Forty Two International Pty Ltd v Barnes

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FEDERAL COURT OF AUSTRALIA

Forty Two International Pty Limited v Barnes [2014] FCA 85

Citation: Forty Two International Pty Limited v Barnes [2014] FCA 85
Parties: FORTY TWO INTERNATIONAL PTY LIMITED ACN 095 622 889, BLUEFREEWAY LIMITED ACN 112 262 819 and THE GANG OF 4 PTY LTD ACN 095 624 678 v KIM BARNES and LEE HAWKSLEY
File number(s): NSD 2018 of 2008
Judge(s): GRIFFITHS J
Date of judgment: 18 February 2014
Catchwords:

CONTRACT – whether respondents breached implied terms in contract – implied terms attaching to express terms – implied term to disclose matters relevant to express term – loss of opportunity – interpretation and application of release and entire agreement clauses where cause of action concealed by party seeking to rely on them

TRADE PRACTICES – whether respondents engaged in misleading or deceptive conduct through non-disclosure – misleading or deceptive conduct by silence – application of s 42 of the Fair Trading Act 1987 (NSW) – loss of opportunity

DUTY TO DISCLOSE – whether there is a duty under the general law requiring directors to disclose material personal interests relating to the interests of the company – whether there is a duty under the general law requiring directors not to place their own personal interests in actual or potential conflict with interests of company – whether respondents breached these general law duties

CORPORATIONS – whether duties under ss 182 and 191 of Corporations Act 2001 (Cth) were breached by non-disclosure of personal interest in a transaction by directors of company

DAMAGES – assessment of damages for loss of opportunity – quantifying damages

EVIDENCE – discussion of principle in Jones v Dunkel (1959) 101 CLR 298 – application of ss 69, 135, 183 of the Evidence Act 1995 (Cth)

CROSS CLAIM – whether the applicants made misleading or deceptive representations – application of s 52 of the Trade Practices Act 1974 (Cth)

Legislation: Corporations Act 2001 (Cth) ss 182, 191, 1317H
Evidence Act 1995 (Cth) ss 69, 135, 183
Fair Trading Act1987 (NSW) s 42
Trade Practices Act 1974 (Cth) s 52
Cases cited: Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470
Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345
B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Bank of Credit and Commerce International SA v Ali [1999] All ER 1005
Bourke v Beneficial Finance Corporation Ltd (1993) 124 ALR 716
Byrne v AustralianAirlines Ltd (1995) 185 CLR 410
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Concut Pty Ltd v Worrell (2000) 176 ALR 693
Daniels v Anderson (1995) 37 NSWLR 438
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473
Fink v Fink (1946) 74 CLR 127
GIO Insurance Ltd v Leighton Contractors Pty Ltd (1995) 9 ANZ Insurance Cases 76,305
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Details
Case
[2014] FCA 85
Decision Date

CaseChat Overview and Summary

Forty Two International Pty Ltd (FTI) initiated proceedings against Messrs Barnes and Hawksley, directors of BlueFreeway Pty Ltd, alleging breaches of fiduciary and statutory duties and misleading or deceptive conduct. The dispute arose from the directors' involvement in facilitating a software licence transaction between FTI and CMUK, using personal funds to secure the licence fee. FTI claimed that the directors breached implied terms in the contract, failed to disclose material personal interests, engaged in misleading or deceptive conduct, and breached duties under the Corporations Act 2001 (Cth). The directors, in turn, asserted that they acted on instructions from other directors and that their actions did not harm FTI or BlueFreeway.

The court had to decide whether the directors breached implied terms in the contract, whether they engaged in misleading or deceptive conduct by non-disclosure, and if they breached duties under the Corporations Act and general law. Specifically, the court examined the nature and extent of the directors' duties to avoid conflicts of interest and to disclose material personal interests. The directors argued that no such duty exists under Australian law, while FTI contended that the directors' actions constituted a breach of these duties.

The court held that the directors breached their duties to avoid conflicts of interest and to disclose material personal interests. The directors' involvement in providing financial assistance to secure the licence fee placed them in a conflict of interest situation, which they failed to disclose to the FTI board. The court found that the directors' conduct constituted misleading or deceptive conduct under the Fair Trading Act 1987 (NSW) and that they breached their statutory duties under the Corporations Act. The court also held that the directors' actions led to a loss of opportunity for FTI, warranting damages.

The court ordered the parties to attempt to agree on final orders within fourteen days, including costs. If an agreement could not be reached, the parties were to file written submissions not exceeding five pages in length in support of their respective proposed orders. Final orders would be made on the papers unless a further oral hearing was deemed necessary.

Orders

Orders of the court

1. The parties are to seek to agree proposed final orders, including as to costs, in the light of the reasons for judgment. If they are unable to reach agreement within fourteen days hereof, within that time they should file and serve written submissions not exceeding five pages in length in support of their respective proposed orders.

2. Subject to any party demonstrating that there is a need for a further oral hearing, final orders will be made on the papers.

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

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

It is convenient to summarise the relevant witness evidence, commencing with the applicants’ witnesses.A Summary of the evidence of the applicants’ witnesses(a) Mr Nick Greiner Mr Greiner swore three affidavits. He was a non-executive director of BlueFreeway from 24 November 2006 (i.e. after the SPA was executed) until 3 July 2009. He described Mr Webb as playing “a principal part” in BlueFreeway acquiring a group of portfolio companies to form one of Australia’s first listed digital and interactive marketing communications services group. He described the board’s discussion in early 2007 of the proposal for FTI to sell a software licence to CMUK. He described how Messrs Webb and McDonnell, as executive directors of BlueFreeway, reported to the board about matters affecting those negotiations with a view to the board ultimately considering whether or not to approve the execution of the Licence Agreement. Mr Greiner also gave evidence that he assumed that CMUK would be paying the licence fee from its own resources and that at no stage during 2007 was he aware or did he suspect that Messrs Barnes and Hawksley would use their own money or security to facilitate the payment of the licence fee. Mr Greiner said that if he was aware of the true facts relating to the source of the financing, he would have requested that the matter be discussed by the board and that the board take legal advice. He said that he would have approached the matter on the basis that, whilst it was generally beneficial for the group for FTI to receive a licence fee in excess of $4 million, it was not advantageous for the group as a whole if the consequence of receiving that fee was to entitle Messrs Barnes and Hawksley to receive more than $16 million under the SPA. He said that he would have conveyed to the BlueFreeway board that the licence agreement should not be approved on that basis. He acknowledged that the prospect of receipt of the licence fee represented a significant improvement in the operating results of FTI and the BlueFreeway group, but if the licence fee amount had not been received in the 2007 financial year and the forecasts in the November 2006 prospectus were not achieved, he said that he believed that the board would have considered the matter and made any appropriate responses, including discussing with management how the operating results could be improved. He said that at no stage did he regard the conclusion of the licence transaction with CMUK as vital. Mr Greiner also gave evidence of board discussions regarding how the licence fee would be accounted for in the group’s accounts. In cross examination, Mr Greiner was taken to the February 2007 board minutes where it is reported that there was a 26% EBIT shortfall regarding FTI. He said that the problems BlueFreeway was experiencing with FTI at that time were that it did not have an adequate sales force and there was also an issue about granting a software licence in the UK. He agreed that Mr Webb had a vision of there being a central sales team for the group but he added that that did not mean that such a goal was to be achieved immediately. Mr Greiner said he regarded FTI as the “strugglers” in the BlueFreeway group.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

The applicants claim that the following duties were owed by Messrs Barnes and Hawksley to FTI and were breached:(a)a duty under s 182 of the Corporations Act 2001 (Cth) (Corporations Act) not to improperly use their position to gain an advantage for themselves or someone else; (b)a duty under s 191 of the Corporations Act to give notice to the other directors of FTI of any material personal interest held by either Messrs Barnes or Hawksley in a matter relating to the affairs of FTI; (c)a duty under the general law not to place their own personal interests in actual or potential conflict with the interests of FTI; and(d)a duty under the general law to disclose to the other directors of FTI any material personal interest either Messrs Barnes or Hawksley had in a matter relating to the affairs of FTI. The applicants divided the alleged duties into two groups and it is convenient to follow the same structure. I will refer to the duties at [55](a) and (c)] as the alleged “duties to avoid conflicts of interest” and the duties at [55](b) and (d)] as the “duties to disclose”. The statutory and general law duties will be referred to separately where appropriate. Messrs Barnes and Hawksley admit that they owed FTI the duties specified at [55](a) - (c)] above, however, they do not admit that they owed any general law duty to disclose any material personal interests. They say that such a duty is positive in character and that no such duty is recognised in Australian law, citing Hollingsworth J’s decision in P & V Industries Pty Ltd v Porto (2006) 14 VR 1 at 9, as well as the High Court’s decision in Pilmer v Duke Group Limited (2001) 207 CLR 165 at [74]. Messrs Barnes and Hawksley otherwise defend the above allegations and they also bring a cross claim against BlueFreeway. Principally, they say that BlueFreeway knew or ought to have known that they were providing financial assistance to CMUK. Further they say that Mr Webb and Mr McDonnell encouraged them to “do whatever it takes” to ensure the transaction was completed in the 2007 financial year, including providing finance for the transaction. They say that Mr Webb wanted to ensure that the Licence Agreement was signed by May 2007 so that an earnings upgrade could be announced in the ASX Announcement on 22 May 2007. They dispute the applicants’ allegation that in providing finance they acted in their own interests (to secure the Additional Payment). They say that they simply acted on Mr Webb’s directive to “do whatever it takes”. Alternatively, Messrs Barnes and Hawksley say that there was no duty to disclose their role in providing financial support for the licence sale transaction. They say that BlueFreeway had full knowledge that they would benefit from the Licence Agreement in accordance with the terms of the SPA. In these circumstances, they say that the applicants nevertheless ensured that the licence sale went ahead to the commercial advantage of the applicants on receipt of the licence fee (namely additional funds, achieving budget forecast, maintenance of share price etc). They say that their actions in procuring and entering into the transactions were of no material relevance to the applicants or to their decision to execute the Exit Agreement. Accordingly, they say that they had no duty to disclose their role in the transaction before or after the Licence Agreement had been executed. Messrs Barnes and Hawksley say that their conduct in procuring and guaranteeing the licence payment was immaterial to the applicants because the provision of financial assistance or a guarantee to CMUK was not capable of adversely affecting or otherwise interfering with the interests of either FTI or BlueFreeway.