Adrenalin International Powersports Pty Ltd v John Caines Management Pty Ltd - [2004] FCA 206

FEDERAL COURT OF AUSTRALIA
Adrenalin International Powersports Pty Ltd v John Caines Management Pty Ltd [2004] FCA 206
TRADE PRACTICES – request for order restraining party from making misleading representations concerning ownership of land
CORPORATIONS – director’s duties – breach of statutory duties - whether directors and officers conspired to defraud shareholders – whether terms of an agreement between board of management members were breached - whether director made misleading representations to members of the board of management – whether directors acted contrary to the interests of shareholders - whether shareholders have been oppressed and unfairly prejudiced
EQUITY – fiduciary duties – whether directors failed to act honestly – existence of a conflict of interest - whether directors diverted a financial benefit away from the company – whether directors used their position to obtain an advantage to the detriment of the company - whether directors failed to act in best interests of the company – whether directors failed to perform their duties – whether directors failed to exercise an option on behalf of the company – whether directors misused property belonging to the company
TRUSTS – constructive trust – whether company held land on trust for another company - whether agreement between board of management members created constructive trust – whether officers of the company breached trust
Trade Practices Act 1974 (Cth)
Corporations Act 2001 (Cth), ss 180, 181, 182, 183, 184, 191, 193, 194, 232, 233, 236, 237, 246G, 247A and 1318
Barnes v Addy (1874) LR 9 Ch App 244, referred to
Chan v Zacharia (1984) 154 CLR 178, referred to
Boardman v Phipps [1967] 2 AC 47, referred to
Woolworths Ltd v Kelly (1991) 22 NSWLR 189, referred to
Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1, referred to
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, referred to
Furs Limited v Tomkies (1936) 54 CLR 583, referred to
Queensland Mines Ltd v Hudson (1978) 18 ALR 1, applied
Warman International Ltd v Dwyer (1995) 182 CLR 544, referred to
Dynasty Pty Ltd v Coombs (1995) 13 ACLC 1290, referred to
Wayde v New South Wales Rugby League Ltd (1985) 61 ALR 225, referred to
ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD v JOHN CAINES MANAGEMENT PTY LTD & ORS
V190 OF 2003
MARSHALL J
10 MARCH 2004
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V190 OF 2003

BETWEEN:

ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD (ACN 089 178 594)
APPLICANT

AND:

JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666)
FIRST RESPONDENT

PENELOPE ROSEWARNE
SECOND RESPONDENT

LIAM ROSSNEY
THIRD RESPONDENT

PETER BENSON
FOURTH RESPONDENT

JIM KNIGHT
FIFTH RESPONDENT

AND:

JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666)
FIRST CROSS-CLAIMANT

PENELOPE ROSEWARNE
SECOND CROSS-CLAIMANT

LIAM ROSSNEY
THIRD CROSS-CLAIMANT

PETER BENSON
FOURTH CROSS-CLAIMANT

JIM KNIGHT
FIRST CROSS-CLAIMANT

ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD
SIXTH CROSS-CLAIMANT

AND:

DAVID ANTHONY ARNOLD
FIRST CROSS-RESPONDENT

RAYMOND JOHN SOLOMON
SECOND CROSS-RESPONDENT

BRUCE VIVIAN THOMAS
THIRD CROSS-RESPONDENT

JUDGE:

MARSHALL J

DATE OF ORDER:

10 MARCH 2004

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:
1.   On or before 31 March 2004 the parties send in minutes of orders to give effect to these reasons for judgment together with any brief written supplementary submissions concerning the form of any final order.
2.   The proceeding be adjourned to a Mention at 10.00am on 26 April 2004.
Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V190 OF 2003

BETWEEN:

ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD (ACN 089 178 594)
APPLICANT

AND:

JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666)
FIRST RESPONDENT

PENELOPE ROSEWARNE
SECOND RESPONDENT

LIAM ROSSNEY
THIRD RESPONDENT

PETER BENSON
FOURTH RESPONDENT

JIM KNIGHT
FIFTH RESPONDENT

AND:

JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666)
FIRST CROSS-CLAIMANT

PENELOPE ROSEWARNE
SECOND CROSS-CLAIMANT

LIAM ROSSNEY
THIRD CROSS-CLAIMANT

PETER BENSON
FOURTH CROSS-CLAIMANT

JIM KNIGHT
FIRST CROSS-CLAIMANT

ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD
SIXTH CROSS-CLAIMANT

AND:

DAVID ANTHONY ARNOLD
FIRST CROSS-RESPONDENT

RAYMOND JOHN SOLOMON
SECOND CROSS-RESPONDENT

BRUCE VIVIAN THOMAS
THIRD CROSS-RESPONDENT

JUDGE:

MARSHALL J

DATE:

10 MARCH 2004

PLACE:

MELBOURNE

REASONS FOR JUDGMENT

Melbourne is Australia’s sporting capital. It boasts of its Spring Racing Carnival as being without peer in the country. It hosts the Australian Football League Grand Final, the Australian Open Tennis Tournament, numerous high ranking golf tournaments and many other major sporting events, including the Australian Formula One Grand Prix. In 1998 a group of friends and acquaintances were invited to a meeting to discuss a proposal to develop a world class dual speedway and jet boat racing facility on the outskirts of Melbourne. The project was to be known as “The Adrenalin Project” (“the project”). It was intended to add to Melbourne’s world class sporting attractions. For reasons which will become apparent, that dream was not realised.
The issues before the Court are not ones involving glamorous sporting achievements but concern rather more mundane aspects of commercial law. Those issues are, inter alia, whether, in respect of two companies created for the purpose of the project:
·     there has been a conspiracy to defraud the shareholders of one of the two companies;
·     a constructive trust exists between the two companies;
·     misrepresentations have been made to shareholders of one of the two companies;
·     the directors of both companies have breached their fiduciary duties;
·     terms of an agreement entered into in respect of the project have been breached;
·     shareholders of one of the companies have been oppressed; and
·     statutory obligations have been breached.
BACKGROUND
Mr Colin Rosewarne was the original driving force behind the project. On 28 April 1998, Mr Rosewarne arranged for the sixth cross-claimant, Adrenalin International Powersports Centre Pty Ltd (“AIPC”) to be incorporated. Mr Rosewarne was the original director and secretary of AIPC.
On 30 April 1998, Mr Rosewarne invited about twenty people, including the then Premier, Mr Kennett, to “a business presentation of the Adrenalin project”. Including Mr Rosewarne, thirteen people attended the meeting. Amongst the attendees were the cross-respondents, Messrs Bruce Thomas, David Arnold and Ray Solomon as well as Messrs Peter Benson, John Caines, Jock Macneish and Liam Rossney. Mr Kennett did not attend.
Mr Rosewarne proposed, at the 30 April 1998 gathering, that a group be formed to be known as the “Wiseheads”. It was anticipated that the Wiseheads would form a board of management of AIPC, which would undertake and develop the project. References to the ‘Wiseheads’ and the ‘Board of Management of AIPC’ are used interchangeably throughout these reasons.
A meeting of the Wiseheads was held on 5 June 1998. A discussion occurred about a site for the development of the project. The minutes of the meeting record the following discussion, in which the “Colin” referred to is Mr Rosewarne and the “Bruce”, Mr Thomas:
“Colin identified 11 blocks of land that had potential for the Adrenalin site. Of the eleven sites inspected 1 site named Foxley Lodge situated on Boundary Road, Laverton North stood out like a beacon. Foxley Lodge is located within the City of Brimbank, 11 minutes drive from the Casino and 15 minutes from the airport on a weekday. The 208 acres of land has a gentle gradient of approximately 10 metres from the high point at the western perimeter over a 1.8 km Boundary Road frontage to the eastern perimeter … .”
The Wiseheads next met on 9 July 1998. Further discussion ensued about the possible purchase of Foxley Lodge. References to “Foxley Lodge” and “the Land” are made interchangeably throughout these reasons. The minutes record the following far-sighted discussion:
“David [Arnold] spoke of the finance being largely dependent on the correct zoning for the facility. The facility would apparently need an Industrial Zoning to attract finance. Candid discussion was entered into with a great deal of clarification required on this area. It was agreed that this area needs some sorting out.”
A further meeting of the Wiseheads was held on 22 July 1998, at which discussion occurred about the purchase of Foxley Lodge. The minutes record that Mr Thomas reported that the then Minister for Sport and Recreation, the Hon T Reynolds “displayed a deal of scepticism having seen nine similar proposals over the last 13½ years that all failed to materialize”.
Other meetings of the Wiseheads were held on 28 July 1998, 18 August 1998, 15 September 1998, 26 November 1998, 26 January 1999, 9 February 1999, 23 February 1999, 9 March 1999, 15 March 1999, 30 March 1999 and 6 May 1999. Issues discussed at these meetings included, but were not limited to:
·           fund raising proposals for the project
·           the purchase of Foxley Lodge and rezoning issues
·           stadium design
·           reimbursement of expenses for directors
·           frustration with the lack of progress
·           lighting systems
·           turnover possibilities
Two items of interest raised during the meetings referred to in the previous paragraphs, having regard to how events developed, were:
· the proposal on 9 March 1999 to “set up a formal entity to buy Foxley Lodge”, and
·Mr Caines’ view, expressed on 15 March 1999, that “we should avoid buying the land and get some sort of lease/hire agreement going”.
A “lock-in” meeting, including an overnight stay on Mr Thomas’ rural property, was held on 18 May 1999. Discussions ensued on the topic of finance, including the possibility of obtaining a loan from Westpac Banking Corporation (“Westpac”). It was minuted that “(a)greement on the land purchase [is] almost finalised”. The Wiseheads agreed on a structure whereby AIPC would be the trustee of a unit trust and the Wiseheads would form AIPC’s Board of Management. The project would be run through the unit trust and the Wiseheads would be “equal unit trust holders on the Board of Management”. It was decided that Mr Thomas and Mr Rosewarne would be the directors of AIPC.
In a Wiseheads meeting held on 26 June 1999 discussion occurred regarding the operation of the board of Adrenalin and the “need to have a commonsense approach” to:
·           the decision making processes,
·           roles,
·           responsibilities.
On 5 July 1999, Mr Arnold wrote to Kalus Kenny, solicitors then retained by AIPC, regarding the purchase of Foxley Lodge. Under a section headed “Trusts and Companies”, Mr Arnold wrote:
“The purchaser will remain the current company and in due course we will create another company which shall become the service company. I shall attend to the formation of the company and ask that you advise the cost of the creation of the appropriate trusts to accompany the companies.”
At a Wiseheads meeting on 13 July 1999, discussion occurred concerning a budget and events program for the “next 3-5 years”. At about this time it was agreed that the Wiseheads each contribute $2.50 as an initial sum representing each Wisehead’s equal share in the project.
On 27 July 1999, Mr Thomas executed a terms contract on behalf of AIPC to purchase Foxley Lodge for $3.35 million. The contract required a $1 million deposit to be paid, with the balance payable over 3.5 years to enable the project to have time to procure a special use permit. A report of the purchase was made to a Wiseheads meeting held the next day. Also on 28 July 1999, the other Wiseheads gave Mr Arnold authority to represent them in instructing Kalus Kenny in relation to the purchase of Foxley Lodge by AIPC.
On 10 August 1999, the Wiseheads decided “that the name of the newly formed operating company be Adrenalin International Powersports Pty Ltd [AIP].” Mr Arnold was to take action to register the company. Consequently, AIP became incorporated on 20 August 1999, with Mr Rosewarne and Mr Thomas as directors and Mr Rosewarne holding all 12 shares in AIP. The incorporation of AIP was noted at the 21 August 1999 meeting of the Wiseheads. At a meeting held on 31 August 1999 it was still being stressed that AIP “will be our operating entity”, as opposed to the land holding company, which at this stage was to be AIPC.
At the 2 November 1999 Wisehead’s meeting a proposal to attract additional investors from outside the Wiseheads was considered. The minutes of that meeting record Mr Solomon as suggesting that a package be prepared which “would let the smaller investor in i.e. 1% less at $50,000 each or even a smaller package that still adds up to the same amount”. This was the beginning of what came to be known as the “Groundbreakers” concept. At the 2 December 1999 meeting Mr Caines is recorded as having:
“…reported that a number of interested parties had contacted him and were interested in becoming members at the set rate of $20,000 each.”
Mr Solomon referred to Mr Knight and his “lady”, Ms Megan Evans, amongst others, as wanting to “talk about the deal with him next week”, and said that he had also gained expression of interest from other friends and family.
The 2 December 1999 meeting also determined that the Groundbreakers would be “put through AIPC”, meaning that the small investors would receive some acknowledgement within the “ownership” of AIPC. In the minutes of the 14 December 1999 meeting the following is recorded under the heading “Groundbreakers Club”:
“Ray [Solomon] expressed concerns about not really knowing what we were offering potential investors to join the Groundbreaker’s Club. John [Caines] clarified the situation by explaining that in exchange for their $20,000, members will get 1% of the net assets of the complex. They are not entitled to 1% of the profits, just 1% of the dividends as defined by the Directors.”
An incomplete draft checklist was prepared for the issue of groundbreaker’s certificates. The checklist was intended to be a list of matters put to prospective Groundbreakers. The third item read as follows, with the concluding words in brackets being in lighter type:
“1.0% of the assets on the block of land (what does this mean?).”
Mr Arnold gave evidence that the Groundbreakers were told that they were investing in a company that would acquire land and build a complex on it.
On 15 December 1999, Gabriel and Wendy Schoffer signed up for a Groundbreakers investment and were given a certificate, which read as follows:
“THIS CERTIFICATE ENTITLES GABRIEL & WENDY SCHOFFER OF [address], UPON PAYMENT OF $20,000 TO ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD (A.C.N. 082 436 137) TO THE FOLLOWING:
·     1.0% EQUITY IN ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD (ACN 082 436 137)
·     TWO GUARANTEED SEATS FOR FIVE YEARS IN THE EXCLUSIVE ADRENALIN CORPORATE SUIT 1 WITH FOOD AND DRINK AT COMPETITIVE RATES
·     VIP PARKING FOR ONE CAR FOR 5 YEARS
·     A CHOICE AFTER FIVE FULL YEARS OF ADRENALIN’S OPERATION TO HAVE:
o    $10,000 REFUNDED, OR
o    ANOTHER FIVE YEARS IN CORPORATE SUITE 1 AND VIP PARKING.
·     THE BENEFITS OF THIS CERTIFICATE ARE TRANSFERABLE
NOTE
There are risks associated with this investment. If the Adrenalin project does not gain a planning permit or the project does not mature to its full potential, investors may lose all or part of their initial investment. We have been advised that any such loss should be tax deductible as a capital loss.”
The 11 January 2000 meeting reported that six Groundbreaker certificates had been issued with three more pending. The minutes also refer to a meeting with Westpac planned for 14 January 2000, at which Mr Arnold, Mr Thomas and Mr Rossney would attend. The minutes also record under the heading Land Valuations that Mr Rossney had been told that on current land sales, once the permit was granted the Land would be worth approximately $31,200,000.
The minutes of the 25 January 2000 meeting, under the heading “Westpac situation”, state as follows:
“David [Arnold] informed the meeting that Westpac are not interested in us at all. John [Caines] and David mentioned quite a few other financing organisations that they will contact.”
At the 25 January 2000 meeting John Caines said that he now did not think the unit trust was required and that the Wiseheads should just issue shares in a company.
At the 15 February 2000 meeting, discussion occurred about setting up AIP and AIPC “with 1,000 shares each (with AIP being owned by AIPC) and distribute 100 shares to each Wise Head”. Following the 15 February 2000 meeting Mr Rosewarne transferred his 100% shareholding in AIP to AIPC.
The 29 February 2000 meeting received a report that Mr Caines and Mr Arnold were “currently dealing with some fairly heavy-duty financiers and are getting results”. The minutes of the meeting held on 21 March 2000 refer to Mr Arnold having discussions with “Suncorp Metway, Bankwest, ANZ and McQuarie (sic)”.
There are minutes recording a meeting of the directors of AIPC on 9 March 2000, which Messrs Arnold, Thomas and Rosewarne attended. It is not clear why a meeting of directors of AIPC was held instead of an AIPC Board of Management meeting. The minutes simply record the resignation of Mr Rosewarne as a director of AIPC and the appointment of Mr Arnold in Mr Rosewarne’s place. There are also minutes, of the same date, recording a meeting of directors of AIP, again noting the resignation of Mr Rosewarne and the appointment of Mr Arnold as a director. As Mr Rosewarne signed a resignation letter in respect of his directorship of AIP, it can be assumed that Mr Rosewarne was aware the change in directorship of AIP occurred. There is no evidence as to why there is not a similar letter, dated 9 March 2000, in which Mr Rosewarne resigned as a director of AIPC.
It is not clear why the change in directorships was made, or why the minutes of the Board of Management of AIPC do not indicate that a resolution was put to the Board of Management to appoint Mr Arnold as a Director of AIPC in Mr Rosewarne’s place. The AIPC Board of Management minutes do not mention the alteration. Evidence was given by Mr Arnold that the change was made because Mr Rosewarne was concerned that a fraud investigation at his work might reflect badly on the project, and that there was a desire not to record this in the minutes. Mr Rosewarne disputed this reason.
At the 4 April 2000 meeting of the Wiseheads concern was expressed in respect of the limited amount of time the two accountants (David Arnold and John Caines) would be available over the following 7 weeks given the need to raise capital for the project. The minutes note that “John assured the meeting that this was not a problem”.
At the meeting held on 3 May 2000, Mr Arnold pointed out that the value of the Land, if it was to be sub divided into industrial plots, would be higher and more attractive to the banks. Mr Arnold suggested that they commission finance brokers to find money as they had the requisite know-how and credibility with the banks. Mr Arnold said the next step was to approach the venture capitalists and “that our time to get the money basically runs out on 20/07/2000.”
On 17 May 2000, at the next meeting of the Wiseheads, Mr Arnold said once again that the company had until 20 July 2000 to get the money for the Land and that $950,000 at least was needed to “sit on the block” and more if they wanted to do anything else.
At the meeting on 15 June 2000 Mr Arnold said that as of 20 July 2000 the company was entitled to a refund of $35,000 for the deposit on the Land, but all contractual arrangements with Mr Robinson (the vendor) would end. Finance to purchase the Land was discussed and the minutes note that it “was apparent from the discussions that a bit more thought be put into this area very soon”. The meeting raised the names of several well known investors. It was noted that Mr Arnold “added that a company such as Lion Nathan would loan us the money to buy the block if we gave them a Directors Guarantee.”

By July 2000 funding had not been arranged for the purchase of Foxley Lodge and it was necessary to request the vendor to extend the time to complete the contract of sale. At the Wiseheads meeting on 4 July 2000, Mr Rossney reported that Mr Robinson wanted $300,000 to extend the contract of sale. At the same meeting under the heading ‘Private finance’ it was noted that:
“Bruce reported that Brian Scott has someone interested in financing 50.0% of the land purchase but under what conditions he has yet to be told. The $1.5 million could be used to pay the $1.0 million deposit and pay the first 2 years of land payments to Robinsons. Bruce told (sic) that most of the other investors have chilled off and are pretty well out of the picture now.”
At the second of three meetings held in July, on 25 July 2000, under the heading ‘Purchase of Foxley Lodge’, the minutes record:
“David [Arnold] informed the meeting that Robinson considered our initial offer of $2.2 million too low and we need to do some more thinking on what would be a fair and mutually acceptable price. David reiterated that we would need to put some form of Director’s guarantees in place in order to get bank finance and that they (the banks) are seemingly not too interested in our project anyway. Liam added that we must strike the deal with Robinson within the next week or so to avoid a total collapse of negotiating and Robinson walking away from the deal.”
An important meeting of the Wiseheads took place on 30 July 2000. It was attended by Mr Thomas, Mr Solomon, Mr Arnold and Mr Rossney. Mr Arnold prepared a proposal to be put to the meeting concerning the purchase of Foxley Lodge.
Mr Arnold’s proposal was put in writing by him. He gave evidence that he “created the document and it was faxed or sent or handed to the board members”. It was not distributed to the Groundbreakers. Mr Arnold considered that first it was important to reach agreement “as a Board” before going to the Groundbreakers. He considered that a “step by step approach” was required. When answering a question regarding whether the intention was to present the proposal to a meeting of the Groundbreakers, Mr Arnold said in evidence:
“I didn’t give consideration as to how we’d have it, whether we’d have a meeting with the Groundbreakers or whether we would do it in writing. Most of the Groundbreakers at this stage were Ray’s [Solomon] family and it could have been done another way. May not have a (sic) been a meeting of all of the Groundbreakers – may have been a meeting one on one with Groundbreakers. So there were many ways but most of the Groundbreakers were Ray’s family or friends, so really it was how we dealt with Groundbreakers was (sic) – probably have been more discussed with Ray as to what he would have thought was appropriate.”
Mr Arnold considered that if his proposal was not agreed to, the project would fail. He observed in his 30 July 2000 document that “Adrenalin [AIPC] does not have sufficient funds to pay the deposit or secure the balance of funding required.” Critically the document proposed that AIP “be used as the purchasing company and be made available to the purchasers. The shares in … AIP are currently held by [AIPC]”. Much of Mr Arnold’s proposal is set out below:
“At this point the securing of the proposal site has been determined essential for the project to continue. If we fail to secure this site it will be impossible to continue the project.
Accordingly we then are faced with 2 options
1.Let the current contract lapse as Adrenalin does not have sufficient funds to pay the deposit or secure the balance of funding required. We could try and negotiate with the vendor that whilst he proceeds to remarket his land, he permits us continue with our Special conditions permit. It is considered unlikely that the vendor will permit this. Thus the project will likely cease.
2.The Board members purchase the land. The purchase of the land would be in a separate legal entity with the participants putting up equal shares of security. This offer is open to all Board members initially then to other parties thereafter. The aim of the land purchasing consortium is to secure the land for Adrenalin and sell it back to Adrenalin in due course being less than 2 years from this date. Adrenalin will need to acquire the land in due course as the financiers will want the first mortgage on the title where all the construction and investment is being undertaken.
In order to enable the project to proceed the following proposal is being put to the Board for their approval.
Land Purchase Conditions
“There are 3 Board members who are prepared to commit to the land purchase, these are Ray [Solomon], David [Arnold] and Bruce [Thomas] however they are hoping for at least a fourth and preferably a fifth or even more people to join them. Liam [Rossney] is determining his capacity to do so. John [Caines] and Peter [Benson] are awaiting further information to make a decision. Jock [McNeish] and Colin [Rosewarne] have stated that they will not be involved….”
After detailing the possible amount a financier is likely to lend against the property and the amount the land purchasers would need to inject in order to cover the deposit and stamp duty, Mr Arnold continued as follows:
“The Land purchasers face the exposure that if Adrenalin fails to obtain a permit they will need to sell the land as they will be unlikely to fund the monthly interest cost for anything but a short period of time. In order to not loose (sic) any money they will need to recover the purchase price, stamp duty paid and selling costs estimated at $80,000 totalling $3,406,000 plus any interest cost. This represents an unacceptable risk to the purchasers.
Accordingly the purchasers are asking Adrenalin to reduce their risk. This would be done by Adrenalin paying the costs of the purchase and holding costs being legal fees, rates, insurance and interest etc until the land is purchased by Adrenalin. The stamp duty is to be paid by the purchasers.”
The proposal then sets out how the deposit, due on 28 August 2000, and the monthly interest payments from settlement, on 26 February 2001, will be met. Part was to come from the “land purchasers” and the rest via a loan of $200,000 from AIPC. The proposal set out the means for meeting further costs of the project by reducing the shareholdings of Wiseheads, who would not inject more money into the project, as follows:
“Fundraising
In order to enable the land purchase to be funded and the ongoing costs of the project up to $500,000 needs to be raised.
Adrenalin has issued 1000 shares. Currently each Board Member hold 110 shares, 70 shares have been sold to Groundbreakers and a further 50 shares are held in trust by Bruce as Chairman.
To obtain the required funding to enable the project to continue it is proposed each Board Member inject $30,000 by 22 August 2000. In the event the Board Member is unable to do so or does not wish to do so they will forfeit 50% of their shareholding, being 55 shares. Ray has already purchased a Groundbreaker however he is required to pay $30,000 as this requirement is a separate and subsequent issue. In the same way each land purchaser is also required to contribute $30,000.
The forfeited shares will be transferred to the Chairman. A second round of Groundbreakers will be sought however the price will be $30,000 for 10 shares. Should any of the forfeited shares not be sold they will be available for purchase by the Board members.
Entities
It is proposed Adrenalin International Powersports Pty Ltd (AIP) be used as the purchasing company and be made available to the purchasers. The shares in this AIP are currently held by Adrenalin International Powersports Centre Pty Ltd. It is understood that this would minimize the cost to Adrenalin however, solicitors advice is pending.”
The document concluded under the heading “Resolution” as follows:
“On Sunday 30 July 2000 the Board met to discuss this matter however only Ray, Liam, David and Bruce attended. In order to adopt this proposal it is considered essential to have a response from each Board member. Please advise Bruce of whether or not the proposal is acceptable to you. Time is of the essence as if we do not execute the contract of sale in the next few days the vendor will undoubtedly terminate discussions and the proposed contract variations. Accordingly please advise your position by 1.00 pm Tuesday 1 August 2000.”
At the foot of the document each Board member was required to indicate on his copy, to be faxed to Mr Thomas, whether the proposal was acceptable or unacceptable. Unsurprisingly, Mr Arnold advised his acceptance. Mr Solomon and Mr Thomas found the proposal acceptable as did Mr Rossney. Mr Macneish and Mr Caines found the proposal “unacceptable”. No other response was received.
The minutes of the meeting refer to Mr Arnold’s proposal as follows:
“David outlined the proposal whereby individuals could purchase the land under a separate entity and Adrenalin [AIPC] can purchase or lease back when the permit has been obtained.
Actions
·Contact Robinson’s [vendor’s] Accountant and Solicitor tomorrow to progress negotiations.
…
·Draw up proposal and distribute to all Board Members for their approval before the contract could be signed.”
On 2 August 2000, the land purchase contract was varied so that the balance of the deposit, $350,000 ($50,000 having been paid on 27 July 1999), was payable on 28 August 2000. The settlement under the contract was to occur on 26 February 2001, by which time further finance would be required to meet the balance of $2,800,000.
The minutes of the Board of Management meeting held on 10 August 2000, under the heading ‘Finance’, record:
“David [Arnold] suggested that we have a formal Groundbreakers meeting within the next couple of weeks to bring them up to speed with what we are and have been doing since they became Ground Breakers Club members. Another meeting is to be arranged between Bruce [Thomas], Ray [Solomon] and David as stakeholders in the land and David and John to set out options ie. percentage offerings, etc for presentation at the [Groundbreakers] meeting.”
The 10 August 2000 Board of Management minutes also record the prospect of Foxley Lodge being zoned as “industrial” as likely to be a “formality”. It was noted in the minutes that the rezoning would considerably increase the value of the Land.
On 17 August 2000, Mr Arnold wrote to Ms Deidre Young, Manager Private Clients, of Westpac, enclosing various documents relevant to AIP’s application for funding of the Land. The letter referred to the necessity to “place this matter prior to the deposit balance payment on Monday the 28^th of August 2000.”
On 25 August 2000, a meeting of Mr Arnold and Mr Thomas, as the directors of AIPC, resolved to transfer AIPC’s shares in AIP to Mr Thomas, Formula Speedway Promotions, a business associated with Mr Solomon, and Kelfire Pty Ltd, a company controlled by Mr Arnold. On the same day a meeting of Mr Arnold and Mr Thomas, as the directors of AIP, resolved to approve the transfer of AIP shares from AIPC. It is not clear if this was performed with the knowledge of all other Board of Management members. There was no resolution put to the Board of Management of AIPC that its shares in AIP be transferred. The only reference to the transfer of AIP shares was in an agenda for a meeting to be held on 19 September 2000. The note in the agenda appears to raise the share transfer for discussion or approval. In any case, whether or not it was raised on 19 September 2000 is of little consequence as by that time the transfer of shares had already been made.
There is a dispute between the parties as to whether any meeting of Wiseheads was held on 19 September 2000. No minutes of a meeting of that date were discovered. However, there is an agenda for a meeting of that date which was emailed by Mr Rosewarne to Mr Benson, Mr Thomas, Mr Arnold, Mr Caines and Mr Solomon. The agenda sets out the points of discussion from the minutes of the last meeting, in which the tenth agenda item was “Transfer of shares of AIPC held by AIP to Bruce [Thomas], David [Arnold] and Ray [Solomon]”.
Mr Arnold was asked in cross examination what authority he had to transfer to himself one-third of the AIP shares. Mr Arnold responded:
“I transferred it under my understanding of the agreement we had reached about transferring shares during the discussion of the proposals.”
Mr Arnold went on to say in cross examination that:
“My understanding was that during the course of the two proposals which we had discussed, some elements had been agreed – although the proposals had not been accepted in total, it had been agreed that this could occur, and there would be other people on the board of management, all agreed to the transferring of the shares.”
On 28 August 2000, Mr Thomas paid $300,000 and AIPC paid $50,000 to meet the balance of the deposit for the Land. Following an agreement at a Wiseheads meeting on 13 January 2001 the $50,000 provided by AIPC would later be identified as being made up of the two contributions of $30,000 to AIPC made by Mr Rossney and Mr Benson in late 2000.
In a letter to all Board of Management members dated 22 September 2000, Mr Caines referred to a meeting held “last Tuesday”, possibly meaning a meeting on 19 September 2000 (a Tuesday), and the proposal to reduce the shareholdings of those who do not contribute a further $30,000 to AIPC. Mr Caines stated in the letter:
“The initial distribution of equity was compensation as a success fee on the proviso that each member would contribute his time and expertise, without cost, for the success of the Project. It was always emphasised that no funds or guarantees would be provided. The basis element of this logic has not changed. To vary the initial shareholding, for whatever reason, makes the statement that some individuals are rewarded disproportionately to others for their efforts. This is a dangerous and controversial statement.”
Mr Caines recommended that the equity proportions are not varied and made the following suggestion:
“Times have changed where our members have been left with no alternative but to contribute funds, securities and guarantees, notwithstanding our initial philosophy. To compensate these contributions with any form of equity makes the statement that inevitably the person with the most money would hold the greatest proportion of equity, completely ignoring the unpaid contributions of other members. I have no problem with a reward mechanism to the contributions of cash, however as cash is contributed, so to should cash be returned as a reward to the contributor and not as a punishment to the non-contributor.”
Mr Rosewarne sent an email, dated 24 September 2000, to Mr Caines, and in it stated:
“…I will restate for the umpteenth time that I had no financial offering at all to offer and I think now, as I did then, that I have no right to tell anyone how, when or where to spend their money.”
Mr Rosewarne then said:
“I feel that the people who have put their money down to buy the block should be handsomely compensated for their risk but not at the direct expense of others.”
Mr Rosewarne concluded his email by saying:
“In closing, I feel that if a fair and equitable arrangement that does not discriminate but gives the land owners true security without going overboard is not found and implemented, my project is doomed to failure. If I had any idea that the greed, bullshit, chest beating and unadulterated back stabbing that is currently rife within our board was going to happen I guarantee THERE WOULD HAVE BEEN NO ADRENALIN.”
At this point in time the greatest concern amongst members of the Board of Management was the proposal to decrease a member’s AIPC shareholdings unless he provided a $30,000 cash injection into AIPC. There was a concern that this would alter the arrangement whereby the original members would share equally in the project. There is little or no discussion of the aspect of the proposal which would have Mr Arnold, Mr Thomas and Mr Solomon purchasing Foxley Lodge through a separate entity.
On 28 September 2000, a further meeting of the AIPC Board of Management was held. Mr Rosewarne sent his apologies. Mr Macneish and Mr Benson were overseas but the other Wiseheads attended. Discussion ensued at the meeting about Mr Arnold’s proposal of 30 July 2000, and a revised form of the proposal presented by Mr Solomon. Mr Rossney once again expressed support. Mr Caines expressed opposition as, in his view, it penalised members of the Board of Management “who cannot or will not contribute any further money”. The minutes records that “A satisfactory agreement could not be reached …”. It was noted in the minutes that Mr Rosewarne had transferred his interest in AIPC to Mrs Penelope Rosewarne, his wife (the second respondent).
Mr Caines’ emailed Mr Solomon on 2 October 2000 regarding Mr Solomon’s draft proposal. Mr Benson was copied in. Mr Caines’ gave his opinion concerning members having half of their shares transferred to a pool to be sold to Groundbreakers unless they contribute $30,000. He also made his position clear in respect of the Land, stating:
“I have stated that I will not commit to participate in the purchase of the land.”
In respect of the entity to purchase the Land, Mr Caines said:
“I have already expressed my concern with respect to the purchasing entity without the prior agreement of all the shareholders, particularly the Ground Breakers. I find it difficult to accept that a bank will not permit seven, 1% shareholders to remain on the books, however I have seen sillier things from banks. A formal extra-ordinary shareholders meeting needs to be convened and a resolution formally put and resolved so that the land can be transferred from an entity in which individuals hold shares into an entity where those same individuals do not hold shares. I personally have no objections to the transfer, provided that there is a clear, simple buy-back agreement executed.”
There was a further Wiseheads meeting on 17 October 2000. Only Mr Macneish and Mr Benson were absent. It was reported that the Brimbank City Council had granted the project its necessary land use permit, but that the matter may “end up at VCAT”.
In November 2000, Mr Arnold renewed discussions with Westpac regarding finance for the project. During that month, the Board of Management met on 15 and 29 November. The minutes of the 29 November meeting record that Mr Arnold and Mr Thomas informed the meeting that Westpac was warming to the project.
A Board of Management meeting was held on 13 December 2000. A meeting of the directors of AIP, Mr Arnold and Mr Thomas, was also held on that day. There is no reference to the AIP meeting in the minutes of the AIPC Board of Management meeting.
Two documents signed by Mr Rosewarne confirm that Mr Rosewarne resigned as secretary of AIP and AIPC on 13 December 2000. These resignations are confirmed by minutes of meetings of the directors of AIP and AIPC. They are not referred to in any AIPC Board of Management meeting minutes. However, as Mr Rosewarne had transferred his interest to his wife in September 2000, there was no point in him holding an office. Also, on this date, Mr Solomon became Secretary of both AIPC and AIP. It is not clear why the changes to the office holders were made on this date, or whether the Board of Management was notified of these changes.
Mr Rossney, Mr Solomon, Mr Thomas, Mr Benson and Mr Arnold attended the meeting of the AIPC Board of Management held on 13 January 2001. Apologies were received from Mr Caines and Mr Rosewarne. Mr Rossney tabled a proxy vote from Mr Macneish. The minutes record that a proposal was tabled to enable Board of Management members to purchase additional shares in AIPC for $30,000, whilst retaining the current number of shares held by each member of the Board of Management and the 1% shareholding held by each Groundbreaker. This proposal was rejected because of:
“…the administration requirements (including the need for emergency Shareholders meetings etc), to issue new shares and that the proposal does not retain the balance of equity currently enjoyed by members of the [Board of Management]…”.

Instead, those present at the meeting agreed that amounts of $30,000, that had previously been paid pursuant to Mr Arnold’s 30 July proposal would now form part of contributions to the Land purchase. The minutes record that:
“It was agreed by Liam Rossney, Peter Benson, David Arnold and Bruce Thomas, that their monies paid previously ($30,000 on the basis of the arrangement proposed at the board meeting on the 30/06/00) would now form their contribution towards the land purchase. Ray Solomon agreed to contribute a further $30,000 under this arrangement.
· In the case of Liam Rossney and Peter Benson, their share of the land would depend on the percentage of their contribution as part of the overall cash or equity requirements by the bank.
· For example; if the amount required by the bank were $900,000, their $30,000 contribution would entitle them to a 3% share of the land.”
It was agreed that AIPC would forward the two amounts of $30,000 provided by Mr Rossney and Mr Benson for the Land purchase. Mr Benson noted that this arrangement preserved the principle of maintaining the current balance in the level of each Board of Management member’s shareholding in AIPC.
An annual return for AIPC, dated 16 January 2001, showed the shareholdings in AIPC as follows:
Shareholder  Number of ordinary shares
Raymond Tampion  5
Elizabeth Winter  5
Andrew and Sue Allcock  10
Rita Bray  10
Megan Evans  10
Gabriel and Wendy Schoffer  10
Michael and Linda Wilkins  10
Daytec Australia Pty Ltd  20
(a company owned by Peter Papos)
John Caines Management Pty Ltd  55 (corrected to become110)
(a company controlled by John Caines)
Penelope Rosewarne  55 (corrected to become110)
Strategic Images Pty Ltd  55 (corrected to become110)
(a company controlled by Mr McNeish)
Peter Benson  110
Kelfire Pty Ltd  110
Liam Rossney  110
Formula Speedway Promotions  120
(a company controlled by Mr Solomon)
Bruce Thomas  305 (corrected to become 130)
In the copy of the annual report provided to the Court, “Bartletts” have been handwritten in as having 10 shares at the bottom of the list of shareholders.
By letter dated 2 February 2001, Westpac’s Victorian subsidiary, the Bank of Melbourne, offered finance for the project at 50% of the purchase price or $1.6 million, whichever was lower. The Bank of Melbourne also required security including “unlimited joint and several guarantees from shareholders/directors”.
On 12 February 2001, Mr Arnold wrote to Westpac requiring a further meeting to discuss, inter alia, the prospect of a large, non-recourse loan. By letter dated 20 February 2001, Mr Arnold sought assistance from a finance broker, Mr Guy Obeid, in obtaining a loan for $2.5 million, in the context of security for the loan being the increased value upon rezoning.
A very important meeting of the Wiseheads was held on 21 February 2001. The major issue for discussion was a letter from Kalus Kenny to each Board of Management member dated 13 February 2001. The most important aspect of the letter was that it sought confirmation from each Board of Management member that AIP would assume the obligations of AIPC under the contract to purchase Foxley Lodge, subject to a 12 month option for AIPC to purchase the Land from AIP for market value. Critically, the letter confirmed that the only persons with an interest in the Land would be Messrs Arnold, Thomas and Solomon.
The Kalus Kenny letter of 13 February 2001 is set out below:
“The Director
Adrenalin International Powersports Centre Pty Ltd
PO Box 114
DEER PARK VIC 3023
-and-
Mr Liam Rossney
-and-
Mr Colin Rosewarne
-and-
Mr John Caines
-and-
Mr Bruce Thomas
-and-
Mr Peter Beson
-and-
Mr Jock Macneish
-and-
Mr Ray Solomen (sic)
Dear Sirs
Purchase of Foxley Lodge
As you know I have been acting on behalf of Adrenalin International Powersports Centre Pty Ltd (“AIPC”) in relation to the purchase of the property known as “Foxley Lodge”. Pursuant to your instructions in writing dated 28 July 1999 I have taken instructions largely from David Arnold although in recent months I have had little involvement in this matter.
I have received instructions from David Arnold that:-
1.Settlement of the Contract to purchase the above property is due on 26 February 2001.
2. Westpac will be providing finance.
3.As a number of you will not provide personal guarantees in relation to Westpac’s finance it is proposed that a different company, Adrenalin International Powersports Pty Ltd A.C.N. 089 178 594 (“AIP”) be utilised to complete the acquisition of the property.
4.To achieve this, either AIPC will nominate AIP as Purchaser or the AIPC Contract with the Vendors will be cancelled, and a new contract entered into with AIP, and all moneys paid under the AIPC Contract will be applied towards partial satisfaction of AIP’S obligations under its new Contract with the Vendor.
5.Each of you have agreed that the acquisition will be completed by AIP even though the only shareholders/participants in API (sic) are David Arnold, Bruce Thomas (Colin Rosewarne crossed out) and Ray Solomen (sic). This will mean that a number of you will have no interest in the property.
6.That AIP will grant an option to AIPC to enable AIPC to purchase the property from AIP any time within 12 months of settlement at a price to [be] determined by valuation at the time of the exercise of the option.
In order to progress this matter I require confirmation from each of you that I am to proceed to complete settlement on behalf of AIP on the basis set out in this letter and in accordance with instructions received from David Arnold on the same basis as is set out in your authorities to me dated 28 July 1999.
Please understand that I am not providing advice to any of you in relation to this matter, nor have I in the past other than in respect of advice which I provided to AIPC in relation to the acquisition of the property and possible corporate and trust structuring.
I have not been instructed as to the commercial involvement of each of you in this project, nor have I been asked to provide advice to any of you individually and accordingly I am not in a position to advise you whether your interests are properly protected or what steps should be taken to protect your interests. In all these circumstances you should each obtain independent legal and financial advice.
However, if any of you have any queries in relation to this matter, please do not hesitate to contact me.
I confirm that in order for me to continue to proceed to settle the purchase on behalf of AIP, I require the enclosed copy letter to be signed and returned, whereby your signature confirms that I am authorised and instructed to act on behalf of AIP in relation to this matter on the basis set out in this letter and to continue to take instructions in relation to the acquisition of Foxley Lodge from David Arnold without further reference to you.
Yours Faithfully
KALUS KENNY
Henry Kalus”
The minutes of the 21 February meeting include the following in respect of the Land purchase:
“A Broker has been engaged to arrange a loan via the Commonwealth bank. Settlement is 5pm on Monday the 26^th of February.
Issues arising include;
1.Concerns regarding the 14-day period after settlement day (default on settlement).
2.Change of purchaser. AIP ILO of AIPC.
3.Bruce indicated his unavailability next Monday the 26^th.
4.Who can be signatories to the land settlement?”
In respect of the Kalus Kenny letter, the minutes record:
“This letter authorises and instructed KK to act on behalf of AIP in relation to this matter on the basis set out in this letter and to continue to take instructions in relation to the acquisition of Foxley Lodge from David Arnold without further reference to the [Board of Management].
All members present signed the letter, however most members questioned the need for such a letter.”
Each of Messrs Caines, Rosewarne, Rossney and Benson countersigned his individual copy of the Kalus Kenny letter at the meeting and handed it back to Mr Thomas. Copies of this letter were also signed by:
·Mr Thomas,
·Mr Solomon,
·Mr Macneish,
·Ms Megan Evans,
·Mr Ray Tampian,
·Mr and Mrs Allcock,
·Mr and Mrs Wilkins,
·Ms Rita Bray and
·Mr P Papos
Given the list of shareholders recorded in the annual report, dated 16 January 2001, it is not known why signatures were not obtained from Gabriel and Wendy Schoffer, Robert and Robyn Bartlett or Elizabeth Winter.
In cross-examination Mr Arnold confirmed that agreement to the proposal had not been sought from the Groundbreakers until Mr Solomon arranged for the Kalus Kenny letter to be signed by them near the end of February. Mr Arnold gave evidence in explanation, saying:
“Well, the Groundbreakers you refer to of course was essentially six of them – if my memory’s correct – five of whom Ray had organised and one of which Colin had organised. These groundbreakers, of course, included Ray’s mum, Ray’s brother-in-law and his sister and two of his work colleagues and Megan Evans and I think that – there might be seven. The groundbreakers when we talked to Ray about it was a constant source of concern because we had other people’s money but Ray said – well, he felt confident that if he’d get a reasonable proposal we could put it to them. After all they had mostly invested in this project to see it get done, to get motor racing going, and they were interested in, most importantly, a cash return. They weren’t interested in getting a capital asset.”
On 28 February 2001, AIPC nominated AIP as the purchaser of Foxley Lodge in substitution for AIPC. Mr Arnold signed the relevant form on behalf of both AIPC and AIP. The vendor of Foxley Lodge served a rescission notice on AIPC, also on 28 February 2001, given that the balance of the monies owing under the contract ($2.8 million) had not been paid by 26 February 2001.
On 1 March 2001, the Commonwealth Bank of Australia (“CBA”) offered AIP a loan of $2.46 million on the basis of “Joint and Several Guarantees (unlimited as to amount) by Bruce Vivian Thomas, Raymond John Solomon and David Anthony Arnold”. On 2 March 2001, the Solomon Family Superannuation Fund lent AIP $92,610.69 in order to assist in the purchase of Foxley Lodge.
On 8 March 2001, Kalus Kenny wrote to Mr Arnold advising him that settlement would occur on 9 March 2001, with CBA providing $2.46 million, and the balance of $367,098.89 being made up by Ray Solomon.
On 9 March 2001, an option agreement was purportedly entered into between AIP and AIPC. Purportedly is used deliberately because the correct seals of the respective companies were not appropriately placed on the document. This was later rectified on some date shortly after 21 May 2001. Under the option agreement AIP granted AIPC an irrevocable option requiring AIP to sell Foxley Lodge to AIPC, if AIPC wished to exercise the option, within 12 months of the date of the agreement.
On 20 March 2001, as a consequence of a contribution of $50,000 by Mr Knight to AIP, Mr Solomon emailed Mr Knight a letter of that date. The letter provided that:
“Re: Shares in Adrenalin International Powersports Pty Ltd
Dear Jim,
The Board of Management of Adrenalin International Powersports Pty Ltd welcomes you as a shareholder of the company.
Please consider this letter as your official receipt for your payment of $50,000.
This payment being the purchase price for 133 fully paid up shares of which there are a total of 10,000 shares issued. On the basis that the share price is $375,000 each, the cost of your 133 shares total $49,875. Given that, a refund of $125 will be returned to you.
We seek your advice as to which entity the 133 shares are to be issued.
On the basis of your advice, share script will be issued and copies forwarded to you.
Yours Sincerely
ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD
Raymond Solomon
Secretary”
On 28 March 2001, AIP became registered as the sole proprietor of the estate fee simple constituted by Foxley Lodge.
The next AIPC Board of Management meeting was held on 28 March 2001, followed by meetings on 26 April 2001 and 6 May 2001. The minutes from these meetings do not reveal any discussions in respect of the purchase of Foxley Lodge. It is unclear whether there was a meeting on 29 May 2001, as there is an Agenda for a meeting on that day, but no minutes of that meeting (if it occurred) were tendered in evidence.
At a meeting of the AIPC Board of Management held on 19 July 2001, Mr Thomas and Mr Arnold discussed the issue of a further valuation of Foxley Lodge to enable AIP to refinance its commitments and allow some repayments to them and to Mr Solomon. The repayments related to the sums contributed by those three men at the time of the settlement of the Land.
On 31 July 2001, Mr Caines wrote to Mr Thomas in Mr Thomas’ capacity as “Chairman” of AIPC. In the letter Mr Caines queried whether Mr Benson and Mr Rossney were also involved in the ownership of the Land, whilst acknowledging that Mr Thomas “stated at the last meeting that there were only three landowners”.
On 1 August 2001, Mr Thomas replied to Mr Caines. Mr Thomas relevantly responded to the issue of land interests as follows:
“Due to your opposition to diminution of equity in A.I.P.C., on which I supported you, Peter and Liam chose to put $30k each into the land purchase to support the cash and personal assets that Ray, David and myself put up to purchase the land, that you so strongly advised me stay away from. We were still $60k short to make up the deposit and Ray asked Jim Knight to contribute, which he did.
So the real situation is that Ray, David & myself have each put up in cash and assets $350k each and taken on a debt of $3,750,000. Peter and Liam have contributed $30k each and Jim Knight $60k and of course hold a commensurate equity in A.I.P. The logic of this is that without any of the above I wouldn’t be writing this letter.”
Mr Thomas further stated:
“I would also point out that you, with the rest of us are signatories to a document which enabled A.I.P. to buy the land and put on offer to A.I.P.C. the opportunity to purchase said land from AIP. At market value, within twelve months from settlement.”
A Wiseheads meeting occurred on 2 August 2001. Mr Rossney reported to the meeting that the Victorian Civil and Administrative Tribunal had approved the planning permit on 31 July 2001, with Ministerial and Council approval expected by 14 August 2001. It was anticipated that re-zoning would follow. A discussion occurred about obtaining a further land valuation and about finishing a new business plan for the project.
On 9 August 2001, Mr Solomon emailed a letter to Mr Knight in which he again confirmed that Mr Knight was a shareholder in AIP to the value of 133 shares out of 10,000 shares in AIP. The letter was in similar terms as the letter from Mr Solomon to Mr Knight, dated 20 March 2001.
On 13 August 2001, FPD Savills (Valuers) valued Foxley Lodge at $5.5 million. The documentation supporting the valuation referred to “imminent re-zoning to Industrial 2”.
At a meeting of the AIPC Board on 22 August 2001 a discussion ensued, led by Mr Arnold, about prospects for funding of the project, including an offer from Rothschilds to contribute $10m in exchange for some form of stake-holding in the project. Amongst other topics discussed was a possible role for International Management Group of America Pty Limited (“IMG”) as a manager of the project.
The next AIPC Board of Management meeting occurred on 12 September 2001. Mr Arnold reported that CBA was likely to agree to the new land valuation of $5.5m. He also said that CBA is likely to approve “AIP’s re-financing” in the “next couple of days” at 60% of the estimated value, and that AIP will advance the funds to AIPC which would “enter, into a debenture with interest charges”.
On 14 September 2001, the Brimbank City Council issued a planning permit for Foxley Lodge which would allow:
“[t]he development and use of a Major Sports and Recreation Facility including a motor racing track, education and hospitality training facilities, event retailing centre, convention centre, motel administration, car parking facilities and associated shop, restaurants/food and drink premises and maintenance facilities.”
Further AIPC Board meetings were held on 10 October and 15 November 2001. Discussions occurred about possible refinancing of the Land, financing for the project, a new business plan and re-zoning, amongst other issues.
By letter dated 15 November 2001, addressed to Mr Thomas, as Chairman of “Adrenalin International Powersports”, Mr Macneish resigned from “the Board of the Adrenalin Project”. The middle paragraph of the letter stated that:
“I would still like to see the project go ahead, and wish you all every success, but feel that I can no longer contribute in a significant way to its progress. I have never been willing to commit any capital towards the proposal and believe that my shareholding should be held by someone who is prepared to make a greater commitment.”
At a meeting of the AIPC Board on 12 December 2001 further discussions occurred, inter alia, about refinancing the Land, re-zoning and a business plan. There was also discussion about further options for the “structure and relationship of AIPC and AIP”, including its possible relationship with IMG, but no decision was made. The minutes do not make it clear whether the relationship of AIPC and AIP that was discussed simply concerned merging the two companies, or related to the desire that AIPC obtain ownership of the Land.
During December 2001 the Board members of AIPC attempted to draft an agreed document dealing with “Funding Strategy and Options”. Mr Arnold’s draft document on that topic was circulated to other Board members and included the following at the second paragraph:
“The land is owned by [AIP] and [AIPC] holds an option to acquire the site at market value.” (emphasis supplied)
Mr Caines sent a revised version of the document back to Mr Arnold, which replaced this statement with the following:
“All the assets are and will be owned by [AIP]. [AIPC] is a wholly owned subsidiary of AIP and will be the operator of the Project. All operations of AIPC will be directed by International Marketing Group (IMG) under a formal management agreement.”
On 11 February 2002, Knight Frank Valuations valued Foxley Lodge at $6 million.
On 18 February 2002, an information pack about the project was circulated in order to attract funding in Mr Arnold’s words to “proceed with the acquisition by AIPC of the land and development thereon of the powersports centre”. A sum of $56 million was sought to be raised, $6 million of which would relate to the Land. A budget prepared by Mr Caines estimated pre-tax earnings of $14.168 million for the project in 2007-2008 financial year.
The AIPC Board met again on 20 February 2002. The authorised minutes, signed by Mr Thomas on 27 March 2002 following acceptance of them at the meeting on that date, contain the following:
“AIPC Shares.
David advised that the share registration with the ASC has been corrected.
Discussion regarding the share allocation of AIP.
Discussions regarding the arrangements between AIPC and AIP.”
The minutes note that Mr Arnold was “to investigate the methods and arrangements by which AIPC shareholder (sic) may be transferred into AIP”.
Although Mr Solomon’s version of the minutes were not authorised by the Board of Management and were not signed by Mr Thomas, they reveal Mr Solomon’s understanding of what was discussed at the meeting. Mr Solomon’s minutes record in greater detail the discussion referred to in the previous paragraph:
“David advised that the share registration of AIP has also been corrected to reflect 4 shares each to Bruce Thomas, David Arnold and Ray Solomon.
Discussions regarding the arrangements between AIPC and AIP.
John expressed the view that the sale price of the land to AIPC was $6 million.
Ray expressed the view that it was CMV at the time of sale.
It was acknowledged by Liam and David that the $6 million was a nominal amount based on the value of the land at the time of the last meeting.
John indicated his believe (sic) that AIPC and AIP had merged under the arrangements discussed at the last meeting.
Ray indicated that this was not the case. AIP is a stand alone company with the intended share structure being 10,000 shares to be issued to Bruce, David, Ray, Liam, Peter and Jim Knight. This share distribution was acknowledged by Bruce, David and Liam.
The future arrangements as to how AIPC and AIP may merge has not been agreed.”

On 9 March 2002, depending on one’s view of the incorrect use of appropriate seals on 9 March 2001, referred to at [73] above, the option agreement expired without AIPC exercising its right to buy Foxley Lodge. A resolution was never put to a Board of Management meeting whether the option should be exercised; although AIPC was not in funds to do so at any stage in the relevant 12 month period or at any time up to the end of May 2002 or later.
At a meeting of AIPC held on 27 March 2002 the Board continued to discuss financing for the project. Mr Solomon requested that the relationship between AIPC and AIP be “clarified”. Mr Arnold and Mr Caines were to “meet and develop a methodology of merging AIPC and AIP”.
On 15 April 2002, Mr Solomon wrote to Mr Benson and Mr Rossney, asking to which entity they wished to have their 81 shares in AIP issued.
A further meeting of the AIPC Board was held on 17 April 2002. The imminent re-financing package for the Land, to be provided by HGR Finance, was discussed. No reference is made in the minutes of that meeting to the concerns surrounding the shareholdings of AIP, the relationship between AIP and AIPC, or the meeting between Messrs Arnold and Caines to discuss merging the two entities.
On 19 April 2002, the mortgage in favour of CBA was discharged, with HGR Finance advancing a loan amount of $3.85 million to AIP. On 7 May 2002, HGR Finance registered a mortgage over Foxley Lodge.
At an AIPC Board meeting on 3 July 2002 the following was discussed and recorded at item 5 in the minutes:
“5. AIP funding strategy, Grove-CMFC David
David and Liam (on behalf of AIP) met with Grove Construction with the view establishing a traditional business model whereby AIPC will be the venue operator and AIP will be the Land and buildings owner and a commercial lease arrangement will exist between the two entities.
Under this arrangement, Grove has agreed to take equity in AIP for a cash payment and will be appointed by AIP as the builder.
The benefits of this model is that;
1.The current Shareholding’s in AIPC will be maintained (100% equity).
2.AIP will provide AIPC with the initial operating capital.
The negatives for AIP is that the current shareholders would need to leave their current level of investment in AIP and that AIP will be required to provide Directors guarantees.”
In August 2002, Mr Knight requested that his AIP shares be held in the name of “Jim Knight Investments”.
Another AIPC Board meeting took place on 28 August 2002. Reference is made in the minutes to the ‘AIP-AIPC Lease & IP Agreement’, noting that the agreement is substantially completed, other than the dollar amounts that would not be able to be included until the building finance arrangements were confirmed.
An AIPC annual return, dated 28 October 2002, showed the shareholdings in AIPC at that point in time as follows:
Shareholder  Number of ordinary shares
Formula Speedway Promotions  115
(a company controlled by Mr Solomon)
Peter Benson  105
JWPM Pty Ltd  105
(a company controlled by John Caines)
Kelfire Pty Ltd  105
Penelope Rosewarne  105
Liam Rossney  105
Strategic Images Pty Ltd  105
(a company controlled by Mr McNeish)
Bruce Thomas  105
Daytec Australia Pty Ltd  20
(a company owned by Peter Papos)
Mellomere  20
(a company owned by Bruce Thomas)
AIP  10
Andrew and Sue Allcock  10
Rita Bray  10
Megan Evans  10
Gabriel and Wendy Schoffer  10
Michael and Linda Wilkins  10
Peter Papos Superannuation Fund  10
(a company owned by Peter Papos)
Ray T.Arp Superannuation Fund  10
(Raymond Tampion’s Superannuation fund)
Robert and Robyn Bartlett  10
Solomon Family Superannuation Fund  10
TOTAL  990
There were 20 additional unallocated shares available for Groundbreakers.
An Australian Securities and Investments Commission Historical Extract, dated 26 February 2003, recorded the shareholdings in AIPC a little differently. A number of shareholders have a slightly greater number of shares than set out above, and a total of 1010 shares are issued. However, the difference does not directly impact on any issue for the Court to determine.
What is revealed when trying to determine who were shareholders in AIPC, and when, is that those matters are difficult to establish, as AIPC’s records do not provide a clear paper trail. Some annual returns for AIPC appear to be pieces of fiction. A 1999 annual return, dated 7 September 1999, appears to record people as shareholders before they have even been introduced to the project.
The AIPC Board met on 30 October 2002. This was an important meeting as discussions regarding the relationship between AIP and AIPC came to a head. There were two versions of the minutes to this meeting provided by Mr Solomon and Mr Rosewarne, which were not accepted by the Board at the next meeting on 7 November 2002. Mr Benson was asked to prepare minutes based on the two rejected versions. His version has an air of objectivity about it and the Court will therefore have regard to that version.
The discussion recorded under the heading ‘AIP/AIPC Relationship’ is revealing:
“There was considerable debate over the issue of the company relationships between AIP and AIPC. The key points debated were:
·    The roll-up of AIPC into AIP
·    The issue of profit retention by AIP of the increase in value of the land
·    The option for AIPC to purchase the land from AIP
·    The Guarantor positions (and thus the risk) taken by the Directors and Secretary of AIP on the purchase of the land.
Peter and John suggested that there was an intention to merge the two companies and that Minutes of AIPC meetings confirmed this intention. Bruce, Ray and David suggested that the merger was only ever to be considered in the context of a total buy-out of the project by C-Bus and that a final decision had not been made. Liam said that generally we were all the same people and that the project would work better if there was a merging of the two companies.
On the matter of profit retention from the increase in land value, Bruce Ray and David stated that any increase in value should be retained by the shareholders in AIP because they had taken the risk on the land purchase. John raised the point that this had been discussed some 12 months ago and he felt that a cap on the land value had been agreed at $6 Million.
The option granted to AIPC to purchase the land was raised. David tabled documents about AIP’s ability to purchase the land and a document that Groundbreakers had signed stating that the purchase of the land was to be effected by AIP. David stated that AIPC had an option to purchase the land and that option had expired in March this year. Another option would need to be drawn-up. Liam said that he thought the option was provided in the context that the Centre would have been operating by that time and there would be sufficient cash to purchase the land.
Peter indicated that the minutes did not show that AIPC had formally considered the option to purchase before it expired and that such an important decision needed proper consideration and perhaps shareholder involvement. Peter also indicated that because of the conflict of interest position of the Directors of AIP and AIPC (Bruce, David and Ray) the decision needed a formal approach and a specific decision either to take or not take up the option.
Bruce and David stated that their role in guaranteeing the loan funds for the purchase and subsequent capital borrowings against the value of the land were onerous. Liam advised that he may be able to solve that problem in part by introducing another person who could support the guarantees. Liam advised the meeting that he could not provide the name until later this week and further discussions were held with that person.
Liam also raised the matter of a payment made to each Director and the Secretary of AIP in the last 6 months (on advice from Ray) which may have been associated with the repayment of loans to AIP by Directors. Peter advised that payments need to [be] made transparently.
Peter then advised that because of the common Directorships in the companies there was a substantial risk of conflicts of interest and that shareholder involvement in the process was probably required. Because of these conflicts of interest transparent processes were required including establishing a register of declared conflicts of interest.”
Mr Caines presented a letter at the meeting requesting that a shareholders meeting to be held and also requested a copy of AIPC’s memorandum and articles of association.
The Board of AIPC next met on 7 November 2002. There was no agreement on the minutes of the previous meeting. It was apparent at this stage that the relationship between Messrs Arnold, Solomon and Thomas on the one hand and the other Board members was becoming strained. Mr Arnold presented Mr Caines a copy of the memorandum and articles of association.
The minutes record that Mr Solomon said “that he explained the share allocation in AIP to [John Caines] at a previous AIPC meeting held at his office on the 20/2/02 (i.e. 10,000 shares are to be issued to [Mr Thomas], [Mr Solomon], [Mr Arnold], [Mr Rossney], [Mr Benson] and [Mr Knight]).” Mr Caines responded “yes, and I left the meeting and told [Mr Thomas] to fix it.”
Mr Caines said he believed AIP had an agreement with AIPC that the companies would be rolled up into AIP. Mr Arnold discussed the proposition that AIPC lease the Land from AIP. At the end of the minutes of meeting there is a ‘without prejudice’ note that Mr Thomas suggested that AIPC purchase the Land from AIP at its current market value of $11 million. Mr Caines suggested $6 million. There was no resolution of any of these issues.
A meeting of AIP was held on 15 November 2002. Consequently Mr Caines and Mr Rosewarne were not present. Following a query about the transfer of shares between AIP and AIPC the minutes note that Mr Arnold “outlined initial lending process and tabled loan/guarantee documents. Initial lender indicated that shares had to be in [Mr Solomon, Mr Arnold and Mr Thomas’] name and that they were individually and severally (sic) liable for the debt.”
Those at the meeting went through Mr Caines’ proposals for merging AIP and AIPC and various other proposals, such as granting a further option for AIPC to purchase the land in the first 5 years of operation of the project. Discussion in respect of the proposals continued at the 18 November 2002 meeting, without agreement being reached on any particular proposal. The discussion reveals there was some preparedness to extend the option to AIPC to buy the Land, albeit that it had expired:
“[Mr Thomas] outlined the option where by AIP would grant AIPC an option to purchase the venue and a cash payout if the venue does not proceed.”
It can also be seen from the following exchange that the basis for the dispute was taking form:
“General discussion followed regarding interest in the land by AIPC/[Groundbreakers]
[Mr Benson’s] view still was that AIP[C] had an interest in the land.
[Mr Solomon] rejecting this and said he can’t understand how AIP has a formal agreement with the members of AIPC and yet now they still have an interest in the land.
[Mr Benson] agreed that it may be [a] philosophical right to the land
[Mr Arnold] indicated that the land was held for AIPC for 12 months at market value
[Mr Arnold] went on to say this Option provides protection for the [Groundbreakers] and that it was a good deal.
[Mr Knight] suggested that we put the option to AIPC and stop mucking around.
[Mr Thomas] suggested a simple solution whereby John, Colin, Jock could purchase a share at $1000 per share.
[Mr Thomas] questioned why AIPC had any interest in the land at all
[Mr Rossney] said that he had argued that he used to be of the view now he has changed and that the land was purchased for AIPC.”
By letter dated 25 November 2002, Mr Moses, a solicitor acting for John Caines Management Pty Ltd (“JCM”), and Mrs Rosewarne wrote to Mr Solomon as Secretary of AIP. The letter threatened legal action in respect of JCM and Mrs Rosewarne being “unlawfully deprived of their respective interests in the land owned by AIPC”. The letter alleged that Messrs Arnold, Solomon and Thomas “have committed and continue to commit serious offences under the Corporations Act 2001 …”.
On 8 December 2002, Mr Moses wrote to Mr Arnold again threatening the issue of proceedings against him, Mr Thomas and Mr Solomon. By email on 11 December 2002, Mr Moses warned Mr Arnold of the imminent issuing of legal proceedings.
Mr Kuperholz, a solicitor, wrote to Mr Moses on 13 December 2002 advising that he acted for Messrs Arnold, Thomas and Solomon. A dialogue then occurred between the two solicitors which resulted in several pieces of correspondence passing between them without resolution of the dispute between their respective clients. The dialogue collapsed on 20 December 2002.
On 23 December 2002, JCM lodged a caveat over Foxley Lodge in which it claimed an “equitable interest in fee simple”, pursuant to “an express or implied trust”. On 7 January 2003, AIP commenced a process designed to lead to the withdrawal of the caveat. The caveat subsequently lapsed on 27 February 2003. In the interim, AIP was involved in attempts to sell the Land, whilst Mr Moses asserted an interest on behalf of his clients in AIPC.
On 18 March 2003, AIP and Westpac entered into a Call Option Deed, whereby AIP granted Westpac an option to purchase Foxley Lodge for $20.6 million. The option involved the payment of a $200,000 non-refundable fee by Westpac, with the option being required to be exercised by 28 March 2003.
On 27 March 2003, Mr Moses threatened proceedings against Westpac if it exercised the option without reference to him. The option was not exercised and lapsed on 28 March 2003.
On 3 April 2003, AIP issued this proceeding pursuant to the Trade Practices Act 1974 (Cth) (“the TP Act”). It sought damages and injunctions against JCM, Mrs Rosewarne and Messrs Rossney, Benson and Knight. AIP sought interlocutory relief against the respondents. On 7 April 2003, Finkelstein J made orders by consent in which he noted the undertakings of counsel for the respondents, inter alia, not to seek to interfere with the sale of Foxley Lodge or represent that they have any interest in the Land, other than in this proceeding.
Counsel for AIP undertook that AIP would not sell the Land for less than $18 million and that if the Land was sold, after deducting payments not exceeding $5.5 million, the balance of the proceeds of any sale would be lodged in an interest bearing account. AIP also undertook not to encumber the Land for more than $5.5 million.
On 11 April 2003, the respondents and cross claimants filed a defence and cross claim. The pleadings foreshadowed that leave would be sought to commence the cross claim pursuant to ss 236 and 237 of the Corporations Act 2001 (“the Act”), insofar as it concerns AIPC on behalf of AIPC. The following claims are made in the cross claim:
·    Messrs Arnold, Solomon and Thomas conspired to injure AIPC and its shareholders
·    AIP acted in breach of trust in respect of AIPC and its shareholders
·    Messrs Arnold, Solomon and Thomas acted in breach of their duties as directors of AIPC and oppressed minority shareholders.
The proceeding was listed for hearing on 5 and 6 June 2003. It soon became apparent that the time allowed was not sufficient to conclude the matter. In total the matter occupied some fifteen days of hearing time, with final submissions being completed on 22 October 2003. The oral submissions were supplemented by detailed written submissions supplied by the parties.
STATEMENT OF CLAIM AND FINDINGS OF FACT
There are a number of facts in relation to events referred to in the background above that are in dispute. Several important factual disputes are covered in the issues raised in the applicant’s Statement of Claim. In light of the findings set out in the background above I now turn to those issues raised in the Statement of Claim. All other factual disputes are dealt with elsewhere in the consideration of the cross claims below.
In its statement of claim, AIP contended that its issued capital is constituted by twelve issued shares held, as to four each, by Messrs Arnold, Solomon and Thomas. In their cross claim, the respondents accepted:
(a) Mr Arnold
- has since March 2000 been a director of AIP and AIPC
- holds 4 ordinary shares in AIP
·holds 110 ordinary shares in AIPC through Kelfire Pty Ltd.
(b) Mr Solomon
- has since 13 December 2000 been the company secretary of AIP and AIPC
- holds 4 ordinary shares in AIP
·holds 120 ordinary shares in AIPC through Formula Speedway Promotions.
(c) Mr Thomas
- has since 23 July 1999 been a director of AIPC
- has since 20 August 1999 been a director of AIP
·holds 4 ordinary shares in AIP
·holds 140 ordinary shares in AIPC of which 10 ordinary shares are held beneficially in trust for the Wiseheads.
Despite this concession, the respondents and cross claimants contended that the issued capital of AIP is and was from 25 August 2000 held on constructive trust for the benefit of AIPC. The claim that the shares in AIP and/or Foxley Lodge was held on constructive trust for the benefit of AIPC is dealt with below.
On 25 August 2000, Messrs Arnold, Solomon and Thomas became the holders of four shares each in AIP. AIP contended that Messrs Rossney, Benson and Knight made contributions to the purchase of the Land in the following amounts:
· $30,000 each by Mr Rossney and Mr Benson,
· $50,000 by Mr Knight,
entitling Mr Rossney and Mr Benson to be issued with 0.81% of its issued shares and Mr Knight with 1.33%. AIP said that the funds advanced by Messrs Rossney, Benson and Knight were expressly stated to be for the purpose of acquiring shares in AIP. They called in aid letters from AIP to Messrs Rossney and Benson each dated 15 April 2002 and to Mr Knight dated 20 March 2001. AIP contended that the other respondents, having made no contribution to AIP, are not entitled to any of its issued shares.
In response, the respondents submitted that Messrs Rossney and Benson advanced loan funds of $30,000 each to AIPC, “which funds were later paid over to AIP”. They said that Mr Knight advanced $50,000 in loan funds to AIP. They denied every other contention set out in the preceding paragraph and reiterated that the twelve issued shares in AIP are held on a constructive trust for AIPC.
The correct characterisation of the payments made by Messrs Rossney, Benson and Knight, referred to in the three previous paragraphs is revealed in the minutes of Board of Management meeting of 13 January 2001. The relevant passage is reproduced above at [60] and below at [303].
Messrs Benson and Rossney remained of the view that, despite the decision at the meeting of 13 January 2001, contributions for the purchase of the Land were loan funds and that Foxley Lodge is held on constructive trust for AIPC. The question of whether AIP shares were held on constructive trust is dealt with below.
In paragraph 4 of its statement of claim AIP contended that the first to fourth respondents agreed to and acknowledged four key points contained in the Kalus Kenny letter of 13 February 2001. Those key points were:
- Messrs Arnold, Thomas and Solomon were the only shareholders and participants in AIP;
- AIP was to be the purchaser of Foxley Lodge;
- AIPC was to have an option to purchase the Land at market value within twelve months of the settlement;
- the first to the fourth respondents were to have no interest in the Land.
The Court finds that the Kalus Kenny letter was signed by Messrs Caines, Rosewarne, Rossney and Benson at the 21 February 2001 meeting, and shortly after by each of the Groundbreakers to whom it was addressed. Further, Mr Benson had advance knowledge of the letter and had suggested corrections to it prior to the meeting. The Court finds that the first to fourth respondents, and those Groundbreakers, by signing the Kalus Kenny letter of 13 February 2001, agreed to and acknowledged the four key points listed above.

AIPC’s memorandum and articles of association at clause 93 provide:
“The directors shall cause proper accounting and other records to be kept and shall distribute copies of the balance sheets as required by the Law and shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounting and other records of the Company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right of inspecting any account or books or paper of the Company except as conferred by statute or authorised by the directors or by the Company in general meeting.”
There is no evidence that Messrs Arnold and Thomas breached their obligations under the Act or AIPC’s memorandum and articles of association in respect of the inspection of books of the company.
Conclusion
I reject each and every allegation made by the cross claimants against the cross respondents on the topic of breach of fiduciary duties. Whatever be the content of that duty, and assuming for the purposes of the argument that fiduciary duty is as is alleged by the cross claimants at paragraph 43A of the cross claim, no breach of fiduciary duty has been established. On the contrary, the cross respondents acted honestly and appropriately to secure Foxley Lodge for the project so that the project may have a prospect of being brought to fruition.
There is no evidence to suggest that Messrs Arnold and Thomas:
·did not act honestly in the exercise of their powers and the discharge of their duties as directors of AIPC;
·did not act in good faith and fairness towards AIPC;
·did not act in the best interests of AIPC;
·allowed their personal interests to conflict with the fiduciary duties which they owed to AIPC; or
·improperly used their position[s] as directors of AIPC to obtain directly or indirectly an advantage for themselves and/or to cause prejudice or detriment to AIPC.
As the Court has found that Messrs Arnold and Thomas have not breached their fiduciary duties as directors of AIPC, the claim that Solomon was knowingly concerned in, and a party to, the breaches falls away.
Conspiracy to defraud
The cross claimants alleged that Messrs Arnold, Solomon and Thomas, “wrongfully and maliciously conspired and combined amongst themselves to deprive and injure AIPC”.
The cross-claimants asserted that the conspiracy to procure AIP as purchaser of Foxley Lodge was pursued through the wrongful conduct of Messrs Arnold and Thomas, in breach of their fiduciary duties, beginning and continuing from 25 August 2000. It is alleged that the making of false representations by Mr Thomas, referred to above, were also acts constituting the conspiracy.
The conspiracy was said to also be furthered by:
·Mr Arnold executing a real estate nomination form in which AIPC nominated AIP as purchaser of Foxley Lodge.
·Messrs Arnold and Thomas’ failure to disclose to the other Wiseheads that the option agreement was executed on 9 March 2001 (or alternatively on 21 May 2001, when the correct seals were affixed) or that the option period would expire on 9 March 2002 (or alternatively 21 May 2002).
·Mr Arnold and Mr Thomas procuring AIPC not to exercise the option, failing to inform the other Wiseheads that the option agreement had been executed or when the option would expire and ensuring that the increased value of the Land would benefit AIP and its shareholders solely.
The alleged breaches of fiduciary duty by Messrs Arnold and Thomas in respect of AIP’s refinancing of its borrowings, its failure to account to AIPC in relation to the purchase of Foxley Lodge and its failure to produce for inspection by AIPC, the financial records and books of account of both AIPC and AIP are alleged as being performed in furtherance of the conspiracy by them to:
“(a) Deprive AIPC of the benefit of the increased value in the land;
(d)To obtain for themselves the whole of the benefit of the increased value of the land;
(e)To exclude contrary to the terms of the Adrenalin Project Agreement the Wiseheads from participating equally in the assets of AIP which includes the land.”
Mr Solomon, as AIPC company secretary since 13 December 2000, is said to have been knowingly concerned in, and a party to, the conspiracy, including the breaches of fiduciary duties by Messrs Arnold and Thomas.
All claims of conspiracy to defraud are denied by the cross respondents.
To establish conspiracy to defraud it is necessary to identify the form of an agreement or combination constituting the conspiracy. An intention to injure should normally exist. Also, although the offence has been defined in broad terms, there should be proof that the conspirators acted fraudulently or dishonestly.
It has been alleged by the cross claimants that the cross respondents acted in combination to gain control of AIP and get the other members of the Board of Management to sign the Kalus Kenny letter in order to exclude the other Wiseheads from an interest in the Land. The conspiracy was alleged to have been furthered by breaches of fiduciary duty, misrepresentations and, it can be presumed, general acts of dishonesty.
The Court does not find that the cross respondent’s acted dishonestly, or fraudulently. Such is reflected in the findings of fact set out above, and by the fact that the Court has preferred the evidence given by the cross respondent’s to that given by the cross claimants. Given the claims concerning misrepresentation and breach of fiduciary duty have been dismissed, it follows that the allied claims of conspiracy are also dismissed. Once AIP became the owner of the Land in March 2001, it was entitled to use that Land as it saw fit, subject to the law.
The Court rejects the contentions of conspiracy to defraud made in respect of the alleged representations referred to at paragraph 59 of the cross claim, which I have found were not made by Mr Thomas. The Court also rejects the conspiracy to defraud allegations arising from the signing of the real estate nomination form referred to at paragraph 51 of the cross claim. The same applies to the alleged conspiracy insofar as it relates to the option agreement as referred to in paragraphs 63 and 68 of the cross claim and the accounting to AIPC and provision of records as referred to at paragraph 70. The Board of Management was aware of the option. The Court rejects the contention that Messrs Arnold, Thomas and Solomon conspired to prevent the option from being exercised.
The allegation that the cross respondents set out to deprive AIPC of the benefit of the increased value of the Land and desired to keep it for themselves is without foundation. The allegation that in some way the cross respondents gained control of AIPC and AIP by procuring Mr Rosewarne to resign from various offices in each company is baseless. Mr Rosewarne resigned willingly and voluntarily as a director of AIP and AIPC. His resignation was not controversial until the filing of the counter claim. Further, at least as at 21 February 2001, there was no term of the project agreement which bound each “Wisehead” to participate equally in the assets of AIP. That concept is totally at odds with what was agreed to in signing the Kalus Kenny letter.
Further, it is extremely difficult for the Court to accept that the cross respondents conspired to defraud AIPC in circumstances when it was never suggested to Mr Solomon or Mr Thomas, when cross-examined, that either of them had dishonestly set out to perpetrate a fraud.
The allegations of conspiracy to defraud are baseless. The events that occurred in connection with AIP’s role as a purchaser of the Land were agreed to in writing by the vast majority of AIPC members, by their acceptance of the terms laid down in the Kalus Kenny letter.
Adrenalin agreement and constructive trust
At paragraphs 73 and 74 of the cross claim, the cross claimants alleged that AIP holds the Land on constructive trust for AIPC and as such owed fiduciary duties to AIPC.
The breach of trust and constructive trust claim is based upon the acceptance of the allegations raised at paragraphs 44 to 56 inclusive, concerning the existence of an agreement between the Wiseheads as to how the project would operate. The alleged terms of the agreement, set out at paragraph 48 of the cross claim, included the term:
“Each of the Wiseheads would have an equal share in the assets of the company or companies which would undertake the development and operation of the dual purpose motorsport facility which was the Adrenalin project.”
The cross-claimants further alleged that another part of the agreement was that:
“Any funds advanced by the Wiseheads for the purposes of the Adrenalin Project were to be treated as loan funds.”
The cross claimants said that as a result of the agreement AIP holds the Land in constructive trust for AIPC and, consequently, owed fiduciary duties to AIPC.
The allegations concerning the existence of an agreement and the constructive trust are denied by the cross respondents. In any event, the cross respondents said that the basis upon which the project was to be conducted was varied by agreement at a meeting held on 21 February 2001 and by the Kalus Kenny letter of 13 February 2001.
Even accepting the existence of the agreement in the terms alleged, I consider that the events of 21 February 2001 resulted in there being broad agreement amongst the Wiseheads to change the basis upon which the project would proceed. This change was made to ensure that the project went ahead. The Kalus Kenny letter and the changes in the direction of the project were agreed to at the “Wiseheads” meeting on 21 February 2001.
A constructive trust arises by operation of law rather than from the intention of the parties, express or implied. It is imposed as a result of the conduct of the trustee. A constructive trust may be imposed to prevent fraud which would otherwise arise if a person was deprived of property that the person is entitled to, or that the denial of the trust would be unconscionable. It is also used to make persons accountable for property where justice would require that they be accountable and where there has been unjust enrichment.
The existence of a constructive trust has not been established either as a result of any agreement that existed between the Wiseheads, or as a result of fraud or other unconscionable conduct. The Court has found that the cross respondents have not acted fraudulently, unconscionably or been unjustly enriched.
Constructive trusts are, in certain situations, remedial. A constructive trust may be declared where the directors of AIPC were personally liable to account for gains obtained as a result of a breach of fiduciary duty. As Messrs Arnold and Thomas have not been found to have breached any fiduciary duties as directors of AIPC, a remedial constructive trust does not arise.
The Court rejects the cross claimant’s contention that the issued capital of AIP is held on constructive trust for AIPC. The cross respondents hold their shares in AIP in their own right. AIP has been the registered owner of Foxley Lodge since 28 March 2001. The cross respondents each hold 4 of the 12 issued shares in AIP. AIPC has no interest in the Land or in any proceeds from the sale of it.
Related claims are made in respect of Messrs Arnold, Thomas and Solomon as being knowingly concerned in breaches of AIP’s trustee duties. At paragraph 77 of the cross claim, the cross claimants alleged they knew of and participated in the breaches of trustee’s duties committed by AIP. As the Court has found that AIP did not hold the Land on constructive trust for AIPC, Messrs Arnold, Thomas and Solomon cannot be said to have known of and participated in breaches of trust that did not happen.
Statutory Duties
At paragraph 79 of the cross claim the cross claimants allege that the cross respondents, as officers of AIPC, owed duties to AIPC under the Act which they have breached, resulting in contraventions of ss 180 to 183 of the Act. These claims are denied by the cross respondents.
The statutory duties, in essence, replicate common law fiduciary duties as characterised by the cross claimants. Section 180(1) provides:
“A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a)were a director or officer of a corporation in the corporation’s circumstances; and
(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Section 181(1) provides:
“A director or other officer of a corporation must exercise their powers and discharge their duties:
(a)in good faith in the best interests of the corporation; and
(b)for a proper purpose.”
Section 182(1) provides:
“A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.”
Section 183(1) provides:
“A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.”
The allegations said to constitute the breach of those obligations are ones which have already been elsewhere rejected by the Court: see [195] to [254] above. No separate or independent basis was advanced for the alleged breaches. This aspect of the cross claim is also without substance.
Oppression
The cross claimants allegation concerning oppressive conduct under Part 2F.1 of the Act referred to much of the conduct set out in each of the other cross claims dealt with above. At paragraph 84 of the cross claim, the cross claimants applied for an order under s 233 of the Act on the basis that Messrs Arnold, Thomas and Solomon, as directors and officers of AIPC, have conducted the affairs of AIPC in a manner which is contrary to the interests of members of AIPC and oppressive to, unfairly prejudicial to and unfairly discriminatory against each other member of AIPC.
Section 232 provides that the Court may make an order under s 233 in respect of oppression in the form conduct of the company’s affairs, an actual or proposed act or omission by or on behalf of a company ora resolution, or proposed resolution, of members or a class of members of the company. An application under s 233 can be made by a member of the company.
The claim of oppression is denied by the cross respondents. The cross respondents point out that the cross claimants do not constitute a minority of AIPC and, consequently, are not in a position to oppress anyone. However, they say that if they are liable to the cross claimants for any default or breach in their capacity as AIPC officers they maintain that they always acted honestly and ought fairly be excused from any alleged liability in accordance with s 1318 of the Act.
The provisions in Part 2F.1 of the Act, where ss 232 and 233 are found, are interpreted broadly and in a flexible manner, particularly in respect of small closely held companies, as they do not necessarily have the additional protections found in the regulation of large public companies. Alleged unfair conduct is to be looked upon as a question of commercial fairness judged objectively from the point of view of a commercial bystander: see Dynasty Pty Ltd v Coombs (1995) 13 ACLC 1290 at 1296. If the conduct is that of a director, the bystander is taken to be a director: Wayde v New South Wales Rugby League Ltd (1985) 61 ALR 225.
Importantly, the Court will look at fairness in context and may undertake a balancing exercise in assessing conduct: see HA Ford, RP Austin and IM Ramsay, Fords Principles of Corporations Law, 11^th edition, Butterworths Lexis Nexis, Australia 2003, at p 615. The conduct of the directors may have an overriding positive result for both the company as a whole, and members as individuals.
The Court rejects the cross claimants submissions based on findings made above. There is no evidence of any overbearing and oppressive conduct, or omissions, contrary to the interests of members, which would establish a basis for the cross claimants seeking relief for oppression. There is also no evidence of unfairly prejudicial or discriminatory conduct, or omissions.
Although Messrs Arnold, Thomas and Solomon diverted an opportunity away from AIPC to AIP, the transaction was in the interests of AIPC, in that it kept the project alive, and was performed with the approval of the members of AIPC.
The Court finds that Messrs Arnold, Thomas and Solomon acted honestly and appropriately to secure the Land for the project, in the absence of which the project would not have survived beyond early 2001. Despite allegations that Mr Thomas made misrepresentations, there is no evidence of conduct by the cross respondents at AIPC Board of Management meetings that would be considered oppressive, for the purposes of s 232 of the Act. In any event, those allegations have been found to lack substance.
In respect of the AIPC directors’ meetings on 9 March 2000, 25 August 2000 and 13 December 2000, no evidence has been provided to the Court to show why, at the time those meetings were held or once members of AIPC had read the Kalus Kenny letter, those directors meetings were oppressive for the purposes of s 232 of the Act. The minutes for the 9 March 2000 meeting indicate Mr Rosewarne was in attendance. Consequently, it should have been no secret that the meeting occurred. There was nothing that occurred at the 25 August 2000 and 13 December 2000 meetings that impacted on AIPC members. In August 2000, AIP was a company without a bank account. AIP and its ownership only became relevant after AIPC members had signed the Kalus Kenney letter setting out the transaction between AIPC and AIP.
The Court finds that all conduct, alleged by the cross claimants to have been a breach of fiduciary duty, is not conduct which could be characterised as oppressive under Part 2F.1 of the Act. Messrs Arnold, Thomas and Solomon did not:
·        obtain control of AIP;
·        procure the Wiseheads to sign the Kalus Kenny letter;
·        nominate AIP as purchaser of the Land;
·        create the option agreement;
·        fail to exercise the option on behalf of AIPC; and
·refinance AIP’s borrowings in respect of the Land,
in a way that was contrary to the interests, or oppressive to, or unfairly discriminatory against, a member or members of AIPC.
The leave to proceed issue
As all the claims made by the cross claimants, including AIPC, have been rejected, there is no need to consider whether the Court should grant leave for the cross claim to be brought on behalf of AIPC under ss 236 and 237 of the Act.
Other issues
The cross claim is dismissed.
To the extent that any other submissions have been reused in support of the cross claim, but do not bear on any pleading in the cross claim, the Court is of the view that such a matter is not properly before it. Senior counsel for the cross claimants was explicitly content to rest on the cross claim as pleaded. The Court should not embark on issues which are not strictly before it.
It is also unnecessary to deal with certain matters raised in the cross respondents’ defence to the cross claim, given that the cross claim has wholly failed. Those issues include the matters raised as follows:
- abandonment of interests in the Land (paragraph 55 );
- estoppel by conduct (paragraph 57 to 60);
- estoppel by convention (paragraph 61 – 62);
- relief from liability under s 1318 of the Act (paragraph 63).
The applicant’s claim
Having rejected every contention raised by the cross claim, the Court finds that the cross respondents hold their shares in AIP in their own right. AIP has been the registered owner of Foxley Lodge since 28 March 2001. AIPC has no interest in the land of in any proceeds from the sale of it.

In respect of AIP shareholdings, AIP submitted that Mr Rossney, Mr Benson and Mr Knight are entitled to the benefit of contributions made to the company. The respondents contended that those men contributed money to AIP rather than contribute funds for the settlement of the Land purchase.
The respondent’s contentions about the option agreement, raised in the defence, essentially mirror those which were made by the cross claimants and rejected by the Court.
The respondents, who include Mr Rossney, Mr Benson and Mr Knight contended that they loaned money variously to AIPC and/or AIP but did not contribute to AIP in a way which would entitle them to have equity in AIP. Their submissions in that regard stem from their primary position that the issued shares in AIP are held on constructive trust for AIPC. I have rejected that primary submission.
The AIP draft shareholders report dated 14 November 2002 sets out the share allocation. The arrangement allocates $1,170,000 to each of Messrs Arnold, Thomas and Solomon as “Funds for shares”, despite the fact they only contributed $300,000, $350,000 and $350,000 respectively. On the other hand, Mr Rossney and Mr Benson were each allocated $30,000 as “Funds for shares”, for the $30,000 they contributed, and Mr Knight $50,000 “Funds for shares”, for his $50,000. Presumably, such an allocation has been made because Messrs Arnold, Thomas and Solomon provided the guarantees for the CBA loan. However, it is not clear when, and by whom, such an allocation was decided upon or whether it accords with the decision made at the Board of Management meeting held on 13 January 2001.
It is worth reproducing the relevant part of the minutes of the 13 January 2001 meeting, which state:
“It was agreed by Liam Rossney, Peter Benson, David Arnold and Bruce Thomas, that their monies paid previously ($30,000 on the basis of the arrangement proposed at the board meeting on the 30/06/00) would now form their contribution towards the land purchase. Ray Solomon agreed to contribute a further $30,000 under this arrangement.
· In the case of Liam Rossney and Peter Benson, their share of the land would depend on the percentage of their contribution as part of the overall cash or equity requirements by the bank.
· For example; if the amount required by the bank were $900,000, their $30,000 contribution would entitle them to a 3% share of the land.”
The fairest course that commends itself to the Court is to allow the respondents to make further submissions to the Court on the question of the entitlements of Messrs Rossney, Benson and Knight, if any, to the share capital of AIP. This can be addressed as part of the brief submissions of the parties on the question of the appropriate orders to be made as a consequence of these reasons for judgment.
Otherwise, it is sufficient to note that I consider that the claims made in the statement of claim on the material issues arising in the case have been established, save what I might describe as issues going to the “spoiling tactics” of the respondents with respect to AIP’s attempts to sell the Land. The issues arising therefrom (ie at paragraphs 11 ff of the statement of claim) do not appear to have any continuing relevance.
ORDERS
The parties are required to send in minutes of the orders they contend the Court should make, together with brief accompanying submissions consistent with these reasons by 31 March 2004. A Mention will be held at 10.00am on 26 April 2004 in an effort to overcome any dispute about appropriate orders. In the event the parties are in agreement as to orders, the Mention will be abandoned.

I certify that the preceding three hundred and six (306) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.
Associate:
Dated: 10 March 2004

Counsel for the Applicant: Mr M Dreyfus QC with Mr M Robins

Solicitor for the Applicant: Nathan Kuperholz

Counsel for the Respondents: Mr J Gilmour QC with Mr S Anderson

Solicitor for the Respondents: Darren Moses

Date of Hearing: 5, 6,16 and 17 June; 8, 9, 10, 11, 12, 15, 16, 17, 18 and 19 September; 22 October 2003

Date of Judgment: 10 March 2004

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V190 OF 2003

BETWEEN:	ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD (ACN 089 178 594) APPLICANT
AND:	JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666) FIRST RESPONDENT PENELOPE ROSEWARNE SECOND RESPONDENT LIAM ROSSNEY THIRD RESPONDENT PETER BENSON FOURTH RESPONDENT JIM KNIGHT FIFTH RESPONDENT
AND:	JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666) FIRST CROSS-CLAIMANT PENELOPE ROSEWARNE SECOND CROSS-CLAIMANT LIAM ROSSNEY THIRD CROSS-CLAIMANT PETER BENSON FOURTH CROSS-CLAIMANT JIM KNIGHT FIRST CROSS-CLAIMANT ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD SIXTH CROSS-CLAIMANT
AND:	DAVID ANTHONY ARNOLD FIRST CROSS-RESPONDENT RAYMOND JOHN SOLOMON SECOND CROSS-RESPONDENT BRUCE VIVIAN THOMAS THIRD CROSS-RESPONDENT
JUDGE:	MARSHALL J
DATE OF ORDER:	10 MARCH 2004
WHERE MADE:	MELBOURNE

JUDGE:	MARSHALL J
DATE:	10 MARCH 2004
PLACE:	MELBOURNE

Counsel for the Applicant:	Mr M Dreyfus QC with Mr M Robins
Solicitor for the Applicant:	Nathan Kuperholz
Counsel for the Respondents:	Mr J Gilmour QC with Mr S Anderson
Solicitor for the Respondents:	Darren Moses
Date of Hearing:	5, 6,16 and 17 June; 8, 9, 10, 11, 12, 15, 16, 17, 18 and 19 September; 22 October 2003
Date of Judgment:	10 March 2004