BDO Group Holdings (Qld) Limited v Sully - [2015] QSC 166

SUPREME COURT OF QUEENSLAND

CITATION:

BDO Group Holdings (Qld) Limited & Anor v Sully [2015] QSC 166

PARTIES:

BDO GROUP HOLDINGS (QLD) LIMITED (FORMERLY BDO GROUP HOLDINGS (QLD) PTY LTD)
ACN 133 657 833

(first applicant)
BDO ADMINISTRATION (QLD) PTY LTD
ACN 134 036 490
(second applicant)

v
BRIAN RUSSELL SULLY

(respondent)

FILE NO/S:

Supreme Court No 2666 of 2015

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court of Queensland at Brisbane

DELIVERED ON:

19 June 2015

DELIVERED AT:

Brisbane

HEARING DATE:

17 April 2015

JUDGE:

Flanagan J

ORDER:

1.    The Court declares that, subject to clauses 23.2 and 23.4, clause 23.1(a)(i), clauses 23.1(b)(i) and (ii), and clauses 23.1(d), (f) and (g) of the BDO Shareholders’ Agreement adopted by the first applicant and the respondent by Deed of Accession dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015.

2.    The Court declares that clause 20(b)(i)(A), clauses 20(b)(ii)(A) and (B), and clauses 20(b)(iv), (vii) and (viii) of the Employment Agreement between the second applicant and the respondent dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015.

3.    The respondent be restrained by injunction until 19 April 2016 from:

(a)   engaging in any activity which involves providing accounting services to any person who was, at any time within the 24 months prior to 19 April 2015, a client of the BDO Group;

(b)   inducing, soliciting or canvassing, approaching or accepting any approach from any person who was, at any time during the 24 month period prior to 19 April 2015, a client of the BDO Group, to obtain the custom of that person in a business or activity which:

                  (i)      is the same or similar to the whole or material part or parts of the accounting services provided by the BDO Group; or

                   (ii)     is in competition with the accounting services provided by the BDO Group.

4.    I will hear the parties as to costs

CATCHWORDS:

TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – PARTICULAR CASES – EMPLOYMENT – where the respondent was a partner at an accountancy firm that merged with, inter alia, the first applicant – where the respondent entered into a shareholders’ agreement with the first applicant and an employment contract with the second applicant – where both the shareholders’ agreement and employment agreement contained restraint provisions in respect of, inter alia, prohibiting the undertaking of services for clients, and soliciting employees, of the applicants – whether the restraints are valid and reasonable

TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – PARTICULAR CASES – PARTNERSHIPS – where the respondent was a partner at an accountancy firm that merged with, inter alia, the first applicant – where the respondent entered into a shareholders’ agreement with the first applicant and an employment contract with the second…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2015] QSC 166
Decision Date: 19 June 2015

CaseChat Overview and Summary

In the case of BDO Group Holdings (Qld) Limited v Sully, the primary issue was the validity and reasonableness of restraint clauses contained within a Shareholders' Agreement and an Employment Agreement. Mr Sully, a former partner at PKF, had merged his practice with BDO Group, leading to the adoption of a new corporate structure. Both agreements included clauses restricting Mr Sully from providing accounting services to certain clients and soliciting employees of the BDO Group for a period following his departure. Mr Sully challenged the enforceability of these clauses.

The court had to determine the legitimate interest sought to be protected by the restraints imposed by BDO Group Holdings and BDO Administration. The applicants argued that the restraints extended beyond a mere employment relationship, protecting the goodwill and client relationships of the BDO Group. In contrast, Mr Sully contended that the restraints only pertained to his time as an employee and did not extend to protecting the goodwill of the company. The court examined whether the restraints were necessary to protect the legitimate interests of the applicants and whether they were reasonable in scope, duration, and geographical extent.

The court concluded that the restraints were necessary to protect the goodwill of the BDO Group, which included the relationships developed between the partners and the clients. The restraints were not overly broad or unreasonable, considering the nature of the business and the need to protect client relationships and financial viability. The court found the restraints to be valid and reasonable, thereby upholding their enforceability against Mr Sully. The court issued an injunction restraining Mr Sully from providing accounting services to certain clients and soliciting employees of the BDO Group for a period of 12 months.

Orders

Orders of the court

1. The Court declares that, subject to clauses 23.2 and 23.4, clause 23.1(a)(i), clauses 23.1(b)(i) and (ii), and clauses 23.1(d), (f) and (g) of the BDO Shareholders’ Agreement adopted by the first applicant and the respondent by Deed of Accession dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015.

2. The Court declares that clause 20(b)(i)(A), clauses 20(b)(ii)(A) and (B), and clauses 20(b)(iv), (vii) and (viii) of the Employment Agreement between the second applicant and the respondent dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015.

3. The respondent be restrained by injunction until 19 April 2016 from:

(a) engaging in any activity which involves providing accounting services to any person who was, at any time within the 24 months prior to 19 April 2015, a client of the BDO Group;

(b) inducing, soliciting or canvassing, approaching or accepting any approach from any person who was, at any time during the 24 month period prior to 19 April 2015, a client of the BDO Group, to obtain the custom of that person in a business or activity which:

(i) is the same or similar to the whole or material part or parts of the accounting services provided by the BDO Group; or

(ii) is in competition with the accounting services provided by the BDO Group.

4. I will hear the parties as to costs

Background

Background to the litigation

Before I identify the issues to be decided it is necessary to outline some of the background to the proceedings. Background Mr Sully, as a chartered accountant, has provided accountancy services predominately to medical practitioners and barristers. He practiced as a sole practitioner at the Australian Medical Association’s headquarters at Kelvin Grove, Brisbane prior to joining an accountancy practice known as PKF in Brisbane.[5] Mr Sully was a partner at PKF in Brisbane. Whilst at PKF he built up a substantial client base of approximately 320 clients. In or about August 2012, he and other partners of PKF in Brisbane merged with the BDO Group.[5] Transcript of proceedings, 1-44, lines 9-13. Prior to this merger the BDO Group was restructured in about 2010. It moved from a partnership structure to a corporate structure. The Shareholders’ Agreement and the Employment Agreement are pro forma agreements which reflect this restructuring. The Shareholders’ Agreement states, under the heading “Background”, that the parties agree that the BDO Group “must carry on the Business, and the Group’s affairs must be managed and controlled, on the terms of [the Shareholders’ Agreement]”.[6] The BDO Group is defined to mean BDO Holdings, its subsidiaries, BDO Audit (Qld) Pty Ltd and BDO Kendalls Holdings Limited as trustee for the BDO Kendalls Group Trust.[7][6] Exhibit ACS-1 to the affidavit of Anthony Craig Schiffmann sworn 13 March 2015, 3.[7] Exhibit ACS-1 to the affidavit of Anthony Craig Schiffmann sworn 13 March 2015, 8. Clause 3.1 of the Shareholders’ Agreement identifies the objectives of the BDO Group. These objectives include carrying on and developing the business including securing new clients, providing timely and accurate service and advice to clients and providing a quality work environment.[8][8] Exhibit ACS-1 to the affidavit of Anthony Craig Schiffmann sworn 13 March 2015, cl 3.1. The Shareholders’ Agreement provides for two principal categories of shareholding: equity and salary.[9] Both of these categories of shares are redeemable preference shares with a face value of $1.00. An equity shareholding contemplates that an individual (described as an “affiliate”) would be employed, on set conditions, by BDO Administration. That individual does not directly hold any shares. Rather, the shares are issued to an entity nominated by that affiliate. Both the shareholder and the affiliate are parties to the Shareholders’ Agreement. The remuneration in respect of a particular shareholder and affiliate consists of a combination of dividends paid to the shareholder, and employee entitlements paid to the affiliate. [9] Exhibit ACS-1 to the affidavit of Anthony Craig Schiffmann sworn 13 March 2015, cl 3.3. The other class of shares is “residuary shares”. At or about the time of the merger Mr Sully and Yllus Pty Ltd, as trustee for the Sully Family Trust, adopted the terms of the Shareholders’ Agreement dated 25 November 2010 by Deed of Accession dated 5 June 2012.[10] Yllus Pty Ltd therefore became an equity shareholder and Mr Sully an equity affiliate.[10] Affidavit of Anthony Craig Schiffmann sworn 13 March 2015, [2]; exhibit ACS-1 to the affidavit of Anthony Craig Schiffmann sworn 13 March 2015, 49-53.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Clause 26 of the Employment Agreement which deals with termination does not identify as an event of termination of employment the redeeming of shares of an equity shareholder. The only relevant difference between an employment agreement for an equity affiliate as opposed to a salary affiliate is the period of notice that is required for resignation, namely at least nine months rather than three months. To the extent that this gives rise to an inconsistency, such an inconsistency is dealt with by clause 33 of the Employment Agreement which provides that the Shareholders’ Agreement prevails. The Shareholders’ Agreement states the relevant period of notice required of a salary affiliate in clause 8.3. It follows that after 1 July 2014 the terms and conditions of Mr Sully’s employment with BDO Administration continued to be governed by the 1 July 2012 Employment Agreement save for the period of notice constituting 3 months in accordance with the Shareholders’ Agreement.Issue (a) – what is legitimate interest sought to be protected by the restraints by BDO Group Holdings and BDO Administration? All parties agree that no public interest consideration arises. It may also be accepted that the merger of PKF Brisbane with BDO Group cannot be characterised as the sale of a business. The applicants’ characterise the legitimate interest sought to be protected by the restraints as going beyond a mere employment relationship to something akin to that of a partnership. What the restraints seek to protect is the goodwill of the BDO Group which include, or is substantially the result of, the relationships developed between the partners and the clients of the BDO Group.[27] The respondent identifies the relevant interest sought to be protected as one of “customer connections” only arising whilst Mr Sully was employed by BDO Administration.[28][27] Applicants’ outline of submissions dated 17 April 2015, [62]-[63].[28] Transcript of proceedings, 1-58, lines 15-20. The legitimate interest cannot necessarily be ascertained by placing the agreement in a particular category and then trying to align that category with existing cases.[29] In Bridge v Deacons [1984] 1 AC 705 the Privy Council considered a restraint clause in a partnership agreement. The person sought to be restrained had become a full capital partner in Deacons with a 5% share of the business and assets, including the goodwill. Clause 28(a) of the relevant partnership agreement provided that no partner ceasing to be a partner should for five years thereafter act as a solicitor in the colony of Hong Kong for any person, firm, or company who was at the time of him ceasing to be a partner or had during the period of three years prior, been a client of the partnership. The partnership increased and was divided into separate departments whereby Bridge became the partner in charge of the intellectual and industrial property department. As a consequence he acted only for clients of that department, having no contact with 90% of the firm’s clients. On his retirement from the partnership at the end of 1982, he transferred his share of the assets to the continuing partners in accordance with the partnership agreement.[29] Respondents’ outline of submissions dated 17 April 2015, [50].

CITATION:	BDO Group Holdings (Qld) Limited & Anor v Sully [2015] QSC 166
PARTIES:	BDO GROUP HOLDINGS (QLD) LIMITED (FORMERLY BDO GROUP HOLDINGS (QLD) PTY LTD) ACN 133 657 833 (first applicant) BDO ADMINISTRATION (QLD) PTY LTD ACN 134 036 490 (second applicant) v BRIAN RUSSELL SULLY (respondent)
FILE NO/S:	Supreme Court No 2666 of 2015
DIVISION:	Trial
PROCEEDING:	Application
ORIGINATING COURT:	Supreme Court of Queensland at Brisbane
DELIVERED ON:	19 June 2015
DELIVERED AT:	Brisbane
HEARING DATE:	17 April 2015
JUDGE:	Flanagan J
ORDER:	1. The Court declares that, subject to clauses 23.2 and 23.4, clause 23.1(a)(i), clauses 23.1(b)(i) and (ii), and clauses 23.1(d), (f) and (g) of the BDO Shareholders’ Agreement adopted by the first applicant and the respondent by Deed of Accession dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015. 2. The Court declares that clause 20(b)(i)(A), clauses 20(b)(ii)(A) and (B), and clauses 20(b)(iv), (vii) and (viii) of the Employment Agreement between the second applicant and the respondent dated 5 June 2012 are binding on the respondent for the period of 12 months from 19 April 2015. 3. The respondent be restrained by injunction until 19 April 2016 from: (a) engaging in any activity which involves providing accounting services to any person who was, at any time within the 24 months prior to 19 April 2015, a client of the BDO Group; (b) inducing, soliciting or canvassing, approaching or accepting any approach from any person who was, at any time during the 24 month period prior to 19 April 2015, a client of the BDO Group, to obtain the custom of that person in a business or activity which: (i) is the same or similar to the whole or material part or parts of the accounting services provided by the BDO Group; or (ii) is in competition with the accounting services provided by the BDO Group. 4. I will hear the parties as to costs
CATCHWORDS:	TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – PARTICULAR CASES – EMPLOYMENT – where the respondent was a partner at an accountancy firm that merged with, inter alia, the first applicant – where the respondent entered into a shareholders’ agreement with the first applicant and an employment contract with the second applicant – where both the shareholders’ agreement and employment agreement contained restraint provisions in respect of, inter alia, prohibiting the undertaking of services for clients, and soliciting employees, of the applicants – whether the restraints are valid and reasonable TRADE AND COMMERCE – OTHER REGULATION OF TRADE OR COMMERCE – RESTRAINTS OF TRADE – VALIDITY AND REASONABLENESS – PARTICULAR CASES – PARTNERSHIPS – where the respondent was a partner at an accountancy firm that merged with, inter alia, the first applicant – where the respondent entered into a shareholders’ agreement with the first applicant and an employment contract with the second…