Corsecure Pty Limited v Kaldor - [2003] NSWSC 91

No judgment structure available for this case.

CITATION: Corsecure Pty Limited & Anor v Kaldor & Ors [2003] NSWSC 91 revised - 05/03/2003

HEARING DATE(S): 25 November-2 December 2002

JUDGMENT DATE:
28 February 2003

JURISDICTION:
Equity Division
Commercial List

JUDGMENT OF: McClellan J

DECISION: Summons dismissed

CATCHWORDS: CONTRACT - agreements - whether binding agreement existed - alleged agreement for formation of a new company to take over distributorship of computer security product from defendant company - whether binding agreement made at meeting between parties - claim for damages and equitable relief - whether defendants estopped from resiling from alleged agreement - whether exemplary damages available

LEGISLATION CITED: Corporations Act

CASES CITED: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153
Barnes v Addy (1874) 9 Ch App 244
Digital Pulse v Harris & Ors (2002) NSWSC 33
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10
Lamb v Cotogno (1987) 164 CLR 1
Uren v John Fairfax & Sons Pty Limited (1986) 117 CLR 118
Walker v Wimborne (1976) 13 CLR 1
XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited [1985] 155 CLR 488

PARTIES :
Corsecure Pty Limited (1st Pltf)
Geoffrey Higgins (2nd Pltf)
Martin Kaldor (1st Def)
Christo Simeonoff (2nd Def)
Blue Sky Industries Pty Limited (3rd Def)

FILE NUMBER(S): SC 50129/01

COUNSEL: R G Forster SC/S L Bell (Pltfs)
K P Smark (Defs)

SOLICITORS: Verekers (Pltfs)
Ferrier & Associates (Defs)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McCLELLAN J

FRIDAY 28 FEBRUARY 2003

50129/01 CORSECURE PTY LIMITED & ANOR v KALDOR & ORS

JUDGMENT

Introduction

1 HIS HONOUR: The first plaintiff, Corsecure Pty Limited, is a company formed by the second plaintiff, Geoffrey Higgins (“Higgins”) and the first defendant, Martin Kaldor (“Kaldor”). The circumstances in which Corsecure was formed are central to the dispute between the parties.

2 The second defendant, Christo Simeonoff (“Simeonoff”) was the principal shareholder in the third defendant, Blue Sky Industries Pty Limited (“Blue Sky”). Blue Sky is a small computer sales and service company which has been operating for more than twenty years. It provides computers and technical management services to organisations which require a high level of information security. Its customers include banks, government, the police department, the Reserve Bank and similar organisations. Higgins and Kaldor were at relevant times, employees of Blue Sky.

3 A company known as CyberGuard Corporation, Inc of the USA is in the business of providing computer security products. One product which it developed is known to the industry as a “firewall” and has been referred to in this litigation as “CyberGuard”. Early in 2001 a representative of CyberGuard came to Australia and made an arrangement with Simeonoff whereby Blue Sky would become a distributor of the firewall product in Australia.

4 By May/June 2001 Blue Sky was in financial difficulties. Those difficulties were threatening the relationship between Blue Sky and CyberGuard. Higgins, Kaldor and Simeonoff were having discussions about how to continue the business and keep the CyberGuard arrangement. They are now at issue as to the content of those discussions and whether they resulted in a legally binding agreement to form a new company which would take over the CyberGuard distribution arrangements from Blue Sky. Higgins says there was such an agreement and accordingly by ultimately keeping CyberGuard for Blue Sky the agreement has been breached. In the event that this claim fails, Higgins alleges that the defendants are estopped from denying the agreement.

The pleadings

5 Being in the commercial list the proceedings were commenced by summons. It was only shortly before the trial that the summons was amended to include the allegation that there was a concluded agreement. The amendment was accompanied by the filing of further evidence to which there was a reply by the defendants.

6 The summons alleges that Simeonoff, Blue Sky, Higgins and Kaldor reached an agreement on 7 June 2001 which provided for a new company to be formed which became known as Corsecure Pty Ltd to take over the CyberGuard business from Blue Sky. The alleged agreement contained many terms, both express and implied. It is alleged that the defendants breached the agreement and ensured that the benefit of the CyberGuard arrangements remained with Blue Sky. It is further alleged that Kaldor, who was a director of Corsecure, breached his fiduciary duties to that company and that Simeonoff and Blue Sky assisted in that breach.

7 A case in estoppel is pleaded. This case requires consideration of the actions of the parties after 7 June 2001 when Corsecure was incorporated and Higgins and Kaldor took steps to secure the CyberGuard business for the new company.

8 Breaches by Kaldor of the Corporations Act are also pleaded.

9 It is agreed that in so far as Higgins may have a claim against Blue Sky for unpaid wages or commission those claims are preserved and they are not the subject of the present proceedings.

10 In their amended summons the plaintiffs claim equitable relief or alternatively, damages, including exemplary damages. It is alleged that Kaldor breached the fiduciary duties which he owed to Corsecure and that Simeonoff and Blue Sky knowingly participated in those breaches and are benefiting from them. A transfer of the CyberGuard business is sought.

The evidence

11 Detailed written statements were provided in evidence. They included detailed statements in reply to others. At many places the evidence of one witness is either denied entirely or a significant element of it is denied by another witness. To relate all of the evidence and determine whether to accept a particular witness’s version of the events on a particular day would be a difficult task. Nor do I believe that it is necessary to approach the matter in that manner. The critical issue is whether there was a binding agreement made on 7 June 2001 when Higgins alleges it was made. If no such agreement was made, the claim in contract fails. It is then necessary to gain an understanding of the conduct of the parties to determine the estoppel claim. However, this does not require a resolution of each of the points at which the parties disagree. I do not understand the submissions of the parties to have suggested otherwise.

12 Each of the main witnesses was cross examined. Simeonoff was suffering significant health problems which I have no doubt influenced his demeanour. He did not appear as a particularly forceful individual.

13 The fundamental contest in the evidence is between Simeonoff and Kaldor on the one hand and Higgins on the other. I have concluded that each of their recollections is probably faulty as to matters of detail, particularly the sequence of events. On occasions I find it impossible to accept the evidence of one or all of them.

The early dealings

14 Higgins’ skills lie in the sale of computer systems whereas Simeonoff has technical and computer system design skills. Simeonoff first met Higgins in about July 2000 when they were working on the problems of a common client. At the time of this meeting Higgins was employed by the Santa Cruz Operation Inc. By August 2000 Higgins had indicated to Simeonoff that he wished to leave Santa Cruz and work for Blue Sky. On or about 2 October 2000 Higgins commenced working for Blue Sky. The arrangement between Simeonoff and Higgins provided for Higgins to be paid, at least initially, on a commission basis only. Higgins was to be paid thirty percent of the gross margin on all sales which he made.

15 The early months of Higgins’ employment proved difficult. He attracted little new business and as a consequence did not earn any commission. This caused some friction between himself and Simeonoff.

16 Blue Sky moved offices in January 2001. The move was not voluntary and the cost of the rent of the new premises was considerably greater than at the previous location. This imposed a financial burden on Blue Sky. At about the same time Simeonoff introduced Higgins to Kaldor who was not at that stage employed by Blue Sky. Kaldor had considerable experience in the marketing of computer products and had previous dealings with Simeonoff. He also had access to Cyberguard. The purpose of the introduction was to discuss the possibility of Blue Sky being offered the CyberGuard distributorship in Australia. Kaldor was responsible for introducing that prospect to Blue Sky.

17 I am satisfied that by February 2001 Blue Sky was experiencing some financial difficulties. Simeonoff attempted to raise extra finance but was not immediately successful. In that month Chris Thatcher of CyberGuard came to Australia to meet the Blue Sky people. At that stage Kaldor was still not employed by Blue Sky but he nevertheless came to the meeting. The meeting resulted in an agreement between Blue Sky and CyberGuard under which Blue Sky would distribute CyberGuard products.

18 The arrangement required Blue Sky to:

· generate sales of the CyberGuard firewall product;

· provide technical support in the event of difficulties with the hardware;

· provide training for new and replacement operators of the CyberGuard product; and

· provide resellers with CyberGuard techniques of selling the product to end users.

19 The arrangement with CyberGuard was a non-exclusive distribution agreement. One of its terms prevented Blue Sky from selling CyberGuard’s products directly to end users. Although CyberGuard has always been entitled to appoint other distributors in Australia it has not done so.

20 There are other firewall products available in the market and, as I understand the situation, CyberGuard is by no means the largest supplier of them, although it has a reasonable share of the market.

21 Kaldor joined Blue Sky in March 2001. He negotiated a salary of $10,000 per month from Simeonoff. The intention was that Kaldor, Simeonoff and Higgins would work together to develop the market for CyberGuard.

22 By April 2001 the cash problems for Blue Sky were becoming serious. Simeonoff was blaming Higgins for the position and suggested that Higgins had failed to secure adequate new business. According to Simeonoff there was a conversation with Higgins in April 2001 when Simeonoff disclosed Blue Sky’s financial problems. Simeonoff also gave evidence that at the same time he had been able to make arrangements for an additional $150,000 in long term funding from Blue Sky’s bankers. Despite this facility the evidence discloses that Blue Sky was having continuing difficulty in meeting payments to its employees, commissions and monies owing to CyberGuard.

23 Notwithstanding these problems, considerable work was undertaken in relation to the prospective sale of CyberGuard and by April it was believed that it was likely that a substantial order would be forthcoming from the Reserve Bank of Australia. Other orders were being pursued.

The meeting in May 2001 – the evidence of Simeonoff and Kaldor

24 I have no doubt that the parties would have informally discussed the financial position of Blue Sky on many occasions. However, some meetings appear to have been more formal. One such meeting occurred in late May 2001. According to Simeonoff the meeting discussed a possible restructuring of the financial arrangements between each of them and Blue Sky. Simeonoff’s evidence was as follows:

I called a meeting on about 24 May 2001, attended at Blue Sky’s office by Kaldor, Higgins and me. I recall thinking at the time of this meeting that Blue Sky could only exit the CyberGuard distributorship in favour of its subsidiary if that company took on an inter-company debt of the same amount and paid it.

At the time of this meeting, Blue Sky was experiencing a shortage of cash but I regarded the company as having assets in excess of total liabilities and I expected that Blue Sky’s efforts concerning CyberGuard would soon result in sales for it, as was the case.

At the meeting, I said: ‘I have an idea to change the way we distribute income in this organisation. I will put it on the Whiteboard in the room. For the CyberGuard sales to work, all three of us will have to put in significant effort to develop and close sales. Kaldor has done a fantastic job in the last few weeks in getting serious interest from Resellers. Higgins, you have been assisting Kaldor very effectively. I am thinking about a profit sharing mechanism which may involve equity. As you know, the company is being valued by financiers for possible third party finance involvement so we could arrive at what the shares are worth.

In addition I propose we three should equally be paid on and from 1 May 2001, say, $10,000 gross including Superannuation per month if sales permit. I propose that whilst this starts on 1 April, payments will only be made from 1 May as the company is not in funds to pay for April. There have been no sales in April. We can only pay when we have sales. The April payment will not necessarily be paid in cash, but could be a combination of, say, equity in Blue Sky on a basis we will agree at some time in the future. Blue Sky could have equity investors from outside in addition. If there were a company developed only to sell CyberGuard, Blue Sky would have to be a shareholder in addition to me having a stake in the same personal amount as you. The Blue Sky stake would be much higher than ours.

I did not suggest the amount of equity, except that it would have reference to the April $10,000 figure. I further said: ‘I would like to propose that we look at a profit sharing arrangement starting later in the year, say about September when we have recovered some of the initial investment of setting up the CyberGuard market.

Kaldor said: ‘I am concerned about a conflict of interest about Blue Sky being both a distributor and also having some end user customers, such as State Rail of NSW, Roads and Traffic NSW and National 1, which we are servicing because they are already our clients. If this keeps up we could upset our new re-sellers.’

Higgins said: ‘Yes. Perhaps we could consider something like a separate distribution company because that would protect the resellers.’

I said: ‘It is premature now. We need to analyse our cash, debt, assets and expectations before we can decide how we structure Blue Sky, possibly by spinning off a Distribution company.’

Kaldor said: ‘I will do that analysis.’ (I recall it was provided by Kaldor some weeks later).

I said: ‘I have prepared a pie chart dividing income into five parts. Three for us, one for operational costs and one for debt reduction and retained profits. This is necessary for all parties to be treated fairly’. During the course of the meeting as discussion proceeded I drew and re-drew a pie chart ending up with six unequal parts, which became the six points noted by Kaldor.

During the course of the meeting, I had been making notes on the whiteboard in the room. At the end of the meeting, I said to Kaldor, ‘Can you make some notes of what we’ve discussed and what’s on the whiteboard.’ “

25 Kaldor gave evidence and confirmed that the meeting took place. He indicated that as requested he prepared a document headed “Principles of Agreement”. He gave evidence that he expected this document would serve as a basis for establishing a possible written agreement but this never progressed. The Principles of Agreement document was in the following terms:

“Principles of Agreement

Preamble

Synopsis

Blue Sky has operated in the UNIX development business for more than 20 years, distributing SCO products, development platform solutions for end users, and providing support and training. At the date of this agreement, the company currently operates with headquarters at premises at Level 1, 1 Atchison St, St Leonards, NSW including training rooms, office area and development laboratory. A Melbourne office has been established with training facilities, and office space. The company currently employs about 12 full and part time staff, principally as UNIX developers and support staff.

There are a number of growth prospects for Blue Sky, potentially requiring expansion and development of the organisation necessitating enhanced management and processes.

As of this date, Blue Sky has an established position in the Sydney/Melbourne markets as a provider of Operating System solutions, involving a historic relationship with SCO and undertaking training and solution development of SCO UNIX based solutions, particularly Open Server, Unixware and recently Tarantella products.

The agreed direction for Blue Sky is to develop as Value-added Distributor, developing business in the Australian market, based on product distribution involving a high level of service requirements, such as training, solution development, 2nd tier support and expertise and additional revenue generating services. Key supplier relationships are expected to include CyberGuard, Tarantella, Caldera (replacing SCO) plus other less significant product sources.

The key success factors are seen as the effective development and support of a range of major and minor reseller channels to end user organisations. The Blue Sky skill set will initially support development of two business streams – information security and operating systems.

The Principals

Mr C Simeonoff, BE: founded Blue Sky, and has led the organisation throughout its lifetime, particularly providing technical expertise and direction. Mr Simeonoff’s expertise will provide the technical focus for Blue Sky, particularly in areas of product selection, solution development and pre-sales expertise.

Mr G Higgins: provides extensive experience in sales, and channel management, particularly for the UNIX products and services. Mr Higgins will provide the initial development of Blue Sky sales and revenues, subsequently developing and managing a channels sales team and relationships.

Mr M Kaldor, BE, MBA: provides extensive experience in business development and service delivery, particularly in telecommunications and information security, plus past experience and relationships built around the CyberGuard business. Mr Kaldor will focus on Operations management and business delivery.

The principals initially agree that these areas will overlap and be co-ordinated in terms of revenues development, process development and business strategy.

Common Objectives

This agreement is intended to focus joint efforts of the principals on:

. Development of Blue Sky business and revenues

. Development of income and business values to be shared by the principals

. Growth of interest and achievement for the principals

. Development of opportunities and benefits for personnel employed by Blue Sky

Immediate Priorities

At the date of this agreement, it is agreed that the organisation is carrying debt accumulated through previous business activities, the re-location from North Sydney to St Leonards, and the initial establishment of the CyberGuard business. This debt is largely funded by Westpac Bank, and secured through mortgage of the home owned by Mr Simeonoff.

It is agreed that the intent of the three principals is to achieve realistic commercial incomes and to equally share in the benefits emerging from development of Blue Sky business.

Accordingly, the gross profits of the organisation will be disbursed to meet the following priorities:

Disbursements on items 4, 5 and 6 will be agreed after finalisation of monthly accounts

Principals Remuneration

Remuneration to the principals is agreed to comprise monthly income, profit sharing and business value through equity as follows:

Monthly income

Profit Sharing

A previous agreement between Messrs Simeonoff and Higgins covering from 1 November 2000 to 31 March 2001, provides for conversion under this agreement of 1/3 of gross margin on sales to an equity position in Blue Sky, proportion to be resolved.

Equity positions

. Ownership of Blue sky by Mr C Simeonoff

. Previous investment and operation by Mr Simeonoff

. The above agreement between Messrs Simeonoff and Higgins

. Mr Kaldor’s investment in the previous operation of CyberGuard business

. Expertise, business relationships and contributions by the Principals

. Unpaid monthly income from 1 April 2001 to this date.”

The meeting in May 2001 – the evidence of Higgins

26 Higgins also gave evidence of the May meeting. He denies that there was discussion regarding the possibility of forming a new company. According to Higgins the exchange was more limited and was in the following terms:

“Later in May 2001, I attended another meeting with Kaldor and Simeonoff during which we had a conversation to the following effect:

Kaldor: ‘The company still is not paying wages on time.’

Simeonoff: ‘If we are to go forward with the present Blue Sky business and with the new CyberGuard business we’ll need additional capital. The possibilities for an initial public offering which I was exploring appear to be exhausted. I will arrange further funding from the bank by extending the mortgage on my house. In the meantime we should move forward on the proposal to issue equity to you. Martin, you could convert your April 2001 salary to equity. Geoff you could do the same for April 2001. And you could do the same for your earlier entitlements.’

Kaldor: ‘I would need to see the company’s financial statements before I would accept shares in lieu. Then I would need to know how many shares, at what value and so on.’

Higgins: ‘Likewise. But the company must already be in serious difficulties. Otherwise it would be able to pay the wages. But, if you have a proposal Christo, show me the details, balance sheet and profit and loss account. I’ll need all of that before I make any decision about equity. It will need to be good. From the little I know the shares must be pretty well worthless.’

Simeonoff: ‘I will get the accounts up to date and give you each a copy and a budget shortly. The accountant’s working on it now.’

Kaldor: ‘Regardless of what is agreed for April we should fix salaries for the period 1 May to 30 June 2001. Then from July 1 there should be a completely new deal concerning profit sharing, equity and salaries.’

Simeonoff: ‘We are agreed that from 1 July 2001 there will be entirely new arrangements. Geoff, in the meantime do you agree to say $10,000 per month to 30 June 2001 instead of the present commission arrangement? I’ll also fix my drawings to that amount. Does $10,000 suit you Martin?’

Higgins: ‘$10,000 a month is fine. Provided you pay all the arrears due, and then pay the wages when due. On time. Every time.’

Simeonoff: ‘That’s the proposal I’m putting.’

Higgins: ‘Then I agree to that.’

Kaldor: ‘I agree. But you must keep your commitment. You must pay the wages on time. Christo, people have commitments. You must pay my May wages by 31 May.’

Simeonoff: ‘Of course.’ “

A meeting on 7 June? – the evidence of Higgins

27 The parties continued to have conversations with each other about Blue Sky’s prospects. They were all working from the same premises and it is likely there were a number of discussions. Higgins gives evidence of a particular conversation between himself, Kaldor and Simeonoff which he says took place on about 7 June. His account which is contained in paragraph 49 of his statement, is as follows:

“Prior to 8 June 2001 I had various conversations with Simeonoff and Kaldor about Blue Sky’s prospects generally and in particular about the prospects of its business as a CyberGuard reseller. In the course of one such conversation on or about 7 June 2001 the following words, or words to the following effect, were spoken:

Higgins: ‘Blue Sky still has not paid my wages. The wages of other employees are in arrears. If Blue Sky is not insolvent already it can’t be far off. In any case Blue Sky is a technical service organisation. It is not organised as a marketing and sales organisation. It does not have the resources or infrastructure. I also understand that Christo has failed to secure any additional equity for Blue Sky to finance current liabilities and the development of any new business. As things are I am not prepared to make any investment in Blue Sky. And Blue Sky must pay to me what it owes. And I’m not prepared to develop a profitable CyberGuard business to subsidise Blue Sky’s loss making activities and inappropriate cost structures. The rent Blue Sky pays is double what we need and staff numbers are too high. If it is to succeed, the CyberGuard business must be developed independently of other Blue Sky business. I am prepared to invest in a new independent CyberGuard reseller business. To the extent that the new company requires technical services they could be supplied under contract by Blue Sky as required. I propose we contribute equally to the capital of the new business. Christo, I also propose that you will not be entitled to contribute any capital or take any equity in the new business until Blue Sky has paid all that it owes to me and Martin and other Blue Sky creditors and you’ve resolved all of Blue Sky’s difficulties. I propose that for the time being you participate in the new CyberGuard business as a full time employee. Your equal participation in the equity of the new business would also be conditional upon you remaining a full time employee from commencement until the time you put in your capital.’

Kaldor: ‘I agree. I’m not prepared to invest in Blue Sky. And unless Blue Sky can afford to pay what it owes to me and Geoffrey and to other creditors it cannot afford to fund key resources necessary for the development of the CyberGuard business. The CyberGuard business should therefore be developed as a separate entity which is properly funded. In the meantime the new company could acquire technical services and training from Blue Sky. That may assist Blue Sky. We will almost certainly need to find some outside investors for the new company. I’ll work up some budgets. And we’ll have to make some inquiries of potential investors.’

Simeonoff: ‘Okay. I agree to that. Its true that Blue Sky is not resourced appropriately as a marketing and sales organisation. And I have not been able to secure any outside investors. I note what you say about you not making any investment in Blue Sky. I have to accept that. Blue Sky is therefore unlikely to be able to develop a CyberGuard reseller business. I would therefore support any negotiations with CyberGuard for a new reseller agreement for a new company. Blue Sky will agree to supply technical services under contract to the new company and its customers.’

Higgins: ‘In that case we should proceed to establish a new company, develop budgets and speak with prospective investors without delay. We should also speak with Chris Thatcher. Assuming he agrees, I’ll make all the necessary arrangements with him.’

Kaldor: ‘Lets proceed on that basis. I’ll research business names. The new company should start as soon as possible and not later than say 1 July 2001. Geoff and I should cease with Blue Sky on 30 June.’

Higgins: ‘That suits me.’

Simeonoff: ‘Okay’.“

A meeting on 7 June? - The evidence of Simeonoff

28 Simeonoff’s initial response to paragraph 49 of Higgins’ statement was made in his statement of 19 December 2001. He said the following:

“I refer to para 49 of Higgins’ statement. I deny that I made the statements attributed to me, including the word ‘okay’.”

29 Simeonoff does not deny that a meeting took place nor that Higgins said the matters which he alleges he said at that meeting.

30 At the time that Simeonoff’s statement was prepared the plaintiffs had not pleaded that an agreement was formed at the meeting of 7 June. That allegation only came with an amended summons for which I granted leave on 15 November 2002. As a result of that amendment Simeonoff provided a further statement on 24 November 2002. In that statement he says:

“I refer to the statement of the second plaintiff (“Higgins”) dated 23 November 2001 (“Higgins’ statement”) and to my previous statement dated 19 December 2001.

I refer to the amended summons, paragraph 19B, to paragraph 49 of Higgins’ statement and to paragraph 82 of my previous statement.

I have no recollection of a meeting between Higgins, Martin Kaldor and myself on or about 7 June 2001 dealing with the sorts of matters set out in paragraph 49 of Higgins’ statement.

I maintain my denial that I said at any time the words set out in that paragraph, except to the extent referred to in my statement (at paras 62-71) by reference to the meeting of 24 May 2001 (where notes were made on the whiteboard and which resulted in the document which is exhibit GAH 5 to Higgins statement).”

The evidence of Kaldor

31 Kaldor also made his first statement in the proceedings before the summons was amended. He did not directly address para 49 of Higgins’ statement but said:

“During May and June, financial and business discussions with Higgins and Simeonoff continued. The financial situation of Blue Sky was discussed at these meetings as was our group financial relationships (I refer to Exhibit GAH 5). I undertook a financial assessment of the company.

During April and May, it became clear to me that Blue Sky was approaching a serious financial position. Higgins and I discussed this, both with Simeonoff and in Simeonoff’s absence. In private, Higgins said to me: ‘Blue Sky is in danger of being insolvent and if that occurs, you and I may be dragged into serious financial responsibility.’

During June and July 2001, I had further discussions with Higgins. I said ‘How can we rescue the company (Blue Sky) or if this is not possible, how can we protect the Information Security business that is emerging?’ Higgins said ‘Nothing can be achieved unless Simeonoff is removed from financial control and also unable to control our information systems.’

At one meeting Higgins said, ‘You and I should insist on Simeonoff providing us with controlling interest in Blue Sky, on the basis of 40% to me, 11% to you and 49% to Simeonoff’.

I said: ‘That does not reflect our draft agreement’.

At one meeting in the coffee house across the road from Blue Sky’s office during June, Higgins’ brother Andrew Higgins attended and introduced himself to me as an accountant and barrister, currently on sabbatical leave. Andrew Higgins also said ‘The risk of insolvency to Geoff and you is a real one. As senior managers in Blue Sky, you may be taking on some personal liability were Blue Sky to fail.’

During June 2001, the concept of a new business, Corsecure, was developed with the intent of establishing the distribution business [as a spin-off out of Blue Sky], [not read] to provide focus and identification in the Information Security industry.’

32 In his second statement, Kaldor addresses para 49 of Higgins’ statement directly. He says:

“I refer to Higgins first statement, paragraph 49.

I do not remember such a conversation at about that time. Indeed, I do not recall a conversation dealing with these topics between Higgins, myself and Simeonoff except to the extent they were discussed in the meeting I refer to in paragraph 20 of my earlier statement (where notes were made on the whiteboard) and the other meetings I have referred to in my earlier statement.

I specifically deny that there was any meeting after that meeting or in the first few weeks of June 2001 where the following words or words to similar effect were said (as per paragraph 49 of Higgins’ first statement):

Higgins: ‘Your equal participation in the equity of the new business would also be conditional upon you remaining a full time employee from commencement until the time you put in your capital.’

Kaldor: ‘And unless Blue Sky owes to me and Geoffrey and can afford to pay what it to other creditors it cannot afford to fund the key resources necessary for the development of the Cyberguard business. The Cyberguard business should be therefore funded as a separate entity which is properly funded.’

Simeonoff: ‘It’s true that Blue Sky is not resourced appropriately as a marketing and sales organisation. I would therefore support any negotiations with Cyberguard for a new reseller agreement for a new company.’

Kaldor: ‘Geoff and I should cease with Blue Sky on 30 June.’

I have available to me a work book which I kept during June to October 2002. I note that extracts of this work book appear exhibited to my earlier statement as MJK 00 and MJK 01 (pages 117 and 346 of the agreed bundle respectively).

I refer to the entry “7/6” in that document, on the first two pages of the work book, copies of which I annex and mark “A”.

I recall that I had a meeting with Higgins at that time or (I think) on the next day. Simeonoff was not present. I refer to Higgins first statement, para 50 and I think that this entry relates to that conversation. My recollection is that words to the following effect were also said by me to Higgins:

I said: ‘What else needs to be done to progress this establishment?’

I recall that Higgins and I discussed various steps which need to be taken, which were noted in my workbook:

I said:’ We also need to finalise our joint agreement.’

I note that the work book seems to contain no record of a meeting such as that referred to in paragraph 49 of Higgins’ first statement. I believe that if a meeting had taken place at that time dealing with these topics, I would have recorded in this workbook or I would have made a typed note of it like I did after the white-board meeting.

33 It is significant that Kaldor accepts that there was a meeting with Higgins on 8 June 2001, he doubts that it occurred on 7 June, but in any event says that Simeonoff was not present.

34 As he indicated in his evidence, Kaldor was in the habit of keeping a workbook where he made notes of various events as they occurred. The workbook was in evidence and contained no record of a meeting such as that referred to in para 49 of Higgins’ statement.

The emails

35 The parties commonly communicated with each other by email. On 13 June 2001 Higgins sent an email to Simeonoff which raised questions relating to the reconciliation of outstanding wages and commissions owing to himself and Kaldor. No mention is made of any agreement on 7 June.

36 The reply sent on the same day is significant. The original email and the reply read as follows:

“Hello Christo,
Confirming our discussions regarding a reconciliation of all outstanding wages and commissions to be provided by 15 June 2001 owing to Martin Kaldor and Geoffrey Higgins.

“Actually, owed to Martin Kaldor and Geoffrey Higgins and Christo Simeonoff, in equal amounts, as agreed ($10,000 gross including Super)

That agreement which applies from April 1, and supersedes our preceding agreement (which covers October 1 through the end of March) covers wages in lieu of commissions, and it was agreed by all parties that the first ‘cash’ payment would be for the period of May, dependant on the company invoicing sufficient amounts to do so. It looks like we can make full payment, based on the first full sale of Cyberguards to SecureNet.

The agreement also discussed additional profit sharing, providing the company made profits. There is a chance that this will happen, especially if sales continue well in the next 2 weeks. I am sure we are all working hard to achieve the maximum amount of income for all of us.

The payment to all three of us for the April period was to be used as Equity in ongoing business. This equity can be used as we all agree, in the new company, or as you direct. (or potentially, if we all agree, and funds permit, may be commuted to a cash payment)

Actually, that is from 1st October 2000 till the end of March 2001. The period after April is covered by the agreement reached by yourself, Martin Kaldor and myself (summarised above, and detailed in the e-mail from Martin, post the meeting)

I have most of the figures, and will have Tracie prepare the remainder of the figures for me tomorrow.

I will calculate the ‘1/3rd of gross profit on company sales including hardware, software, training and services as of 1st October 2000 up till 31st March’ as we have agreed.

I expect to have those calculations complete by Friday evening, and, since you are in Canberra on Friday, I would like to review the results with you on Monday, so we can agree on how this amount is to be credited to you. You did discuss possibly taking this amount as equity, and again, I presume this may be taken in the new company, at your discretion. All three of us should discuss the ongoing path, so we can move forward, in a timely and equitable manner.”

37 The email from Simeonoff does not suggest that there was any agreement between the parties beyond the matters discussed in May. It is plain that Simeonoff is contemplating that a new company may be formed but it is evident from the email that the terms of any future arrangements have not been settled.

38 It is also significant that there was no reply by Higgins suggesting that Simeonoff was wrong to suggest there was a need for ongoing discussions because relevant matters had not been agreed. There is in evidence a document which Higgins recognises as an email which he sent in reply. It was in the following terms:

“Christo,

As yet I have not been provided with the reconciliation requested.

As part of this reconciliation it will need to be complete of all sales, total sales figure for BSI and the formula used to calculate gross profit.

The meeting of Higgins, Kaldor and others on 14 June 2001

39 Higgins gives an account of a meeting which he says did not include Simeonoff which occurred on 14 June 2001. By this time Kaldor and Higgins had proceeded to set up a new company, Corsecure Pty Ltd. Simeonoff did not join in their activities. It is further evident that any proposed restructuring of the corporate arrangements between the parties had not been agreed. Higgins says:

“On or about 14 June 2001, I met with Andrew Higgins (my brother), Kaldor and and a man called Ross Abbott. I introduced Andrew Higgins as a potential investor in Corsecure and Kaldor introduced Ross Abbott as a potential investor in Corsecure. We had a conversation about the financial structure and the prospects of the company to be formed to carry on the CyberGuard reseller business during which the following words or words to the following effect were said:

Andrew Higgins: ‘If Blue Sky is unable to pay its debts such as your wages as and when they fall due, then without knowing any more, it would appear to be insolvent. Any person who is a director or defacto director should continue only with the utmost caution and only if satisfied that the company is not insolvent. The CyberGuard business would not appear to have any real prospects if carried on by Blue Sky. I would not invest in it.’

Kaldor: ‘The new CyberGuard business will be carried on by a new company, Corsecure. Blue Sky appears to have too much history. In any case it is not a marketing and sales organisation.’

Geoffrey Higgins: ‘I won't be making any investment in Blue Sky. That company owes me too much money. However I am enthusiastic about developing the CyberGuard business in a new company. That suits Christo. Blue Sky could provide technical services under contract as required. But we will need some significant amount of start up capital.’

Ross Abbott: ‘If I was satisfied there was a sound business plan I could give some consideration to investing in the new company. I would need a great deal more information. However, what I have heard so far about the opportunity appears to be positive. I could not consider any investment if Christo Simeonoff or Blue Sky Industries were involved in any way unless I was first satisfied that there was no insolvency and had been no insolvent trading.’

Andrew Higgins: ‘I agree.’

Meeting of 18 June 2001

40 On 18 June 2001 there was another meeting between Simeonoff, Kaldor and Higgins of which Kaldor took a note. The note provides for a prospective distribution of the business between Blue Sky and Corsecure and defines the possible future roles of Higgins, Kaldor and Simeonoff in a restructured organisation. However, it does not suggest that any other essential terms for the rearrangement of the CyberGuard business were either discussed or agreed.

The events which followed

41 In the days following 8 June 2001 Kaldor and Higgins either together or alone took the following steps:

· registered the name Corsecure for business and internet purposes.

· obtained a business card and other stationery in the name of Corsecure.

· obtained a telephone line for Corsecure which was installed into Blue Sky’s premises.

· opened a bank cheque account in the name of Corsecure Pty Limited.

· drafted a reseller agreement in the name of Corsecure.

42 By late June 2001 both Higgins and Kaldor were using the name Corsecure when talking with prospective clients. Higgins also spoke with Thatcher from CyberGuard who agreed that Corsecure rather than Blue Sky could become the new distributor for CyberGuard. Thatcher was not to know of the difficulties and actions of the various parties in Australia.

43 Higgins gives evidence that on a number of occasions when meeting with clients or prospective clients, and when Simeonoff was present, reference was made to Corsecure. Although Simeonoff denies a number of the conversations of which Higgins gives evidence, I am satisfied that reference to Corsecure was made on occasions.

44 Higgins accepts that he continued to work for Blue Sky although he says that he and Kaldor were also developing Corsecure. He says that by working for Blue Sky he was able to recompense that company for the use of its premises and equipment. By late July he started to require orders to be written in the name of Corsecure and this apparently occurred. However, I do not find that Simeonoff consented to this course.

45 Throughout this period I have no doubt all parties believed that it may be appropriate to restructure the arrangement so that Corsecure carried on the CyberGuard business but I do not find that the terms for such an arrangement were ever agreed with Simeonoff. Before Kaldor and Higgins would have been entitled to take the distributorship from Blue Sky an appropriate commercial arrangement with Blue Sky and Simeonoff would have been required. This never occurred.

The evidence of Kaldor

46 Kaldor gives a complete account of events during June and the subsequent weeks. I accept this evidence. It gives a useful picture of the parties’ discussions and the problems which unfolded. I have already related part of it and he continued:

“During June 2001, the concept of a new business, Corsecure, was developed with the intent of establishing the distribution business as a spin-off out of Blue Sky, to provide focus and identification in the Information Security industry.

I developed a name which we investigated to ensure availability, and in my notes on or about 8th June 2001, Higgins and I listed the next steps necessary (ie Higgins and I formed a company).

On 8 June 2001, Higgins and I registered the business name (which I paid for) and applied for Internet name registration (which he paid for).

On or about 18 June 2001, Higgins organised purchase of a shelf company through Patricia Holdings, which was listed in the Australian Business Register on 20th June. Higgins and I then began to refer to this name when speaking with Cyberguard and re-sellers.

Also on 18th June 2001, my notes show a record of a meeting between Simeonoff, Higgins and myself, establishing what business activities were to be in each company, and what our roles would be (Higgins – Sales, Simeonoff – Technical Services, myself – Operations).

Higgins and I initially operated on the basis that Simeonoff would need to clear debt from Blue Sky before taking up a position in Corsecure. Higgins was most active in pushing ahead with this new company by purchasing a shelf company, registering it for GST and ABN and obtaining telephone numbers from Telstra. I was also continuing to transfer a lot of my relationships to Higgins as our intended Sales Manager, although at one stage shortly before our July training sessions, I said to Higgins ‘I am not seeing much activity on your part to develop our sales’. He made no comment.

I undertook increased customer contact to ensure attendance at our training courses. I continued with the development of Blue Sky’s Cyberguard and Information Security business, seeing the best way to resolve financial problems would be to generate revenues, then work out our relationships.

I was concerned about how the Corsecure development would affect Blue Sky’s finances in view of the investment by Blue Sky that had taken place. I said to Tracie Forysth and Simeonoff words to the effect: ‘Please identify the Cyberguard business expenses which Blue Sky has paid as these must be paid back when we establish the capital base of Corsecure, that is, from share subscriptions or loans to Corsecure by Higgins and me’.

(By late July), I had arranged loans from my parents and Higgins said that he would also find funds. My parents were prepared to lend $20,000 - $25,000 when I advised it was appropriate. Higgins said that he had money at hand and I did not enquire further. We were planning to put in $50,000 at the start which I intended to go immediately to Blue Sky. We had also had initial discussions with two other possible sources of investment.

From June onwards, I said to Higgins on a number of occasions, ‘Upon Simeonoff being in a position to put in an equal sum, he will assume a one-third equal ownership of Corsecure’.

On 24 July 2001, we held a further meeting between the three of us to identify our individual requirements and concerns. There is a list of pre-requisites by Simeonoff, Higgins and myself for proceeding with the Corsecure launch, and identified as one of our needs, the requirement for a three way Agreement which was still a target. During this meeting, I said to Higgins and Simeonoff words to the following effect: ‘I believe that we must protect our common interest. Simeonoff has historic debts which we (ie Corsecure, Higgins or I) should not have but he has assisted us in the Cyberguard development and is entitled to an equal share. The structure we are setting up must reflect that’. Simeonoff said ‘That is acceptable to me.’

At about this time, in late July, 2001, I developed versions of a draft financial business plan for Corsecure, expanding on discussions at an earlier meeting and gave it to Higgins and Simeonoff. This plan was never finalised. It showed a $50,000 - $100,000 value investment in the Cyberguard business by Blue Sky which Corsecure would be required to pay.

At about this time Higgins’ brother Andrew Higgins said to Higgins and me words to the effect: ‘The Corsecure business will be protected if Blue Sky becomes insolvent’. He did not explain how.

In late July, as the Cyberguard orders began to flow, Higgins said ‘I want to re-route the orders to Corsecure’. I said ‘That’s Ok with me, but we need Simeonoff’s acceptance, and a final agreement between us. In addition Corsecure needs to repay Blue Sky investment’.

None of these requirements were finalised.

At about this time I contacted my solicitor to seek his opinion, particularly in view of the adverse effect on Blue Sky if it were not kept funded.

In the last week of July 2001, whilst Simeonoff, Higgins and I were talking, Higgins said words to the effect: ‘I am going to bring my brother into Corsecure. He will be a Director and a shareholder.’ Neither Simeonoff nor I commented at that time but subsequently I said to Higgins: ‘We have not agreed to that. I am not comfortable with it’. Higgins made no relevant response.

Simeonoff and I spoke by telephone that evening. Simeonoff said ‘I am not comfortable about this move to bring Higgins brother in’. I said ‘Neither am I. This is not in line with our original intention’.

In July, we targeted 1st August 2001 as the start date for Corsecure Operations. However at 1st August, we still had not concluded any agreement, nor did Corsecure have all the requirements in place such as an agreement with Cyberguard, nor technical support agreements. Nonetheless during the first week of August, Higgins declared: ‘Corsecure has been launched’ and began shifting orders against Blue Sky to bring orders against Corsecure. In particular, there was an order from SecureNet received on 31st July. During the following weeks and without agreement from Simeonoff or myself, Higgins transferred these orders against Blue Sky to bring an order by SecureNet against Corsecure.

Tracie Forsyth advised us of the changed orders and said to Simeonoff and I words to the following effect ‘Higgins has advised me that he has asked SecureNet to change their order from Blue Sky to Corsecure’.

Shortly after she also said ‘Higgins has also told me that Marconi will be placing a Cyberguard order for Reserve Bank. He said that he would arrange for this order to be placed on Corsecure – is this Ok?’

I said ‘Leave this with us, we will sort it out with Higgins’.

The Marconi order was for about $160,000 for Cyberguard units to be installed by Marconi in the Reserve Bank.

I recall that in about late May or June 2001, Higgins said to me: ‘We need to form a separate company to reduce the control, financial and infrastructure problems which Simeonoff keeps creating. Simeonoff's way of operating does not suit me so far as running a business is concerned and will continue to cause problems. We have no database, I can’t access the information I need, and this is not workable. I have been working here for six months and we can’t develop business this way.’

I personally had some concerns about the way Simeonoff operated Blue Sky. I said to Simeonoff ‘Why is Blue Sky in such financial difficulty and so late paying accounts?’. Simeonoff said ‘Blue Sky is experiencing difficulties because of the investment necessary to move from North Sydney to St Leonards and because Higgins has not achieved his forecast sales through summer 2000/01’.

In the last week of July and the first week of August, 2001, Higgins said to me ‘I think we should not let Simeonoff at any time have a share of the business. I think we should simply pay him a quarterly fee. That would be $90,000 per annum. Blue Sky is in serious financial trouble and our payment will help him to close it down and he can then come and work for us.’

I said ‘This needs to be discussed with Simeonoff. Until we have clear financial agreements about what Corsecure will owe Blue Sky for the work it has done, we can't progress.’

Higgins made no answer.

From my own investigations into Blue Sky’s financial performance, I provided financial analysis figures from time to time to Simeonoff and Higgins. I said to Higgins words to the effect: ‘Corsecure will have to meet Blue Sky’s investment in the Cyberguard business of about $50,000 to $100,000 and we need to agree what assets could sensibly be acquired by Corsecure from Blue Sky. We will also need to finalise arrangements for use of Blue Sky Training and Professional Services’.

These arrangements were not progressed.

From time to time during July 2001, Higgins made remarks like: ‘Simeonoff is incompetent’, ‘he will not change his ways’, ‘he will insist on controlling our computer servers and prevent us from operating properly’.

In late July 2001, I said to Higgins ‘I am uncomfortable with the fact that you appear to be focused on taking over my reseller relationships and not developing any new business’.

Higgins said ‘This is my role’.

I said ‘Your role is to develop sales, but to develop business, we already have my relationships, and need to add to them’.

I also said ‘we rarely know what has been discussed with customers unless Simeonoff and I were present. You are not providing records of meetings and this does not enable effective co-ordination’.

In late July, I said to Higgins and his brother, when they were present at the coffee shop across the road from the office ‘I am increasingly concerned about the perception that I have gained of potentially losing our equal relationship between Simeonoff, Higgins and myself. You want to bring your brother in as an equal partner in this business in addition to excluding Simeonoff. That would leave you and your brother with majority control. I would rather terminate Corsecure and the Cyberguard business than move into a situation where I did not have at least equal control. I have the feeling that you are taking control of this whole business yourself.‘

Andrew Higgins said ‘We will operate independently and my interest is in my own financial opportunity for myself and not in relationship with my brother. In any event, if we only had three directors, it would need a majority of 75% to dispose of any one director.’

I said ‘I am not comfortable with this. If I feel that there is ongoing intention to takeover my Cyberguard business, other than as proposed, I would rather not continue’.

47 At about 11.00pm on or about 27 June 2001 Higgins says he had a telephone conversation with Thatcher of CyberGuard in which it was agreed that Corsecure could become the distributor in lieu of Blue Sky.

48 The conversation was confirmed by email.

49 On or about 28 June 2001, there was a further conversation between Simeonoff, Higgins and Kaldor. Higgins said the following was said:

“Higgins: I've spoken with Chris Thatcher. He's agreed to the appointment of Corsecure Pty Limited as CyberGuard reseller instead of Blue Sky. He'll send a new agreement. CyberGuard will process all new orders as Corsecure Pty Limited orders. All proposals, quotations, reseller agreements and orders should now be made in the name of the Corsecure.

Simeonoff: We'll work something out. And in any case you will still be doing things for Blue Sky as the opportunity permits."

Higgins: Sure. But it will be short term. We've already agreed Blue Sky premises and facilities are not suitable to the marketing and sales organisation we need for CyberGuard. The companies need separate and different facilities as soon as we can arrange them. I'm sure we can get other premises at a better rate.

Kaldor: Geoff and I should finish up formally with Blue Sky on 30 June 2001. We will commence with Corsecure on 1 July 2001. From that date Corsecure should also make an arrangement with Blue Sky for the use of premises, reception and administration staff, telephones and computer systems.

50 Simeonoff denies this conversation and says there was never any discussions about Kaldor and Higgins finishing with Blue Sky on 1 July 2001.

51 Arrangements were made for Corsecure to operate from Blue Sky’s offices. Separate telephone lines were provided. The receptionist for Blue Sky was intended to also answer the telephone for Corsecure. I am satisfied that Simeonoff acquiesced in these arrangements.

52 Higgins gives evidence that in the week of 2 July 2001 he attended a meeting with Simeonoff, Kaldor and representatives of Marconi and another company. In the course of the discussion Higgins said Simeonoff said words to the following effect:

“Corsecure Pty Limited is the new value added distributor organisation for CyberGuard in Australia. Blue Sky is not continuing with CyberGuard. Corsecure will provide all the support services to its resellers. Blue Sky will supply technical services to Corsecure as required. Blue Sky will remain a technical services organisation.”

53 Simeonoff denies making this statement although he accepts that he did speak of using another company “for the Blue Sky distribution business.”

The evidence of Mr Bewick

54 Andrew Bewick is the Federal Business Manager for 90East. That business supplies computer network security systems to government and non government organisations in Australia. I accept Bewick’s evidence.

55 He gives evidence of negotiations he held with Higgins and Kaldor from about April 2001. They introduced him to Blue Sky indicating that it was the Australian importer and distributor of a brand of firewall appliances from CyberGuard. The discussions relate to the prospect of 90East becoming a user and reseller of CyberGuard firewall appliances.

56 He gives evidence that on 12 July 2001 he had a meeting in Canberra with Higgins and Kaldor. He was given a business card by Kaldor in the name of Corsecure. At the meeting Bewick says that Kaldor said the following:

“A new company called Corsecure Pty Limited will be the CyberGuard distributor instead of Blue Sky. Blue Sky will remain a technical service provider and training organisation. Corsecure will contract its services as required.”

57 At the meeting Higgins and Kaldor gave Bewick a document entitled “Corsecure Pty Limited Reseller Agreement”.

58 On 26 July 2001 Higgins and Kaldor again met Bewick. On this occasion they were accompanied by Simeonoff and Thatcher. Other persons from 90East were present. At that meeting Higgins and Kaldor distributed business cards in the name of Corsecure and the following conversation occurred:

“Kaldor: ‘CyberGuard is Corsecure’s principal information security product.’

Simeonoff: ‘Blue Sky will be continuing as a technical services and training organisation. It will contract with Corsecure to assist with its CyberGuard business as required.’

Higgins: ‘As we develop Corsecure’s business we will provide additional security products and services. We are also in discussions with RedCreek to provide a high performance VPN solution.’

Thatcher: ‘Our next product release is in a couple of months. Corsecure will be able to supply 90East with CyberGuard’s new VBN solution that is soft ware based. That will provide 90East with low end VBN solutions’.”

59 That meeting was followed by a meeting with representatives of the Australian Taxation Office. At that meeting Bewick introduced Higgins and Kaldor as Directors of Corsecure Pty Limited and as the Australian distributor of CyberGuard firewall products. Again Kaldor distributed business cards in the name of Corsecure.

The events from 5 August 2001 – matters come to an end

60 Any possibility of Higgins, Kaldor and Simeonoff working together came to an end on 8 August 2001 when some apparently dramatic exchanges occurred. Recollections of witnesses are inconsistent as to events of that day and the immediately preceding days. Higgins says that on Sunday, 5 August he had a conversation with Simeonoff in which the latter acknowledged the hopeless financial position of Blue Sky and offered in future to work for Corsecure full time.

61 Higgins says that he spoke to Kaldor on the same day about an offer of employment to Simeonoff and that they agreed to pay him $90,000 per annum.

62 Simeonoff disagrees with Higgins’ account of events and says that he became concerned that Higgins was now requiring orders to be written on Corsecure and not Blue Sky without Simeonoff’s agreement. He says that he indicated to Higgins that if this occurred Blue Sky would fail.

63 Kaldor says that he did not agree the prospective remuneration of Simeonoff with Higgins arguing that $90,000 was inadequate.

64 The true account of these conversations is impossible to determine. However, I am satisfied that Simeonoff had come to realise that Blue Sky was facing a difficult situation and that something had to be done. Higgins and Kaldor had by now assumed control of the CyberGuard business from which Simeonoff was being excluded.

65 On 6 August Simeonoff was in the process of making arrangements to wind down the Blue Sky business. He intended to vacate the rented premises. However, on 7 August a substantial order was placed for CyberGuard on behalf of the Reserve Bank. Steps were taken by Higgins to process it in the name of Corsecure.

66 At about 4.30 pm on 7 August 2001, Higgins had a conversation with Simeonoff and Kaldor in the boardroom of the premises shared by Blue Sky and Corsecure during which I am satisfied the following was said:

“Higgins: Corsecure must make significant expenditure very shortly. No doubt it would assist Blue Sky if Corsecure purchased all Blue Sky CyberGuard stock on hand. Other imminent expenses include the security deposit for new premises, establishing telephone and computer systems, acquiring other fixed assets and wages.

Simeonoff: CyberGuards on hand cost Blue Sky about forty one thousand. A cheque tomorrow would be appreciated.

Kaldor: I'll bring my chequebook tomorrow. We'll have to put in twenty thousand each. But forty thousand reduced by the cost of Blue Sky inventory won't leave us any working capital.

Higgins: We'll need twenty five thousand each. You know Andrew's agreed to put in an equal share - one-third at this stage. That's twenty five thousand times three - Martin, Andrew and me, less the forty one thousand. That will leave us about thirty four thousand working capital. You don't have any other investors do you Martin.

Kaldor: No.

Higgins: We need the funds now. Martin, if there's any difficulty please say so. Can you bring your cheque book tomorrow?

Kaldor: Yes.

67 At about 5.30 pm on 7 August 2001, Higgins had a conversation with Simeonoff to the following effect:

“Higgins: Christo, I must have that reconciliation of commissions due. Tracie has not completed it. I must have my pay.

Simeonoff: You'll have it by Friday. She'll do it by then.

Higgins: Please make sure of it. You don't seem to realise that your default may have very serious consequences.

68 On the following day at about 8.30am, Higgins had a conversation with Simeonoff in the offices shared by Corsecure and Blue Sky during which the following words or words to the following effect were spoken:

“Higgins: I can't get onto the system.

69 Shogun is the computer network system through which all computers in the offices shared by Corsecure and Blue Sky are operated. Apparently, the true position was that Simeonoff had manipulated the system to deny Higgins access. Kaldor still had access.

70 At about 9.05 am, Simeonoff convened a meeting of all Blue Sky employees. He requested that Kaldor and Higgins also attend, which they did. In the course of his address to the meeting, Simeonoff said:

Kaldor says he is not going ahead

71 At about 9.15 am 8 August 2001, Higgins had a conversation with Kaldor in the following words:

“Kaldor: I wont be going ahead with Corsecure. I'll resign as a director of Corsecure and transfer my shares in the company to you. I'll also return the company registers which I have taken. I'll be doing something else with the CyberGuard product. Either that or I will buy you out.

Higgins: How much?

Kaldor: Two thousand dollars.

72 At about 9.20 am 8 August 2001 Higgins had a conversation with Simeonoff as follows:

“Simeonoff: I'm terminating your employment with Blue Sky. I want you to leave the premises immediately.

Higgins: I'm not employed by Blue Sky. I haven't been employed by Blue Sky since 30 June 2001. These premises are also Corsecure's premises. If you want to terminate that arrangement with Corsecure you will need to give reasonable notice. And in any case you are still in default of payment of virtually all of the wages due to me from October 2000 to 30 June 2001. I won’t be going anywhere until you produce a cheque for my wages.

Simeonoff: I'll have Tracie make out what's owed to you right now.

Higgins: And a full reconciliation of all sales, gross profit and commission due.

Simeonoff: That might be difficult.

73 Simeonoff repeated his demand that Higgins leave the premises. A few minutes later, Higgins found the telephone in his office was not working.

74 There were further heated discussions about entitlements and rights of Higgins. Higgins’ account is that about 10 am Simeonoff gave him a letter and that after he had read it the following conversation took place:

“Higgins: That's incorrect. Commissions due to me are much higher than that. On that basis Blue Sky would scarcely have made any sales. Where is the reconciliation?

Simeonoff: The figures are correct. I can't give you the reconciliation. It's not complete.

Higgins: I demand that Blue Sky pays to me today all of my entitlements. I also demand that Blue Sky provides to me today a full reconciliation of all sales and the gross profit on all sales from 2 October 2000 to 30 April 2001 and the amount of my commission.

Simeonoff: I can't do that. It’s not complete.

Higgins: Lets go over this again. Your letter says that the amounts shown are the amounts of commission due. That can only be because there is a reconciliation which shows the correct figures. Last night you said you had completed just such a document. Produce it now please.

Simeonoff: I can't do that.

Higgins: Now you say, the reconciliation is yet to be completed. Then the figures in your letter cannot be correct. This is just another attempt by you to mislead and deceive.

75 Later there were further conversations between Higgins, Simeonoff, Kaldor and Andrew Higgins. Difficulties continued and matters were only resolved after the police were called.

Kaldor’s evidence as to the events of 5-8 August

76 Kaldor gives the following account of the events between 5 and 8 August. I accept his evidence.

On the morning of Sunday 5th August at about 9.30 am, Simeonoff telephoned me at my home. He said words to the effect: “ I have been going over accounts and without income from the Cyberguard products or compensation from Corsecure, Blue Sky will be insolvent. Since this appears to be the position, on Monday I will have to close down Blue Sky. I have to try to avoid losing my house to the bank.”

I said, ‘Don’t act too quickly. As I have advised, I am still committed to Corsecure’s payment for Blue Sky’s investment, and as you know, my first calculations indicate that Blue Sky investment is between $50,000 and $100,000. We will try to resolve this with Higgins tomorrow, and you and I will discuss this further then’.

I telephoned Simeonoff later that afternoon at about 3.45pm. He said words to the effect: ‘I have spoken with Higgins on the same topic since calling you earlier, but he simply accepts that Blue Sky might have to be shut down and has not made any comment about any payments’.

On Monday 6th August 2001, Simeonoff and I met at the office to hold the normal Monday morning sales review meeting together with Higgins, and then extend that meeting into a discussion of finances and agreement.

My workbook records:

Discussions
Resolve Capital
Christo – offer!
Resolve Startup requirements
Resolve personnel

BSI revenues
Training
NEC – GH?
Stream – TF Tuesday

I recorded these matter to ensure that we firstly should resolve key issues between Blue Sky and Corsecure, establishing a three-way agreement, so that Simeonoff could review Blue Sky finances and we could make correct and sensible decisions. I also created our normal weekly sales review document. My records of this document indicate that it was completed ‘9.04 am Monday 6th August’. However Higgins did not arrive for the meeting and it did not proceed.

Early in the afternoon of 6th August 2001, Higgins arrived for a scheduled site inspection and Higgins and I went to inspect a possible alternate office location, together with his brother at North Sydney. We inspected two office sites. Part-way through our inspection, the owner left to go back to his office, leaving Higgins, his brother and I to continue. During the inspection of two sites side by side, I said to Higgins, ‘What is the advantage of moving?. This will involve considerable re-location expenses?’ Higgins said ‘Yes, but it will substantially reduce monthly rents, and move us into a better controlled setup. This gives us space for a training room, the technical staff can fit into the corner larger office, with a work bench along one wall, Simeonoff becomes an employee, and the three of us can fit into these offices’.

I said, ‘What happens when Simeonoff has cleared Blue Sky debt and wants to buy in?’ Higgins did not answer.
On Tuesday 7th August 2001, I expected to attend a meeting at 8.30am requested by Simeonoff with Higgins and myself to discuss the Blue Sky/Corsecure development and directions. It did not however occur and I had no further discussions with Higgins on that day.

77 Kaldor then gives evidence of his discussions with CyberGuard saying:

“During Tuesday evening, from my house, I telephoned Paul Henry and Chris Thatcher of Cyberguard, USA.

I said ‘Blue Sky will not be continuing to transfer the Cyberguard distribution into Corsecure and I will be continuing the Blue Sky activities and hence there will be no need to transfer the distribution agreement’.

I also said ‘Paul, I have a problem developing in our business operations. Higgins appears to be trying to take over the business, and I am going to have to break off relations with him. I need to know what Cyberguard will do in this situation. Can I count on a continued relationship with Blue Sky, if Christo and I continue with Cyberguard business?’

Paul Henry said ‘We’ve worked together for a number of years, and I know your past involvement and effort, and I’ve met Simeonoff and know his expertise. I will support Simeonoff and yourself. I will talk with Chris (Thatcher) to progress this action’.

In a telephone conversation with Chris Thatcher at about 9.30 pm, I said, ‘Chris, I’ve spoken with Paul to explain the Australian situation, I need to make sure that the original discussions about transferring the Blue Sky distribution agreement to Corsecure does not proceed, and that you are comfortable about continuing the (Cyberguard) business with Blue Sky if Higgins is no longer involved?’

Chris Thatcher said ‘Paul has spoken with me, and he said that ‘Martin has the most skin on the road’ and has recommended that if Simeonoff and you are progressing with our business, then we should back you. I’m in agreement and will push this from here.’

I subsequently telephoned Simeonoff at his home, at about 10 pm and said ‘Cyberguard are prepared to continue with you and I, and will maintain the present agreement with Blue Sky. Tomorrow, I will terminate further relationship with Higgins, and the development of the Corsecure business’.

Simeonoff said ‘Thank you for this advice, it makes a lot of difference. However, in view of the uncertainty of Blue Sky finances, I must advise all staff of the Blue Sky uncertainties, and put everyone on notice tomorrow morning in order to be able to close down if my financial position becomes insolvent.’

On the morning of Wednesday 8th August 2001, Simeonoff called a meeting of all Blue Sky staff for 9.00 am. Higgins and I were present. The other Blue Sky staff included Tracie Forsyth, Mike Cust, Chris Mathey, Noelene Moyle, Ronelle Stead, and Helen Point. At the meeting, Simeonoff addressed the Blue Sky personnel, in the Meeting room and said words to the effect ‘I’m very sorry to advise everyone that Blue Sky may be facing insolvency. This is due to uncertainties over future revenues and business situations. Accordingly, I have no option but to give everyone notice in case of having to close down. Tracie has been working out the details for everyone, and we will give you an indication of entitlements. We will undertake necessary investigations and actions, and advise everyone of their position within 24 – 48 hours. As you know this has been my company for the past 23 years, and most of you have been with Blue Sky for long periods, so I am not happy about this situation, but have very little choice at this time’. Most staff were upset or visibly concerned. Higgins appeared quite cheerful.

Following this staff meeting, at about 9.30 am, I requested a discussion with Higgins in his office at Blue Sky. At that meeting between the two of us, with Higgins sitting in his normal chair and me on the other side of the desk, I said ‘Geoff, I’ve been considering our relationship, and the recent developments. I am no longer comfortable with our relationship or directions. I’m not prepared to continue if it involves cutting Simeonoff out of the firewall business. His skill set has contributed as much to our developments as anyone else. I’m not prepared to continue transferring the Cyberguard business into the Corsecure operation, and I’m going to keep the Cyberguard business in Blue Sky with Simeonoff. In view of these changes, I will probably need to resign as Corsecure Director.’

Higgins said ‘I’m surprised at this change. I don’t understand why you would want to do that, and what about my Corsecure investment?’

I said ‘I’m aware that you have incurred expenses, and am willing to buy you out by meeting your expenses.’

Higgins said ‘How much did you have in mind?’

I said ‘Well, I’ll meet all documented expenses, say a couple of thousand.’

Higgins said, ‘I’ll want much more than that! I’m not prepared to let this business go.’

I said, ‘I’m not able to discuss this further at this time.’ I then left Higgins’ office.

By mid-morning, I recall seeing that Higgins was angry and threatening in his demeanour. At one stage, he was standing near my desk and arguing with Simeonoff.

He said ‘I demand to know on what basis this cheque was calculated, and I don’t agree with the amount’.

Simeonoff provided him with a sheet of paper and said ‘Here are the monthly calculations from Tracie on the basis we agreed up to April this year, and the agreed salary amounts from there on including the extra four weeks.’

Higgins’ brother, Andrew Higgins arrived later that morning and demanded a meeting of the four of us in the meeting room. This involved Higgins, his brother, Simeonoff and I, standing around the table. At this meeting Andrew Higgins said, ‘This (our advice and discussions with Higgins) is unacceptable behaviour, completely unacceptable, and in breach of all sorts of laws, and you (Simeonoff and I) are going to be in serious trouble. My brother has operated with you in good faith and this will lead to all sorts of law suits. Firstly, we demand all documentation relating to calculation of Higgins’ payout and payout reconciliation, what was the basis for this, and we will want our accountant to review the accounts.’

Simeonoff said ‘This has been calculated on the basis that Higgins, Tracie and I discussed. We are prepared to provide further documentation, but cannot do that until Friday. We cannot agree to your accountant, but will accept an independent auditor on which we will agree with you’.

I said to Andrew Higgins, ‘What is your role here? Are you providing legal advice to Higgins?’

He replied ‘I am here to help my brother at a time when he’s being taken advantage of and to make sure that he gets his full entitlements.’

Simeonoff said ‘I agree to provide information for the payout calculation. I have asked Geoff to collect all personal belongings and leave the premises as quickly as possible, rather than causing further disturbance.’

I said ‘In view of your attitude, your remaining here will be disruptive and we would prefer that you finished as soon as possible.’

Higgins said ‘We do not have resolution of my matters, and I will stay here until we do. I have my computer, furniture and other personal items. I have the right to remain in here until all matters are settled.’

However shortly after that Higgins and his brother left the office without taking any property or material with them.

Later that day, while I was on a private telephone conversation with one of our major customers, I became aware that Higgins and his brother had returned to the office and were listening in to my private conversation as to why Mr Higgins would no longer be the contact point for resellers and customers. I had said that Blue Sky will continue as the Cyberguard distributor, and we have had to discontinue the transfer to Corsecure. Geoff will not be continuing with Blue Sky, as we have had to head off an apparent takeover attempt.

When he realised that I was aware of his presence alongside my desk, Andrew Higgins said ‘That’s wonderful, perfect libel situation. We will be taking action, and we will contact the other party who heard these statements.’

Finding in relation to contract

78 It is important to keep in mind that the agreement for which the plaintiffs contend was allegedly made during the conversation which Higgins says took place on 7 June 2001. It is not submitted that a binding agreement was reached on any later date.

79 It is plain that the recollections of the parties of meetings and discussions at about this time may not be entirely accurate. This is not surprising for a great deal was happening and they were operating under considerable pressure.

80 There is no doubt that a meeting occurred in late May although there is uncertainty as to the content of the discussion. Although it is possible, as Simeonoff suggests, that the suggestion of a new corporate structure was raised at the meeting, there was certainly no agreement in relation to it. However, such a matter would have been important and as Kaldor was requested to make a note of the meeting, if the subject matter had been raised, it seems likely that his note would have referred to it.

81 Notwithstanding the differing accounts, it is plain that Blue Sky’s financial difficulties were recognised by all parties and agreement had been reached that it was necessary to have further discussions about the way forward. Although there was the prospect of a significantly improved financial position because of sales of CyberGuard, the enterprise needed to be put on a sound financial footing if it was to continue.

82 Following this meeting arrangements were apparently put in place for Higgins to be paid $10,000 per month by way of salary. However, difficulties continued in relation to his entitlement to commissions. It also appears that Blue Sky’s financial difficulties continued and extended to problems in relation to the payment of monies owed by Blue Sky to CyberGuard. By early June the emails from CyberGuard were demanding payment. CyberGuard was also concerned that the rate of orders for new product was less than was originally promised. I am satisfied that unless these problems were soon removed there was a real possibility that CyberGuard would terminate Blue Sky.

83 I am satisfied that there must have been a discussion in the terms suggested by Higgins between, at least, Kaldor and Higgins, on or about 7 June. The events which immediately followed, including the formation of the new company, Corsecure, and the use of that company when promoting CyberGuard, with the knowledge of all parties, are adequate confirmation that such a conversation must have taken place. I am not satisfied that Simeonoff was present. However, even if the account given by Higgins is accepted, the question of whether the parties reached a binding agreement capable of enforcement is another matter. Such an agreement was not originally asserted by Higgins and was pleaded only shortly before the trial. I have no doubt the parties reached a common view at some stage that it might be sensible for a new company to take over the CyberGuard business but the terms of the arrangement between them and the financial structure of the enterprise, including any deal with Blue Sky, were essential matters requiring resolution.

84 It is, of course appropriate, to consider later events before reaching a final conclusion as to whether an agreement was made. See Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163. However the account given by Higgins leaves a number of fundamental matters undetermined. Although, if Higgins’ account is accepted, Simeonoff should be understood as agreeing to develop the CyberGuard business as a separate entity with Blue Sky providing technical services and training, the financial arrangements were not agreed. The need for new investors was acknowledged but their identity and conditions for their participation were not discussed. The terms of Simeonoff’s capital participation in the new entity, beyond the fact that it would be delayed, were not agreed.

85 Furthermore, the email exchange between Higgins and Simeonoff on 4 June 2001 tells against an agreement.

86 As I have related, Kaldor and Higgins took various steps to develop Corsecure. Because of the financial situation of Blue Sky I have no doubt that by 8 June they believed that it was inevitable that the way forward with CyberGuard was through a new company. I am satisfied that Higgins was determined to pursue Corsecure without Simeonoff having other than some salaried arrangement. He did not intend that either Simeonoff or Blue Sky would be equity participants in Corsecure, at least for some period of time. There is no suggestion in the evidence that he contemplated any recompense to Blue Sky for Corsecure’s goodwill in CyberGuard.

87 The parties had spoken of a transition to Corsecure from 1 July. Simeonoff denies that there was agreement as to this date and I am not satisfied that the parties progressed matters beyond an expectation that this might occur. However, I am satisfied that Higgins was determined that it should occur and took steps to secure orders in the name of Corsecure after this date, rather than Blue Sky. Kaldor was a willing participant with Higgins because for a time he believed he would benefit from the new arrangements.

88 Although it is undoubted that Higgins and Kaldor energetically promoted Corsecure and did this with the knowledge of Simeonoff this does not mean that a concluded agreement had been made. Simeonoff gave evidence, which I accept, that he was not happy with this situation. But the reality is that, short of bringing legal proceedings, which was not practical, he had no ability to control the activities of Kaldor and Higgins. I have no doubt that Kaldor was initially an active participant in the promotion of Corsecure but came later to have serious reservations when he saw the control which Higgins, together with his brother, might be able to exert over the situation. He became uncomfortable and together with Simeonoff, decided not to proceed with Corsecure but to continue with Blue Sky.

89 The submissions of the parties concentrated, in particular, on whether the alleged agreement provided for consideration to Blue Sky for the assignment of the CyberGuard agency to Corsecure. The plaintiffs submitted that it should be accepted that the benefit to Blue Sky was to be the profit from the maintenance and training functions which Blue Sky was to continue to carry on. In this respect it must be recognised that Blue Sky, by reason of its existing agreement with CyberGuard, already had the benefit to be derived from providing these services. Even if it be assumed that but for Corsecure the arrangement with CyberGuard may have been entirely lost, the terms upon which Blue Sky was to undertake these tasks were never discussed between Blue Sky and Corsecure, much less agreed.

90 At the time of the alleged agreement both Higgins and Kaldor were employees of Blue Sky and owed duties to it. Duties owed to the company must take account not only of the interests of shareholders but also of creditors: Walker v Wimborne (1976) 13 CLR 1 at 7.

91 In its amended cross claim, Blue Sky complains of a breach by Higgins of the duty he owed to Blue Sky. As a consequence it is alleged that even if there was a concluded agreement, Blue Sky would, by reason of this breach, be entitled to recover the CyberGuard business from Corsecure. To succeed in this claim it would have to be demonstrated that a binding agreement, to the detriment of Blue Sky was concluded. I have found that this was not the case and it is therefore unnecessary to resolve the cross claim.

92 However, as it is part of my finding that there was no binding arrangement made as to the terms of, either, any payment to Blue Sky, or for its ongoing remuneration, this does not bespeak arrangements consistent with a discharge of the fiduciary obligations owed to Blue Sky.

Estoppel

93 Both Higgins and Corsecure plead a case in estoppel. In substance it is asserted that at the meeting of 7 June 2001 it was represented that the defendants would procure the benefit of agreements with CyberGuard for Higgins and Corsecure. Although it is possible that these matters were discussed with Simeonoff present and that the parties agreed to work towards this possibility, I have found that it did not extend further. Any party was able to withdraw from further negotiations.

94 I am satisfied that from June until August both Higgins and Kaldor were active in promoting Corsecure. Although he may have preferred that this did not occur, Simeonoff did not discourage these activities. He was present when representations were made that Corsecure would be the future distributor of CyberGuard. I am satisfied that in reality he had no choice. At that time Blue Sky was in trouble and Kaldor and Higgins had determined on forming a new company to exploit the CyberGuard product. Simeonoff was neither by personality, nor training, suited to a marketing role and he would have known that without Kaldor and Higgins the CyberGuard arrangement would probably be lost.

95 I accept Kaldor’s evidence that he changed his mind when he realised that he would be likely to be a minor player in Corsecure given the intention of the Higgins brothers that they would be major equity participants. It was that realisation which caused a realignment of his interests with those of Simeonoff.

96 Although, no doubt, Higgins has lost the opportunity of exploiting CyberGuard there is no detriment which could in my opinion, found an estoppel. Higgins joined Blue Sky at a time when it would appear he had no other job opportunity. Perhaps he would not have continued to work for Blue Sky for the period he did but for the prospect of obtaining access to the benefit of the CyberGuard arrangement. However, for that employment he either has been, or will be, compensated, as his right to bring a claim for lost wages and commission has been expressly reserved. Although both Higgins and Kaldor spent modest sums in pursuing Corsecure, there is no evidence of any lost opportunity or detriment which could found an estoppel.

97 With respect to Corsecure, the plaintiffs’ submission is that there is operating “a form of estoppel by convention in the sense that the benefits are mutual rather than all for Higgins or Corsecure.” The benefit to Corsecure is said to be the right to exploit a business opportunity and to profit from it. It is submitted that the defendants encouraged Corsecure in its development of the CyberGuard business, which resulted in significant sales prior to 7 August. However, it is submitted that the later change of position deprived Corsecure of the prospective benefits of the arrangement and that it would be unconscionable to allow the defendants to take this course. The plaintiffs claim they are entitled to equitable relief giving the future benefit of the CyberGuard arrangement to Corsecure, or to an award of damages.

98 As I have already stated, in the present case, there can be no doubt that the parties had discussions which involved a prospective rearrangement of the equity holding in Blue Sky and the formation of a new company to exploit the CyberGuard opportunity. Kaldor and Higgins energetically pursued the development of Corsecure and saw this as the only means of securing their own financial futures. However, they never came to any concluded arrangements with Simeonoff or Blue Sky and, in so far as arrangements had been made, appeared intent on leaving Simeonoff without equity in the new venture and Blue Sky without recompense for the release of its arrangement with CyberGuard. Although Simeonoff undoubtedly vacillated and allowed Corsecure to be pursued I do not accept that his conduct was relevantly unconscionable. If anything, before taking the CyberGuard business for themselves, as Kaldor and Higgins were attempting to do, they owed obligations to Simeonoff to reach fair arrangements to recompense him for the loss of the CyberGuard business and provide for his future participation in any joint venture company.

A summary of the position

99 The ultimate position in these proceedings may be shortly summarised. Blue Sky was poorly managed and performing accordingly. When the opportunity to develop a business as the agent for CyberGuard was provided by Kaldor it appeared for a time that it might be lost because of the indebtedness of Blue Sky. Higgins and Kaldor, the former being the more forceful personality, worked together to develop a new company, in which they would, (perhaps with others) be equity participants with a view to taking over the CyberGuard business. Negotiations were held with Blue Sky and Simeonoff where a general agreement was reached to the effect that a new company would be a good idea. However, the terms of “the deal” were not agreed and the obligations owed to Blue Sky were not considered or discharged. Ultimately Kaldor lost faith in Higgins and, with Simeonoff, came to the view that the CyberGuard business could be satisfactorily exploited by Blue Sky which would remain viable. Higgins is entitled to be appropriately remunerated for the work he did for Blue Sky in promoting and selling CyberGuard but no more.

Damages

100 Having regard to my findings in relation to liability matters of damages are not relevant. However, extensive evidence was given and I should express my conclusion about matters which were the subject of dispute between the parties.

101 The parties have agreed that the damages for the period 1 July 2001 to 30 June 2002 should be assessed as $134,000 but cannot agree the multiplier which should be applied to this sum to provide for the loss of business in future years. Mr Morrishead, the expert called by the plaintiffs suggested that a multiplier of five would be appropriate. Mr Hunter, who was called by the defendants suggested that the multiplier should be of the order of one or two.

102 Both Messrs Morrishead and Hunter gave oral evidence and provided a written report.

103 Each of the parties also called evidence in relation to the expectations for the CyberGuard product in the immediate future and out to the medium term. Mr Peter Sanderlands is a director of Better Development Skills Pty Ltd and is very experienced in the information technology industry in Australia. He expressed the opinion that Blue Sky has been able to exploit the CyberGuard product at a time when it had the advantage of exclusive distribution of a product of high quality. However, he has indicated that CyberGuard’s competitors are working to improve their products. Furthermore, because the agreement between CyberGuard and Blue Sky is not exclusive, CyberGuard may appoint other distributors and Blue Sky’s present advantage may be lost in the future. He also believed there is a significant possibility that CyberGuard, which on a world scale is a relatively small company, may be taken over by a competitor who will terminate the arrangement with Blue Sky. He believed that although there will be a continuing market for CyberGuard firewall appliances it will not grow at the same rate as has occurred in the past.

104 Mr Bewick was called by the plaintiffs. He has considerable experience in the network security market over recent years and is the Federal Manager of Managed Security Services which is a large managed on-line security service provider in Australia.

105 Mr Bewick is of the opinion that in recent months the sale of computer products has experienced some volatile fluctuations and the sale of firewalls has accordingly been affected. However, the government sector has remained as a significant user of firewalls. Although he agreed that the number of firewall and security product vendors is likely to increase in the Australian market, this does not mean that all new vendors will compete with CyberGuard. CyberGuard is apparently a product which is attractive to those who are interested in security before the lowest costs. In this respect CyberGuard apparently meets the criteria required at the more sophisticated end of the market.

106 Mr Bewick agrees with Mr Sandilands that there is a likelihood that CyberGuard will sign additional distribution partners in Australia during the next two to five years. However, he believed this may be accompanied by an increase in the number of CyberGuard sales. He does not believe that CyberGuard will appoint new distributors that would diminish Blue Sky’s market share unless it came to the view that Blue Sky was performing poorly.

107 Unlike Mr Sandilands, Mr Bewick believed that the market for firewalls will continue to grow and the growth rate will not slow. He does not accept that the market for firewalls is mature.

108 Mr Morrishead was called by the plaintiff. He is a chartered accountant with considerable experience in advising in relation to commercial matters and business valuations. He gave evidence that in his opinion the pre-tax capitalisation rate with a multiple of five remains appropriate in the present circumstances. He set forth the reasons in his report and commented upon the evidence on this matter given by Mr Hunter. Mr Morrishead agreed that the choice of multiplier was a matter of judgment. He agreed that in most cases businesses would trade on a multiplier between one and three. Most commonly it would be somewhere around three.

109 In cross-examination Mr Morrishead conceded that a significant component of the multiplier which he assessed was comprised of the tax advantages available to Blue Sky because of its presently accumulated tax losses. If this was discarded he believed the appropriate multiplier would be of the order of 3.5.

110 In my opinion the views which Mr Morrishead expressed were overly optimistic. In my opinion there is a greater likelihood of CyberGuard being taken over by a competitor and the distribution rights with Blue Sky discontinued than he allowed. He also allowed the prospect of an income stream from training and maintenance which were to be for the benefit of Blue Sky, together with the tax position, to influence his judgment.

111 In my judgment, and having regard to the available evidence and the opinions of the experts, it would be appropriate to use a multiplier of 2.5. If an award of damages was appropriate this multiplier would be applied to the first year’s profit of Blue Sky from the CyberGuard arrangement.

Relief against Kaldor

112 As I have related Kaldor was instrumental in ensuring that the distributorship of CyberGuard products returned to Blue Sky. His phone calls to CyberGuard on the evening of 7 August 2001 were made knowing that the inevitable consequence would be that Corsecure would not have the CyberGuard business. It is plain that if there was a binding arrangement these calls were made in breach of his fiduciary obligations to Corsecure. It is inconceivable that the phone calls were made without the knowledge and cooperation of Simeonoff.

113 It would follow if Blue Sky and Simeonoff were liable Corsecure would be entitled to judgment against Kaldor in the same amount as the judgment against Blue Sky for the breach of contract. The same result flows from the application of sections 181 and 182 of the Corporations Act. The damages which flow from that breach are provided by s 1317(E) and 1317(H) of the Act.

114 Kaldor did not pay for his shares in Corsecure, although he offered to pay for them recently. Furthermore, I accept Higgins’ evidence that Kaldor indicated that he would surrender his shares in favour of Higgins. In any event, as a fiduciary Kaldor could not be permitted to profit from the breaches of his duties. He would be ordered to transfer the shares to Higgins as he originally promised.

Relief against Simeonoff

115 It is plain that Simeonoff participated with Kaldor in the arrangements which deprived Corsecure of the prospective benefit of the agreement with CyberGuard. Simeonoff knew that Kaldor was a director of Corsecure and accordingly if there was a breach of any fiduciary duty to Corsecure, has knowingly participated in the breach by Kaldor of his duty. He has also derived a benefit, by reason of his shareholding in Blue Sky, of the breach which resulted in the CyberGuard business being restored to Blue Sky. It follows that if there was an agreement both limbs of Barnes v Addy (1874) 9 Ch App 244 apply to him and he would be liable to Corsecure in the same amount as Kaldor.

Exemplary damages

116 The plaintiffs claim exemplary damages against both Kaldor and Simeonoff. It is submitted that such relief is available and reliance was placed upon the decision of Palmer J in Digital Pulse v Harris & Ors (2002) NSWSC 33. Although Palmer J found that exemplary damages were available in Equity, the Court of Appeal reversed the decision in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10. (See the comments in Meagher, Gummow & Lehane’s Equity Doctrines & Remedies, 4th ed [23-020]). Even if the decision of the Court of Appeal was to be reversed by the High Court, in my opinion this is not an appropriate case for exemplary damages. The relevant principles and the punitive nature of an award for exemplary damages were referred to by Brennan J in XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited [1985] 155 CLR 448 at 471 where his Honour said:

Merest v Harvey

‘I wish to know, in a case where a man disregards every principle which actuates the conduct of gentlemen, what is to restrain him except large damages?’

Broome v Cassell & Co

117 Elsewhere exemplary damages have been described as damages awarded to punish the wrong doer for reprehensible conduct, to deter not only the wrong-doer but others of like mind in the community of similar conduct; to ameliorate the victim’s sense of grievance and thereby to abate the urge for self help or violent retribution to the danger of the public peace. See Digital Pulse; Uren v John Fairfax & Sons Pty Limited (1986) 117 CLR 118 and Lamb v Cotogno (1987) 164 CLR 1 at 9.

118 In my opinion if there was a binding agreement the conduct of the defendants in the present case would be deserving of criticism but an award of compensatory damages would be sufficient. In these events the defendants’ conduct may be described as “smart practice” but their conduct would not be of a kind which requires punishment by an award of exemplary damages.

Conclusion

119 For these reasons I am of the opinion that the plaintiffs’ claim fails and the summons should be dismissed. I direct the defendants to bring in appropriate short minutes. Costs may be argued.

Last Modified: 03/06/2003

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Citations

Corsecure Pty Limited v Kaldor [2003] NSWSC 91

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Rankin Investments (Qld) Pty Ltd v CMC Property Pty Ltd [2021] QCA 156

Walker v Wimborne [1976] HCA 7

CITATION:	Corsecure Pty Limited & Anor v Kaldor & Ors [2003] NSWSC 91 revised - 05/03/2003
HEARING DATE(S):	25 November-2 December 2002
JUDGMENT DATE:	28 February 2003
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McClellan J
DECISION:	Summons dismissed
CATCHWORDS:	CONTRACT - agreements - whether binding agreement existed - alleged agreement for formation of a new company to take over distributorship of computer security product from defendant company - whether binding agreement made at meeting between parties - claim for damages and equitable relief - whether defendants estopped from resiling from alleged agreement - whether exemplary damages available
LEGISLATION CITED:	Corporations Act
CASES CITED:	Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 Barnes v Addy (1874) 9 Ch App 244 Digital Pulse v Harris & Ors (2002) NSWSC 33 Harris v Digital Pulse Pty Ltd [2003] NSWCA 10 Lamb v Cotogno (1987) 164 CLR 1 Uren v John Fairfax & Sons Pty Limited (1986) 117 CLR 118 Walker v Wimborne (1976) 13 CLR 1 XL Petroleum (NSW) Pty Limited v Caltex Oil (Australia) Pty Limited [1985] 155 CLR 488
PARTIES :	Corsecure Pty Limited (1st Pltf) Geoffrey Higgins (2nd Pltf) Martin Kaldor (1st Def) Christo Simeonoff (2nd Def) Blue Sky Industries Pty Limited (3rd Def)
FILE NUMBER(S):	SC 50129/01
COUNSEL:	R G Forster SC/S L Bell (Pltfs) K P Smark (Defs)
SOLICITORS:	Verekers (Pltfs) Ferrier & Associates (Defs)