Calvo v Sweeney

[2009] NSWSC 719

CITATION:	Calvo v Sweeney [2009] NSWSC 719
HEARING DATE(S):	09-13 February 2009; 16-18 February 2009
JUDGMENT DATE :	29 July 2009
JURISDICTION:	Equity
JUDGMENT OF:	White J
DECISION:	Refer to para 275 of judgment.
CATCHWORDS:	EQUITY - general principles - fiduciary obligations – defendant retained as plaintiffs’ adviser to find purchasers for plaintiffs’ shares or to raise capital for company to repay plaintiffs’ loan – defendant obtained control of company and procured the issue of a substantial shareholding to himself for no consideration - dependence and vulnerability to exercise of influence – relationship of confidence - conflict between interest and duty – appropriateness of enquiry into fairness of transaction – undue influence - no presumption of undue influence – actual influence - EQUITY – equitable remedies – constructive trusts - EQUITY – equitable defences – acquiescence and laches - EQUITY – equitable relief – whether equitable relief should be conditional on making of just allowance for time spent on company’s affairs or donations to company
LEGISLATION CITED:	Fair Trading Act 1987 (NSW) Income Tax Assessment Act 1936 (Cth) Higher Education Act 2001 (NSW) Higher Education Support Act 2003 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 Bristol & West Building Society v Mothew [1998] Ch 1 Chan v Zacharia (1984) 154 CLR 178 Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538 Coleman v Myers [1977] 2 NZLR 225 Tate v Williamson (1866) LR2ChApp 55 Hadid v Lenfest Communications Inc [1999] FCA 1798 Australian Securities & Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963; (2007) 160 FCR 35 Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 McEvilly v Manenti Quinlan & Associates Pty Ltd (Supreme Court of New South Wales, Einstein J, 10 August 1998, unreported) Holder v Holder [1968] Ch 353 Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; 40 ACSR 83 Aberdeen Railway Co v Blaikie Bros [1843-60] All ER Rep 249 McPherson v Watt (1877) 3 App Cas 254 Daly v Sydney Stock Exchange (1986) 160 CLR 371 Clay v Clay [2001] HCA 9; (2001) 202 CLR 410 In re Thompson’s Settlement [1986] Ch 99 People’s Prudential Assurance Co Ltd v Australian Federal Life and General Assurance Co Ltd (1935) 35 SR (NSW) 253 Chellew v Excell [2009] 1 NZLR 711 Johnson v Buttress (1936) 56 CLR 113 Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 Lindsay Petroleum Company v Hurd (1873-74) LR 5 PC 221 Clegg v Edmondson (1857) 8 De GM & G 787 Re Jarvis (decd); Edge v Jarvis [1958] 2 All ER 336 Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 Phipps v Boardman [1965] Ch 992 Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No. 2) [1984] WAR 32 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298
TEXTS CITED:	Abel-Smith & Stevens, Lawyers and The Courts – A Sociological Study of the English Legal System 1750-1965, (1967)
PARTIES:	Dr Peter Calvo & Anor v William Sweeney & Anor
FILE NUMBER(S):	SC 3670/07
COUNSEL:	Plaintiffs: D R Conti SC with D H Mitchell Defendant: K P Smark SC with B J Burke
SOLICITORS:	Plaintiffs: Leigh Johnson Lawyers Defendant: Hicksons Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Wednesday, 29 July 2009

3670/07 Dr Peter Calvo & Anor v William Sweeney & Anor

JUDGMENT

INTRODUCTION

1 HIS HONOUR: The defendant, Mr William Sweeney holds 37.5 percent of the issued shares in the Australian Institute of Music Ltd (”AIM” or “the Institute”). The plaintiffs, Dr Peter Calvo and Mrs Athalie Calvo allege that he holds those shares on trust for them. They allege that the shares were acquired by Mr Sweeney in breach of fiduciary obligations he owed to them, or as a result of the exercise of undue influence or of unconscionable conduct, or misleading and deceptive conduct.

2 Prior to 6 September 2004, Dr Calvo and Mrs Calvo owned all of the issued shares in AIM. On 6 September 2004, shares were issued in AIM to Dr and Mrs Calvo and to Mr Sweeney as a result of which Mr Sweeney held 51 percent of the issued shares in AIM and Dr and Mrs Calvo each held 24.5 percent of the issued shares in AIM. This was intended to be a temporary arrangement. Negotiations were on foot with AIM’s landlord for the compromise of a debt owed by AIM for outstanding rent and for the renegotiation of the terms of AIM’s lease. On or about 27 September 2004, Mrs Calvo transferred her shares to Dr Calvo and further shares were issued as a result of which AIM’s landlord, Ellimark Pty Ltd (“Ellimark”) became the holder of 37.5 percent of the issued shares in AIM, and Mr Sweeney and Dr Calvo held 37.5 percent and 25 percent of the issued shares respectively. Mr Sweeney did not pay for the shares he acquired.

3 Mr Sweeney is a chartered accountant. He is a partner of a firm known as PKF. The plaintiffs allege that Mr Sweeney and PKF were retained to seek out investors who would be prepared to acquire the business or a share of the business of AIM, or acquire shares in AIM, in order that the capital so raised, or a substantial part of it, would be paid to Dr and Mrs Calvo. In return they would relinquish some of their shares. On 23 December 2003, Dr Calvo and Mrs Calvo paid $1,456,409.20 to discharge AIM’s debt to Westpac Banking Corporation and to provide AIM with working capital. It was proposed that moneys raised from new investors would be applied to reimburse Dr and Mrs Calvo for these payments.

4 The plaintiffs say that the relationship between Mr Sweeney and them was a fiduciary one. They say that Mr Sweeney’s task was to seek out potential investors and to negotiate the best terms that he could for Dr and Mrs Calvo. They say that in entering into transactions with them, or with Dr Calvo alone, Mr Sweeney had a conflict between his personal interest and his duty to them.

5 Mr Sweeney did not acquire his shares by transfer from Dr Calvo and Mrs Calvo. Rather they were issued to him by AIM. Accordingly, instead of seeking rescission of a transfer of the shares (there being no transfer to rescind), the plaintiffs claim a declaration that he holds the shares on trust for them.

6 Mr Sweeney denies that he owed fiduciary duties to the plaintiffs and denies that he breached any such duties. He does not plead that the plaintiffs gave their informed consent to the alleged breach of duty. The decision not to plead informed consent was deliberate. The question was raised at a directions hearing well before the trial. At the trial, senior counsel for Mr Sweeney confirmed that the decision was carefully considered.

7 Dr Calvo suffered a stroke on 12 July 2004. He returned to work in August 2004. The plaintiffs allege that the stroke put Dr Calvo in a position of special disadvantage. They allege that Mr Sweeney took unconscientious advantage of Dr Calvo’s position of special disadvantage. They also say that Mr Sweeney had obtained a position of influence over Dr Calvo and came to occupy a position of ascendency or domination over him. They say that the transactions under which Mr Sweeney acquired a 37.5 percent shareholding in AIM and an irrevocable proxy over Dr Calvo’s remaining shares should be undone on grounds of undue influence and the unconscientious taking advantage of Dr Calvo’s position of special disadvantage. They also allege that the transactions were entered into as a result of misrepresentations. They allege that Mr Sweeney engaged in trade or commerce in conduct which was misleading or deceptive, or likely to mislead or deceive, contrary to s 42 of the Fair Trading Act 1987 (NSW).

8 As well as denying the allegations of breach of fiduciary duty, undue influence, unconscionable conduct and misleading and deceptive conduct, Mr Sweeney contends that the plaintiffs are not entitled to equitable relief on grounds of laches, acquiescence and estoppel. He also contends that it should be a condition of any equitable relief that an order for just allowances be made in his favour. He seeks such an order to compensate him for services he has provided to AIM as its managing director for which he has not been paid a salary and to compensate him for donations he, and a company controlled by him, have made to AIM.

9 I have concluded that the plaintiffs are entitled to the equitable relief sought on the grounds that Mr Sweeney acquired his shareholding through a breach of fiduciary duty he owed the plaintiffs and the exercise of undue influence. I have rejected the defences and the claim for just allowances.

Background

10 In 1969 Dr Calvo started a business called the Sydney Spanish Guitar Centre. After various changes of name that business was renamed the Australian Institute of Music. AIM was incorporated in 1987 as a proprietary company limited by shares. On 14 June 1989 it changed its name to the Australian Institute of Guitar Limited. Its constitution was amended so that it became a public company limited by shares and by guarantee. On 27 November 1991, it changed its name to its present name and was registered as a public company limited by shares. On 21 January 1993 its memorandum was amended to provide that all of the income, profits and property of the company should be applied solely towards the promotion and education of music and no portion should be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profits to the persons who at any time are or have been members of the company. Its objects were also amended to provide that on a winding-up, after satisfaction of all its debts and liabilities, its property should be given to the Sydney Conservatorium of Music, or failing acceptance by that organisation, to the University of New South Wales, or in default thereof, to some charitable object. In 1996, its objects were further amended so that upon a winding-up after satisfaction of its debts and liabilities, any of its property could be given or transferred to some other educational organisation or organisations whose principal purpose involved the provision of instruction in the performing arts or a related field, and whose rules prohibited the distribution of its income among its members, being an organisation eligible for tax deductibility of donations and listed on the Register of Cultural Organisations maintained under the Income Tax Assessment Act 1936 (Cth).

11 From the time AIM was incorporated up to 26 September 2004, Dr Calvo and Mrs Calvo were its only shareholders. They and their son, Mr Benjamin Calvo, were its directors. In 1989 AIM was accredited by the New South Wales Department of Education as a provider of tertiary courses providing a three-year Diploma in Music. In 1995 it became accredited by the Department of Education for a four-year Degree of Bachelor of Music. It has been accredited by the Department for various graduate diplomas in music. It also provides non-tertiary education in music, particularly in performance. Dr Calvo deposes that AIM is the largest private music institute in Australia.

12 Mrs Calvo deposed that she and Dr Calvo made substantial capital contributions to AIM prior to 2003 but did not keep records of those contributions. She deposed that in 1982 and 1993 they invested substantial amounts from the proceeds of sale of their homes.

13 In about 2002 AIM extended its premises. It received a capital grant from the New South Wales Government of $2.4 million to help meet the costs of establishing itself in new premises. In advising the approval of the grant the Treasurer stated that it was his understanding that the move to new premises would enable AIM to expand its operations and increase full-time student numbers from 530 students in 2002 to 1,260 in 2010. It was a term of the grant that the Institute maintain its status as a not-for-profit organisation. In expanding its premises AIM became liable to pay a substantially increased rent to its landlord.

14 In May 2003, the Commonwealth Government released a report on higher education. That paper described the proposed new Higher Education Loan Program which included a new Fee-Help scheme to “offer eligible students an income contingent loan facility to pay their undergraduate or postgraduate fees in courses in public or eligible private institutions.” It was announced that for students at a private higher education institute to have access to Fee-Help, the institution had to be listed as a Higher Education Institution on the Australian Qualifications Framework Register, and to meet certain other requirements.

15 In 2003 Dr Calvo was considering selling AIM to a university or other institution providing tertiary education.

Introduction of Mr Sweeney

16 Mr William Bowtell was retained as a marketing consultant to AIM. Dr Calvo discussed with him his plans to retire and his desire to sell AIM to a similar institute at the best possible price. In June 2003 Mr Bowtell recommended that Dr Calvo speak to an accountant of Mr Bowtell’s acquaintance, namely Mr Sweeney, to assist him to find a buyer for the Institute. On 24 July 2003 Mr Bowtell sent a memorandum to Mr Sweeney in anticipation of a meeting to be held with Dr Calvo. He wrote:

“ We have arranged to see Dr Peter Calvo of the Australian Institute of Music to discuss the possible restructuring of the AIM; and particularly in the context of the possible changes to funding of private sector higher education being proposed by the Commonwealth government; and the impact that these changes will have on the profitability of AIM.
AIM
The AIM is a fully fee-based private institution that has for some 30 years provided music and related degree courses.
It is a non-profit organisation owned by Dr Peter Calvo and his family.
It presently operates from rented premises in Foveaux Street Surry Hills and Crown Street Surry Hills.
The AIM has a current enrolment of about 800 full and part time students and a staff of about 100 full and part time teachers and administrators.
Apart from some very minor secondary studies grants, AIM receives no government recurrent subsidy of any kind and is totally dependent on student fees for its income.
AIM has an outstanding academic record and is widely recognised as producing exceptionally high quality students in all forms of music, music industry and sound technology.
Last year, AIM received a one-off grant from the NSW government to build a very good music auditorium at its Foveaux Street premises.
It also secured a 10-year lease over its expanded and renovated Foveaux Street premises that will enable it to accommodate a much greater number of students in response to increasing demand.
Student enrolments this year are running at some 30% over the previous year; and AIM is consistently attracting a large percentage of its students from overseas.
In summary, therefore, AIM is a long-established, reputable institution whose income matches its recurrent expenditure and with an increasing demand from students in Australia and overseas. It has a secure long-term lease over its premises; and the landlord is a possible seller to the AIM.
However, there is a need to restructure the AIM to separate its institutional interests from those of the Calvo family; and to place the AIM on a long-term sound and secure basis.
The need to do this is recognized by Dr Calvo and several options, including merging the AIM into another public sector tertiary institution, have been tentatively explored without success.
However, the recent decision by the Commonwealth government to allow students of approved private sector education institutions (of which AIM is one) to have access to low-interest government loans to fund their fees (the HELP scheme) will have a dramatic impact on AIM.
If the legislation is approved, and the HELP scheme commences operation as planned in early 2005, AIM will experience a surge in enrolments in that year and consequent increase in operating surpluses; as well as in effect having its total fee income underwritten by the Commonwealth.
AIM presently turns away many hundreds of students annually who wish to enroll [sic] but who cannot afford the present fees of about $10-13000 per annum.
With access to the HELP scheme, many of these students will enroll in the 2005 year and beyond.
AIM will also experience a transfer of enrolments from traditional public sector providers of musical and related education (the Conservatorium and others) whose students have had access to HECS and therefore had a competitive advantage over AIM.
While the restructuring should happen in any event, the possible introduction of HELP therefore is an opportunity to restructure AIM from a non-profit institution, housed in leased premises and run by the Calvo family into an independent profit making institution purchasing its own premises and free to offer innovative and market based education services without being incorporated into a public sector tertiary institution.
If all the reforms go through, then it seems to me that there is a good opportunity if the AIM can be established with a clear, transparent and investment-grade structure for its income stream over 10 years to be securitised.
Such a securitisation of funds would assist the capitalisation of the AIM; and allow the Calvo family interests to be paid out in whole or part after the restructuring.
A properly restructured AIM would also be able to purchase its premises that over time would become a very valuable asset of the new AIM.
The discussions with Dr Calvo might therefore result in some progress on the AIM.
But moreover they might also serve as the basis for considering the opportunities that will be present across the entire private sector tertiary education sector as and when the HELP reforms are introduced. ”

17 Dr Calvo and Mr Sweeney met for the first time with Mr Bowtell on 29 July 2003. Following the meeting Mr Sweeney sent an email to Dr Calvo in which he identified the main issue as being the identification of an appropriate exit strategy for Dr Calvo. He asked to be provided with management results for the business for the year ended 30 June 2003, profit and loss statements and balance sheets for the previous two years, any business plans, strategy and philosophy documentation, and any background or history to the business. On 8 August 2003 Dr Calvo forwarded to Mr Sweeney documents describing the history of the Institute, the courses it offered, its governance structure, a business plan, and brief biographical details of some of its principal teachers. Also enclosed were draft profit and loss accounts and draft balance sheets for the half-year ended 31 December 2002 and forecast results to 30 June 2003. The documents also included what were said to be actual profit and loss results for the 12 months to 30 June 2002. The figures showed a profit of $1,726,000 to 30 June 2002 after treating as income the government grant of $2,182,000 for the construction of a concert hall. The figures showed an estimated loss for the 12 months to 30 June 2003 of $1,381,000 and an estimated deficiency as at 30 June 2003 of net assets of in excess of $650,000. This was after bringing into account the assets and liabilities of a business called the Sydney School of Guitar which was a business conducted by Mrs Calvo. The draft accounts showed that course fees and the bulk of other income was received by the Institute, that the Institute paid a service fee to the Sydney School of Guitar (“SSG”), and that most of the expenses other than rent, including expenses for salaries and wages, were incurred by SSG.

18 On 13 August 2003, Mr Sweeney wrote to his partner at PKF, Mr Andrew Kesik in relation to AIM. He said:

“ It is my proposal that PKF work out how to provide services for this second tier of education and in particular the Australian Institute of Music. Under this new funding scheme, these new businesses will become financially strong and viable but they do not have the runs on the board in terms of management and finance etc. ”

19 Mr Sweeney prepared notes of his meeting with Dr Calvo of 29 July 2003. These notes included information as to the number of students, the area under lease, the prospective increase in the numbers of students, Dr Calvo’s estimate of prospective increased turnover, numbers of staff, and wages cost as a percentage of turnover. Dr Calvo told Mr Sweeney that a United States group called the Kaplan Institute had shown interest in buying the business and Dr Calvo believed it would pay somewhere between $8 million and $12 million. After reviewing the documents forwarded by Dr Calvo on 8 August 2003, Mr Sweeney formed the view that AIM and its related businesses probably did not have a value of anything like the figure of $12 million mentioned by Dr Calvo at the meeting on 29 July. At the meeting on 29 July Dr Calvo said that he was not in a hurry to leave the Institute but at present was willing to sell 20 percent of the Institute for $2 million. In his note to Mr Kesik, Mr Sweeney said:

“ Our Objectives

To work out how to refund the business [sic] and free the Calvo family and bring in someone who is interested in being an educator. ... ”

20 On 14 August 2003, Dr Calvo wrote to Mr Sweeney and told him that:

“ At this time in August to early September, the institute is willing to sell between 25% to 100% of the four entities, AIM, AIMS, TCI and SSG between $2 million for 25% and $8 million for 100%. ”

21 On 26 August 2003, Mr Sweeney prepared a draft position paper and sent the paper to Mr Bowtell and to Dr David Lance, a former deputy chancellor of the University of Technology of Sydney who had retired from that position and started his own venture raising capital for what Mr Sweeney called the commercialisation of scientific inventions and research projects. Mr Sweeney proposed to provide the paper to Dr Calvo. It set out points for proposed discussions with the University of New South Wales for the possibility of the latter acquiring the business of the Institute or entering into a joint venture with it. Points for discussion identified by Mr Sweeney included identifying the objectives of Dr Calvo, and what would constitute success for him. He noted that Dr Calvo:

“ needs to be repaid say $8 million on a walk in/walk out basis.

* Dr Calvo is happy to maintain an involvement in the management of the AIM

* Dr Calvo’s involvement would require a continuation of the existing culture. ”

22 Nothing came of the proposed discussions with the University of New South Wales.

23 On 2 and 3 October 2003 Mr Sweeney forwarded information about AIM to two individuals whom he thought were potential investors. He provided a number of documents describing the Institute and its business, including its business plan which he said required updating. He also enclosed draft financial figures for the year ended 30 June 2003 and a projected cashflow forecast. He advised both potential investors that:

“ Peter Calvo is a keen educator and, on a personal note, he is looking for an exit strategy. What I am hoping to do is to find a person who is interested in education and/or music who will be happy to have an investment, and if need be an active management interest, in the AIM. ”

24 Neither person expressed an interest in investing.

25 On 29 October 2003 a meeting was held between Mr Sweeney and Mr Kesik of PKF, Dr Calvo, Mr Bowtell and Mr Paul Keating. Mr Keating was the chairman of a body called the Council of External Advisors which was actively involved in the development of the Institute’s programs. During the meeting Dr Calvo said that in his view the Institute was worth at least $8 million. He said that he personally had put millions of dollars of his and his family’s money into the Institute and was entitled to have this repaid. Mr Sweeney said that his review of the financial statements showed that the Institute was not worth $8 million and it was not making a profit. Mr Sweeney said that a demonstration that the Institute had value could not be based on its past performance but on its potential for future growth and that to demonstrate why it had value based on future growth it would be necessary to prepare forecasts. He said that the ledgers and accounts of the Institute did not reflect that Dr Calvo and his wife were owed any money. Mr Sweeney proposed that to attract potential investors an information memorandum be prepared by a reputable properly accredited and independent source. He advised that PKF could prepare such an information memorandum and estimated it would cost about $15,000 if AIM staff did the bulk of the work of collecting together the necessary financial and other information. This course was agreed to.

PKF’s Letter of 31 October 2003

26 On 31 October 2003 Mr Kesik of PKF wrote to Dr Calvo. As counsel for Mr Sweeney says that the letter sets out the terms of the retainer and defines the party to whom PKF or Mr Sweeney owed duties, it is appropriate to set out the term of the letter in full. Mr Kesik wrote as follows:

“ Dr Peter Calvo
Director
The Australian Institute of Music
1-51 Foveaux Street
SURRY HILLS NSW 2010
Information Memorandum
Dear Dr Calvo,
I refer to our recent meeting where we concluded that the way forward was to prepare an Information Memorandum (IM) in the first instance. Following further discussion with Bill Sweeney and having regard to you [r] current circumstances our fees for the preparation of an IM will be fixed at $1500 with payment deferred to 27 February 2004. An additional success fee of 5% will apply to any monies raised either as equity or borrowing for the Institute or gross sale proceeds in the event that a purchaser is introduced and a sale is concluded.
Should these terms be satisfactory to you will you please return a signed copy of this letter to me.
In order to prepare the IM we will require the following information from AIM:-
1. A formal group structure for AIM and any subsidiaries including details of shareholders and office holders.
2. A copy of the constitution (memorandum and articles of association) of each company.
3. Copy of any correspondence with the Australian Tax Office granting exemption from income tax and providing for tax deductibility of any donations made to AIM.
4. Copy of the lease over the premises or an extract of the lease detailing the terms and conditions of the lease.
5. Details of any other leases over property or equipment.
6. Management accounts for the period 1 July 2003 to 30 September 2003 together with details of accounts supporting balance sheet items.
7. A list of current liabilities at 31 October 2003.
8. Copy of the budget and cash flow forecasts for the year ended 30 June 2004 including any ancillary workings to support assumptions made in the forecasts.
9. Copy of any longer term forecasts prepared by AIM or its advisors.
10. Details of remuneration paid to you and any related entities.
11. An updated business plan if this has been done (we have a copy of a plan prepared in 2000.
12. A schedule detailing each of the courses offered by AIM together with a timeline of when the courses commence and course semesters.
13. A schedule which details the current course fees (by course) and when fees are paid (also see 10 above).
14. A schedule detailing the current student population by course.
15. A schedule detailing student population (by course) over the past 3 years.
16. Details of course completion history (student retention over duration of course) and AIM policy regarding any refunds of fees.
17. A schedule detailing projections of growth in student population by course over the next 3 years.
18. A schedule showing the student teacher ratios by course.
19. Details of all the teaching staff including current annual remuneration and a schedule of accrued benefits for annual and long service leave.
20. Details of any cost analysis either by course or student indicating how course fees are determined, gross profit and costs.
21. Details of all non-teaching staff including current annual remuneration and accrued benefits. A statement indicating factors that may have driven growth of the institute in the past and what is likely to drive growth over the next 3.
I appreciate that this is a lot of detail however it will be necessary in order for any IM to be meaningful. We may have further information requests as we proceed. You will most likely have to pass on some of this to your external auditor and as discussed we will need to meet with you [r] auditor as well as AIM’s accountant and head of student administration. ”

27 On 16 December 2003 Dr Calvo, signing as director of AIM, replied to this letter. He said:

“ Dear Andrew
Thank you for your letter in which you have enumerated the elements necessary for the preparation of the Information Memorandum , at a cost of $15,000. The items that have been requested will be presented shortly.
In relation to the percentage for payment to PKF for monies raised either as equity or sale of the entire operation we confirm 5% will be payable.
As to borrowing I feel it is superfluous in the circumstances.
... ”

28 The reason Dr Calvo said that he felt that borrowing was superfluous in the circumstances was that by December 2003 Dr and Mrs Calvo had arranged to sell their family home and apply the bulk of the proceeds of sale to discharging the debts owed by AIM to its bank and to provide it with working capital. It appears from a draft report of Ferrier Hodgson that on 28 October 2003 the former financial controller of AIM had sent a confidential letter to Westpac Banking Corporation containing allegations regarding AIM’s solvency. In a draft report Ferrier Hodgson expressed the view that the bank should not further extend its facilities to AIM. Ferrier Hodgson expressed adverse views in relation to AIM’s solvency. On or about 28 November 2003 Dr and Mrs Calvo exchanged contracts for the sale of their house for $1,635,000. On 23 December 2003 they paid $959,689.75 to the Westpac Bank to discharge AIM’s overdraft account and other facilities. $496,719.45 was paid as an advance to AIM.

Further Discussions Between Dr Calvo and Mr Sweeney

29 On 16 December 2003 Dr Calvo and Mr Sweeney had a further discussion in relation to the raising of capital. Mr Sweeney asked Dr Calvo what he wanted and Dr Calvo replied with words to the effect:

“ I want to serve the Institute. I want it to be my legacy. But I also want to solve the problem of getting funding and be properly paid for what I have created when I retire. The Institute is worth at least $8 million and I should be entitled to sell it for that when I retire. ”

30 Mr Sweeney told Dr Calvo that an investor would do due diligence and look at the Institute’s financial performance and on that basis would not want to pay $8 million. He told Dr Calvo that “for AIM’s immediate funding problems we need to find donations of about $2.5 million to allow AIM to pay you back the $1.6 million you have invested in it from the sale of your home and still give AIM sufficient working capital for its operations in the coming academic year.” They discussed the need for an information memorandum to attract potential investors.

31 After this meeting Mr Sweeney sent an email to Mr Kesik. After referring to Dr Calvo’s sale of his home to pay off the overdraft for the business and to provide funding for 2004, Mr Sweeney wrote:

“ Peter is very keen for me to do something and I think we are his last hope. His wish is for me to get somebody to pay him to retire from the business or leave him there as a figurehead. He has answered all your questions and has accepted that PKF can do the work for the fee quoted plus the 5% success fee. I am very keen that we get an information memorandum completed ...

...

I am not sure what the solution for Peter Calvo is right now. I don’t believe we can sell the business in its current state as it does have the tax status of being able to accept donations and not be taxed for them. They have changed the Memorandum of Articles [sic] so that it would not distribute profits and all profits will be ploughed back into the business ... I think I will try and sit down with one of our tax guys to see whether we should try and restructure this business to make it a profitable entity or transfer the business to a new entity.

What I would like to do is to raise $2.5m in a tax deductible format payable into this new business. With this money I would like to repay Peter Calvo the $1.6 million that he has currently put in and leave it at that. This will give us $900,000 in working capital. To do that doesn’t require any restructuring at all. ...

... Can we move this to a profitable entity and bring in investors? Could this be a reality or should we always remain a not-for-profit organisation? ... ”

32 Between December 2003 and April 2004, Mr Sweeney spoke with Dr Lance and with another potential investor to sound them out as to their willingness to invest in AIM or make a significant donation to it.

Qualified Audit Report for 2003 Financial Statements

33 The financial statements for AIM for the year ended 30 June 2003 were signed on 7 May 2004. They disclosed a loss for the 2003 financial year of $836,116. The auditor, Mr Docherty, gave a qualified audit opinion. He stated that the sudden departure of the company’s financial controller at the commencement of the audit, the non-existence of an audit trail substantiating numerous figures disclosed in the financial report, and the lack of many accounting records, had resulted in a limitation of the scope of the audit. He had been unable to obtain all information and explanations required to form an opinion on the financial report. He said that AIM’s financial survival was dependent on the directors providing ongoing financial support from their personal assets and without that support there was significant uncertainty as to whether the company would be able to continue as a going concern. He said that if the company were unable to continue as a going concern it might be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial reports. The auditor was unable to express an opinion as to whether the financial report was presented fairly in accordance with the applicable accounting standards.

Information Memorandum

34 The information memorandum was completed on 20 May 2004. It contained forecasts of future profitability based on different assumptions for increases in student numbers and tuition fees. A major theme of the information memorandum was that the commencement of Fee-Help would transform the funding base of private higher educational institutions whose students qualified to receive Fee-Help loans. Fee-Help was due to commence on 1 January 2005. The introduction of Fee-Help was expected to be of considerable benefit to AIM by attracting students who would otherwise not be able to afford to pay the fees. The information memorandum noted that AIM had spare capacity and could easily absorb additional student numbers at a marginal cost without expanding its floor space. The financial projections were based on assumptions of either an additional 50 full-time equivalent students in 2005 and 2006, or projected full year increases of 100 students. There were also projections based on assumptions of savings in teaching costs of five percent, and assumptions based upon increases in tuition fees of up to ten percent, or reductions in scholarships and early payment discounts.

Advice from Mr Sweeney

35 At meetings with Dr Calvo in April and May 2004 Mr Sweeney advised Dr Calvo that the only way to interest an investor or to raise capital for AIM was first to ensure that it was profitable and this meant that it needed to be restructured and its management needed to be reorganised. He advised that AIM’s status had to be changed from “not-for-profit” to “for-profit”. He advised that investors would only be interested if they could expect some return for their investment which they could not expect from a not-for-profit institute.

36 Dr Calvo gave evidence that on 27 April 2004 Mr Sweeney handed him a first draft of the information memorandum and told him that he would be interested in making a personal investment as a project for his retirement. Mr Sweeney denied saying that at that time. Mr Sweeney said that the first time he suggested to Dr Calvo that he might personally invest in AIM was on 6 July 2004. I accept this part of Mr Sweeney’s evidence.

37 PKF rendered two invoices each for $7,500 for its work in preparing the information memorandum. The invoices were addressed to:

“ Dr Peter Calvo
Australian Institute of Music ”

The invoices were paid by AIM.

Negotiation Between Mr Sweeney and the Plaintiffs in May and June 2004

38 According to Mrs Calvo, in May 2004 a meeting took place between her, Dr Calvo and Mr Sweeney. She deposed that Mr Sweeney offered $1 million for 49 percent of the shares in the company. She said that Mr Sweeney offered to pay $2 million with the balance of $1 million to be paid from a second capital-raising within 12 months. She said that Mr Sweeney proposed to keep Dr and Mrs Calvo on a retainer at $150,000 per annum for the next three years.

39 There were discussions along these lines in about May and June 2004, although I do not accept that Mr Sweeney put himself forward as a potential investor prior to 6 July 2004. Rather, he negotiated with Dr and Mrs Calvo the terms they would be prepared to accept. On 31 May 2004 Dr Calvo raised the following points with Mr Sweeney as appears from a letter Dr Calvo wrote on 4 June 2004 to Mr Keating. Dr Calvo wrote:

“ Dear Paul,
...
Investor provides 1m as initial owner takeaway.
Investor acquires 49% of the Institute.
Owner is on salary of 150K
Provision of second takeaway of 1m at end of 1 ^st year.
Investor’s acquisition expands to 75%.
Investor undertakes to invest 1m each year for 5 years.
Without second takeaway, Investor’s share shrinks to 25%.
I believe these are the main points you mentioned. I discussed them with Bill Sweeney. He seems to be interested and gone away to think about it. ”

40 On 7 June 2004 Mr Sweeney made a record of his negotiations with Dr Calvo of the terms of a deal to be put to potential investors. He wrote:

“ Exit of Dr Peter Calvo
Peter Calvo’s immediate requirement is assistance to buy back his home which would cost approximately $1.8 million. I explained to him it is not possible during the capital raising to get enough money to give provide him $2 million upfront and nor do we consider that it is worth it. As such, a deal has been negotiated as follows:
To get $1 million upfront for 49% of the company. Peter Calvo will retain the remaining 51% however there will be a Shareholders Agreement with the Board representatives having equal voting rights ie. 50:50.
The balance of the $1 million is payable on the second capital raising and within twelve months. On payment of this $1 million, Peter Calvo’s equity will reduce to 25%. It is accepted that his equity can reduce further as additional capital raising is made or the company goes to float.
Peter Calvo will receive a retainer of $150,000 per annum for a period of three (3) years. It is considered that his ongoing support for the AIM, his culture and his abilities remain a key factor in going forward. ”

41 In the same document Mr Sweeney wrote that:

“ Music is the backbone of the AIM. It has allowed for the proper development of infrastructure to create in a new business without needing substantially more capital than we are talking about. There is already a Principal, a General Manager, Accountants and a staff of 165 – the basis of a university and a higher education premises. Peter Calvo’s expansionary nature has also developed courses other than music and these are growing and are the platform for future growth. He has employed Professor Greg Whateley, from the Central Queensland University, an Australian leader in on-line education. ...
With this infrastructure already in place and the move to profitability in 2005, we have worked on a valuation figure for the business of $8 million. The raising of $4 million equates to 50% of the equity. The remaining equity will go to 25% to Peter Calvo to provide him with an ongoing interest in the business (see settlement details attached as Annexure 3) and the remaining 25% to go to management who will contribute to the overall growth of the business, the raising of $4 million in capital and the management of the business. ”

Provision of Detailed Financial and Other Information

42 On 3 June 2004 Mr Sweeney sent a long list of “due diligence questions” to Mr Ian Brooks who held the position of registrar at AIM.

43 Mr Brooks responded to the questions on 9 June 2004. He provided a breakdown of student and staff numbers, and information about leases, marketing, associations with other academic institutions, courses, and accounts. On 21 June 2004 Mr Sweeney wrote to the financial controller, Ms Vivien Power, seeking copies of the tax returns. On 25 June 2004 he asked Ms Power whether she had prepared a “trend analysis” and a comparison of expenses to budget. He made inquiries concerning the company’s rental obligations and the arrangements under which it was then not paying full rent. He concluded by saying that rather than his trying to extract information she should be volunteering information to him so that there were to be no secrets kept from him.

44 Because of his role as an adviser, Mr Sweeney was provided with detailed information about the Institute’s business which was otherwise confidential. That is not to say that an investor would not have required the same or similar detailed information before deciding to invest. Mr Sweeney initially sought the information so that he could provide it to serious potential investors and be in a position to respond to queries. He also saw himself as having an ongoing role in management.

Further Approaches to Potential Investors

45 Mr Sweeney made more approaches to persons whom he thought might be potential investors in AIM. On 21 June 2004 he wrote to a Mr John Leece advising that he, Mr Sweeney, had taken a keen interest in AIM and would like to take a lead position in its future. After referring to the fact that AIM was currently a non-profit organisation and could receive donations which were not taxable income, which donations would be deductible to the donor, he described his view of the future of AIM. He said that the future of AIM should be as a new organisation that was a “for-profit” organisation; that it deliver a wider range of education than music, and that it be self-sufficient in money and resources. He advised that Dr Calvo had engaged him and many others to lead such a change for the future. He attached the information memorandum and said that AIM could be a profitable business and with the new Fee-Help scheme, new courses and new teachers, it could become highly profitable. He wrote:

“ Capital Requirements
At the conclusion of our investigations, I believe that the AIM needs a capital investment of $4 million and I propose $2 million be raised before December 2004 and the balance before December 2005.
The use of this money is two-fold:
1. It is to be used to pay out Dr Peter Calvo, the philanthropist and founder of the AIM. Peter is active in the AIM and life but he does require an exit strategy. Peter has put all his energies and wealth into the AIM and in the last two years, has sold his family home and invested this money into the AIM to put it on the sound financial footing it currently holds. From the sale of his home, Peter lent the AIM an amount of $1.6 million and it is proposed that this is loan is repaid to him through the capital raised over a period of two years. The exit strategy, which [h]as been approved by Peter Calvo, is provided at Annexure 2.
2. It is my purpose to make this business profitable and healthy. The second $2 million in capital will be raised at a time when the business is profitable and therefore will be raised as investment capital – shareholders funds.
Return on Capital
...
As you may know, my friend David Lance, played a key role in the development of Insearch Education ... David believes that a number of highly profitable large market courses could be added to the present portfolio enabling profits of $5 million or more to be achieved in perhaps 3-4 years. ...
Based on the above, I value the business at $8 million.
I would be keen for you to be a donor and/or investor in the AIM and would appreciate an opportunity to sit down with you to discuss this proposal further. ”

46 A letter in similar terms was sent to a number of persons whom Mr Sweeney thought were potential investors on about 25 June 2004. The “exit strategy” contained in annexure 2 was in the same terms as the document quoted at para [40] with an additional provision that:

“ 4. Of the 25% equity remaining with Peter Calvo, he will grant an option over it to:
a. To transfer 10% of the company within the first two (2) years for $2 million
b. To transfer 10% of the company within the next five (5) years for $3 million ”

47 On 23 June 2004, Mr Sweeney had dinner with Dr Lance and Professor Bob Robertson. Professor Robertson had recently retired as vice-president of the University of Technology Sydney. Dr Lance had suggested to Mr Sweeney that he talk to Professor Robertson. Mr Sweeney proposed that all three of himself, Dr Lance and Professor Robertson invest in AIM and that they work together to provide it with new management. Professor Robertson said that he might be prepared to put in $500,000. Mr Sweeney asked for Professor Robertson’s assistance in obtaining reaccreditation by the New South Wales Department of Education and Training under the Higher Education Act 2001 (NSW) without which it could not qualify for Fee-Help.

Application for Approval as a Higher Education Provider

48 On or about 24 June 2004 the Institute applied to the Commonwealth Department of Education, Science and Training for approval as a higher education provider under s 16(25) of the Higher Education Support Act 2003 (Cth).

Grant of Charge to Ellimark

49 On 1 July 2004 AIM granted a fixed and floating charge over all of its assets and undertaking to its landlord to secure all of its current and future obligations under its lease. The charge was signed for AIM by Dr and Mrs Calvo. The charge was given without the prior knowledge of Mr Sweeney.

First Offer by Mr Sweeney to the Calvos on 6 July 2004

50 Mr Sweeney deposed that on 6 July 2004 he had a meeting with Dr Calvo in which he said to him words to the following effect:

“ I am prepared to invest $500,000 this month, July 2004, into AIM. This will allow AIM to repay $500,000 to you of your investment of the proceeds of sale of your home in December 2003, but only on condition that you use this money towards the purchase of a new home up to a value of $2 million. In addition, I am prepared to borrow in my own name on your behalf $1.5 million, using your home as security, and pay all the costs and the interest on the loan as they fall due and repay the principal sum within 12 months. In consideration for doing this, I am proposing that you transfer to me now 49% of the equity in AIM and all its associated entities and give me equal voting power with you in the company and full participation in the management of AIM. When I repay the $1.5 million loan in 12 months’ time, you will transfer a further 25% of the equity in AIM to me. We would both need to enter into a shareholders’ agreement to ensure that we have equal voting rights on the Board. If I am going to manage AIM’s re-organisation as a successful Higher Education Provider, I need to be sure that I can direct the management staff. You will also be employed for three years on a salary of $150,000 per annum as Chancellor. Finally, I would like to have an option to purchase 10% more equity in AIM from your remaining 25% shareholding for $2 million within the first two years and another 10% of the equity in AIM from you for $4 million within five years, leaving you with 5% of AIM’s equity. ”

51 Mr Sweeney deposed that Dr Calvo said that he would consider the proposal, but that he was not prepared to give an option to purchase his remaining shareholding in AIM. Mr Sweeney deposed that he told Dr Calvo that he would need to conduct a satisfactory due diligence on AIM and would need access to all of AIM’s records and information. Dr Calvo agreed that he could carry out the due diligence.

52 I accept Mr Sweeney’s evidence that a conversation to this effect took place.

53 Mr Sweeney was still looking for investors for AIM. He sent an email on 7 July 2004 to be provided to Mr Keating in which he stated that “I don’t believe it will be easy to raise capital for the aim unless there is a clear demonstration that the business will be appropriately managed and that sensible people are investing money ... I am prepared to invest $500,000 of my money to start the ball rolling. This will give me an opportunity over the next 12 months to talk to various people and get the appropriate level of investment which I believe should be an amount of between $3,000,000-$4,000,000. ...”. Mr Sweeney had meetings with several people who he thought would be interested in investing in or donating to AIM up to 27 September 2004.

Dr Calvo’s Stroke

54 On 2 July 2004 Dr Calvo suffered a stroke resulting in temporary paralysis of his right side and loss of speech. He was discharged from hospital on 20 July 2004. It is unclear when he returned to work. According to Mrs Calvo he attended an executive meeting at the Institute on 3 August 2004. According to Dr Calvo he returned to work on 5 August 2004. According to Mr Sweeney he was back at work by 20 July 2004. This last date cannot be right because the hospital records show that he was not discharged until 3.55pm on 20 July 2004.

Further Draft of Information Memorandum: Institute’s Prospects

55 A further draft of an information memorandum for prospective investments prepared by PKF is dated 15 July 2004. It stated amongst other things that:

“ At present the equivalent of 500 full-time students attend AIM. It is now proposed to build on the sound structure established by the Institute while preserving its outstanding reputation. The building blocks that will be put in place include:
gradual and careful addition of high volume, high profit courses
establishment of a close working association with at least one major Australian university
establishment of a relationship with a major US university
an active domestic and international marketing program
adequate funding to enable the Institute to develop effective and proven marketing strategies.
The new enterprise will aim at profits before tax for the years 2007 and 2008 before tax of $4.8 million and $7.4 million.
It is the intention of AIM to seek Australian Stock Exchange listing in its third or fourth year of operation under the proposed new format. Assuming that the ASX valuation is ten times pre-text profit then the implied value based on the profits above for the years 2007 and 2008 is $8 million and in the following year $74 million.
Investors are now being invited to acquire a 30% interest in the Institute for $3 million implying a valuation of $10 million for the company at this time.
... ”

Correspondence from NSW Department of Education and Training

56 On 20 July 2004 the NSW Department of Education and Training wrote to Dr Calvo in relation to the Institute’s application for registration and accreditation for the Diploma of Music, the Advanced Diploma of Music and the Doctorate of Professional Studies. The Department advised that further information was required if the Institute were to be considered for registration as a higher education institute. The information required would need to give assurance that the company would be financially viable and that its students’ financial investment in their education was protected. The Department said that it required a legally enforceable guarantee by the company’s directors and a satisfactory audit report. Of particular concern to the Department was the qualification to the 30 June 2003 financial statements by the auditors that there was significant uncertainty as to whether the company would continue as a going concern. The Department noted that the financial statement for the 30 June 2003 financial year reported a loss of $836,116 and that there was no disclosure of how the government capital grant totalling $2.4 million received after 13 June 2002 had been spent in accordance with the conditions of the grant.

57 On 21 July 2004 Dr Calvo spoke to Mr Bowtell. Mr Bowtell told him that he (Mr Bowtell) had organised an informal meeting at senior level with the NSW Government to brief them on the PKF report. Dr Calvo authorised him to hand over a copy of the PKF report.

58 Dr Calvo responded to the Department’s correspondence on 30 July 2004. He said that the reasons for qualification of the auditor’s report for the 2003 financial year had been explained (that is, by reference to the alleged fact that the company’s previous financial controller had left the company with its books in disarray). He said that the company’s auditors, Rhodes Docherty, would be able to provide an unqualified audit statement that financial year. He also said that the audit of accounts for expenditure of the government grant had been provided to various named government ministers and senior public servants. It would seem from this correspondence that even if Dr Calvo had not returned to the office, he had resumed work by 30 July 2004. He was also able to compose the letter of 30 July 2004.

59 Dr Calvo did not show the letter from the New South Wales Department of Education and Training to Mr Sweeney at this time. Mr Sweeney did not become aware of the letter until about 1 September 2004.

60 On 5 August 2004 Dr Calvo wrote to the Chief of Staff to the Deputy Premier and Minister for Education concerning the Institute’s application for registration under the Higher Education Act. He advised that the Institute had been recapitalised in 2003 and was now operating on a debt-free basis and was cashflow positive. He said that the financial results for the 2003-2004 financial year would be available by October 2004 and would reflect strong growth in student numbers and income. This correspondence was written without any reference to Mr Sweeney.

Mr Sweeney’s Discussions with Dr Lance and Professor Robertson

61 In the meantime Mr Sweeney had been discussing the position of the Institute with Dr Lance and Professor Robertson. They discussed matters such as the need for injection of capital, and obtaining additional students from Asia. At this time Professor Robertson told Mr Sweeney that “if I become involved in your endeavour to save AIM, I ultimately want to have an equity position in the company. ... I would also want to be on the Board as an independent director participating in the management of AIM and also directing its marketing.” On 6 August 2004 Dr Lance reported to Mr Sweeney of meetings he had had with various academics and administrators in tertiary education in relation to the possible future of the Institute including provision of subjects which could be given credit by other university degree courses, and otherwise expanding the degree courses which the Institute might provide to attract a large number of additional students. Dr Calvo had no involvement in the discussions that Mr Sweeney was having with Dr Lance and Professor Robertson at this time.

62 Dr Calvo had attended a meeting with Professor Robertson prior to 12 July 2004 with Mr Sweeney and Mr Bowtell at which they discussed the courses and academic credentials the Institute was then offering. Dr Calvo responded to Professor Robertson’s enquiries concerning the Institute’s academic and administrative systems. However, Dr Calvo was not a party to the correspondence between Dr Lance, Professor Robertson and Mr Sweeney in which Dr Lance reported on the discussions he had had with Professor Robertson and others on plans to expand the range of courses to be offered by the Institute and plans to tap into new student markets.

Further Communications with Dr Calvo and Ms Power

63 On 11 August 2004 Mr Sweeney attended a meeting with Dr Calvo at AIM. He told Dr Calvo he believed that the Institute needed to increase student fees to improve its profit and loss account. He told Dr Calvo that he had not had any success in finding any investors for AIM and said that this was mainly owing to AIM’s poor financial state and its status as a not-for-profit organisation. Dr Calvo did not agree that student fees should be increased as proposed by Mr Sweeney. Although Dr Calvo denied that Mr Sweeney told him that he, Mr Sweeney, had not had any success in finding investors owing to the poor financial state of the Institute and its status as a not-for-profit institute, I think it probable that that was said at this time. Mr Sweeney had not been successful in obtaining financial investors and he was concerned about the Institute’s financial position. It is likely that he would have explained the reasons he had been unable to obtain investors.

64 Dr Calvo did not discuss with Mr Sweeney at the meeting of 11 August 2004 the issues which the Institute then had with the New South Wales Department of Education and Training to be reaccredited as a higher education provider for New South Wales. Dr Calvo’s view was that there was no real risk that the Institute would not be re-accredited. He had faith that personal contacts with persons he perceived to be influential would ensure that all necessary accreditations were received. At about this time he told Mr Sweeney that the then Commonwealth Minister for Education, Mr Nelson, would support the Institute’s application for Fee-Help to ensure that the Institute obtained registration by the Commonwealth.

65 On 13 August 2004 Mr Sweeney wrote to Dr Calvo and to Ms Vivien Power. She had been engaged as the in-house accountant for the Institute in November 2003. As well as asking for information about the Institute’s courses, he asked for copies of the last three years’ income tax returns and the most recent management accounts. He asked to see a copy of the plant schedule to explain an allowance for depreciation in the accounts which had been prepared for the year ended 30 June 2004.

66 Mr Sweeney had a meeting with Ms Power on 13 August 2004 in which she told Mr Sweeney of the auditor’s qualification to the 2003 financial statements. She also told him that the Department of Education and Training had advised they needed an unqualified audit certificate before they would let the accreditation process proceed.

67 On 17 August 2004 Mr Sweeney telephoned Mr Docherty of Rhodes Docherty, the auditors of the Institute. Mr Docherty advised him that the Institute had recently given a fixed and floating charge in favour of the lessor. Mr Docherty said that he would need to have a copy of the charge and see whether the Institute could meet its obligations under the leases and without this he could not issue an unqualified audit certificate. This was the first Mr Sweeney had heard of the charge.

“ Now the doctrine of laches in Courts of Equity is not an arbitrary or technical doctrine. Where it would practically unjust to give a remedy, either because the party has, by his conduct, done that which might fairly be regarded as equivalent to a waiver of it, or whereby his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse of time and delay are most material. ... Two circumstances, always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy. ... In order that the remedy should be lost by laches or delay, it is, if not universally at all events ordinarily ... necessary that there should be sufficient knowledge of the facts constituting the title to relief. ”

260 Delay is of greater significance where the plaintiff has stood by and allowed the defendant to conduct a business to which, or the profits from which, the plaintiff then lays claim. In Clegg v Edmondson (1857) 8 De GM & G 787, Knight-Bruce LJ said (at 814):

“ A mine which a man works is in the nature of a trade carried on by him. It requires his time, care, attention and skill to be bestowed on it, besides the possible expenditure and risk of capital. Nor can any degree of science, foresight and examination afford a sure guarantee against sudden losses, disappointments and reverses. In such cases a man having an adverse claim in equity on the ground of constructive trust should pursue it promptly, and not by empty words merely. He should show himself in good time willing to participate in possible loss as well as profit, not play a game in which he alone risks nothing. ”

(See also Re Jarvis (decd); Edge v Jarvis [1958] 2 All ER 336 at 341; Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 559).

261 In this case the plaintiffs lay claim to a specific asset, namely the shares held by Mr Sweeney, and not to the business or the profits from the business. The case is not wholly analogous to Clegg v Edmondson. Mr Sweeney did not stand to be compelled to contribute to losses of the Institute. However, he has devoted time and attention, and no doubt skill, to the business and has made tax-deductible gifts to the Institute. Mr Sweeney also guaranteed the Institute’s obligations under a hire purchase agreement for 18 pianos. His guarantee was not called on.

262 Mr Sweeney estimated that on average he spent about 20 hours per week on his duties as chief executive officer of AIM from the end of September 2004 for about 40 weeks each year. He deposed that he carried out much of that work from his office at PKF, but in addition, carried out some of it at AIM’s premises and some of it at home. The work included attending weekly executive meetings, meetings of heads of departments and monthly finance committee meetings. He also was concerned in all aspects of business planning for the Institute, including developing budgets and forecasts and co-ordinating marketing strategy and promotional activities. He attended to matters of a corporate secretarial nature and to general management issues, including what he called “staff matters, student fees, scholarships and related matters”.

263 Mr Sweeney has not been paid for that work. He did not render an account. As noted earlier in these reasons, I do not accept his evidence that he would not have provided the services without rendering an account if he had become aware that Dr Calvo was making a claim to his shares in the Institute. Whilst Mr Sweeney has not made a claim, there is no evidence to suggest that he has released the Institute from any liability it may have to pay for his services. The shareholders’ agreement, to which the Institute was a party, provided that the fees payable for Mr Sweeney’s services for the period from 1 April 2005 were to be approved by the directors, but could not exceed $200,000 plus GST per year unless the approval of shareholders holding not less than 75 percent of the issued shares were obtained.

264 It is probable that if Mr Sweeney were to sue the Institute for remuneration of $220,000 per year from 1 April 2005 based on the shareholders’ agreement the Institute would challenge the validity of that term. I express no views on the merits of such a challenge. But even if such a challenge were successful, prima facie Mr Sweeney would be entitled to reasonable remuneration from the Institute for the work done. If the Institute had a defence to such a claim, it is likely that any such defence would affect the merits of the defence of laches.

265 Mr Sweeney and Rowlands Pty Ltd made tax-deductible gifts to the Institute in November and December 2004 and December 2005. These were not payments made to acquire a shareholding in the Institute. However, Mr Sweeney had made it clear that he would only make the gifts if he obtained control of the Institute. I have found that Mr Sweeney would not have made the gifts or caused Rowlands Pty Ltd to do so had he been aware that the plaintiffs might make a claim to the shares. Prior to making the last donation on 31 December 2005, Mr Sweeney was aware that Dr Calvo was pressing for payment. Dr Calvo asserted that payment of $1.56 million was due for the 37.5 percent of the shares acquired by Mr Sweeney. As noted at paras [196] and [197] Mr Sweeney held out to Dr Calvo that he might be paid $1.5 million for his remaining shares.

266 Mr Sweeney induced the plaintiffs to believe that they would be paid for their shares, albeit that he did not promise to exercise the option. His conduct about which the plaintiffs complain, contributed to their delay in instituting proceedings whilst they waited to be paid.

267 The gifts were not a quid pro quo for the shares or other benefits Mr Sweeney obtained from the plaintiffs; or they would not have been gifts. When Mr Sweeney made his gifts and caused Rowlands Pty Ltd to make its gifts he knew of all of the facts which give the plaintiffs their title to relief. The plaintiffs did not know of their right to have it declared that Mr Sweeney held his shares on trust for them. Mr Sweeney did not make the gifts in the belief that the plaintiffs knew of their rights and had chosen not to exercise them. Mr Sweeney was not induced to make the gifts by anything done by the plaintiffs. Whilst I accept that he would not have made the gifts had the plaintiffs commenced proceedings there was no relevant delay up to the end of 2004, and by December 2005 Mr Sweeney knew that the plaintiffs asserted an entitlement to be paid for the shares he had acquired. Whilst that was not a claim to which they were entitled, Mr Sweeney did not cause Rowlands Pty Ltd to make its gift in 2005 expecting to be free of any claim.

268 I do not consider that it would be just to deny the plaintiffs equitable relief on the ground of laches.

Estoppel

269 No separate submissions were advanced for the defence of estoppel. Counsel for Mr Sweeney acknowledged that if the defences of laches and acquiescence did not succeed, the defence of estoppel would not succeed.

Just Allowances

270 I do not consider that it should be a condition of equitable relief that the plaintiffs compensate Mr Sweeney for the value of the time he devoted to the affairs of the Institute. Prima facie Mr Sweeney would be entitled to recover at least reasonable remuneration for his services. If there were an available defence to the Institute to such a claim, that would reflect on the justice of his receiving such remuneration. I see no reason why a suit he may have against the Institute should, in effect, be prejudged by ordering the plaintiffs to pay compensation as a condition of equitable relief for the services he provided.

271 Nor is Mr Sweeney entitled to compensation as a condition of equitable relief for the tax deductible gifts he and his company made to the Institute. As noted above, the last payment of $100,000 in December 2005 was made when Mr Sweeney was aware that Dr Calvo asserted that he was liable to pay $1.56 million for his 37.5 percent shareholding. Moreover the payments were gifts. They were not made for an expected return. They improved the financial position of the Institute, but not in a way which can be seen to directly affect the value of the shares. So far as the evidence discloses, AIM’s constitution still provides that members are not entitled to dividends or a return of capital. Whilst Mr Sweeney said that he had been advised by the tax office that the company could be converted from a not-for-profit company, it does not appear that that has been done. Ellimark would have to approve any such change to the constitution. There is no evidence that Dr and Mrs Calvo would wish to change the status of the company or that Ellimark would wish to do so.

272 Finally, the making of just allowances as a condition of equitable relief is discretionary. Just allowances may be refused where a fiduciary has been guilty of bad faith (Phipps v Boardman [1965] Ch 992 at 1021; Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No. 2) [1984] WAR 32 at 38). In Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298, Heydon JA (as his Honour then was) summarised the authorities (at 384 [335]) as imposing an onus on the defendant to negate dishonesty or other grave forms of misconduct, and said that the absence of grave misconduct is a passport to an indulgence in favour of the defendant. I have found not only that Mr Sweeney placed himself in a position of conflict between his interest and duty, but that he took advantage of the plaintiffs and did not deal fairly with them. In those circumstances and having regard also to the earlier matters dealt with at paras [267] and [271], I do not consider that Mr Sweeney is entitled to an indulgence by way of a just allowance.

Conclusion and Orders

273 The plaintiffs did not press a claim for a declaration that the shareholders’ agreement had been terminated. The exercise period for the call option expired on 31 August 2008. The co-operation deed will come to an end upon Mr Sweeney’s ceasing to be a shareholder of the Institute. The plaintiffs sought a declaration that the shares held by Mr Sweeney in the Institute are held by him on trust for the plaintiffs. They are entitled to that relief. They are also entitled to a declaration that the plaintiffs are entitled to be registered as the holders of those shares and an order that Mr Sweeney deliver a share transfer. I will not order rectification of the share register. The Institute has not been joined as a party and the register accurately describes the holders of the shares. No claim for damages or equitable compensation was pressed, save in respect to the claims under the Fair Trading Act and those claims have failed. The plaintiffs did not press their claim to be entitled to the sum of $1.56 million and they are not entitled to that relief.

274 There is no occasion to order an account as it has not been shown that Mr Sweeney has derived any profit from his shareholding. However, in case any such profit has been derived of which the plaintiffs were unaware, or has been derived since the hearing, I will reserve the proceedings for further consideration and grant liberty to apply.

275 For these reasons I make the following declarations and orders:

1. Declare that the shares in The Australian Institute of Music Ltd (“AIM”) held by the defendant are held by him in trust for and on behalf of the plaintiffs;

2. Declare that the plaintiffs are entitled to be registered as the holders of the shares in AIM held by the defendant;

3. Order that within 21 days the defendant execute and deliver to the plaintiffs a transfer of the shares in AIM held by him and deliver to the plaintiffs any certificate held by him in respect of such shares;

4. Reserve proceedings for further consideration and grant liberty to apply on reasonable notice;

5. Order that the plaintiffs’ claims for relief in para 37(c), (f), (g), (h) and (i) of the further amended statement of claim be dismissed;

6. Order that the exhibits may be returned after 28 days.

276 Prima facie the plaintiffs are entitled to their costs. I will hear the parties on costs.

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