Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari

IN THE COURT OF APPEAL	99.230
SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1998

Brisbane

[Ferrari & Anor v Ferrari Invest (T'ville) P/L (In Liq)]

BETWEEN:

ALAN FULVIO FERRARI and
CHRISTINE MARGARET FERRARI

(First Defendants) First Appellants

AND:

FERRARI MANAGEMENT SERVICES PTY LTD
ACN 010 774 060

(Third Defendant) Second Appellant

AND:

FERRARI INVESTMENT (TOWNSVILLE) PTY LTD
(IN LIQUIDATION) ACN 010 110 979

(Plaintiff) Respondent

MONFERRATO PTY LTD
(Second Defendant)
Pincus JA
Thomas JA
Shepherdson J

Judgment delivered 22 June 1999.

Separate reasons for judgment of each member of the Court; Pincus JA dissenting.

APPEAL DISMISSED. CROSS-APPEAL ALLOWED AND JUDGMENT BELOW INCREASED TO $150,000 DAMAGES WITH INTEREST AMOUNTING TO $123,750. APPELLANTS TO PAY THE RESPONDENT'S COSTS OF THE APPEAL AND THE CROSS-APPEAL TO BE TAXED.

CATCHWORDS:	CORPORATIONS LAW - MANAGEMENT AND ADMINISTRATION - DIRECTORS AND OTHER OFFICERS - FIDUCIARY POSITION - BREACH OF DUTY AND MISFEASANCE PROCEEDINGS - transfer of company's rent roll in breach of fiduciary duty - remedy - equitable compensation - whether damages to be assessed by analogy with common law (hypothetical sale as per Spencer v The Commonwealth of Australia (1907) 5 CLR 418) or according to value in the hands of wrongdoer - duty of directors not to compete against interests of company in business involving rent roll - statement in Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508, 524 reconsidered - remedy of equitable damages
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1975) 133 CLR 331 Attwood v Lamont [1920] 3 KB 571, [1920] 3 AllER 55 Commissioner of Taxation v Murry (1998) 72 ALJR 1065 Johnson v Agnew [1980] AC 367 Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508 Mordecai v Mordecai (1988) 12 ACLR 751, (1988) 6 ACLC 370, (1988) 12 NSWLR 58 Nocton v Lord Ashburton [1914] AC 932 Re Dawson [1966] 2 NSWR 211 Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779 Spencer v The Commonwealth of Australia (1907) 5 CLR 418
Counsel:	Mr P Keane QC, with him Mr D Savage, for the appellants. Mr M Martin for the respondent.
Solicitors:	Connolly Suthers for the appellants. Crosby Brosnan & Creen for the respondent.
Hearing Date:	8 March 1999

IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1998

Brisbane

Before Pincus JA
Thomas JA
Shepherdson J
[Ferrari & Anor v. Ferrari Invest (T'ville) P/L (in Liq)]
BETWEEN:

ALAN FULVIO FERRARI and
CHRISTINE MARGARET FERRARI

(First Defendants) First Appellants

AND:

FERRARI MANAGEMENT SERVICES PTY LTD
ACN 010 774 060

(Third Defendant) Second Appellant

AND:

FERRARI INVESTMENT (TOWNSVILLE) PTY LTD
(IN LIQUIDATION) ACN 010 110 979

(Plaintiff) Respondent

MONFERRATO PTY LTD

(Second Defendant)

REASONS FOR JUDGMENT - PINCUS JA

Judgment delivered 22 June 1999

I have had the advantage of reading the reasons of Thomas JA in which the issues in this
difficult case are explained. The question is whether the primary judge correctly assessed the
amount of compensation the respondent company (Investment) should receive for the breach of
fiduciary duty on the part of the first appellants (Mr and Mrs Ferrari) in transferring Investment's letting business called the "rent roll" to the second appellant (Management). According to
Mr Ferrari's statement, Exhibit 15, many of the landlords had a personal connection with
Investment’s letting business, being "either myself, staff members, family and close friends or
extremely loyal clients that would have stayed with me". He also said that most of the landlords
would have continued to deal with Coleen Foster, who had been employed as property manager
of Investment, but accepted employment with Management. Mr Ferrari's statements about these
matters were not challenged in cross-examination. The judge did not, however, accept the
argument that because of the facts just mentioned, and others, the letting business had practically
no value. The basis of that argument was that company directors' fiduciary obligations do not go
so far as to oblige them to support or add value to the company by entering into personal covenants.
The judge's view was that Investment could have sold the letting business for $150,000, but
only if certain conditions were met. His Honour indicated their content:
"By far and away the most important consideration seems to be whether the contract for the sale of the rent roll contains a restraint of trade clause, or at least whether the circumstances of the sale are such that it can confidently be assumed that the principal of the vendor will present no competition to the purchaser, as, for example, if the principal is retiring, leaving town and ceasing to carry on business. Other factors which can be relevant are whether the vendor is providing assistance to the purchaser after the transaction, whether the vendor's staff are transferring to the purchaser, the degree of personal following which the principal of the vendor had attracted to the list which constituted the roll, and the question whether the contract contained any clause providing for reduction of price or rebate in respect of landlords who might withdraw their custom within a period of say, three or six months immediately after the transaction".
The judge assessed compensation on the basis that $150,000 was the figure attainable on a sale in
relation to which the factors set out in the passage I have quoted were "favourable". That figure was
discounted by 30% to take account of the fact that on the relevant date, 1 July 1997, "all these
factors were not optimal".
The appellants argued that the discount of 30% was too low and should perhaps have been
100%. They invited this Court to accept the assumption, to assess the proper value, that the
business would have been sold without the Ferraris undertaking any personal obligation; that is
what the primary judge did. His Honour did not assess on the basis that the Ferraris would
undertake not to compete; but he thought that competition, on the part of the Ferraris, with the sold
business would to some extent have been restrained by injunction. His Honour proceeded on the
footing that the Ferraris would not have accepted personal contractual restraint, although they were
themselves the parties in breach of fiduciary obligations and also were the persons in control of
Investment, which owned the letting business. That was the proper approach, since Investment's
complaint was that it had lost the value of the business, not the value of any promises to be made
by the Ferraris.
There is, in my respectful opinion, much force in the appellants' submission that the primary
judge did not make sufficient discount from the gross figure of $150,000. As I have pointed out,
his Honour postulated a sale in which the Ferraris made no promises. That would have been a sale
in which a purchaser could have been confronted with competition from such an entity as
Management, the company which the Ferraris in fact established to take over the letting business.
That competition might have been able to be enjoined, to an extent which a purchaser's legal
advisers would have found difficult to define, for example by taking proceedings against the Ferraris
if they solicited business from the old customers. I cannot, with respect, agree that the hypothetical
sale should be examined on the assumption that the Ferraris would have become directors of the
purchaser for a considerable period after the sale, thereby leaving themselves vulnerable to a suit restraining them, as directors, from competing; it was on that basis that the primary judge
proceeded in lessening the extent to which the hypothetical purchaser would need to be concerned
about competition from the Ferraris. This, in my opinion, vitiates his Honour's assessment and
makes it necessary for this Court to make up its own mind about the proper amount.
It appears to me that if compensation is fixed as the figure likely to be attained in a sale with
no co-operation other than by the Ferraris executing the necessary assignments, a lower amount
than the judge awarded must be the result. Having no promise from the Ferraris to act otherwise,
a prudent purchaser would have good reason to fear an outcome resembling that which was in fact
achieved by the Ferraris' establishment of Management: that the business would be successfully
carried on by a new entity controlled by the Ferraris with the assistance of the property manager
and perhaps other staff, and in the very same premises in which Investment had conducted the
business. The evidence was that the Ferraris owned those premises and so a purchaser would
probably have had to establish an office elsewhere.
The case is about the value attainable on a sale of goodwill, a concept recently analysed by
the High Court in Federal Commissioner of Taxation v. Murry (1998) 193 CLR 605. In the
principal judgment it is explained that:
" . . . goodwill is really a quality or attribute derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business". (611)
"Goodwill is correctly identified as property . . . because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it . . . The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it". (615)
Some of what might be treated as goodwill of an entity, such as relations with its staff, may be affected by a takeover or sale of the business conducted. The Court refers to goodwill as the product of combining and using the assets of the business so that custom is drawn to it. "Human
assets" are included in this concept and that accords with commercial reality; a business might have
substantial value, over and above its physical assets, in the quality of its staff. That idea has
relevance here where, according to the evidence, the people who worked for Investment, and
especially Mr Ferrari and the property manager Coleen Foster, were important advantages the
business possessed. Those "human assets" would be at risk in a sale of the letting business to an
outsider.
The business was worth more as it was being run by Investment than the figure which could
have been achieved on sale on the open market, which would have produced the difficulties about
protection from competition which constitute one of the main problems in assessing compensation
in this case. A solution which is suggested by the reasons of Hope JA in Mordecai v. Mordecai
(1988) 12 NSWLR 58 is to consider only the value on the sale to the directors guilty of the breach
- i.e., in the present case, to Mr and Mrs Ferrari. The advantages of this concept are explained by
Hope JA:
"The business was of unquestioned value to Morpak, and it was not to be expected to give it away. Moreover the appellants, being directors of Morpak, could not canvass Morpak's customers for themselves . . . [i]f, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them and as the position stood when they took the business from Morpak, the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them". (69)
This is not a case in which the Ferraris would have been the only possible purchasers.
The second approach discussed by Hope JA in Mordecai was to fix compensation at the
figure which a court would have approved, treating the purchasers, being the persons in the position
of the Ferraris, as trustees. Hope JA remarked:
"That approval would have required evidence that the purchase price was a proper price, not diminished by the matters relied upon by the appellants to support the claim that the goodwill was valueless in Morpak's hands". (71)
The approach just mentioned was that which Hope JA in fact adopted, requiring the appellants in
that case to pay an amount assessed -
". . . by reference to the value of the goodwill of the business, determined upon the basis of what they would have had to pay had they obtained it lawfully from Morpak". (71)
A rather similar situation would have arisen if, a liquidator or provisional liquidator having been
appointed, the Court's direction was sought as to a proposed disposition of the letting business to
Management, at what was asserted to be a proper price. That hypothesis is in the present case
(where Investment was at material times insolvent and ultimately went into liquidation) closer to the
facts than the sort of approval discussed in Mordecai.
It would have been advantageous, from the point of view of the creditors of Investment as
well as that of the Ferraris, if such a sale could have been effected, at a proper price. A proper
price would have been a greater sum than could be achieved by a sale in the open market, because
of the special value of the property to a company, such as Management, in the control of the
Ferraris. But a proper price would not in my respectful opinion have been one which ignored the
advantages which the Ferraris personally had in their ownership of the premises, connection with
the existing staff and particularly with the property manager, and personal following.
All of these were assets which Investment had been able to use, but were not assets of
which it could dispose. I favour an approach based upon the one taken in Mordecai; but I reach
a different result from that adopted in that case. I do so because of my opinion that a fair negotiated
price would take into account, not only the advantages to the Ferraris of arranging to purchase a
business already in their control, but also the advantages to Investment of making such a sale, rather
than having to accept a substantially lower figure by sale to a purchaser controlled by people other than the Ferraris. I think the probability is that a compromise figure, reflecting the bargaining
strength and interests of the parties, would have been reached - one between the open market value
and the value which the business would have had in the hands of a company such as Management.
The appellants say there are significant differences between Mordecai and this case, which

justify the Court declining to apply the method used there. I find it unnecessary to decide whether that

is so, but am satisfied that to allow the "undiscounted" figure, as was done in Mordecai, would in the

present case be to fix a price for the hypothetical sale well above that which would in reality have been

achievable. And I can see no warrant in principle for making the appellants pay, by way of

compensation, more than a realistic value, or for making them pay a value which treats their personal

goodwill as an asset of Investment. True compensation restores to Investment the proper value of its

business and has no punitive component.

There is no point in sending the case back for a reassessment; precision, in this

situation, is an illusory goal. I would allow the appeal with costs, by reducing the assessment from $105,000 to $75,000 and would make a consequential adjustment in the interest allowed. I would dismiss the cross-appeal with costs.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1998

Brisbane

Before:

Pincus JA
Thomas JA
Shepherdson J

[Ferrari & Anor v Ferrari Invest (T'ville) P/L (In Liq)]

BETWEEN:

ALAN FULVIO FERRARI and
CHRISTINE MARGARET FERRARI

(First Defendants) First Appellants

AND:

FERRARI MANAGEMENT SERVICES PTY LTD
ACN 010 774 060

(Second Defendant) Second Appellant

AND:

FERRARI INVESTMENT (TOWNSVILLE) PTY LTD
(IN LIQUIDATION) ACN 010 110 979

(Plaintiff) Respondent

MONFERRATO PTY LTD

(Second Defendant)

REASONS FOR JUDGMENT - THOMAS JA

Judgment delivered 22 June 1999

Ferrari Investment (Townsville) Pty Ltd (In Liquidation) ("the original company") successfully

sued its directors (Mr and Mrs Ferrari) and Ferrari Management Services Pty Ltd ("the new company")

which Mr and Mrs Ferrari incorporated and operated from the time when the original company ceased

to carry on business. A third company was also sued, but it plays no part in the present appeal.

Judgment was given for $105,000.00 plus interest.

The appellants (the directors and the new company) have appealed against the judgment in

favour of the respondent (the original company).

The original company was a licensed real estate agent whose business included the earning of

commission from letting property for clients. The asset represented by the goodwill of such clients was

referred to at the trial as that company's "rent roll". By June 1987 the original company had become

insolvent. The new company was then incorporated by the directors. From 1 July 1987 the original

company ceased business and the new company commenced business as a real estate agent, continuing

to act as commission agent for clients who had previously rented their property through the original

company, and using the original company's rent roll.

The directors were the sole directors and shareholders of the companies at all material times.
They traded by means of the new company for a period of almost two years before the original

company was placed in liquidation, remaining directors of both companies.

It was ultimately conceded by the directors at trial that the transfer or gift of the rent roll to the

new company was in breach of their fiduciary duty to the original company. The new company was of

course the knowing beneficiary of that breach of duty. The relief pursued by the original company was

equitable damages or compensation, and it may be taken to have elected not to seek an account of

profits in respect of subsequent dealings with the asset in question.

The learned trial judge assessed damages by analogy with common law principles, with the

object of putting the original company into the position in which it would have been had the wrongful

abstraction of the rent roll not occurred. The trial judge rejected the original company's submission that

as the new company had acquired the asset as a constructive trustee, it was the value of the asset in the

new company's hands that should govern the level of compensation.

At trial, the valuers for both parties agreed, on the assumption that co-operation would be

forthcoming from the directors to the extent that they would give adequate assurance to a potential

purchaser of the rent roll that they would not compete or cause others to compete with the purchaser,

that the rent roll could be sold for a price based on $1.50 for each $1.00 of commission payable by

landlords whose names appeared on it. On the above favourable assumption, $150,000.00 was

calculated as the market value of the asset. The relevant market seems to have been regarded as letting

properties for clients in the Townsville area. Most of the trial was taken up with questions concerning

whether such an assumption ought to be made with respect to the hypothetical sale of the asset. In

particular, Mr Ferrari gave evidence that he had received legal advice that he was not bound to give

undertakings that would restrain his activities in these ways, and that he would not have given them; nor

would he have offered assistance after sale to a prospective purchaser. On that basis, the valuer called

on behalf of the defendants opined that the value of the rent roll would be purely speculative, and

possibly nil.

The learned trial judge approached the hypothetical sale of the asset on the footing that the

directors could not have been forced to sign a restraint of trade clause, but that a court of equity would

have enjoined them from carrying on competitive business (i.e. business derived from use of the rent roll)

for a reasonable period into the future. Further, his Honour stated that whilst such a protection would be regarded by a hypothetical purchaser as less favourable than an express restraint of trade clause

signed by directors, it would have been regarded as a substantial protection. Accordingly his Honour

applied a 30 per cent discount to the market value figure of $150,000.00 as at the date of abstraction

of the asset, arriving at a figure of $105,000.00.

Apparently no interest was allowed between that date and the issue of the writ (March 1990),

but interest at 10 per cent on the above sum was allowed between the date of issue of the writ and

judgment (a further $85,622.94).

The appellants (the directors and the new company) challenge this assessment, contending that

it should be set aside and replaced with a nil assessment or alternatively a small or nominal assessment

not exceeding $5,000.00. The respondent (the original company) has filed a notice of contention

disputing the discount allowed by his Honour and contending that the damages should be $150,000.00,

and that interest should accordingly be adjusted upwards.

Appellants' challenge to his Honour's assessment

The trial judge's assessment proceeded on the footing of market value assessed by a

hypothetical sale such as that envisaged in Spencer v The Commonwealth of Australia[1]. On that

basis the value of the asset would be the amount which might be expected to be realised from a willing

purchaser for such property sold in the open market by a willing though not over-desirous seller. The

assumption is that each party is equipped with knowledge of existing relevant circumstances.

[1] (1907) 5 CLR 418, 432, 436; cf Deputy Federal Commissioner of Taxation v

Gold Estates of Australia (1903) Limited (1934) 51 CLR 509, 515.

Counsel for the appellants, Mr Keane QC, challenged the assumption made by his Honour that

a potential purchaser could have been told that there would be a reasonable period during which the

directors were not entitled to compete with the purchaser, and during which they would be unable to

use the information contained in the rent roll for their own benefit. He also challenged his Honour's view

that had the rent roll not been wrongfully abstracted from the original company's assets, the directors

would have been under a duty to refrain from carrying on competitive business against the interests of

the original company whether or not it had continued to trade.

Counsel for the appellants submitted that the question whether the directors could have been

precluded from competing with a purchaser of the rent roll was altogether different from the question

whether the directors could compete against the original company. Even if the questions can be tidily

separated in this way, I do not think that they should be given different answers. If the directors were

not permitted to enter into competition with the original company, they would not personally be able to

compete in the relevant market. It is true that the original company was insolvent and could not at that

point continue trading. But it continued to exist and was capable of revival. Moreover the issue is the

notional sale of an asset that was wrongfully taken from the original company. It is in my view

unacceptable to look at the notional sale as if the original company no longer existed and as if no duty

existed to use or deal with the rent roll for the advantage of the original company. The limited picture

presented by counsel for the appellants, which shows no more than the directors personally dealing with

third parties to whom they owed no fiduciary duty, overlooks the fact that they were dealing with

company property which they had misappropriated and in respect of which they continued to owe

fiduciary duties to the company. In an equitable assessment, that fact should surely be projected into

the hypothetical sale.

It is also possible that in circumstances like the present, the hypothetical sale should be simplified

into one which entirely eliminates the position of directors and their particular attitudes. As Hope JA

observed in Mordecai v Mordecai[2]:

"It may also be that if the vendor is, for the purposes of the hypothetical sale, truly hypothetical, the position of directors of an owner-company is also to be ignored, for they would have had no position in and would thus have derived no advantage from an association with the hypothetical vendor with which they would have had nothing to do. The hypothetical purchaser could be adequately protected by the hypothetical vendor.[3]"
[2] (1988) 12 ACLR 751, (1988) 6 ACLC 370, (1988) 12 NSWLR 58. References will be to the NSWLR report.
[3] Ibid p.69.

I therefore do not accept that the above submissions invalidate his Honour's assessment.
It was further submitted for the appellants that although they at material times retained their

directorships in the original company, they could have at any time resigned. The submission proceeds

that after resignation the directors would have been under no obligation to abstain from competing with

the original company. To support this, the appellants referred to Attwood v Lamont[4] and Amoco

[4] [1920] 3 KB 571, [1920] 3 All ER 55.

Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [No 2][5]. It was submitted that no

[5] (1975) 133 CLR 331.

court of equity would restrain the appellants as former directors from using knowledge of the client base

of the original company if they elected to enter into competition with it, citing Rosetex Company Pty

Ltd v Licata[6]. These submissions rather overstate the rights of directors in such a situation. Duty to

the company does not cease at the point of resignation[7]. Further, there is reason to think that customer

lists, particularly when a good deal of effort has gone into their compilation, enjoy such protection[8]. In

the present matter it is difficult to sever the knowledge acquired by the directors of the contents of the

roll and how it might be used from the roll itself which they admitted they had no right to appropriate.

Directors are accountable to a company if they divert business opportunities away from it and into their

own business[9]. Benefits thereby obtained are held on constructive trust in favour of the original company, and the law will intervene to protect confidential information and trade secrets before or after

resignation.

[6] (1994) 12 ACSR 779, 782, 784.

[7] SEA Food International Pty Ltd v Lam & Anor (1998) 16 ACLC 552, 556.

[8] Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, 334; Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275, 313-317; Roger Bullivant Ltd v Ellis [1987] FSR 172; Associated Insurance Brokers of Australia (Queensland) Pty Ltd v Slevin (CA No 250 of 1995, 16 February 1996); Faccenda Chicken Ltd v Fowler [1986] FSR 291, [1986] 3 WLR 288, [1987] Ch 117, (1985) 6 IPR 155.

[9] Cook v Deeks [1916] 1 AC 554, (1916) 27 DLR 1.

The submission in any event fails as the directors at all material times retained their office.
In Mordecai v Mordecai[10] the same argument was raised as that in the present case, namely
[10] Above n.2.

that the directors were not prepared to give restrictive covenants, and that therefore the goodwill of the

company was valueless. It was rejected. Hope JA, after the preliminary observation that "[t]his

appears ... to be so unjust a result as to make it unlikely that it is a correct way to approach the

question", continued:

"[T]his is not a case where the directors of a company set up a business in competition with that
of the company. Making improper use of their powers as directors, they terminated the
company's involvement in the business and carried on the same business and took over its
goodwill for themselves. What they had, and what [the new company] now has, was and is a
valuable asset. And yet they claim that [the original company's] goodwill was valueless in its
hands and [the original company] is not entitled to damages for the loss of its goodwill because
they, the appellants, could have frustrated the hypothetical sale which formed the basis of the
valuation. I am happy to be able to conclude that Cohen J was right, and that the appellants'
claim cannot be sustained[11]".

The Court of Appeal (Hope JA with whom Samuels and Priestley JJA agreed) held that one of the

ways in which damages could properly be assessed for the breach of trust in that case was on the basis

of a hypothetical willing vendor and a hypothetical willing purchaser, unaffected by the absence of

restrictive covenants that would preclude the directors from competing with the purchaser[12].

[11] Ibid pp68-69.

[12] Ibid pp69, 71.

Counsel for the appellants sought to distinguish Mordecai on the footing that the directors in that

case deliberately closed down the company's business at a time when it was a going concern. Whilst

that is a factual distinction, it does not make the recognised duty of directors inapplicable to companies

which have become unable, temporarily or otherwise, to trade. Nor does it invalidate the tests for

assessment of damages in such a case. The duties of directors to the company and its creditors are

fundamental, especially in relation to preservation of assets, and are measured against high standards

of loyalty and integrity [13].

[13] Jeffree v National Companies & Securities Commission (1989) 15 ACLR 217, [1990] WAR 183, (1989) 7 ACLC 556; Kinsela v Russell Kinsela Pty Ltd (In Liq.) (1986) 4 NSWLR 722, (1986) 10 ACLR 395, (1986) 4 ACLC 215; Mills v Mills (1938) 60 CLR 150; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41.

There are many ways in which the quantification of the original company's entitlement might have

proceeded[14]. So far I have discussed the method which his Honour adopted, and the alleged errors

in that process that have been raised by counsel on behalf of the appellants. Suffice to say that in the

context of the envisaged hypothetical sale his Honour did not err against the appellants in acting on the

assumption that the directors could have been restrained from competing in the market which the

purchaser entered by reason of its use of the rent roll.

[14] Further see paras 27-31 below.

Respondent's challenge to his Honour's assessment

More complex issues arise on the submissions on behalf of the respondent (the original

company). Its contention is that damages should have been assessed on the basis of what the appellants

would have had to pay if they had lawfully obtained the rent roll from the original company. This would

seem to be consistent with their submission below that the new company acquired the rent roll as a

constructive trustee, and that damages should be assessed as the value of the rent roll in its hands. The

submission is that there should have been no discount; the full prima facie market value should have been

paid. There is some support for the respondent's contention in Mordecai to which I shall return later.

Cause of action

The respondent's claim is based upon the fiduciary relationship that exists between directors and

their company. Such duties have been articulated in many decisions[15], but for present purposes it is

sufficient to note that this is an equitable cause of action rather than a specific claim based under relevant

sections of the Corporations Law. Inter alia it was admitted on the pleadings that the directors were

at all times under a duty to exercise their powers for the benefit of the company, and not to make

improper use of their position to gain indirectly an advantage for themselves or for the new company

or to cause detriment to the original company. When a company becomes insolvent or is nearing

insolvency, directors are required to have regard to the interests of the company's creditors[16].

[15] For example, Re City Equitable Fire Insurance Company Ltd [1925] Ch 407, [1924] 3 AllER 485; AWA Limited v Daniels trading as Deloitte Haskins & Sells (1992) 7 ACSR 759 at 864-868.

[16] Walker v Wimborne (1976) 137 CLR 1; Commonwealth Bank of Australia v

The duty that was breached in the present case may be very simply stated as the duty not to

misappropriate company property, either for their own or a third party's benefit.

Remedy

Friedrich (1991) 9 ACLC 946, (1991) 5 ACSR 115.

The directors are personally liable for the breach of such a duty. As their own new company

received the benefit of such breaches with full knowledge of the relevant facts it inter alia became

accountable as a constructive trustee[17]. The liability of such a company may be for an account of

profits, or for an assessment of equitable damages[18].

[17] Selangor United Rubber Estates Limited v Cradock (No 3) [1968] 1 WLR 1555, [1968] 2 AllER 1073; Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276, [1969] 2 WLR 427, [1969] 2 AllER 367; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Cook v Deeks above n.9.

[18] Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508, 525.

In the present case claims were made both for damages and for an account of the profits arising

from the use of the original company's assets but in the event the learned trial judge was asked only to

make an assessment of damages. Some reliance was placed by counsel for the appellants upon my

statement in Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd[19] that "equitable damages, when

[19] Ibid p.524.

assessed at all, have always been assessed in the same way and on the same principles as common law

damages". Johnson v Agnew[20] was cited in support of this statement, but that case was concerned

[20] [1980] AC 367, 379.

only with assessments of damages under Lord Cairns Act. That is to say Johnson v Agnew justifies

the statement only with reference to damages that are in addition to or in substitution for the grant of an

injunction or of specific performance. Reference was then made in Markwell to Nocton v Lord

Ashburton[21] which draws attention to the flexibility of courts of equity in measuring damages. With

respect to the relief to be granted in respect of a breach of fiduciary duty by a solicitor, Viscount

Haldane observed that "the measure of damages may not always be the same as in an action of deceit

or for negligence", but found it unnecessary to pursue the other options, as the plaintiff in that case had

sought and obtained an inquiry as to damages that had been sustained by reason of the release of a

specified security.[22] The passage relied on in Markwell's case above concludes with the observation

"in some cases the damages may be different but the present case is not one of them". Upon reflection

the first passage quoted above from Markwell's case is erroneous. Equity follows the law and equitable damages may often be assessed on the same principles as common law damages[23]; but there is no rigid

rule. The variety of situations in which equitable damages may be assessed may not always lend

themselves to application of the common law remedy of damages.

[21] [1914] AC 932.

[22] Ibid p958.

[23] See for example the assessment of Dixon AJ (as he then was) in McKenzie v McDonald [1927] VLR 134, 146.

The basic principle underlying the remedy against directors who breach their fiduciary duty is

that a trustee must not benefit from the trust[24]. The remedy against the trustee is sometimes referred to

as compensation against the trustee personally[25]. The present case concerns defaulting fiduciaries and

more particularly, misappropriating fiduciaries. The obligation of such a party is essentially to effect

restitution to the estate, and this may be achieved in a number of ways, one of which is to require the

fiduciary to disgorge the equivalent of the advantage that has been taken. Such obligation is of a

personal character. In Re Dawson[26], Street J (as he then was) observed that its extent is not limited
by common law principles such as those governing remoteness of damage. His Honour continued:

"The cases to which I have referred demonstrate that the obligation to make restitution, which courts of equity have from very early times imposed on defaulting trustees and other fiduciaries, is of a more absolute nature than the common-law obligation to pay damages for tort or breach of contract... Moreover the distinction between common law damages and relief against a defaulting trustee is strikingly demonstrated by reference to the actual form of relief granted in equity in respect of breaches of trust. The form of relief is couched in terms appropriate to require the defaulting trustee to restore to the estate the assets of which he deprived it.
Increases in market values between the date of breach and the date of recoupment are for the trustee's account: the effect of such increases would, at common law, be excluded from the computation of damages but in equity a defaulting trustee must make good the loss by restoring to the estate the assets of which he deprived it notwithstanding that market values may have increased in the meantime".
[24] Cook v Deeks above n.9; Regal (Hastings) Ltd v Gulliver [1942] 1 AllER 378; Warman International Ltd v Dwyer (1995) 182 CLR 544, 560-562.
[25] Lewin, The Law of Trusts (16th Edn) pp193-194, 664; Meagher Gummow and Lehane, Equity Doctrines and Remedies (3rd Edn) para 2304.
[26] [1966] 2 NSWR 211. Re Dawson has been cited with approval in many jurisdictions. See Meagher, Gummow and Lehane (above) at para 2303.

Meagher, Gummow and Lehane[27] suggest that equitable compensation is "normally" computed

by reference to the profit made by the defendant rather than by reference to the detriment suffered by

the plaintiff. In an article titled "Compensations for Breach of Fiduciary Duty" published in 1988[28]

Gummow J emphasised that when a defaulting fiduciary makes an improper profit, "equity acts not to

restore what the plaintiff has lost, for nothing has been lost, but to deprive the fiduciary of a gain made

in breach of an obligation to eschew undisclosed conflicts between his duty to his principal and self

interest"29. He continued: "the fundamental point remains that the obligation to make restitution which

is imposed on defaulting trustees is of a more absolute nature than the common law obligations to pay

[27] Ibid para 2304.

[28] In Equity, Fiduciaries and Trusts edited by TG Youdan, pp57-92.

damages for tort or breach of contract"30.

A similar principle is applied in cases involving the abuse of confidential information:

29 Ibid p62.
30 Ibid p71.
"It is a principle applied in conformity with the more general principle that a person misusing confidential information must answer for his default according to his gain. A headstart may often be the gain in these cases. If it is the gain, damages will be assessed accordingly and any other relief, such as injunction, will be moulded. If it is not the gain the method of assessing damages or the appropriateness of some other remedy has to be considered in the light of what that gain is."[31]
[31] United States Surgical Corporation v Hospital Products International Pty Ltd (1983) 2 NSWLR 157, 233 (reversed on other grounds in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41); cf Fisher-Karpark Industries Ltd v Nichols [1982] 8 FSR 351.

In Mordecai, Hope JA recognised that the matter of assessing damages for breach of fiduciary

duty by directors could be approached in a number of ways. In addition to the hypothetical sale method

under which Cohen J's judgment was upheld, his Honour considered two other approaches, each of

which in my view would support the respondent's submission of an assessment of value in the hands of

the new company.

The first method is to assess the asset at its proper value to the misappropriating fiduciary.
"If, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them, and as the position stood when they took the business from [the original company], the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them. It is well established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person."[32]
[32] Mordecai above n.2, pp69-70.
The further alternative method, considered by Hope JA to be "the basis of the correct approach", is to assess damages by analogy with the assessment of damages in copyright cases. Upon this approach, damages are measured as the amount of royalty or other payment which the infringer

would have to pay to obtain the intellectual property lawfully instead of unlawfully. His Honour

considered this to be apt when someone unlawfully takes property which he might have obtained

lawfully.

In the wide range of situations which have been canvassed over the last six paragraphs, the

common factor is value of the acquisition to the wrong-doer. In my view the learned trial judge erred

against the original company in taking what would seem to be the equivalent of a strict common law

approach to the assessment of damages instead of acceding to the submission that damages should be

assessed as the value of the rent roll in the new company's hands. His Honour did so in purported

reliance upon Markwell Bros v CPN Diesels[33], but for the reasons above the statements at page 524

of that case need qualification. The preponderance of authority on the question of equitable

compensation in a situation such as the present supports the view that damages should be assessed on

the basis of value to the misappropriating fiduciary rather than value according to an artificial

hypothetical exercise as if there had been a sale on the open market with directors behaving in a manner

calculated to render the asset valueless.

[33] Above, n.19.

On the evidence in this case the asset in the hands of the new company was plainly worth

$150,000.00. The discounting exercise by which his Honour reduced this by 30 per cent was not

necessary or appropriate. It may be observed that the same result is reached whichever of the three

methods of assessment discussed by Hope JA in Mordecai is used. As I see the present case, the only

realistic purchasers were the directors or some entity to which they were prepared to give the benefit

of their knowledge of the original company's business and of how the rent roll could best be used. As the persons controlling both the vendor and the purchaser in such a situation, it must be assumed that

they would purchase the asset at full value in the interests of the vendor company to which they owed

fiduciary duties.

It is true that the directors' personal association with the business undoubtedly invested it with

a special value in the hands of both the original company and the new company, and that the appellants

then carried on virtually the same business that had formerly been conducted by the original company.

In the light of the factors adverted to in the reasons of Pincus JA which I have read since preparing the

above reasons I have given further consideration to the question whether application of the above

principle would transform the liability of the fiduciary into a vehicle for the unjust enrichment of the

plaintiff. Such a risk is adverted to in Warman International Ltd v Dwyer[34], and a method of avoiding

[34] (1994-1995) 182 CLR 544, 561.

it is suggested. In that case a distinction was drawn between cases of wrongful acquisition of an asset

by a fiduciary and cases of wrongful acquisition of a business which is then operated by the fiduciary.

In cases of the latter kind it is recognised that it may sometimes be appropriate to allow the fiduciary

a portion of the profits[35]. However I do not think that the present case is one of the latter kind. The

[35] Ibid pp558-562.

original company elected not to seek an account of the profits of the business and instead sought

equitable compensation. The case was conducted on the footing that a specific asset, namely the rent

roll, has been misappropriated and used by the appellants for their own purposes. In these

circumstances the balance of authority favours assessment according to the value of the acquisition to

the wrong-doer, and in my view the evidence showed this to be $150,000.00. I do not think that this

is a case where it would be appropriate to discount that sum by reason of analogy with those cases where an account is taken of the profits of a business run by a fiduciary who invests special expertise

and labour which, if completely left out of account, will unfairly enrich the beneficiary. The distinction

between the two types of case drawn in Warman International Ltd v Dwyer is not always a tidy one,

as the present case tends to illustrate, but in the circumstances here the correct solution seems to be that

there should be a notional purchase by the appellants at full value to them without discount.

For the above reasons I would uphold the respondent's cross-contention that the damages
should have been assessed as the value of the rent roll in the hands of the new company. On this
basis the judgment to which the respondent is entitled is $150,000.00 and interest thereon comes
to $123,750.00.
Orders
The appeal should be dismissed. The cross-appeal should be allowed and the judgment
below increased to $150,000.00 damages with interest amounting to $123,750.00. The appellants
should pay the respondent's costs of the appeal and the cross-appeal to be taxed.
IN THE COURT OF APPEAL
SUPREME COURT OF QUEENSLAND

Appeal No. 5161 of 1998

Brisbane

Before Pincus JA
Thomas JA
Shepherdson J
[Ferrari & Ferrari Management Services Pty Ltd v Ferrari Investment Pty Ltd]
BETWEEN:
ALAN FULVIO FERRARI AND CHRISTINE MARGARET FERRARI

(First Defendants) First Appellants

AND:
FERRARI MANAGEMENT SERVICES PTY LTD

(Second Defendant) Second Appellant

AND:

FERRARI INVESTMENT (TOWNSVILLE) PTY LTD (IN

LIQUIDATION) Respondent
(Plaintiff)

REASONS FOR JUDGMENT - SHEPHERDSON J

Judgment delivered 22 June 1999

I have read the reasons for judgment prepared by the two other members of this Court.
I agree with the orders proposed by Thomas JA and for the reasons which he has given.
However, I wish to point to an additional reason for the result proposed by Thomas JA and at the
same time emphasise the following matters:
1.          That the above named first appellants ("the directors") as such directors acted in breach of the fiduciary duty owed by them to the above named respondent ("Investment") was
admitted at the trial.
2.          That breach was the making of the gift of the rent roll to the above named second appellant
("Management").
3.          The rent roll represented goodwill of Investment. That it constituted such goodwill in the
circumstances of this case is well illustrated by the words which I have emphasised in the
following extract from the speech of Lord Herschell in Trego v Hunt [1896] AC 7 at pp
17 and 18:
"the goodwill ... is the connection thus formed, together with the circumstances whether of habit or otherwise, which tend to make it permanent, that constitutes the goodwill of a business. It is this which constitutes the difference between a business just started, which has no goodwill attached to it and one which has acquired a goodwill. The former trader has to seek out his customers from among the community as best he can. The latter has a custom ready made ... ."
4.          In the present case, Management, having acquired gratis a ready made property
management business in the shape of the rent roll then, with the directors in charge, traded
for almost two years before Investment was placed in liquidation. From the moment
Management commenced business it had a current list of active clients - neither the
directors nor Management had to seek out clients - thanks to the directors’ gift to
Management.
5.          In addition and importantly Management from the time it commenced its business had the
services of Ms Foster formerly an employee of Investment who was well known to the
landlord clients on the rent roll and who was employed by Investment "to operate the roll"
(R18); she began working for Management the day it opened its doors for business at the
same premises from which Investment had operated on the preceding business day. The directors also caused Investment's plant and business to be transferred to Management.
Effectively then Investment's property management business ceased one day and next day
the same property management business began in the name of Management and from the
same premises.
6.          In the present case the real issue has been the method of assessing Investment's equitable
compensation to which it was entitled. It is my view that that compensation fell to be
assessed on the basis of a hypothetical willing vendor and a hypothetical willing purchaser
unaffected by the absence of restrictive covenants that would preclude the directors from
competing with the purchaser (see para 18 of Thomas JA's reasons).
In my respectful view if the matter of restrictive covenants enters the assessment, it must be
on the basis that if any hypothetical purchaser sought from Investment as hypothetical vendor an
undertaking from the directors that they would not compete with the hypothetical purchaser for a
reasonable period, such undertaking must have been forthcoming from the directors. That this is
so flows from the obligation which the law casts on the directors of Investment to act honestly and
in the best interests of that company and its shareholders. Consequently, if restrictive covenants
enter the assessment, then as a hypothetical vendor, Investment as vendor must be taken to have
obtained and given to the hypothetical purchaser the directors' undertaking not to compete.
When the learned trial judge came to determine the quantum of Investment's equitable
damages and reduced the $150,000 by 30 per cent the learned trial judge, in my view, instead of
acting on the valuation evidence before him, went beyond his judicial role and performed the role
of a valuer.

5	In my respectful view when he did this he erred. He had before him evidence from two valuers, Mr Stack (for Investment) and Mr Matson (for Management and the directors) that if all

the factors referred to in his Honour's reasons were optimal (including a restraint of trade clause for
the rent roll) the roll in question could be valued at $1.50 for each dollar of commission payable by
the landlords whose names appeared on the roll. His Honour accepted the evidence of Mr
Charlton the agent of the liquidator of Investment and found that commission to be a little over
$100,000 per annum. He found that with the optimal factors present the market value of the rent
roll was $150,000.

In making that latter finding His Honour was acting on the evidence of the valuers and Mr
Charlton. When Mr Stack gave evidence, it was never suggested to him in cross-examination that
the $150,000 should be reduced by any particular amount or percentage by reason of factors
mentioned by the learned trial judge in his reasons. It is true to say that Mr Stack was cross-
examined about a number of these factors e.g. that ideally a rent roll is sold with a restraint on trade
and retention clause, the retention clause containing a formula whereby the vendor had to refund
money if the purchaser did not retain all or part of the landlords on the roll.
In my view, if Management and the directors were contending at trial that the $150,000
should have been reduced because any of the optimal factors were not present in the hypothetical
sale of the rent roll, then there was an onus on them to lead evidence - valuation evidence - of the
extent of that reduction, whether by percentage or amount. This evidence was not led although it
is true to say that Mr Matson in his written valuation contended for an open market value of the rent
roll of no more than $5,000 because on his instructions:

" · there was no agreement to sell - rather a closing of one business and an opening of
another;
· the principal and staff will be in competition with the old company;
· there is no restraint on trade;
· no agreement for discount of purchase price for landlords lost."

It is my view that in this case Mr Matson as a competent valuer and the valuation expert
called by Management and the directors, should have been asked in evidence to identify by estimate
the percentage or amount of reduction when any one, two or three of the above four matters was
absent. As a competent valuer, and there is nothing to suggest that neither Mr Stack nor Mr
Matson was not a competent valuer, Mr Matson should have been able to give such estimate or
opinion. This exercise was not done and as a result in Mr Stack's cross-examination there was
never any suggestion put to him of an appropriate reduction. I add that I am not being critical of
Mr Matson - rather of the failure to elicit such evidence from him. 9 In my view the
responsibility in this case for performing that exercise was on the directors and Management but it
appears Mr Matson was not asked to do it. I note that in "Principles and Practice of Valuation"
(4th Ed) by J.F.N. Murray, the author in Chapter 20 discusses "Business Valuations and Goodwill"
and at p 375 said:
"If a business is being purchased care should be taken to ascertain if the vendor has agreed not to compete within certain limits of time or place. If there is no such agreement, he may carry a great portion of the goodwill with him if he starts a new or similar business close by the old one."
It is true to say that in assessing pecuniary loss in a personal injury case where there are
difficulties due to uncertainty (Naylor v Yorkshire Electricity Board ([1968] AC 529 at 548) the
trial judge has to make an assessment doing the best he can with the evidence available. In my view
that rule does not apply in the present case where valuers were called but during the trial their
valuation skills touching on quantifying each of the optimal matters were not called on by the parties
on whom lay the burden of introducing such evidence.

11	In my view, because of lack of the valuation evidence to which I have referred the present appellants cannot be permitted to retain the benefit of a 30 per cent reduction in Investments

compensation simply because they say that no restraint on trade covenant would have been
forthcoming in a hypothetical sale by Investment and that they would have traded in opposition to
Investment. To permit that argument to succeed rewards the parties who breached the fiduciary
duty.

That argument also mixes the hypothetical sale with the reality of the attitude displayed by the

actions of the directors in mid 1987.

It is only by treating as hypothetical the sale and all that it entails e.g. the restraint on trade

covenant that must accompany it, that one can, on the valuation evidence adduced, reach the proper

quantum of Investment's compensation.

I add that in my view there was no onus on Investment to adduce the missing evidence to which

I have referred. Of course, had amounts or percentages been put to Mr Stack during his cross-

examination he would have been expected, as a valuer, to comment on his acceptance or otherwise of

those amounts or percentages and, if he disagreed, to give his own opinion on each of those matters.

His Honour accepted the evidence of Mr Charlton the agent of the liquidator of Investment and

found the commission to be a little over $100,000 per annum. He found that with the optimal factors

present the market value of the rent roll was $150,000.

In summary then, the decision to reduce the $150,000 market value was not based on any

evidence and particularly evidence from the persons qualified to estimate such reduction and for the

reasons which I have given the decision to reduce cannot be justified.

[1999] QCA 230

22/06/1999

Key Legal Topics

Areas of Law

Corporate Law & Governance

Legal Concepts

Fiduciary Duty

Breach of Duty

Equitable Compensation

Damages

"	·	there was no agreement to sell - rather a closing of one business and an opening of another;
·	the principal and staff will be in competition with the old company;
·	there is no restraint on trade;
·	no agreement for discount of purchase price for landlords lost."