stricter interpretation, it is argued, would impermissibly read words of limitation into the provision.

[16] Section 48 has not been extensively considered. It was mentioned in Australian Pipeline Ltd [2006] NSWSC 1316 but in circumstances satisfying the stricter view, namely that the entity for which the shares were held on trust was a related entity. However, there is nothing in that decision to suggest that a broader interpretation is not available. Plainly, s 48 expands the circumstances in which a company may avoid qualification, under s 46, as a ‘subsidiary’ of another. The section was construed in that way in Hemmingway v Intico (WA) Pty Ltd [2006] AIRC 603, which also concerned a corporation that held all of the relevant corporation’s share capital on trust for a separate family trust.

[17] On this basis, s 48 should apply to qualify the finding that ASC is a subsidiary of Torque. This in effect requires that Torque’s 100% share ownership and, as the applicant suggests, its power potentially derived from that through voting rights be disregarded because those shares and that power is held in a purely non-beneficial capacity for the Jinx Family Trust. The effect of this is that ASC should not be properly regarded as a subsidiary by virtue of being related to Torque, and therefore falls within the definition of ‘excluded corporation’ in the Defamation Act.

[18] The test under UCPR r 69 is whether it would be ‘desirable, just and convenient’ to add ASC as a plaintiff. For the present purposes of the discretion available under the rule, the evidence adduced for ASC is sufficient to conclude, at this early stage, that the company may have a right of action, may find a path through the provisions discussed above, and should not be kept out as a party.

[19] Aussie Networks, the respondent, has also raised a number of evidentiary and procedural issues which in its view should (despite any finding that ASC may bring a claim under the Act in principle) prevent the company being joined as a plaintiff.

[20] Firstly, the respondent argues that because the evidence as it stands suggests that the trust deed allegedly establishing the Jinx Family Trust was not properly executed, the shares cannot properly be said to be held on trust for the purposes of s 48. The formality that has not been complied with is, it is said, the requirement of a witness to the deed. Ultimately this is an evidentiary matter for the applicant to meet once the proceeding reaches trial, and for the purposes of this application there is a prima facie case based on other evidence that the shares were held in a fiduciary capacity so as to satisfy s 48. This conclusion also applies to the respondent’s linked contention that the other evidence the applicant relies on in relation to the trust deed and its constitution is contradictory.

[21] The respondent also argues that the proposed amended statement of claim does not adequately set out the case for ASC, in addition to Mr Jones, having a cause of action. The proposed amendments on this point are as follows:

2A. At all such times, ASC:

(a) employed fewer than 10 people;

(b) was not related to another corporation within the meaning of that expression as used in s9(2)(b) of the Defamation Act 2005 (Qld);

(c) was not a ‘public body’ within the meaning of that expression as defined by s 9(6) if the said Act;

(d) accordingly was an ‘excluded corporation’ within the meaning of that expression as used in s 9(2) of the Act.

The respondent is right in asserting that this sets out the grounds on which ASC has a cause of action under the Defamation Act, and does not refer to the sections of the Corporations Act relevant in relation to this. However, understanding s 9(2) and (6) in isolation on the basis of the pleading necessarily involves reading the section as a whole, and the relevance of the Corporations Act in determining whether s 9(2) applies is explicitly set out in s 9(4). As such, the preconditions for ASC’s cause of action are succinctly but adequately set out. The applicant also makes the reasonable submission that the respondent is at liberty to seek particulars to expand on this part of the pleadings.’

The Supreme Court were satisfied that ASC was an ‘excluded corporation’ under section 9(2) of the Defamation Act and subsequently granted the application to join the relevant parties to the proceedings.

But what happens if a corporation does not satisfy the requirements under section 9 of the Defamation Act, are they precluded from taking action against a party that has defamed them or damage their reputation? Fortunately, there is an alternative cause of action for corporations.

Alternative causes of actions for Corporations

If it turns out that corporations are excluded under section 9 of the Defamation Act, an alternative cause of action that is available for corporations is the tort of injurious falsehood.

Injurious falsehood shares some similarities with defamation. Both involve a false and damaging statement about a plaintiff that’s been communicated to a third party. However, they differ in their protections: defamation safeguards personal reputation, while injurious falsehood law defends the marketability of a person’s property, products, or business.

Defamation claims typically don’t require proof of damage (albeit that they will still have to satisfy the serious harm threshold); the falsehood is assumed, and liability is strict. On the other hand, for an injurious falsehood claim, a plaintiff must demonstrate actual economic loss, the falsity of the statement, and that it was made with the intent to cause harm without lawful justification. This necessary intent is often referred to as malice. It’s important to understand these distinctions prior to considering any legal proceedings.

Justice Gummow in Palmer Bruyn and Parker Pty Limited v Parsons [2001] HCA 69, set out the required elements for a claim of injurious falsehood to:

1. a false statement of or concerning the plaintiff’s goods or business.

2. publication of that statement by the defendant to a third person.

3. malice on the part of the defendant; and

4. proof by the plaintiff of actual damage (which may include a general loss of business) suffered as a result of the statement.

The primary difference lies in the type of damages you can claim. In defamation proceedings, you could seek general damages for loss of reputation. However, for a claim of injurious falsehood, the plaintiff must demonstrate actual economic loss. If the plaintiff is unable to do so, then their claim will be dismissed with an adverse costs order made against them.

This was considered following the Trial in the Jones Case (Jones & Anor v Aussie Networks Pty Ltd & Anor [2018] QSC 219), as Jones and ASC (Plaintiffs) had pleaded their claim on an alternative basis, namely:

1. In the first instance, a defamation claim was pleaded; and

2. In the alternative, a claim for injurious falsehood.

The Supreme Court in this case however found that:

1. The Defendants were able to establish a defence of honest opinion under the Defamation Act, thereby defeating the defamation claim by the Plaintiffs;

2. The Plaintiffs failed to establish malice on the part of the Defendant;

3. The Plaintiffs failed to establish that the publications were the cause of any damages suffered (or economic loss);

4. The Plaintiffs failed to provide sufficient evidence to demonstrate the damages suffered from the publications; and

5. For the above reasons, the Plaintiffs were unable to maintain their claim for injurious falsehood as they had not satisfied the required elements.

As a result, the Supreme Court dismissed the Plaintiff’s claim (defamation and injurious falsehood) with an order that they pay the Defendants costs of the proceedings.

This case provides critical guidance for claims in defamation and injurious falsehood and in particular, the elements that are required to be satisfied to be successful in your claim.

Conclusion

In conclusion, if a corporation is considering defamation proceedings, then it is imperative (prior to issuing a concerns notice or commencing proceedings) to consider section 9 of the Defamation Act and obtain advice on whether the corporation is an ‘Excluded Corporation’ or whether an alternative cause of action is required.

At Odyssey Legal, our defamation lawyers understand and can navigate the complexities of defamation law to protect your interests and reputation.

We invite you to schedule a free 15-minute consultation to speak with our expert defamation lawyers today to discuss your matter and explore strategies to progress the matter forward.