CellOS Software Ltd v Huber (No 2)

Case [2020] FCA 505

FEDERAL COURT OF AUSTRALIA

CellOS Software Ltd v Huber (No 2) [2020] FCA 505

File number: VID 951 of 2015
Judge: BEACH J
Date of judgment: 17 April 2020
Catchwords: CORPORATIONS – equitable remedies – trial on quantum – securities – share scheme – breach of director’s duties – ss 181 and 182 of the Corporations Act 2001 (Cth) – breach of fiduciary duties – liability of a fiduciary to account –account of profits – equitable compensation – declarations – other relief
Legislation: Corporations Act 2001 (Cth) ss 181, 182
Cases cited:

Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 360 ALR 1

Cable & Wireless Australia & Pacific Holding BV (in liq) v Federal Commissioner of Taxation (2017) 251 FCR 483

CellOS Software Ltd v Huber (2018) 132 ACSR 468: [2018] FCA 2069

Generic Health Pty Ltd v Bayer Pharma Aktiengesellschaft (2018) 267 FCR 428

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41

Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25

Ramsay v BigTinCan Pty Ltd (2014) 101 ACSR 415

Strategic Minerals Corp NL v Basham (1997) 25 ACSR 470

Warman International Limited v Dwyer (1995) 182 CLR 544

Date of hearing: 28 and 29 October 2019
Date of last submissions: 23 December 2019
Registry: Victoria
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Commercial Contracts, Banking, Finance and Insurance
Category: Catchwords
Number of paragraphs: 147
Counsel for the Applicant: Dr COH Parkinson and Mr JWG Grant
Solicitor for the Applicant: Corrs Chambers Westgarth
Counsel for the First Respondent: The First Respondent appeared in person
Counsel for the Second to Fourteenth Respondents: The Second to Fourteenth Respondents did not appear
Counsel for the Fifteenth Respondent: The First Respondent appeared in person on behalf of the Fifteenth Respondent

ORDERS

VID 951 of 2015
BETWEEN:

CELLOS SOFTWARE LTD ACN 114 670 094

Applicant
AND:

JASON JOSEPH EMMANUEL HUBER

First Respondent

BIRINC TRADE CORP

Second Respondent

SKY WEALTH INTERNATIONAL LTD (and others named in the Schedule)

Third Respondent

JUDGE:

BEACH J

DATE OF ORDER:

17 APRIL 2020

THE COURT DECLARES THAT:

1.The First Respondent breached his statutory duties to the Applicant in contravention of ss 181(1) and 182(1) of the Corporations Act 2001 (Cth) (the Act) and breached his fiduciary duties to the Applicant as the chief executive officer and the director responsible for fundraising by:

(a)procuring the purchase of a substantial number of shares in the Applicant, and the sale of a substantial number of shares in the Applicant for profit, thereby diverting investors from taking up shares in the Applicant;

(b)causing the Applicant to enter into a loan agreement with LGA Energy Investments Limited which contained an option to convert past and future loans to the Applicant to shares in the Applicant at SG$1.80 per share, at a time when the market price for shares in the Applicant was at least US$2 per…

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Details
AGLC
CellOS Software Ltd v Huber (No 2) [2020] FCA 505
Case
[2020] FCA 505
Decision Date

CaseChat Overview and Summary

CellOS Software Ltd sought equitable remedies against Huber and others for breaches of fiduciary duties and director’s duties under the Corporations Act 2001 (Cth). The dispute involved a share scheme and payments made by CellOS to Huber and related entities. The Federal Court was required to determine the appropriate quantum of the account of profits and whether further equitable remedies, including equitable compensation and declarations, were warranted.

The court held that the profits made by Huber and related entities from the share scheme were the result of breaches of fiduciary duties. The court rejected Huber’s argument that the profits should not be accounted for in full, finding that he had failed to discharge the onus of proving inequity in ordering him to account for the entirety of the profits. The court accepted the lower scenario estimate of profits, amounting to AU$42,000,000, as a conservative measure. The court also found it appropriate to declare that shares held by Huber controlled entities be held on a constructive trust in favour of CellOS and that CellOS has no outstanding indebtedness to Pized. The court did not award equitable compensation or interest, noting that the subsequent drop in CellOS' share price did not negate the profits made at the time of the breaches.

The court made several declarations, including that the Huber controlled entities and Huber should account for AU$42,000,000 and that CellOS has no outstanding indebtedness to Pized. The court ordered Huber and related entities to pay CellOS AU$42,000,000 and the costs of the proceeding. The orders were to be entered in accordance with Rule 39.32 of the Federal Court Rules 2011.

Orders

Orders of the court

11. The First to Fifteenth Respondents account to the Plaintiff in the sum of AU$42,000,000.00.

12. The First to Fifteenth Respondents pay the Applicant’s costs of and incidental to this proceeding.

13. Liberty to apply.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

In summary, any liability owing by CellOS to LGA in relation to the relevant payments was converted to equity each time, with the outstanding loan balance of the LGA loan reduced to nil on each occasion. Mr Huber’s submissions on this aspect do not take him anywhere.Conclusion I accept Ms Hennessy’s methodology in the supplementary Hennessy report. Accordingly I will order an account of profits based upon her low scenario estimate of AU$44,663,904. I will further discount this for contingencies giving a figure of AU$42,000,000. Mr Huber has failed to discharge his onus of establishing that it would be inequitable to order him to account for the entirety of the profit made by him and the Huber controlled entities as a result of his fiduciary breaches. Let me make some final observations. First, at this stage I have not allowed for any interest component. I have not awarded equitable compensation and so one dimension for any loss of use claim simply does not arise. As to the other dimension concerning the respondents’ use of any of the profits received from the Scheme, I am not satisfied that I should add any use component, particularly in light of subsequent events concerning CellOS’ share price. Second, as the shares held by the Huber controlled entities were sourced from the operation of the Scheme and its profits, it is appropriate that I declare that such shares be held on a constructive trust in favour of CellOS. Third, even if I had accepted Mr Huber’s submissions concerning a substantial proportion of the relevant 20,800,000 shares, nevertheless one could still justify an account applying to a quantum in the order of AU$42,000,000. I say that because on one view I could have taken the mid scenario used by Ms Hennessy and her illustrative calculations excluding both the first category of shares and the second category of shares which would have given a figure of AU$44,431,616. Now I accept that I have chosen the low scenario generally as a conservative measure in favour of Mr Huber. But another equally open choice would have been for me to have taken the mid scenario. There is imprecision, of course, in this whole exercise. But overall I am satisfied that AU$42,000,000 is the appropriate figure with no interest. Moreover, as participants, the Huber controlled entities should also be jointly and severally liable with Mr Huber for accounting for such an amount. Fourth, as the moneys used to advance the Pized loan were sourced from the implementation of the Scheme, it is appropriate to declare that CellOS has no outstanding indebtedness to Pized. What CellOS is purported to owe is in substance owed to itself. Any such loan should be expunged from CellOS’ balance sheet and past balance sheets reconstructed with such a purported loan removed. The tenth declaration that I propose to make, followed through to its logical consequence, should achieve this result. Finally, I appreciate Mr Huber’s intuitive thought that he has not made any profit, but rather suffered significant losses. But such a perspective is partly informed by what happened to the share price of CellOS well after the relevant events. That hindsight analysis does not deny that at the time of the breaches of fiduciary duty, significant profits were made for which there should be an accounting. But as I say, I have not awarded interest.

Ratio Decidendi

Legal Principle Established

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