Findex Group Limited v McKay

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FEDERAL COURT OF AUSTRALIA

Findex Group Limited v McKay [2019] FCA 2129

File number: VID 1026 of 2016
Judge: STEWART J
Date of judgment: 18 December 2019
Catchwords:

CONTRACTS – formation – executed by director on behalf of corporation – whether signature is also binding on director personally – construction

TRADE AND COMMERCE – restraint of trade –restraint in shareholders’ agreement governing relationship between shareholders of financial planning business – whether reasonably necessary to protect legitimate interests

CONTRACTS – restraint of trade – protection of goodwill – whether reasonably necessary to protect legitimate interests – whether enforceable – whether unreasonable restraints severable – duration of restraint – area of restraint – cascading areas and duration

CONTRACTS – restraint of trade – whether restraint clauses breached – whether any loss suffered – who suffered loss – whether all or part of the loss avoidable

CORPORATIONS – s 183 Corporations Act 2001 (Cth) – whether breached by use of company information – whether injunction should issue – discretion

Legislation: Corporations Act 2001 (Cth) ss 9, 20, 183, 500(2), 911A(1), 1324
Cases cited:

Adamson v New South Wales Rugby League Ltd [1991] FCA 550; 31 FCR 242

Agricultural and Rural Finance Pty Limited v Gardiner [2008] HCA 57; 238 CLR 570

Alonso v SRS Investments (WA) Pty Ltd [2012] WASC 168

Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; 133 CLR 288

Bebonis v Angelos [2003] NSWCA 13; 56 NSWLR 127

Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61

British Reinforced Concrete Engineering co Ltd v Schelff [1921] 2 Ch 563

Butt v Long [1953] HCA 76; 88 CLR 476

Byrnes v Kendle [2011] HCA 26; 243 CLR 253

Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9

Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337

Commissioner for Corporate Affairs v Green [1978] VR 505

Connors Bros Ltd v Connors [1940] 4 All ER 179

D Bates & Co v Dale [1937] 3 All ER 650

Deeks v Little Moreton Trading Pty Ltd (1995) 14 WAR 58

Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172; 73 IPR 326

Eastwood Co-operative Society Ltd v Williams (1932) 32 SR (NSW) 403

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640

Equity Nominees Ltd v Tucker [1967] HCA 22; 116 CLR 518

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

Extraman (NT) Pty Ltd v Blenkinship (2008) 23 NTLR 77; 220 FLR 375

Federal Commissioner of Taxation v Murry [1998] HCA 42; 193 CLR 605

Findex Australia Pty Limited v McKay [2019] FCA 335

Fitch v Dewes [1921] 2 AC 158

Follacchio v Harvard Securities (Aust) Pty Ltd [2002] FCA 1067

Forkserve Pty Ltd v Jack [2000] NSWSC…

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Details
Case
[2019] FCA 2129
Decision Date

CaseChat Overview and Summary

The case of Findex Group Limited v McKay involved a dispute between Findex and Mr McKay, a former principal of Civic Financial Planning Pty Ltd. The central issue was whether Mr McKay was personally bound by the restraint provisions in a shareholders' agreement and whether he breached these provisions. The court had to determine if Mr McKay, by signing the agreement both as a director of Vandaman and on his own behalf, was also personally bound by the terms of the shareholders' agreement. Another significant issue was the enforceability of the restraint provisions, particularly whether they were reasonably necessary to protect the legitimate interests of the parties. The court also considered whether Mr McKay breached the restraint provisions and if so, whether the applicants suffered any loss as a result.

The court found that Mr McKay was not personally bound by the restraint provisions in the shareholders' agreement because his signature on the agreement did not indicate an intention to be personally bound. The court ruled that the restraints were not enforceable as they were unreasonable in terms of the parties whose conduct they sought to restrain. This conclusion rendered the issue of whether Mr McKay breached the restraint provisions moot, as the restraints were deemed unenforceable. Regarding the potential breach of section 183(1) of the Corporations Act and the application for an injunction, the court did not find that Mr McKay breached this section. Lastly, the court dismissed the proceeding against Vandaman as it was in voluntary liquidation and did not appear at the final hearing.

The court ordered that the proceeding be dismissed, the applicants pay Mr McKay’s costs, and granted leave for the parties to apply to vary the costs order under specific conditions. The submissions for any variation of the costs order were to be concise and legible.

Orders

Orders of the court

1. The proceeding be dismissed.

2. The applicants pay the first respondent’s costs.

3. The parties be granted leave to apply to vary order 2 by filing and serving submissions (of no more than 5 pages) in support of any variation they contend for within 7 days of these orders.

4. In the event that a party applies to vary order 2 by filing and serving submissions under order 3:

(a) The opposing party or parties is/are to file and serve any submissions in response (of no more than 5 pages) within 7 days of service on them of the submissions under order 3;

(b) The party or parties served with submissions under paragraph (a) of this order are to file and serve any submissions in reply (of no more than 3 pages) within 5 days of service on them of the first mentioned submissions.

5. The days from 21 December 2019 to 26 January 2020 (inclusive) are not to count in the calculation of the periods mentioned in orders 3 and 4.

6. The submissions referred to in Orders 3 and 4 should be easily legible using a font size of at least 12 points and one and a half line spacing throughout, including in any footnotes and annexures.

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

Background

Background to the litigation

Before turning to each of the issues it is convenient to address some of the background.BACKGROUND The business of Old Civic Mr McKay began working as a financial planner in about 1999. In about February 2003, Mr McKay became one of five principals of Civic Financial Planning Pty Ltd ACN 103 941 313 (Old Civic). Old Civic was the trustee for the Civic Financial Planning Unit Trust. The other principals and the entities through which they held their units in the unit trust were William Waller (through Waller Pty Ltd), Dianne Dash (through DBDash Pty Ltd), Thomas Dawes (through Livengal Pty Ltd) and Howard Kemp (through Blarch Nominees Pty Ltd). Mr McKay held his stake in Old Civic through Vandaman. Also in February 2003, Vandaman was registered in the ACT. Initially, the directors of Vandaman were Mr McKay and Ms Denise May McKay. Ms McKay ceased to be a director of Vandaman on 1 March 2013. Mr McKay was the sole director of Vandaman thereafter. Mr McKay and Ms McKay each own half of Vandaman’s shares. The principals of Old Civic, in their capacity as financial advisers, were each authorised corporate representatives of Securitor Financial Group Ltd and provided financial advice under Securitor’s AFSL. Securitor was not a related body corporate of Old Civic. The business of Old Civic was conducted from premises in Fyshwick in Canberra. It was a financial planning and advisory business catering to private clients. Old Civic’s clientele were largely, though not exclusively, members of Commonwealth government superannuation schemes who were in or close to retirement. In 2007, the principals of Old Civic made a decision to prepare the business for sale. After several years of negotiations wfith different organisations, a decision was made to begin negotiations with Findex for the sale of the business. On or about 14 July 2009, a document titled “Non Binding Heads of Agreement Joint Venture Transaction” was signed by all the principals of Old Civic, including Mr McKay, on behalf of their stakeholder companies and Findex. By March 2010, Findex was to be the buyer of the shares of a new company incorporated in the ACT to which the business of Old Civic was first to be transferred. On 16 March 2010, the new company, Vandaman, Mr McKay and others executed a share sale agreement (which, for reasons that will become apparent, I will refer to as the first SSA). Mr McKay signed the first SSA twice, once as director of Vandaman and separately on his own behalf. Also on 16 March 2010, the new company, Vandaman, Mr McKay and others executed a shareholders agreement (which I will refer to as the first SHA). Again, Mr McKay signed the first SHA twice, once as director of Vandaman and separately on his own behalf. That arrangement was subsequently abandoned and a new arrangement was agreed. On 21 May 2010, the new company, Findex, Vandaman, Mr McKay and others executed a deed of rescission pursuant to which the first SSA was rescinded. Pursuant to the new arrangement, New Civic was incorporated in Victoria in April 2010 with a view to the business of Old Civic being transferred to that company prior to the shares of that company being transferred to Findex. The contractual arrangements that were put in place to effect the transaction are set out in detail below.Share Sale Agreement (SSA)

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

If that was the submission, it misses the point. The covenantors’ covenants were to protect the whole of the goodwill of the business, including the whole client list. For the reasons I have given and on the authorities identified, that is a justifiable subject of protection in the case of a goodwill restraint. It is not to the point, even if true, that Mr McKay did not have the opportunity to develop client relationships outside his own client list. The position might be different in relation to an employment restraint, depending on the context: Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9 at [32]-[34].Conclusion on the restraints In the result, the restraints are not enforceable because they are unreasonable as to the parties whose conduct they seek to restrain, and to the extent that they are unreasonable on that basis they are not severable. However, if I am wrong on that, in my view the restraints would be reasonable and enforceable in so far as area and time are concerned.ISSUE 3: DID MR MCKAY BREACH THE RESTRAINT PROVISIONS? This issue falls away in view of my conclusion that the restraint provisions are unenforceable. However, in case I am wrong on that conclusion I will give consideration to this issue. Mr McKay accepts that if the restraint provisions were valid, including so as to extend in time to after January 2014 when he says that he commenced contacting and soliciting his former clients, then he did breach the restraints subject to one further matter. That is whether New Civic conducted a business at that time. That is because if New Civic did not conduct business then Mr McKay could not have been in breach of subclauses (b), (c) or (f) of cl. 20.2 because the restrained conduct in each of those subclauses relates to the business of New Civic, i.e. whether he solicited any client from doing business with New Civic, whether he accepted from a client any business of the kind ordinarily forming part of the business of New Civic from time to time, or whether he interfered in the business of New Civic. I have identified above (at [46]) that after the put options were all exercised in August 2013 and Findex became the sole shareholder of New Civic, the arrangements with regard to the collection of the revenue and distribution of the profits of the business changed – whereas revenue had been collected by Financial Index and profits paid by it to New Civic for it to distribute to shareholders by way of dividends, the profits were paid directly to Findex (the sole shareholder) bypassing New Civic. Mr McKay relies on this to say that New Civic was not conducting the business. That is not the only basis on which he says that New Civic did not conduct a business. Mr McKay says that New Civic could not legally operate a financial planning business, and that the name “Civic Financial Planning” was not in use with respect to financial planning. It is to be recalled that under the BSA, Old Civic sold to New Civic “the Business and the Assets for the Purchase Price” (cl. 3(a)). The business was defined as the financial planning business conducted by Old Civic known as Civic Financial Planning. The assets included the goodwill of the business and the clients. There is thus no controversy about the proposition that the business that had been actively conducted by Old Civic was then sold and transferred to New Civic. Moreover, that business was then conducted by New Civic. However, a few things changed.

Ratio Decidendi

Legal Principle Established

At the commencement of the trial I gave the applicants leave to proceed with the proceeding against Vandaman under s 500(2) of the Corporations Act 2001 (Cth) despite it being in voluntary liquidation: Findex Australia Pty Limited v McKay [2019] FCA 335. Vandaman did not appear at the final hearing, by its liquidator or otherwise. There are eight issues requiring resolution:·Issue 1: was Mr McKay personally bound by the restraint provisions? That issue raises further issues. Did Mr McKay in signing the relevant agreement sign only for Vandaman or did he also sign it for himself personally? Alternatively, did Mr McKay by the conduct of the parties become bound to the terms of the shareholders’ agreement? Or, as a further alternative, is Mr McKay estopped from denying that he was bound by the shareholders’ agreement?·Issue 2: are the restraint provisions enforceable?·Issue 3: did Mr McKay breach the restraint provisions? This also raises an issue whether New Civic conducted the relevant business.·Issue 4: did the applicants suffer any loss? This is related to the issue that arises under issue 3, namely whether New Civic conducted the relevant business.·Issue 5: was all or part of the loss avoidable?·Issue 6: what loss, if any, did the applicants suffer?·Issue 7: did Mr McKay breach s 183(1) of the Corporations Act and should an injunction be ordered to prevent further breaches?·Issue 8: is there any liability of Vandaman? Before turning to each of the issues it is convenient to address some of the background.BACKGROUND The business of Old Civic Mr McKay began working as a financial planner in about 1999. In about February 2003, Mr McKay became one of five principals of Civic Financial Planning Pty Ltd ACN 103 941 313 (Old Civic). Old Civic was the trustee for the Civic Financial Planning Unit Trust. The other principals and the entities through which they held their units in the unit trust were William Waller (through Waller Pty Ltd), Dianne Dash (through DBDash Pty Ltd), Thomas Dawes (through Livengal Pty Ltd) and Howard Kemp (through Blarch Nominees Pty Ltd). Mr McKay held his stake in Old Civic through Vandaman. Also in February 2003, Vandaman was registered in the ACT. Initially, the directors of Vandaman were Mr McKay and Ms Denise May McKay. Ms McKay ceased to be a director of Vandaman on 1 March 2013. Mr McKay was the sole director of Vandaman thereafter. Mr McKay and Ms McKay each own half of Vandaman’s shares. The principals of Old Civic, in their capacity as financial advisers, were each authorised corporate representatives of Securitor Financial Group Ltd and provided financial advice under Securitor’s AFSL. Securitor was not a related body corporate of Old Civic. The business of Old Civic was conducted from premises in Fyshwick in Canberra. It was a financial planning and advisory business catering to private clients. Old Civic’s clientele were largely, though not exclusively, members of Commonwealth government superannuation schemes who were in or close to retirement.