Elston Private Wealth Pty Ltd v Wilson Advisory and
[2022] ACTSC 237
•2 September 2022
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Elston Private Wealth Pty Ltd v Wilson Advisory and Stockbroking Ltd |
Citation: | [2022] ACTSC 237 |
Hearing Dates: | 15 – 16, 18, 23 – 24 March 2022 |
DecisionDate: | 2 September 2022 |
Before: | Mossop J |
Decision: | See [537] |
Catchwords: | EQUITY – FIDUCIARY DUTIES – Fiduciary duty to employer –first plaintiff’s employee left to commence work as a corporate authorised representative of the second defendant – employee retained confidential information acquired in the course of his employment about the clients and business - employee contacted client about moving custom to the second defendant prior to resignation – breach of fiduciary duty established – no “clear plan” prior to resignation – plaintiffs did not establish that contact with other clients after resignation amounted to a breach of fiduciary duty EQUITY – FIDUCIARY DUTIES – Whether second defendant knowingly assisted the breach of fiduciary duty – plaintiffs’ confidential information received by the second defendant as part of due diligence process – information used by first defendant in business plan – knowledge of breach of duty did not amount to knowledge of dishonest or fraudulent conduct – no evidence that but for the use of confidential information the second defendant would not have entered into corporate authorised representative agreement with first defendant – knowing assistance not established |
Legislation Cited: | Civil Law (Wrongs) Act 2002 (ACT), s 107B Corporations Act 2001 (Cth), ss 181, 182, 183, 191 |
Cases Cited: | Advanced Fuels Technology Pty Ltd v Blythe [2018] VSC 286 Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society [2018] HCA 43; 265 CLR 1 Zibara v Ultra Management (Sports) Pty Ltd [2021] FCAFC 4; 283 FCR 18 |
Texts cited: | Alison Gurr, ‘Accessory Liability and Contribution, Release and Apportionment’ (2010) 34 Melbourne University Law Review 481 R Meagher, D Heydon and M Leeming, Meagher, Gummow and Lehane’s Equity Doctrines & Remedies (LexisNexis Butterworths, 4th ed, 2002) J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) |
Parties: | Elston Private Wealth Pty Ltd (First Plaintiff) EP Financial Services Pty Ltd (Second Plaintiff) Timothy Leslie Anderson (First Defendant) Wilson Advisory and Stockbroking Ltd (Second Defendant) Fortis Private Pty Ltd (Third Defendant) |
Representation: | Counsel P Walker SC with R Ross-Smith (Plaintiffs) J Moffett (First and Third Defendants) S Onitiri (Second Defendant) |
| Solicitors DW Fox Tucker (Plaintiffs) Bradley Allen Love (First and Third Defendants) Herbert Smith Freehills (Second Defendant) | |
File Number: | SC 82 of 2021 |
MOSSOP J:
Introduction
The first and second plaintiffs are members of the “Elston Group”, a group of companies providing financial planning and advice services. The Elston Group relevantly includes:
(a)the first plaintiff, Elston Private Wealth Pty Ltd (EPW) which was the operating and employing entity for Elston’s offices and advisers;
(b)the second plaintiff, EP Financial Services Pty Ltd (EPFS) which was the holder of Australian Financial Services Licence 325252;
(c)Elston Asset Management Pty Ltd, the Elston Group’s asset management entity which holds the funds under management (FUM) of each client of EPFS; and
(d)Elston Group Pty Ltd (EGPL), the parent company and majority shareholder of the abovenamed entities.
(Collectively referred to in these reasons as “the Elston Group” or “Elston”.)
Timothy Leslie Anderson (Anderson) is the first defendant. He was an employee of EPW. He subsequently resigned and became associated with the second defendant.
The second defendant, Wilsons Advisory and Stockbroking Ltd (Wilsons), is another financial advisory business which operated in competition with the Elston Group.
The third defendant, Fortis Private Pty Ltd (Fortis), is a company owned and controlled by Anderson.
EPW claimed damages and a permanent injunction against Anderson. EPFS claimed damages, equitable compensation and equitable damages against Anderson. EPW claimed equitable compensation and an account of profits against Fortis. EPW and EPFS claimed equitable compensation, equitable damages or an account of profits against Wilsons. EPFS claimed orders requiring the destruction of certain documents.
The claim against Anderson and Fortis
EPW and EPFS relied upon a variety of causes of action against Anderson and Fortis. EPW claimed that Anderson had breached:
(a)employment restraints set out in his contract of employment;
(b)the confidentiality clause in his contract of employment; and
(c)an implied duty of fidelity within his contract of employment.
EPW also claimed that Anderson had:
(a)breached his statutory duties as an officer of EPW under ss 181, 182, 183 and 191 of the Corporations Act2001 (Cth); and
(b)breached his fiduciary duty to EPW and an equitable duty of confidence.
EPW as “Company” and EFPS as “Licensee” were also parties to a “Services Agreement”, which provided that “the Licensee provides Financial Services to Clients through Authorised Representatives employed by the Company subject to the Licensee giving each Authorised Representative a Letter of Authority”. The agreement also required EPW to indemnify EFPS for any loss or damage caused to EFPS by EPW or its employees or authorised representatives. Anderson was liable pursuant to a clause in his contract (cl 18.7) to indemnify EPW against losses incurred by it as a result of breaches of certain provisions of his contract.
EPFS alleged that Anderson had:
(a)breached his equitable duty of confidence to it; and
(b)breached a fiduciary duty owed to it.
The plaintiffs’ claim against Anderson and Fortis was settled. Judgment was entered in favour of EPW and EPFS against Anderson and Fortis in the sum of $3.25 million. A fixed sum costs order of $1.4 million was made in favour of EPW and EPFS.
The trial then proceeded in relation to the plaintiffs’ claim against Wilsons only. The claim against Wilsons was that it had been a knowing participant in the conduct of Anderson and that as a result was liable to EPW and EPFS for an account of profits, equitable compensation or equitable damages.
The scope of the proceedings was significantly altered by the plaintiffs settling the claim against Anderson and Fortis and confining the case to the claim against Wilsons. That was because, leaving aside the order related to destruction of documents, the claim against Wilsons by EPW and EPFS was limited to equitable compensation, equitable damages and an account of profits. As presented at trial, the claim was limited to equitable compensation. That meant that many of the issues that might have arisen relating to the contractual claims against Anderson fell away. The case against Wilsons was confined to its knowing involvement in the asserted breaches of fiduciary duty and duty of confidence as that was the cause of action available to EPW and EPFS. Its knowledge of or participation in any breaches of contract were not relevant except to the extent to which that conduct also amounted to a breach of fiduciary duty or duty of confidence.
Claim against Wilsons
The plaintiffs’ claim against Wilsons has, as its foundation, certain pleaded conduct of Anderson which the plaintiffs assert was knowingly and intentionally undertaken by Anderson during the course of, and after, his employment with EPW and with the intent of procuring a benefit for himself, Fortis and/or Wilsons at the expense of EPW or EPFS.
In summary, the conduct pleaded was as follows.
Paragraph 54 of the Second Further Amended Statement of Claim (SOC) asserts that Anderson breached the confidentiality clause of his contract, in that he retained “Confidential Information” or information termed “Confidential Sale Information”, used that information and then contacted and solicited clients, the identity and details of whom constituted confidential information. This included:
(a)approaching the “Known Clients”, a list of clients with whom Anderson had a direct working relationship during and as a result of his employment with EPW, and other clients of EPFS; and
(b)sending to Wilsons a PowerPoint presentation entitled “Business Plan 2020” (the Business Plan) which contained “account codes” and amounts of FUM for a number of clients referred to as the “Business Plan Clients”.
Paragraph 56 alleges that Anderson breached an equitable duty of confidence which he owed to EPW by reason of his employment. He is alleged to have done that by using and revealing Confidential Information and/or Confidential Sale Information in a number of ways:
(a)keeping details of the Known Clients in his mobile phone and failing to return or delete those details following his resignation;
(b)disclosing (as alleged in paragraph 54) information in relation to the Business Plan including account codes and FUM amounts in relation to listed clients;
(c)soliciting the Known Clients and servicing them; and
(d)using Confidential Information and or Confidential Sale Information for the purpose of causing Wilsons to approach the known clients and have them transferred away from EPW;
(e)from 31 December 2020 using the Confidential Information or Confidential Sale Information to approach and solicit the Known Clients of EPFS;
(f)from 1 January 2021 using the Confidential Information or Confidential Sale Information to begin servicing the Known Clients; and
(g)servicing former clients of EPFS other than the Known Clients.
Paragraph 61 alleges that Anderson breached his duty of fidelity in a number of respects:
(a)forming an intention to resign his employment and join a business in direct competition with EPW without disclosing that intention to EPW;
(b)retaining Confidential Information about clients of EPW and Confidential Sale Information;
(c)using Confidential Information for the purposes of soliciting clients following his resignation;
(d)accessing Confidential Information for the purpose of servicing clients in a competing business;
(e)using Confidential Information and or Confidential Sale Information for the purpose of permitting Wilsons to approach those clients;
(f)actively preparing to enter into competition with EPW and EPFS;
(g)placing himself in a position to compete with EPW and EPFS;
(h)meeting or having telephone discussions with Known Clients for the purpose of soliciting their engagement of Wilsons, having planned for those communications before his resignation; and
(i)soliciting known clients away from EPFS to Wilsons.
Paragraph 62 alleges that Anderson took certain steps immediately following his resignation with an intention to join Wilsons and use Confidential Information of EPW or EPFS:
(a)meeting with or having telephone conversations with Known Clients for the purpose of soliciting their work in favour of Wilsons; and
(b)sending the Known Clients correspondence with a view to soliciting their custom using Confidential Information, namely their identity and their mobile telephone numbers.
The plaintiffs allege that Wilsons was a knowing participant in that conduct because it had knowledge of Anderson’s breaches (as set out in the SOC) as it:
(a)engaged in negotiations with Anderson in relation to him being appointed as an authorised representative and thereafter appointed him as an authorised representative;
(b)took over the Known Clients of EPFS;
(c)engaged in the receipt and transfer of the commissions, fees, rebates or volume bonus payments attributable to the Known Clients;
(d)engaged Fortis under a “Corporate Authorised Representative” (CAR) arrangement to establish a profit-sharing arrangement between Fortis and Wilsons; and
(e)received certain confidential information contained in the “Business Plan”.
It is alleged that Wilsons had knowledge for the purposes of the claim because of its:
(a)calculated abstention from enquiry; or
(b)because an honest person with knowledge of the circumstances known to Wilsons would have reasoned that Anderson’s conduct amounted to a breach by Anderson and/or Fortis of their equitable duties.
The SOC pleads that from 15 January 2021 Wilsons was expressly put on notice that Anderson’s conduct was in breach of a restraint clause and statutory and equitable duties owed to the plaintiffs. The SOC also pleads that Wilsons knowingly received commissions, fees, rebates or volume bonus payments attributable to the Known Clients when it had knowledge of Anderson’s and/or Fortis’s breaches.
Although claims for an account of profits and equitable damages were sought in the SOC, the plaintiffs made an election to pursue only the claim for equitable compensation from Wilsons.
Personalia
Apart from the parties to the proceedings, other people are referred to in these reasons. Their names are as follows. Capitalised titles are those which are given to them by their respective organisations.
(a)Damon Bensein (Bensein), Team Leader and Senior Wealth Advisor of EPW;
(b)Kelsi Blumson (Blumson), a Client Support Officer at Elston;
(c)Nathalie Bunge-Krueger (Bunge-Krueger), Chief Administration Officer at Elston;
(d)Anthony Castellaro (Castellaro), Director and Senior Private Wealth Adviser at Elston;
(e)Gia Frino (Frino), a Wealth Management Assistant at Elston;
(f)Brooke Lye (Lye), Adviser Support Officer to Anderson at Elston and then team assistant to Anderson employed by Fortis;
(g)Andrew McKie (McKie), Co-founder and Executive Director of EGPL;
(h)Timothy McLaughlan (McLaughlan), a Strategy Adviser at Elston;
(i)Ben McNamara (McNamara), Chief Operating Officer of EPFS;
(j)Peter McVeigh (McVeigh), Executive Chairman of EGPL;
(k)Michael Papandrea (Papandrea), Anderson's wife’s cousin and also a referral partner of Elston;
(l)Andrew Rosetta (Rosetta), a Strategy Adviser at Elston;
(m)Richard Taylor (Taylor), an employee of EPW and then Fortis;
(n)Bruce Williams (Williams), Executive Director of EGPL;
(o)Paul Bryant (Bryant), Head of Private Wealth Advisory and Authorised Investment Manager at Wilsons;
(p)Brad Gale (Gale), Chief Executive Officer of Wilsons;
(q)Duncan Gamble (Gamble), Institutional Equity Adviser and board member of Wilsons;
(r)Mariam Shelbourne (Shelbourne), Head of Compliance, Risk and Legal at Wilsons;
(s)Lindsay Clement-Meehan (Clement-Meehan), Head of Communications and Public Relations at Wilsons;
(t)Tara Ross (Ross), General Manager Private Wealth Advisory at Wilsons;
(u)Dean Easterby (Easterby), Financial Adviser and Director of Parker Financial Services Pty Ltd; and
(v)Robert Neill (Neill), Chartered Accountant employed by Seaview Consulting Pty Ltd.
Facts
Timothy Anderson
From 2008 to 1 January 2021 Anderson was an employee of EPW pursuant to a series of contracts of employment.
From 2008 to 2011 Anderson was employed as a private wealth adviser at Elston’s Ballina office. In 2011, Anderson accepted an offer to transfer to Elston’s Canberra office.
From 2011 to 2021 Anderson was employed at Elston’s Canberra office. From 2011 to 2013 Anderson was the sole adviser at the Canberra office.
As the Canberra office grew and took on more clients, its staff size began to expand such that in December 2020 the Canberra office employed two private wealth advisers, two strategy advisers and four support staff.
From no later than 2013 Anderson was appointed team leader of the Canberra office and held that role until 31 December 2020.
In 2016 Wilsons was considering expanding into Canberra, Perth and Adelaide. Bryant was introduced to a number of potential recruits, including Anderson. Anderson ultimately indicated that he was not prepared to leave Elston.
In about September 2018 Elston implemented a requirement for its advisory staff to enter into renewed employment contracts annually. Anderson entered into employment contracts on:
(a)24 July 2018;
(b)15 July 2019; and
(c)21 October 2020.
From at least 24 April 2013 Anderson was an “Authorised Representative” of EPFS.
Anderson contacts Wilsons
In June 2020 the executive committee of Elston resolved to attempt to sell the Canberra office. In the same month, Anderson commenced discussions with Bryant of Wilsons to investigate becoming an authorised representative of Wilsons. Anderson initially requested a telephone meeting. On 12 June 2020 Bryant had a telephone conversation with Anderson about Wilsons in general. Bryant understood from the conversation that Anderson was looking to purchase his client base from Elston, as that was possible under his employment contract, and that Anderson thought Elston would agree a fair price with him. Following this telephone conversation, Bryant provided Anderson with a confidentiality agreement and draft CAR agreement to review.
On 8 July 2020 Bryant and Anderson met for lunch in Brisbane to discuss further what Wilsons could offer Anderson. The lunch lasted approximately 90 minutes. So far as Bryant was concerned, the meeting was an introductory meeting to see whether Anderson would be a good fit for Wilsons. Bryant also discussed the opportunity to open an office in Canberra (under a CAR agreement). Bryant reported to senior people within Wilsons that he was “relatively confident” that he could get Anderson’s “team across as a CAR” and that the timing could be “September/October”.
On 3 August 2020 Bryant sent by email to Anderson details to log in to Wilsons’ client portal so that Anderson could access and review the quality of resources that Wilsons’ clients have access to.
Proposed sale of Elston’s Canberra office
In about August 2020 the shareholders of EGPL resolved to restructure EPW and, as part of that restructure, sell the Canberra office. On 18 August 2020 EGPL engaged Neill of Seaview Consulting to facilitate the sale of the Canberra office on behalf of EPW.
In around September 2020 Anderson and McKie had discussions regarding the strategic options available for the Elston Canberra office, which included its potential sale.
On 15 September 2020 a list of potential purchasers was proposed by Neill and settled on after some input from McKie. That input included McKie suggesting removing Wilsons from the list of potential purchasers.
By 25 September 2020 Neill had prepared a “Business Brief” and an “Information Memorandum” for circulation to interested parties. On the same day McKie and McVeigh attended a meeting with Anderson at Hotel Realm in Canberra. At this meeting:
(a)McKie explained that given Anderson’s position as the manager/team leader and a key stakeholder of the Canberra office, Elston wished to have him involved in the sale process;
(b)Anderson was presented with and signed a memorandum acknowledging the confidentiality of the information to which he was to become privy at the meeting;
(c)McKie presented a slideshow to Anderson which set out the rationale for, goals of, and possible outcomes for the sale, which included a potential bonus payment to Anderson of up to $1.44 million if the sale was successful;
(d)McKie outlined the four options for the future of the Canberra office, being:
(i)a third-party purchase, pursuant to which Anderson would remain the team leader of the Canberra office and receive a substantial bonus payment on the sale;
(ii)an adviser purchase of the Canberra office by the advisers there;
(iii)retaining and improving the Canberra office; or
(iv)“disfunction” [sic].
McKie informed Anderson that the approximate purchase price of the Canberra office was $6 million and that he could undertake the same process as any other bidder to make an offer. During the meeting, Anderson and McKie discussed a list of potential purchasers and a distribution list for the supply of information.
McKie noted his concern that Anderson may have a conflict of interest. Anderson informed McKie that he would handle any conflict of interest and would not interfere with the sale process.
Anderson also agreed to be a key point of contact and assist with the sale of the Canberra office.
On 28 September 2020 McKie introduced Anderson and Neill to one another by email. Anderson had indicated that he was interested in purchasing the Canberra office. Neill sent Anderson a copy of the Business Brief and Information Memorandum on that date.
On 12 October 2020 Clime Investment Management Ltd (Clime Investments) submitted a non-binding indicative offer to purchase the Canberra office. On 19 October 2020 Parker Financial Services Pty Ltd (Parker Financial) submitted a non-binding indicative offer to purchase the Canberra office. Both parties were given access to the due diligence materials in respect of the Canberra office on 29 October 2020.
On 14 October 2020 EPFS and EPW executed the Services Agreement: (see [8] above) whereby EPFS was to provide financial advisory services to Elston clients through an authorised representative employed by EPW.
Further dealings between Anderson and Wilsons
On 14 October 2020 Bryant sent an email to Anderson attaching some Wilsons research on asset allocation.
On 20 October 2020 Anderson called McKie and expressed his interest in purchasing the Canberra office. That did not go anywhere.
On 21 October 2020 Elston and Anderson signed a further employment agreement. Anderson's position was “Manager Canberra, Private Wealth Adviser". Bunge-Krueger said in a message that the employment agreement was needed for the data room (being prepared for the sale of the Canberra office).
On 25 October 2020 Anderson sent an email to Bryant saying that things were “moving quickly”, that he wanted to “progress [their] discussions to the next step” and that he would like to fly to Brisbane with Taylor to meet Bryant.
On 29 October 2020 Bryant emailed Anderson a Wilsons questionnaire. He explained:
Attached are the things we would need from a DD [due diligence] perspective. Obviously with the client file requirement it would be with all names etc removed and is more for our Compliance area to be able to get a feel for the type of advice you are providing. From our discussions it is going to be almost identical to what we do
The documents sought were in four categories, including:
(a)“Client Information” including the number of clients, the FUM and the revenue for retail and wholesale clients;
(b)“Advisor Information” including the current authorisation letter for each authorised representative and copies of academic transcripts;
(c)“Practice Governance” including details of complaints, “breach and incident register”, any regulator correspondence and other matters; and
(d)“Client File” which requested:
1.Two current client files which include:
·Data collection documents
·Risk profiling documents
·Advice documentation
·File notes
·Client presentation documentation
·FDS [fee disclosure statement]
·Opt-In renewals
On 7 November 2020 Anderson responded to this email from Bryant and provided his personal email address.
On 5 November 2020 Bryant met Anderson and Taylor for lunch in Brisbane to discuss the opportunity to enter into a CAR arrangement. Bryant told Anderson that if he could not buy his clients, “we will want to make sure you don’t breach your contract”.
This was the first time Bryant met Taylor. Bryant did not recall a detailed discussion of Anderson or Taylor's obligations to Elston at that meeting, or a discussion about Elston trying to sell its Canberra office. He believed there was limited discussions of Anderson's post-employment restraints. The discussion was to the following effect:
Anderson or Taylor: We are going to get legal advice about when we can start.
Bryant: That’s good. Make sure you follow the legal advice and follow your obligations so we don’t have any trouble at the end.
After 5 November 2020 Bryant understood from Anderson that Anderson was developing a plan to purchase clients from Elston.
Bryant gave evidence that he said words to the effect of:
I agree that clients come first. If you can buy them and there are no issues with that, it is great. If it doesn’t go that way, we will want to make sure that you don’t breach your contract. As a CAR, I don’t care if you bring in zero or one hundred clients. Our philosophy is that we want really high quality advisors, and we will back them to build a client base over time.
Potential sales do not proceed
By 9 November 2020 Clime Investments did not express further interest in participating in the sale of the Elston Canberra office.
On about 16 November 2020 Easterby of Parker Financial requested a meeting with Elston and, in particular, Anderson, in order to advance the possible purchase by Parker Financial.
On 20 November 2020 McKie, McVeigh and Anderson met with Easterby, Paul Cooke, Julian Farmer, and Sam Furler of Parker Financial at the Commonwealth Club. At the meeting, Anderson was observed by McKie to be withdrawn, aloof and did not engage with the representatives from Parker Financial. McVeigh provided examples including Anderson not responding seriously to queries from Parker Financial and Anderson reclining his chair and putting his hands behind his head. Mr Farmer made a comment to McKie and McVeigh to the effect that “well, you could tell he [Anderson] didn’t want to be here”. Neill received a message from McKie saying that the meeting had not gone well and that Anderson had “blown it up”.
Immediately after the Parker Financial meeting, McVeigh had a meeting with McKie and Papandrea. In that meeting, Papandrea indicated that he was worried about Anderson's state of mind.
On 23 November 2020 McKie called Easterby, who informed McKie that Parker Financial would be withdrawing the offer to purchase the business. Anderson’s conduct in the meeting at the Commonwealth Club, alongside the significant financial commitment, were cited as reasons why Parker felt no longer comfortable with the sale. Easterby noted that Anderson was a key person in the Canberra office and as such, there was too much key person risk for Parker Financial to proceed with the purchase.
McKie called McVeigh to inform him that Parker Financial would not be proceeding with the purchase.
Parker Financial subsequently withdrew their offer to purchase the Canberra office. The behaviour of Anderson at the 20 November meeting was, at the least, a significant reason for that decision.
Elston meetings with Anderson 26-27 November
On 24 November 2020 Elston’s board had a meeting regarding Anderson’s behavior and the fact that Parker Financial had withdrawn from the purchase. Three directors resolved to travel to Canberra to meet with Anderson to determine what he wanted out of the process and the nature of his issues and concerns.
On 26 November 2020 McKie, McVeigh and Williams met with Anderson in Canberra to inform him that Parker Financial had withdrawn their bid and that Anderson’s conduct at the meeting was a reason why. The purpose of the meeting was to ascertain Anderson’s intention and what he wanted from that point on. Anderson said words to the effect of “well, I can’t control what others will think of me.” After McKie replied in words to the effect of saying “well, you can control the way you conduct yourself in meetings.” Anderson proceeded to “storm out” and did not return to the office for the rest of the day.
On 27 November 2020 McKie, McVeigh and Williams met with Anderson again. Anderson said that he would consider his options regarding the purchase of the client book and that he would get back to them in the next two weeks. McKie was unable to get an answer from Anderson despite contacting him in the weeks following.
Decision not to sell the Canberra office
On 27 November 2020 in the afternoon, shortly after the meeting with Anderson, McKie, McVeigh and Williams met to discuss whether a continued sale process would yield a fair result. The meeting unanimously agreed that given Anderson was not “on board” with the sale, they could not risk going out to the market and getting a similarly poor result.
Elston took no further steps to sell the Canberra office after Anderson’s resignation.
Possible purchase by Anderson
On 15 December 2020 Anderson participated in a telephone meeting with McVeigh and discussed:
(a)Anderson possibly purchasing the Canberra office;
(b)that Anderson expected a discounted purchase price; and
(c)the advice model that Anderson would run.
McVeigh agreed to provide some additional information to Anderson concerning the purchase of the Canberra office.
On 16 December 2020 Anderson sent an email to McVeigh asking:
Will you be able to have a quasi IM of sorts to confirm your expectations as they relate to an adviser purchase of the Canberra office to me by tomorrow?
I’d like to be able to give it some thought and get some independent advice and come back to you early January.
The sooner I get your thoughts, the sooner I will come back to you with mine.
On 17 December 2020 Anderson sent a text message to McVeigh requesting information for an adviser purchase of the Canberra office. McVeigh responded that he had taken some time off and that Anderson should follow up with Williams. Anderson then took a screenshot of his conversation with McVeigh and sent it to Williams.
Board decision to put Anderson on leave
After the 26 November meeting, because of Anderson’s behaviour, McVeigh sought legal advice from Suzanne Wishart of Murdoch Lawyers about Elston’s obligations to Anderson arising out of his concerns for Anderson’s wellbeing and mental health. Further information about Anderson’s behaviour and personal circumstances led McVeigh to conclude that Anderson should be put on leave for his own wellbeing and the morale of the Canberra office.
On 17 December 2020 McVeigh and Bunge-Krueger had a meeting with Ms Wishart in relation to Anderson.
The same day, McVeigh emailed Bunge-Krueger, McKie, Williams and Bensein with a “list of incidents that raise concern” about Anderson. McVeigh asked others to add to the list “so Nat can collate as reasons to put him on special leave”. The list identified a series of incidents between June and December 2020.
On 17 December 2020 Elston resolved to place Anderson on paid leave to allow him to take time to address his mental health and personal issues. That day, McKie, McVeigh, and Williams flew from Brisbane to Canberra to meet with Anderson and discuss his mental health issues but he was absent from the office.
On 18 December 2020 Bunge-Krueger sent an email to Anderson which attached a letter placing him on paid leave for a period of three months. Later that day, Bunge‑Krueger sent the letter to Anderson by text message. Anderson responded to the email stating that he was currently on “personal/carers leave”, did not accept the direction to take leave and would be returning to work on 4 January 2021.
On 18 December 2020 Anderson was placed on special leave by EPW and locked out of the Elston computer systems. The locks to the Canberra office were changed on 20 December 2020.
Anderson’s actions after being placed on leave
After being placed on leave, Anderson called Bryant and said that the meeting with McKie went poorly, that most of his clients are family and friends and Elston wanted Anderson to pay a “ridiculous” amount for them. Anderson said that he was forced to take three months of mental health leave, and that he was getting some advice about what he could do.
Bryant said that “new recruits are encouraged to meet their contractual obligations to their previous employers and not breach them. I’m glad to hear you are getting legal advice”. Bryant noted that some advisers had recently left Wilsons for Shaw and Partners Limited and refused to work out their notice period.
On 18 December 2020 Anderson sought advice from Jennifer Wyborn of Clayton Utz as to the validity and enforceability of his employment restraint. On 22 December 2020 at Anderson's request, Ms Wyborn provided Anderson with a written advice. The advice set out her views, including on the enforceability of the restraints in Anderson’s contract of employment. The written advice included the following:
3. In summary, my view is that the restraint of trade clause in the Contract in not enforceble. However, you are nonetheless prevented from contacting clients of Elston as it would breach the confidentiality clause in the Contract as well as the Corporations Act 2001 (Cth). Further, if Elston is sold, they can assign these confidential information protections to the purchaser.
4. It would be a breach for you to use information you gained during your employment with Elston to contact Elston’s clients, directly or indirectly, even if Elston no longer has a physical presence in Canberra or if the clients choose to leave Elston. However, if you were to advertise your new business and the clients approached you, I do not consider that it would be a breach of the confidentiality clause or the Corporations Act 2001 (Cth) if you accepted their business.
On 20 December 2020 Anderson emailed Bryant explaining that he would resign on 4 January 2021:
Hi Mate,
Here is what I was thinking in terms of timing;
· I am resigning on the 4th of January
· I already have a dormant shelf company I could use as the CAR company – but may look to set up a new entity with my lawyer/accountant as soon as I resign. I would like to be in a position to start to call clients week starting 4 January if possible, to at least [let] them know I have left and will be in touch.
He referred to his assistant (Lye) returning from maternity leave on 18 January 2021 and being available to start with him immediately. Lye in fact started employment with him in February 2021. He refers to another casual assistant starting with him “at any stage”. The email continues:
As discussed, post my meeting with Peter Mcveigh last Tuesday to discuss the purchase of clients, I have subsequently had all my access to systems suspended and the office locks were changed today.
As far as Elston are concerned they have put me on ‘special leave’ for 3 months on full pay to give me some personal time to help my mother who has some health issues to deal with. Why they then felt it necessary to change the locks and cut my access as well is quite laughable really..!!
I’ve sought legal advice regarding the above from Clayton Utz and have been guided by them – hence the resignation on the 4th of January.
I have all my DD documents ready to send you tomorrow. I will email you the business plan too.
I have also made contact with Dean Brumby and will start the PI process this week as well.
Lots to do, but am looking forward to getting on with it ASAP.
Drop me an email if you have any questions.
Bryant responded the next morning, suggesting that they speak later in the day.
On 21 December 2020 Bryant, Anderson and Taylor were due to meet and Gale (Chief Executive Officer of Wilsons) in person in Sydney. However, due to COVID-19 restrictions, they instead had a Zoom meeting. At that meeting, Anderson discussed resigning from EPW, the notice period and the restraints in his contractual agreement.
Either in the Zoom meeting or in a separate telephone call that day, Anderson told Gale that he had legal advice and a one‑month notice period, that he intended to resign on 1 January 2021 and then could start the CAR arrangement from 1 February. Anderson told him that he could not contact his clients during the notice period but could accept approaches from them.
On 22 December 2020 Anderson forwarded Wilsons’ research to an Elston client, stating that the direct purchase of international shares might be something to consider when things were “up and running”.
On 31 December 2020 Anderson emailed Bryant, in which he distinguished between clients (meaning Elston clients) and “referral partners”, saying:
I’m resigning tomorrow as well.
I’m also working with my lawyer to at least go to Elston and offer to purchase those clients that have been referred to me by one of my referral partners (Papandrea Partners).
Anderson resigns from Elston
On 1 January 2021 Anderson resigned from his employment with Elston. His email to Bensein, copied to Bunge-Krueger, provided:
Please be advised I hereby provide notice of resignation from employment. Given I am currently on personal leave, I trust you will be happy to pay me my 4 week notice period in lieu. I am happy to attend the office on Monday, 11 January to return all my property and documents.
Bryant understood that Anderson resigned from this date.
Rosetta and McLaughlan received a text message from Anderson stating that he had resigned.
McLaughlan received a text message from Anderson stating that he had resigned.
On 4 January 2021 Bensein instructed Elston staff to “get on the front foot with the top clients” to inform them of Anderson’s resignation and that it would be business as usual.
On 5 January 2021 Elston accepted Anderson’s resignation. The acknowledgement letter set out Anderson’s five-week notice period and that payment was to be made in lieu of that notice. Elston reminded Anderson of his obligations under his employment agreement. It also reminded Anderson of the “substantial monetary benefits” he stood receive under the Deferred Employee Entitlement Policy (DEEP) if he satisfied the requirements of a “good leaver” and outlined what was required of him to meet the good leaver criteria. This was an Elston policy which identified payments to be made to former employees who met certain criteria after their departure. Those criteria included not soliciting Elston clients or staff and not breaching the terms of their employment agreement. Under the terms of the DEEP, Anderson could receive a payment in excess of $700,000.
Elston’s actions after Anderson’s resignation
Elston Group’s board of directors instructed the Canberra office to contact all Elston clients that Anderson had contact with, to inform them that Anderson had resigned, and that the Canberra office would continue to provide financial services.
On 5 January 2021 McLaughlan began calling clients that Rosetta and Anderson jointly serviced. He and Rosetta kept an excel spreadsheet of these calls. McLaughlan also kept contemporaneous notes of these calls. Contact was made with approximately 75 to 80 Elston clients who were previously in contact with or advised by Anderson. As these calls involved explaining the resignation of Anderson, this led some clients to get in contact with Anderson.
Anderson’s actions after resignation
On 7 January 2021 Anderson registered Fortis.
The same day Anderson sent an email to Bryant which responded to the request made by Bryant on 29 October 2020 for due diligence information see [49] above. The body of the email sent by Anderson provided:
Breakdown of client book
· Most clients are Individual Managed Accounts. ~230 clients. There are some additional SMA clients on Hub 24 and Macquarie Wrap
· All IMA clients above have accounts and HINS with UBS Securities Australia (market participant). Elston act as the Financial Intermediary
· All IMA clients are STP via UBS and all have Macquarie Cash Management accounts
Advisor Information
· I will provide this information in a separate email
Practice Governance
· There have been no adviser complaints recorded in the last five years
· There have been no adviser breaches or incidents in the last five years
· There has been no regulator correspondence in the last five years
· I will attach the advisor compliance/audit reports in a separate email
· I consent to background and bankruptcy checks – presume I will need to sign something to give consent?
· Trading activity overview to be sent in a separate email
Client Files
· I will forward these files in a separate email
A document with the filename “Corporate Authorised Representative DD Requirements.docx” was annexed. Within that document there was a table headed “Breakdown of client book” which was partially completed. It disclosed that there were 230 clients with $263 million in FUM and revenue of $2 million with brokerage fees of $115,000 and statement of advice fees of $147,000.
Elston client file notes were provided by email at 9pm. This document was wholly redacted in the exhibit because of its confidentiality. It is not clear whether or to what extent the contents were redacted when sent to Bryant.
An example of Elston’s fee disclosure statement and opt-in renewal notice was provided by email at 9:03pm on 7 January 2021. These were standard forms. On these documents, some details had been blacked out but the names of the sample clients remained.
An “Adviser Compliance Audit report” was provided at 9:04pm. This was a review prepared by a compliance consultancy for Elston in August 2020 relating to Anderson. It was 10 pages long. The review appeared to involve the completion of a questionnaire by Anderson, an interview and a file review involving assessment of file notes, statements of advice, reviews and files generally. It identified issues arising from the examination of those files.
An Elston risk assessment document was provided at 9:49pm. This was a document in which various multiple-choice items were ticked which allowed an assessment of the risk appetite of the client. The full names of the clients were redacted but their signatures and first names were not redacted.
An Elston statement of advice was provided at 9:51pm. This too was wholly redacted in the exhibit and it is not clear what redactions were made on the document when it was provided to Bryant.
Each of the documents provided on 7 January 2021 was a confidential document of Elston which, in the absence of consent, should not have remained in the possession of Anderson.
On 8 January 2021 McNamara requested that an external provider, Cyber Audit Team, undertake searches of Anderson’s IT system usage to “see if there is anything that correlates to sneaky removal of data/client details”. The outcome of these searches was that no such activity was identified.
On 8 January 2021 Anderson told Bryant the name of the company for the CAR agreement was Fortis Private Pty Ltd and noted that Taylor would be added as a director at an appropriate time. In a separate email he said that he had “sourced an office solution”.
On 9 January 2021 at 10:18am Anderson emailed Bryant with the subject, "RE: Fortis Private Pty Ltd (Canberra CAR)". The email referred to the fact that Taylor was resigning the next Monday and that Lye had already resigned. In relation to another assistant, Frino, he refers to her moving across at an appropriate time and “(just need to be careful on timing here)” although the reason for this is not explained. He refers to Taylor’s start date and his estimate that he would be “good to go” from mid-February. The email continues:
Oh - one thing, would it be possible to give some thought to the communication strategy upon commencement 1 February? I’ve already had plenty of calls inbound to me as the word has got out that I’ve resigned, however I have been extremely cautious about what I’ve said and communicated to date to anyone.
My advice from Clayton Utz is that I will be able to accept clients if they call me/seek me out post 1 February, I just won’t be able to solicit them. Would you give some thought to how we brand/communicate my move on the 1st of February (once board approved of course)? I was thinking something simple like some help from your marketing team to update my Linkedin page etc but I want to adhere to all the brand guidelines. I will also be posting something on the other social media platforms etc subject to your marketing departments approval.
I also have a fair amount of FUM that is family/extended family, that will come across automatically from 1 Feb.
Anyways – let me know if you have some thoughts re-marketing strategy from 1 Feb. I just want to make sure I do the right thing and that the communication goes out as soon as possible as it will make it easier for me to accept clients as they call up.
Bryant responded indicating that he would be working up a plan with Clement‑Meehan and would have announcements ready for 1 February 2021 as well as giving Anderson help with updating LinkedIn (a professional network on the internet). At 10:33am Bryant emailed Clement-Meehan about Fortis becoming the Canberra CAR. One of the considerations that he pointed to in relation to messaging was that it was: “Important to get the message out that Tim has joined so his clients can see it and help him get business across.” He also asked Shelbourne to review any communications “prior to print”.
At 10:53am Bryant sent an email to Anderson asking him to populate a table with year one, year two and year three estimates for a variety of parameters including FUM and funds under advisement, average FUM per client, client size and number of clients. He had earlier explained that this was “[j]ust for our forecasting for Board approval”. The email also requested confirmation of where Anderson intended to operate from initially and then the estimated timeframe for setting up an office. It sought details of the commencement of Taylor and other staff.
At 11:24am Bryant collated the due diligence materials that had been sent to him by Anderson on 7 January 2020 and sent them to Wilsons’ compliance team to review with the comment, “I have gone through them and can’t see any issues, but please let me know if you think there are any issues, and [Shelbourne] please confirm with me that you are happy with everything as I will need to include confirmation that you are satisfied in the approval memo.”
Also on that day, Bryant updated Gale and Shawn Sanders (an employee of Wilsons) on progress with the CAR.
On 10 January 2021 Anderson sent to Bryant a completed version of the table previously provided by Bryant. This was in response to the email from Bryant the previous day. This email included estimated financial figures for year one, year two and year three of the proposed CAR arrangement. It also included other commentary about office location and the commencement of other staff. The significant parts of the email were as follows:
Hi PB,
See below estimate. Its only a very rough estimate.
Year 1 will be pretty accurate though.
Year 1
Year 2
Year 3
#Investment Advisers EOY
2
3
4
#Financial Advisers EOY
1
2
2
#Associates EOY
1
1
#Assistants EOY
1
1
1
FUM (on platform) discretionary EOY
$44,919,000
$110,000,000
$150,000,000
FUA (on platform) non-discretionary EOF
$41,916,000
$60,000,000
$90,000,000
CHESS Only EOY
Unknown
Unknown
Unknown
Revenue (excl platform/admin fees) for the 12 months
$700,000
$1,700,000
$2,600,000
Average FUM Client Size
$1,100,000
$1,100,000
$1,100,000
Number of FUM Clients EOY
41
100
150
Average FUA Client Size
$4,200,000
$2,000,000
$1,500,000
Number of FUA Clients EOY
10
30
60
% of FUM to be moved to Wilsons reporting platform
50
60
60
% of FUA to be moved to Wilsons reporting platform
50
40
40
…
(re the numbers above, I feel I will have a better handle on things within the first 6 months). It is however my intention to strategically grow out the investment adviser numbers within the first 2 to 3 years to about 4, which I think can be suitably serviced by 2 planners.
…
Hope this all helps mate – please shoot me an email if you have any questions.
The source of the information in this table is not clear. The plaintiffs pointed to the precision of the figures as suggesting they came from documents improperly retained by Anderson. Wilsons, on the other hand, pointed to alternative explanations such as that the number of clients proposed in year one reflected 21 clients which were “ring-fenced” clients of Taylor plus a round figure of 20 other clients. The ring-fenced clients of Taylor were those he had brought to Elston on commencement of his employment with it and in relation to whom there was no contractual restraint on him. It is not possible to reach a conclusion that the number of clients in this table involved the misuse of confidential information as opposed to an estimate based upon Anderson’s knowledge of his previous client base and his assessment of the likelihood that they would move across to Wilsons. However, the figures for FUM, “FUA” (funds under advisement) and average client size are so specific that it is more probable than not that they arose, at least in part, from the use of retained confidential information of Elston.
On 11 January 2021 Taylor provided four weeks' notice of resignation to Elston.
On 11 January 2021 there was email communication between Shelbourne and Bryant in relation to due diligence matters.
On 12 January 2021 there was a further conversation between Bryant and Anderson about the fact that Papandrea, who had referred clients to Anderson, had been arrested for money laundering. The conversation satisfied Bryant that there was nothing in it that would stop Wilsons from proceeding with the CAR agreement. He sought Shelbourne’s confirmation that she agreed.
On 15 January 2021 McKie messaged Gamble, inviting him to have a chat about Wilsons’ intention to license Anderson and potentially Taylor to provide financial services. Gamble and McKie met at the Dicky Beach Surf Club on the Sunshine Coast. McKie made a reasonably contemporaneous note of the conversation on 17 January 2021 which was apparently only for internal purposes and this is likely to be the best evidence of the conversation. McKie explained the background in relation to Anderson and also what had happened with Papandrea. He explained Anderson’s involvement in the abortive sale process. He suggested that it was in Elston’s interest “to run it pretty hard legally” but asked whether it might be possible to work out a deal whereby Wilsons purchased the clients and thus took the money out of Anderson’s commissions.
McKie deposed that he has not heard from Gamble since. There is no evidence that he attempted to contact Gamble after 15 January 2021.
On 18 January 2021 Shelbourne raised a number of follow‑up questions in relation to the due-diligence documents, which Anderson responded to on the same day. One of the requests from Shelbourne was for a complete client file but Bryant, when passing on the request to Anderson, said “as you have left the business and would not have access we do not need to get these”. Also on that day, Taylor sent a variety of documents to Bryant and Shelbourne for due diligence purposes. Anderson’s email to Bryant and Shelbourne provided a response to one of Shelbourne’s questions about the advice given to the clients whose risk profiling document and statement of advice had been disclosed: see [101]-[102] above. In doing so he disclosed, as “context” to the advice, information about the personal and financial circumstances of these Elston clients.
In the week starting 18 January 2021 Gamble called Bryant. The conversation was to the following effect:
Gamble: I just caught up with Andrew McKie. He was not complimentary of Tim Anderson. He asked if we had done our homework on him.
Bryant:I have dealt with Andrew McKie for long enough to not believe a word that comes out of his mouth. Tim seems like a good guy and I have checked his character with mutual acquaintances who also confirm his good standing as a person and quality as an Advisor. I have spoken to him about his obligations, and he is getting independent advice on them, so I am comfortable.
Between 18 January 2021 and 1 February 2021 Taylor and McVeigh engaged in negotiations over email in relation to Taylor purchasing clients from Elston (in addition to his ring‑fenced clients). Those negotiations did not continue after Taylor informed McVeigh that he would be joining Wilsons.
Entry into the CAR agreement
On 19 January 2021 Bryant sent Anderson and Taylor the CAR agreement for review and signing.
On Wednesday 20 January 2021 Elston paid Anderson five weeks’ pay in lieu of his notice period.
The same day, Bryant emailed the leadership group of Wilsons a copy of a presentation that he had prepared in relation to the Canberra CAR arrangement, in advance of a meeting the next day. This was a PowerPoint presentation which included financial forecasts for calendar years 2021, 2022 and 2023. The forecasts included number of advisers, funds under advice, revenue and profit contribution to Wilsons. In relation to the move from Elston, the presentation included:
Tim has attempted to buy his client base off Elston (as per a clause in their employment contracts) however this has been rejected by Elston with a payment requested for the business by Elston which was in Tim’s opinion completely unreasonable. Both Tim and Richard have provided 1 months notice period and will not be starting prior to that completing.
Tim and Richard reviewed the various offerings in the Private Wealth space and believe Wilsons will provide the best outcomes for their clients and provide the best fit for them.
A more detailed breakdown of the funds under advice, revenue and profit contribution was provided later in the presentation. Under the heading “Due Diligence”, various matters are described under subheadings “Advisor Information”, “Practice Governance” and “Client File (names redacted)”. The document records that this information was reviewed by various people “with no issues identified”. A “Potential Issue” relating to the arrest of Papandrea who had referred clients to Anderson was then discussed. The presentation reports on the pros and cons of the proposal. In relation to the communication strategy, it says “Assistance to the Canberra team to establish their profiles on LinkedIn and any advertising in Canberra to reach out to previous clients.” It identifies that the next step was to seek board approval and complete documentation for a 1 February 2021 start date for the CAR office in Canberra.
That evening, Anderson arranged a zoom conference call on 29 January 2021 to introduce two of his clients from Elston, Clive and Lynlea Rodger (the Rodgers), to Gale.
On 21 January 2021 the Wilsons leadership group approved the Canberra CAR office proposal. That afternoon Shelbourne made arrangements to discuss with Anderson his contractual obligations and advice from Clayton Utz. She later emailed Clement‑Meehan about “the comms plan in relation to the Cars” and said “We need to ensure the release of any comms does not conflict with the contractual obligations the two advisers have in relation to Elston their previous employer.”
On 21 January 2021 Anderson sent Taylor an email which included a draft email to McKie and McVeigh which he said had been sitting in his email drafts folder since 21 November 2020. In the draft email, he indicated a non-binding offer for the Canberra office of $4 million and explained the reasons for an offer at that level. The email was never sent to McKie or McVeigh.
On 22 January 2021 after having spoken with Anderson, Shelbourne emailed Bryant. That email included:
Have spoken to Tim and we talked about his obligations. He was happy to send me the advice from Clutz, I am in two minds about receiving the advice, so have held off on that for the time being.
I have stated no activity (client meetings etc) until after his start date and advised that we need to be careful around the comms and timing.
On 25 January 2021 Taylor sent Anderson an email about the Business Plan.
On 28 January 2021 Anderson, on instruction from Shelbourne, told Wilsons he would like to reschedule a meeting with his clients the Rodgers until after the Wilsons Canberra office was up and running as he would like to be "sure I'm doing the right thing".
On 29 January 2021 Anderson told Clement-Meehan, Ross and Bryant that "The only clients that have sent Elston a termination request so far are my friends amd [sic] family" and that "I have been very cautious in my capacity as their adviser around changing their circumstances. However the ones that have sent off requests are friends and family [who] will have come across regardless."
On 1 February 2021 Anderson, on behalf of Fortis, signed a CAR Agreement with Wilsons. Anderson and Fortis commenced operating under that CAR Agreement on the same day.
Lye who had resigned her employment with EFPS on 6 January 2021 while on maternity leave, commenced working with Anderson and Taylor.
At no time prior to entering into the CAR Agreement did Wilsons review Anderson’s contract with Elston or written legal advice.
Events after entry into the CAR Agreement
On 1 February 2021 Anderson sent to Ross the Business Plan the same day that the CAR Agreement commenced.
The Business Plan was submitted by Anderson as one of the supporting documents for his Authorised Investment Manager applications. Authorised Investment Managers were able to operate “Managed Discretionary Investments”, a form of investment which allowed discretionary decisions to be made by the Authorised Investment Manager about investments.
The Business Plan included a history of the business, its geographical coverage and a description of the nature of the clients. It was based on the proposition that Anderson and Taylor were responsible for the establishment of the Canberra office “from 2013 for previous private advisory firm”. There was financial information from the “previous AFSL”. That included statements of the approximate normalised earnings before interest, taxes, depreciation and amortization (EBITDA), approximate FUM, approximate number of individual management accounts and a statement of the gross recurring professional advice fees. Graphs were included showing growth in the value of individually managed accounts and separately managed accounts. These graphs covered the period 2015 to 2020. It identified aggregate FUM as $283,243,237 as at December 2020. It provided a breakdown of the revenue as between advice fees, statements of advice and implementation fees and brokerage fees. It identified that the average client had approximately $1.4 million in FUM. It provided some profit and loss figures for after the set‑up phase as well as estimated cash flow for the 2021 calendar year. It identified plans for additional employees and the timing of the engagement of those employees.
In slides entitled “Referral Partner Client List” and “Referral Partner Client List (Maybe Subject to Employment Restraint)” it included a three-column table which listed account codes, FUM and 12-month fees. This involved precise disclosure of what must have been Elston information, namely the account codes for these clients, the precise amount of FUM and a precise statement of the 12‑month fees. At the end of the table, it indicated that these amounted to approximately $61 million with recurring advice fees for the past 12 months of approximately $706,000.
An additional slide entitled “Ring-Fenced Clients – No Restraint” identified that there were some 25 ring-fenced clients with FUM of $30 million.
Some of the more precise past performance figures in the Business Plan are likely to have been derived from the Information Memorandum or Business Brief prepared by Neill: see [38] above. For example:
(a)some of the figures on page eight of the Business Plan match those on page four of Elston’s Business Brief and page four of Elston’s information memorandum; and
(b)the fees set out on page 14 of the Business Plan match those on page four of the Elston Business Brief.
The Business Plan was one of the attachments to an email circulated to Wilsons “MDA Committee” on 2 February 2021. The MDA Committee was responsible for approving advisers to become AIMs. The committee included Ross, Bryant and Shelbourne. The other attachments to the email circulated to the members of the committee were “Application Form”, “Investment Philosophy”, a curriculum vitae, “Portfolio Performance Samples” and transcripts relating to his educational qualifications. Although Bryant was on the Committee and approved Ross’ email to its members, he did not read its attachments, including the Business Plan, at the time because he supported and approved Anderson based on his knowledge of him. Anderson was approved as an Authorised Investment Manager shortly after 2 February 2021.
On 2 February 2021 Bunge-Krueger wrote to Anderson outlining his continuing obligations to Elston, asserting that he had breached those obligations and requesting that he sign an undertaking.
In early February 2021 Anderson called Bryant to tell him that Elston was telling clients that Anderson had left and that this was good marketing. Bryant confirmed with Anderson that he was meeting his contractual obligations and not actively making calls to clients.
On 2 February 2021 Bryant met (via Zoom) with two of Anderson’s potential clients (who were, at the time, clients of Elston), the Rodgers. The meeting was organised by Anderson at the request of the Rodgers.
On 3 February 2021 the Elston Group's board of directors caused personnel in the Canberra office to issue a short statement to Elston clients notifying them of Anderson's resignation.
Bensein circulated a notice to Elston clients regarding Anderson’s resignation.
On 4 February 2021 Anderson posted an announcement on LinkedIn that he had commenced his professional relationship with Wilsons.
On 8 February 2021 Taylor was registered as an Authorised Representative of Wilsons, and Wilsons posted on its website an announcement that Anderson and Taylor were commencing at Wilsons, "spearheading the firm's activity in the ACT region".
In or about February or March 2021 Gamble had a conversation with Gale about McKie and provided McKie's phone number to Gale.
On 18 February 2021 Gale met with the Rodgers. The meeting was organised by Anderson at the request of the Rodgers.
On 22 February 2021 DW Fox Tucker (solicitors for Elston) wrote to Wilsons in relation to Anderson’s departure from Elston. The letter asserted that Anderson had breached his employment contract as well as equitable, fiduciary and statutory obligations. It made specific reference to Wilsons’ potential liability under the principles outlined in Ancient Order of Forestersin Victoria Friendly Society Ltd v Lifeplan Australian Friendly Society [2018] HCA 43; 265 CLR 1 (Foresters). On 23 February 2021, Shelbourne wrote to Bryant and Gale saying:
We had contemplated that Elston might engage lawyers.
As you know Tim Anderson confirmed that he took advice from Clayton Utz and we agreed that his contract with Elston was a matter between himself and Elston.
On 5 March 2021 Anderson signed an undertaking (without admissions) that he would not provide services to, or solicit, persons that he knew to be clients of Elston as at the date of the undertaking until 19 March 2021.
Between 1 January 2021 and 5 March 2021 a number of Anderson’s former Elston clients terminated their engagement with Elston and subsequently became clients of Anderson and Fortis under their Wilsons CAR agreement. Those clients, and the dates on which they terminated their engagement with Elston, are set out in the plaintiffs’ closing submissions.
In the week commencing 9 March 2021 Gale and Bryant had a discussion to the following effect:
The Elston business is pretty complementary to ours. It looks to me like they are potentially looking to sell it, so I wonder whether you should call Andrew [McKie] to see what their intentions might be and that we may be interested in potentially buying it.
Bryant’s evidence was that he did not recall when he became aware that Elston had been trying to sell its Canberra office, but that he was definitely not aware when he met with Anderson on 5 November 2020 but was aware by 10 March 2021.
On or about 10 March 2021 Gale called McKie. The discussion did not result in any substantive development. Gale then spoke with Bryant and stated, "I spoke with Andrew McKie. He suggested we discuss any potential transaction with Elston after this litigation is all settled."
Proceedings commenced
On 15 April 2021 the Originating Claim was lodged.
On 28 April 2021 the court made orders by consent of the parties to extend Anderson’s undertaking of 5 March 2021 until 1 October 2021.
End of the relationship with Wilsons
Prior to the hearing, Fortis ceased to work with Wilsons under the CAR Agreement. Anderson then worked under the banner of Shaw and Partners.
Between 1 February 2021 and 31 December 2021, Wilsons received $44,657.89 in brokerage, and $496,300.87 in fees from the Known Clients. Of this amount, a large proportion was paid to Fortis under the terms of the CAR Agreement.
As at 27 January 2022 all of the Known Clients who had become clients of Wilsons had ceased to be clients of Wilsons, with the exception of the following:
(a)AFPA Super Pty Ltd;
(b)Mrs Betty Maddern and Mr Barry Maddern;
(c)David Eric Padgham;
(d)Burleigh & Hanlon Pty Ltd;
(e)Peter Burleigh and Judy Burleigh;
(f)Marie P Wright Investments Pty Ltd; and
(g)Giuseppe Lumbaca.
The acquisition of Elston clients
The acquisition of Elston clients is identified by Elston as not only being a breach of contract but also evidence of the implementation of the plan which it says Anderson developed while employed by Elston.
44 persons or entities are identified in the list of Known Clients in the SOC which Anderson is alleged to have contacted following his resignation (SOC [37]). However, the plaintiffs’ closing submissions only made reference to Anderson’s contact with a subset of those persons or entities. Excluded from the Known Clients that were the subject of submissions were some of the entities which never became clients of Wilsons: (S.M.P Holdings Pty Ltd (SOC 37.2); Lachma Pty Ltd (SOC 37.38), Douglas Francis and Charlotte Wheeler (SOC 37.39), Sava Momcilovic (SOC 37.40) and Field Family Pty Ltd (SOC 37.42)). Also excluded were some entities that had been Taylor’s clients which were described as the “ring-fenced” clients which he was authorised under his contract of employment to take from Elston (Malcolm Carlin and Leslie Carlin, John Kirkwood and Lillian Kirkwood, Marie P Wright Investments Pty Ltd, Clarkies Pty Ltd, Douglas Francis and Charlotte Wheeler). Three clients who became Wilsons clients and were not ring‑fenced clients (Peter Chamberlain and Tate Harris (Wolf Pact Investments Pty Ltd (SOC 37.43)), Tanya Lumbaca (SOC 37.35) and Giuseppe Lumbaca (SOC 37.36) were also not mentioned in the plaintiffs’ closing submissions.
Precisely why not all of the Known Clients were referred to in the plaintiffs’ submissions was not clear. It is likely to be because any contact that occurred was not productive of loss because the clients did not move, or because Taylor was entitled to take the clients if he left Elston. The three clients not referred to in the plaintiffs’ submissions who became Wilsons clients and were not ring-fenced clients are included in what appears below.
It is important to note that the principal complaint in relation to contact with clients was that made against Anderson, in relation to whom breach of contract and breach of statutory duty was alleged. So far as the claim against Wilsons is concerned, what is of significance is the extent to which the contact with and recruitment of those clients is shown to be a breach of Anderson’s fiduciary duty or involve the use of Elston’s confidential information. The relevant breaches would be:
(a)the implementation of a plan formulated prior to the cessation of employment to take the clients and business of Elston; or
(b)the use of wrongfully retained Elston information including contact information in order to implement that plan.
None of the clients or the persons behind those clients gave evidence. Elston’s contentions were based upon documentary records and inferences to be drawn from the circumstances. Each member of the subset of the Known Clients relied upon by the plaintiffs will be dealt with individually below. However, it is necessary to bear in mind that there are alternative possibilities for the circumstances in which each came to be a client of Wilsons.
First, the client may have been within the category of friends or family of Anderson. Although this category of persons was referred to in the evidence, the extent of this category was not explained in the evidence. It is therefore possible that a significant number of the clients who went to Wilsons were within that category. It is notable that on 29 January 2021 Anderson sent the email to Clement-Meehan, Ross and Bryant referred to at [131] above in which he stated that the only clients contacted were “friends and family”.
Similarly, on 3 February 2021 Taylor wrote to a representative of Judo Bank explaining the circumstances at the time and saying:
Since Tim’s departure from the prior AFSL on 1 Jan 2021, approximately $50m of FUM have requested that their services be terminated. A large minority of these clients are friends and family. The balance is pending to meeting his required post-employment obligations and restraints, to the extent they are legally valid, before joining our new practice.
Further, the category of persons who may be described as “friends” needs to be assessed in light of the fact that the business model involved the advisers having close, individualised contact with many of the clients in order to form relationships which established a bond between adviser and client likely to endure for the benefit of the business. That is, the category of “friends” may well include persons who had a relationship of “friendship” arising from the business connection. Thus, it is probably only friends who predated or were formed outside the context of Anderson’s Elston employment in relation to which the friendship might provide a basis for Anderson having their personal information or for being in contact with them other than for the promotion of the business of Elston.
Second, following Anderson’s departure, Elston, seeking to be “proactive”, contacted clients in order to tell them that Anderson had departed: see [94]. If those persons did not already know, then this may have been the trigger to make enquiries of Anderson if they wished to continue to have him responsible for the management of their money.
Third, Wilsons assisted to update Anderson’s LinkedIn profile and to give some publicity to the newly established presence of Wilsons in Canberra: see [147]-[148]. This may have been a source of knowledge to clients of Elston that Anderson had moved elsewhere.
Anderson’s contact with the subset of Known Clients relied upon by the plaintiffs is set out below.
Vik and Sumathi Sundar (V & S Sundar Pty Ltd (SOC 37.01))
On 18 January 2021 Sumathi Sundar sent an email to McLaughlan following a conversation the previous week (i.e. the week of 11-15 January 2021). The email included:
During our conversation last week, you had mentioned that you wanted me to sign a Form for Elston to continue managing my investments. After giving this much thought and in view of the Staff changes at Elston I have decided not to renew my engagement with Elston. Please could you suspend my Account and all fees until I provide instructions of where I will be transferring my Accounts too.
Thank you for the services you rendered all these years. It was much appreciated.
There appears to have been an email from McLaughlan to which Ms Sundar responded on 22 January 2021. She repeated that she had been grateful for the services that she had provided and again requested the relevant form. On 22 January 2021 McLaughlan responded. The same day Blumson sent Ms Sundar a termination letter.
On 2 February 2021 Vik Sundar sent a text to Anderson asking him to call Ms Sundar. He did so.
On 11 February 2021 Anderson emailed Ms Sundar and asked her to request a copy of her statement of advice from Elston and provide it to Anderson. That is consistent with Anderson going through the proper channels to obtain that client’s specific confidential information.
On 24 February 2021 Anderson again requested that Ms Sundar provide a copy of her most recent statement of advice.
Email correspondence in early March 2021 indicates that Anderson was still setting up the relevant accounts for the Sundars.
The evidence is not sufficient to establish that Anderson used Elston’s confidential information to obtain the Sundars as clients of Wilsons.
Susan O'Connor (S.M.P Holdings Pty Ltd (SOC 37.02))
Communications on a messaging app between Anderson and Susan O’Connor show that he was in touch with her from an early stage. On 5 January Anderson thanked her for her message and said “I’ll be in touch”. On 21 January Anderson asked for her email address and said he was going to “send you some stuff now”. She provided her email address. He responded “Thanks Susie. It’s on your email now. … Tom Mclaughlin [sic] will call you and try amd [sic] talk you out of it. He has been very pushy with some of my other clients. Stand firm. I will look after you come 1 February”.
On 23 January the two exchanged messages as follows:
Anderson: Hi Susie, did you get a response?
Anderson: From your email?
Ms O’Connor: Yes. Have form to fill out. So will call
Anderson: Ok. Give me a call Monday and I’ll help you fill it out.
On Wednesday 27 January 2021 Ms O’Connor emailed a termination letter which was dated 22 January 2021 to Blumson. The format of the letter is consistent with it having been pre-filled out by somebody at Elston and that is supported by the reference to an earlier email from Blumson on 22 January 2021.
On 18 February 2021 Anderson exchanged further messages with Ms O’Connor.
S.M.P Holdings Pty Ltd did not become a client of Wilsons.
The messaging app communications indicated that Anderson solicited Ms O’Connor and encouraged her to resist any attempts by Elston to retain her as a client from 5 January. It is not clear how Ms O’Connor came to get in contact with him or leave him the message to which he responded on 5 January.
Ferdinando and Lucia Lumbaca (Aggso Investments Pty Ltd (SOC 37.03) and Aggso Super Pty Ltd (SOC 37.04))
On 14 January 2021 Lucia Lumbaca wrote an email indicating that she and Ferdinando Lumbaca were aware that Anderson was no longer an employee of Elston and sought to have activity on all accounts suspended immediately. One minute after sending the email to Elston she forwarded a copy to Anderson saying “as discussed, please see below”, indicating that they had discussed the matter previously.
On 15 January 2021 an email was sent from Ferdinando Lumbaca confirming the instruction to suspend the accounts. On 15 January 2021 Anderson responded to a request from Lucia Lumbaca about a query from her accountant relevant to their self‑managed superannuation fund.
McLaughlan responded by email on 20 January 2021 indicating a trading halt had been put on the account with Elston and indicating that they needed to either continue or terminate their Elston service. This was immediately forwarded to Anderson. On 21 January 2021 Anderson provided precise advice as to and how to terminate the relationship with Elston and asked them for a copy of the most recent comprehensive statement of advice. 20 minutes later Lucia Lumbaca emailed Anderson a draft of her letter to Elston and Anderson approved its contents.
On 25 January 2021 Blumson sent letters to initiate the termination of the investments with Elston that needed to be completed and returned. This email was sent following the conversation between one of the clients and McLaughlan.
On 27 January 2021 the letters were returned to Elston. Also on that day, Ferdinando Lumbaca emailed a query arising from his change of jobs to Anderson and Anderson responded the next day.
In March 2021 Anderson asked Lucia Lumbaca to follow up with McLaughlan as to whether or not there was a hold-up with transferring certain accounts to Wilsons.
By the end of April 2021, Anderson provided a summary of the clients’ financial position including some confidential information redacted from the exhibit. That evidence is consistent with the transfer process having been completed by that time.
Having regard to the terms of the communications on 14 January, although he did not initiate the contact, I infer that Anderson had a discussion with Ferdinando or Lucia Lumbaca. It is clear that he was assisting and thereby encouraging them to terminate their relationship with Elston and move to Wilsons.
Lara Hall (Lah Investments Pty Ltd (SOC 37.05) and Laras Super Pty Ltd (SOC 37.34))
On 7 January 2021 Anderson contacted the lawyer acting for Lara Hall in relation to a difficulty that had arisen because Papandrea (who had been charged by police) was the appointor of her trust. Anderson provided information as to who to contact at Elston to address the issue. This appears to have occurred because Anderson was a trusted point of contact for Ms Hall and was prepared to assist to the extent that he did by pointing Ms Hall’s lawyer in the right direction.
It is clear that McLaughlan had emailed Ms Hall giving her notice of Anderson’s resignation. She then consulted Anderson. Anderson advised her on 15 January 2021 to send an email to Elston asking them to suspend trading on her portfolios in terms that he had drafted. The email commences: “Hey Lara, Next step re Elston. Can you please copy and paste the below and send it in an email to Tim Mclaughlan (but delete my email, that is don’t forward it on). I’m uncomfortable with them trading on your account while I am not there”. The draft letter included as part of the email was addressed to McLaughlan and commenced: “Hi Tim [McLaughlan], Thanks for the update about Tim’s resignation…” These aspects of the email suggest that McLaughlan contacted Ms Hall advising of Anderson’s resignation. Either she contacted Anderson or Anderson contacted her subsequent to that. That led to Anderson encouraging her to transfer her business to Wilsons.
On 25 January 2021 Anderson sent an email to Lara Hall saying that “you can email Elston now and let them know you will be changing providers and request they send you a termination letter to complete”. He warned her that McLaughlan would try to talk her out of it and may be pushy. He advised her to be firm and told her that she did not need to disclose where she was going.
On 27 January 2021 Ms Hall emailed McLaughlan saying “As you know I have been considering my options with relation to my portfolios that are currently with Elston.” She said that she had made a decision “to move my portfolios to a different provider” and sought that a letter of termination be sent to her. McLaughlan responded with an email querying why she was moving and expressing concern “that someone may be encouraging you to be dishonest on their behalf”. He requested an opportunity to talk about alternatives that she was considering. He nevertheless indicated that he had arranged to have the termination letters prepared and sent to her. The same day, Blumson prepared the termination letter and sent them to Ms Hall for completion.
The DCF method involved construction of estimates of future revenue for a number of years in advance. This allowed, and readily exposed for scrutiny, adjustments made for future years from the historically available figures. Because of the potential across a wide range of inputs for adjustments to be made from historical figures, it provided a range of ways in which the cash flows for future years and hence the valuation may be affected. Those assumptions were, however, directly stated.
The FME method allowed “normalisation” of earnings, that is the exclusion of abnormal expenses or income so as to determine what the earnings would be in a normal year in the future. After that was done, the key element of the process was the selection of the multiple to be applied to those normalised earnings. This was done by reference to those of comparable companies and adjustments to make the figures for comparable companies applicable to the company in question. This exercise involves a great degree of professional judgment as to how to treat the range of multiples indicated by comparable companies and the extent of adjustment that needed to be made to take account of the differences between the comparable companies and the subject company. It is within those adjustments that all uncertainties as to the future are contained. While those uncertainties may be described in general terms, the consequences of any particular uncertainty are not exposed and a single figure must ultimately be chosen which is simply an exercise of professional judgment.
Principal areas of contention
In addition to preparation of initial reports, the experts prepared a joint statement which identified areas of agreement and disagreement. They also gave oral evidence which further elaborated upon their areas of disagreement. Some of the significant areas of disagreement are described below.
Relevance of valuation methods: The experts disagreed on what market participants use in the valuation of companies. Mr Clifford said that he had never valued such a business using the DCF method as part of a bank’s credit procedures, nor had he received such a valuation from a prospective purchaser. Mr Phillips said that it was used. In this case, the Parker Financial offer made to Elston was based upon a multiple of earnings before income and tax (EBIT), more consistent with the approach of Mr Clifford than Mr Phillips. In the absence of further evidence, it is not possible to reach a conclusion about which methodology is more used in the marketplace. The FME methodology has the benefit of simplicity. The DCF methodology appears better able to accommodate future uncertainties and the potential for a business to be run differently under its new owners.
Annual revenue growth and the inclusion of staff incentives: In relation to Mr Phillips’ DCF methodology, one of the components of his projections for future year earnings was the growth of Elston’s revenue at 13 percent.
In arriving at a figure in relation to projected revenue growth, one issue was the consequence of the acquisition of Dragonfly Financial Services in 2018 resulting in an increase in adviser fee revenue in 2019. Another was how to deal with abnormally high referral payments in the 2018 financial year. In his revised calculations, Mr Phillips adopted a year-on-year revenue growth rate of 11 percent. Mr Clifford was of the opinion that if the consequences of the referral payment and the Dragonfly acquisition were removed (and hence the revenue figures normalised) the revenue growth was approximately 8.5 percent.
Another significant component of Mr Phillips’ DCF methodology was the exclusion of the cost of bonuses and DEEP incentives from the expenses of the business. He did this because he considered that these were discretionary payments. Mr Clifford thought it was appropriate to include them because they had been paid in the past and were common in the financial services industry. In the event that they were to be included, Mr Phillips pointed to their variability and thought that if they were to be included, they should be done in a way that resulted in the total adviser costs being equivalent to those paid by other businesses.
During the course of his evidence, Mr Phillips had prepared alternative valuations which were based upon revenue growth of 11 percent and the payment of bonuses at 37.1 percent of the adviser wages and superannuation costs. These two figures were averages taken from six different financial advisory firms that he had valued in 2021. For staff bonuses, the combination of wages, superannuation and bonuses was on average 37.1 percent of the revenue of such businesses. It was for that reason that in preparing an alternative calculation, he included an adjustment to the adviser costs that resulted in them being 37.1 percent of revenue rather than a figure based on that which had been paid by Elston in any particular year. With these adjustments to staff costs and revenue, the difference in value between 2020 and 2021 was substantially reduced (from $4.5 million to $2.9 million).
Adjustment for key person risk: Mr Phillips incorporated key person risk into his valuations by making specific adjustments to anticipated future revenue as well as by applying a higher discount rate in 2021. Mr Clifford contended that this involved double counting, although he ultimately accepted in cross-examination that depending on the adjustments made, it may not involve double counting even if it was not an approach that he himself would take.
So far as the first kind of adjustment made by Mr Phillips is concerned, he incorporated in his projected figures for the 2022 and 2023 financial years’ loss of revenue from additional clients that would be lost by Elston of $400,000 and $300,000. He included these figures because he considered that Anderson and Taylor would have a strong incentive to build up their Wilsons business so that it generated similar revenue to that which had supported them at Elston. Built into his assumption was that they were employees and had a 50-50 revenue split with their employer. He was not aware that Anderson and Taylor would operate via a CAR which had an 82.5 percent:17.5 percent revenue split. It was suggested that because of the increased proportion of revenue applicable to Anderson and Taylor, this would reduce the incentive for them to acquire more of Elston’s clients. However, the issue was not explored in cross-examination sufficiently to determine whether any change to Mr Phillips’ figures was necessary. That is because, in contrast to the position of employees, the CAR arrangement places responsibility for the expenses of the business on the adviser, hence justifying a greater proportion of revenue. As a consequence, it was not clear whether this issue would affect Mr Phillips’ assumptions about the motivation for Anderson and Taylor to take more business from Elston.
Revenue figures in 2021: In Mr Clifford’s assessment of the value of the business in 2021 he used the revenue figures for the 2020 year as the starting point and then adjusted them, rather than using the actual figures achieved in 2021. He did this because there was a decline in revenue which he could not explain. The drop in revenue was greater than the $531,000 of revenue earned by Wilsons from clients taken from Elston. The drop in revenue was identified by Mr Clifford as approximately $217,000. Mr Phillips considered it more appropriate to use the actual 2021 figures. The use of actual 2021 figures would capture losses arising not simply from the actual loss of customers who were taken by Anderson but would also capture any disruption to the business arising from the departure of Anderson.
Using adjusted 2020 revenue figures, Mr Clifford assessed Elston’s FME as $900,000. Mr Phillips on the other hand assessed it at $713,296. Had Mr Clifford instead of using his $900,000 figure used $713,296, then this would have altered his 2021 value from $3.8 million to $3 million. That in turn would have meant that the difference between his 2020 and 2021 valuations would have been $2.4 million, much closer to Mr Phillips’ revised figure of $2.9 million. If the halfway point between their FME figures ($806,000) is adopted in order to recognise that some of the reduction may reflect short-term factors which may require “normalisation” but others reflect long-term factors, then the resultant 2021 value would be $3.4 million and the difference between 2020 and 2021 value would be $2 million.
Comparable companies for FME method: The FME method is very much dependent upon the selection of comparable companies in order to arrive at an appropriate EBIT multiple. The businesses relied upon as comparable businesses by Mr Clifford were not very comparable, having regard to their size and the nature of the financial services that they provided. The multiples which they generated covered a wide range and it was not clear whether simply selecting the mean and median ranges of those multiples provided an appropriate starting point for the valuation exercise. It was on the basis of these mean and median figures that adjustments were made to take into account “size and business risk factors” and a premium for control of the whole business. So far as the latter was concerned, the adjustment for a premium for control appeared to have an empirical basis. The adjustment made for “size and business risk factors” is dealt with next.
Extent of adjustment for the EBIT multiple: Determining an EBIT multiple was central to the FME method of valuation. The adjustment for “size and business risk factors” was an adjustment which involved a significant component of untestable professional judgment. What is particularly notable is that the extent of the discounts required from EBIT multiples of the notionally comparable businesses was so great (62.5 percent in 2020 and 72.5 percent in 2021) that they indicate that the entities said to be comparable were not truly comparable and that the selection of an EBIT multiple was simply a figure based upon an untestable exercise of judgment. Modest changes to the discount applied for size and business risk would significantly change the valuation. For example, if, in relation to the 2020 valuation, instead of a discount of 62.5 percent for “size and business risk factors” as applied by Mr Clifford, a discount of 57.5 percent was used, then value of the business using Mr Clifford’s method would be $5.92 million and the difference between that and the 2021 value would be $2.1 million rather than the $1.6 million that he assessed it at. An adjustment of the discount by greater than the 5 percent given in this example, or adjustments to both the 2020 and 2021 discounts, have the potential to dramatically affect the overall outcome. Given that the extent of discounts for “size and business risk factors” are between 62.5 percent and 72.5 percent, this example illustrates the sensitivity of this method to contestable exercises of judgment. The application of a “check method” based on recurring revenue multiples for clients with different demographic and financial features also results in a single recurring revenue multiple which is based upon an exercise of judgment. It does not significantly reinforce the validity of the exercise of judgment with the FME method.
Conclusions on valuation
In my view, the downward adjustments contained in Mr Phillips’ revised figures were clearly appropriate. They were the adjustments to reduce the anticipated growth rate from 13 percent to 11 percent and to allow a mechanism for taking into account bonuses and incentive schemes. As far as the change from 13 percent to 11 percent is concerned, that was in order to remove the effect of the Dragonfly acquisition and the anomalously large referral payment made in 2018.
So far as the staff incentives were concerned, it was appropriate to include as a business expense the ongoing need to make incentive payments in order to retain staff and continue generating the revenue of the business. Mr Phillips’ method of adjustment had a reasonable basis having regard to the overall employee expenses of other businesses. While the method of adjustment did not specifically give effect to the incentive structure adopted by Elston or any differences between its adviser model and the model to be adopted by an acquirer of the business, it provided a reasonable basis for addressing this issue having regard to the fact that an acquirer may not continue all of Elston’s practices.
The incorporation of these amendments reduced the difference between the value of the business in 2020 and 2021 from $4.5 million to $2.9 million. The downward adjustment of the projected growth left the difference between Mr Phillips and Mr Clifford as 11 percent versus 8.5 percent. The consequences of applying Mr Clifford’s 8.5 percent to the valuation exercise undertaken by Mr Phillips were not the subject of evidence. It is not possible, having regard to the complexity of the valuation exercise, for the court to assess the consequences for itself.
Each of those valuations incorporates within it exposed or unexposed contestable assumptions. As just noted, the nature of Mr Phillips’ valuation is such that it is not readily possible for the court to test the sensitivity of the valuation to different inputs. On the other hand, given the dependence of Mr Clifford’s valuation upon the selection of a multiplier, it is readily apparent how sensitive his valuations are to minor adjustments in the multiplier or to the ongoing EBIT figure to which they are applied.
Ultimately, the matter is to be resolved on the basis that Wilsons bears the onus of proof on this issue. There are some uncertainties surrounding the inputs to the valuation exercise undertaken by Mr Phillips. There are clear difficulties with the lack of transparency in the assessment of the EBIT multiples adopted by Mr Clifford. I cannot say on the balance of probabilities that the $2.9 million assessed in Mr Phillips’ revised calculations represents the difference in value between 2020 and 2021. In those circumstances, the assessed difference in value of $1.6 million arrived at by Mr Clifford represents a floor on the assessed difference. In my view, that needs to be adjusted so as to better reflect the actual revenue figures from 2021. The adoption of the 2020 revenue figures would be appropriate if the sole aim of the exercise was to assess the drop in value arising from the loss of $531,000 of revenue from the clients who left Elston and went to Wilsons. However, in the present case, the consequences of Anderson’s conduct are more likely than not to have extended beyond the mere loss of revenue. The evidence discloses substantial disruption to the activities of the remaining staff arising from the loss of or threat of loss of clients. No other explanation is provided for the reduction in revenue. However, given the lack of analysis of the reasons for the 2020 decline, it is not possible to say that the whole of the difference is attributable to longer‑term factors that should be reflected in the assessment of FME.
In those circumstances, I consider that it is appropriate to only accept that a part of the drop in revenue should be reflected in the assessment of FME. My approach is therefore to:
(a)start with the 2021 EBIT figure arrived at by Mr Phillips of $713,296;
(b)determine the difference between that and the EBIT figure of $915,000 that Mr Clifford used to arrive at the FME figure of $900,000, namely, (in round terms) $200,000;
(c)attribute half of that difference to short-term factors which should not be reflected in the FME and half of that to longer-term factors which should be reflected in the FME; and
(d)therefore, calculate the FME based on a figure of $806,000 rather than the $900,000 used by Mr Clifford.
That gives a 2021 value of approximately $3.4 million ($815,000 x 4.25) and a difference between the 2020 and 2021 value of $2.0 million ($5.4 million - $3.4 million) Given the uncertainties in the inputs into the various methods adopted by the valuers, I cannot be satisfied on the balance of probabilities that the difference in value of the business was greater than $2.0 million.
Had it been necessary to do so, Elston's loss would have been assessed at $2.0 million.
Proportionate liability
Wilsons submitted that the plaintiffs’ claim was an apportionable claim for the purposes of s 107B of the Civil Law (Wrongs) Act 2002 (ACT). This is an issue which it would only be necessary to determine if an award of equitable compensation was to be made. However, as part of the contingent assessment of that issue, it is appropriate to address that submission. Section 107B defines apportionable claim as including “a claim for economic loss or damage to property in an action for damages (whether in tort, under contract or otherwise) arising from a failure to take reasonable care”. Wilsons accepted that no case has recognised an accessory’s liability as apportionable under State or Territory legislation. Despite this, it submitted that if the court found that, upon the receipt of the due diligence material which was inadequately redacted, Wilsons had “failed to take reasonable care in responding to the breach” then Wilsons’ liability should be proportionally limited to the loss or damage flowing from that failure to take reasonable care and not every other breach by Anderson.
I do not consider that the loss suffered by Elston arose from a failure on the part of Wilsons take reasonable care. Rather, it was caused by Anderson’s breach of fiduciary duty in relation to which Wilsons knowingly assisted. It is not open, in order to attempt to make the statute apply, to recharacterise the knowing assistance as a failure to take reasonable care. If that were permissible, then the source of liability in almost any claim could be recharacterised in that way and the terms of the definition, limiting the category of cases in which apportionment is available, would be largely defeated by that recharacterisation process. This conclusion appears to be consistent with the approach taken in George v Webb [2011] NSWSC 1608 at [325] and Cassegrain v Cassegrain [2016] NSWCA 71 at [84]. See also Alison Gurr, ‘Accessory Liability and Contribution, Release and Apportionment’ (2010) 34 Melbourne University Law Review 481 at 514.
Having said that, the substantive point made by Wilsons, that Wilsons’ liability should be limited to any loss or damage flowing from the use of the due diligence material and not every other breach by Anderson, is a good one and forms the basis for my conclusion above that no order for compensation should be made.
Joint or several liability
Wilsons made a submission that the liability of a knowing assistant in Wilsons’ position was several and not joint and several with the liability of Anderson. It referred to the useful summary of the authorities by Stevenson J in Edgewater Homes Pty Ltd v Donohoe [2019] NSWSC 44. No submissions were made as to the consequences for any orders that might have been made in this case of several or joint and several liability of Wilsons with Anderson in light of the judgment against him. Having regard to the conclusion that I have reached, it is not necessary to pursue this issue further.
Order
Having regard to the conclusion above at [499] that Elston’s claim must be dismissed, the orders of the Court are:
1. The plaintiffs’ claim against the second defendant is dismissed.
2. The plaintiffs are to pay the second defendant’s costs of the proceedings.
3. Order 2 does not take effect for 14 days and if any party notifies the associate to Mossop J by email (copied to each other party) that it wishes to be further heard in relation to costs, order 2 does not take effect until further order of the Court.
| I certify that the preceding five hundred and thirty‑seven [537] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Mossop Associate: Date: 2 September 2022 |
Amendments
| 2 September 2022 | Replace “I Meagher” with “J Moffett” | Page 2, “Representation: Counsel” |
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