Jones v Jones
[2009] VSC 292
•23 July 2009
IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST B
No. 2028 of 2008
| DAVID CHARLES JONES and others (According to the schedule attached) | Plaintiffs |
| and | |
| JEFFREY WILLIAM JONES and INGRESS CONSULTING PTY LTD (ACN 052 950 893) | Defendants |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 25-27 May 2009 | |
DATE OF JUDGMENT: | 23 July 2009 | |
CASE MAY BE CITED AS: | Jones v Jones | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 292 | |
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CORPORATIONS – Director acquired interest of minority shareholder without disclosing negotiations for the sale of company business – Duty not to prefer personal interests to joint interests of all shareholders – Equitable compensation
TORT – Deceit
TRADE PRACTICES – false and misleading conduct – s 9 Fair Trading Act1999 (Vic)
CONTRACT – Illegality – Part IV Income Tax Assessment Act 1936 (Cth)
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr JP Brett | McKean Park |
| For the Defendants | Mr MT Flynn | Hopkins Lawyers |
HIS HONOUR:
Introduction
The first plaintiff, David Jones, and the first defendant, Jeffrey Jones, are not related. To adopt the convention of referring to both as Mr Jones will lead to confusion. I intend no disrespect to either of them when using their given names to ensure the necessary clarity of identification. David and Jeffrey were business partners who, after a restructure of their information technology consultancy business in 2005, were the directors of the companies which owned and operated the business.
David controlled the second and third plaintiffs, eQuus Contracting Pty Ltd, as trustee of the eQuus One Unit Trust and DNM Computer Consulting Pty Ltd respectively. DNM owned 70% of the units in the eQuus One Unit Trust and eQuus IT Recruitment Pty Ltd, a company controlled by Ms Anne McKenzie, owned 30% of the units. Jeffrey controlled the second defendant, Ingriss Consulting Pty Ltd.
The information technology business was carried on by a group of companies. At the apex of the group was ITR Group Pty Ltd, as trustee of the ITR Unit Trust (the Trust). Until early 2006 ITR Group was controlled by David, Jeffrey and Alan Singer. After the restructure in late 2005 DNM held 14 units in the Trust, eQuus Contracting 30 units and Ingriss Consulting 56 units. Mr Singer ceased to be a director on 3 January 2006. David resigned as a director on 7 February 2006. Thereafter, Jeffrey was sole director of all companies in the group.
On 7 September 2006 David executed on his own behalf, and on behalf of DNM and eQuus Contracting, a Sale of Units and Shares Agreement under which his shares and units were sold to Jeffrey and Ingriss Consulting for $575,000. At the same time the parties executed a Deed of Assignment under which a debt owed by DNM to ITR Group was assigned to David and the debt forgiven. For the purpose of the transaction the debt was attributed a value of $200,000.
A few days later Jeffrey sold the business carried on by the group to Hamilton James & Bruce Pty Ltd (HJB) for a price, subject to adjustments, of $4,050,000. David alleges that Jeffrey owed all shareholders in ITR Group and unit holders in the Trust a duty to treat them equally. He alleges that Jeffrey breached his duty by failing to disclose the fact and details of negotiations with HJB while procuring David to complete the contract of sale of the shares and units. The plaintiffs claim equitable compensation in the sum of $963,710 as the amount they were denied by reason of the breach.
Of the price payable for the shares and units, Jeffrey has paid $200,000 to Ms McKenzie and $78,000 to David. It is not in dispute that the balance due under the contract of sale, in the sum of $297,000, remains unpaid.
David alleges that during the negotiation for the purchase of his shares and the units, which coincided with Jeffrey’s negotiation with HJB, he asked Jeffrey on a number of occasions whether there was “a deal in the wings”. On each occasion Jeffrey answered, “no”. David alleges that these answers were false denials designed to enable Jeffrey to retain for himself a premium over the price payable to David for his shares and the units. The plaintiffs claim damages for deceit and damages under s 159 of the Fair Trading Act1999 (Vic) for loss suffered by reason of a contravention of s 9 of the Act.
The defendants resisted all claims. They denied any false denial or representation of the kind alleged or that Jeffrey owed any fiduciary duty to the plaintiffs as shareholder and unit holders. The defendants alleged that the contract of sale and deed of assignment had been prepared as part of a plan to avoid the incidence of capital gains tax and was unenforceable. They also contended that by reason of the financial position of the group, the plaintiffs were not denied any benefit from the sale of the business.
Background
Mr Singer and an associated entity had been part of the group since 2004 when David, Jeffrey, Mr Singer and their associated entities entered into a Unit Holders Agreement to regulate their relationship. The involvement of Mr Singer and his entities ceased following the sale of his units to entities associated with David and Jeffrey in December 2005
The business carried on by the group expanded with the acquisition of new businesses. By September 2006, ITR Group had a number of subsidiaries. They were IT Resources Pty Ltd, eQuus Consulting Pty Ltd, eQuus Resources Planning Pty Ltd, eQuus Software Pty Ltd, The Peer Partnership Pty Ltd, Echo Beach TMW Pty Ltd, ITR Group Holdings Pty Ltd and ITR Group Management Pty Ltd.
Until early in 2005 David had held the position of Chief Operating Officer in the group. Jeffrey was Chief Executive Officer. In early 2005 David ceased to hold his executive position but continued to work part-time. The circumstances in which this change took place are not altogether clear, although appear to have been related to domestic pressures on David. At about that time initial negotiations commenced between David and Jeffrey for the purchase by Jeffrey of David’s interest, but these came to nothing.
It was common ground that David and Jeffrey had shared an objective to realise on their investment in the group by a trade sale or by listing the group on the stock exchange. A firm of consultants, James & Munroe, had been engaged to provide “investment ready” advice to prepare the business for listing or acquisition. The principals of James & Munroe were John Kent and Bill Clements.
A meeting took place between David and Jeffrey on 29 November 2005, at which they agreed on terms for their future involvement in the business. Jeffrey confirmed his understanding of the terms to David by email as follows:
It was good to talk to you today, and discuss various matters.
As I explained, I am happy for you to retain your shareholding in ITR Group on the understanding that I am allowed to focus on the running, development and growth of the business, without any unnecessary distractions and with your full support.
You will become a Non Executive Director and draw a monthly amount, which is to be agreed by you and I, some of which will be debited against your loan account, and the balance expensed as Directors fees.
I will draw $40,000.00 per month, of which $240,000.00 will be expensed and the balance debited to my Loan account which will be treated as a priority distribution at year end.
It is also understood that neither of us have any objections to either of us drawing additional amounts from time to time which will be allocated to our respective loan accounts.
Please confirm your understanding and acceptance of the above.
In early 2006 Jeffrey approached David to assist the group by providing security to its bankers. Additional capital was required due to delays in recovery from debtors. It was experiencing cash flow difficulties. There is no suggestion that the group was insolvent. David did not immediately respond to Jeffrey’s request, but eventually informed him that he was unable to assist. There was a discussion between the two men on 6 February 2006, the outcome of which was confirmed in an email from Jeffrey to David on the following day.
Confirming our discussions yesterday morning;
Due to the cost and subsequent losses ITR Group incurred with our involvement in the JV with Infopeople together with the cost of pursuing the since failed Eagle acquisition, there is a need to raise additional working capital funding for the business, going forward.
Due to you being unable, due to not owning any assets in your own right, not being able to fund your share of the working capital needs, I will be required to fund 100% of the future working capital requirements, which will necessitate me providing additional assets of mine as security.
With this in mind, I proposed that you consider granting me and or my nominee an option to acquire the total of your shareholding held by you through your respective entities, at a price to be agreed.
Additionally, for a period of time, which is to be mutually agreed upon, the company will pay the two car leases that are currently being paid for the company, together with a monthly sum, both of which will be credited to your loan account.
You will also resign from all directorships within the ITR group that you currently hold, with immediate effect.
David, should you decide that you do not wish to grant the above option, I am perfectly happy for you to remain as a shareholder and be assured that I will continue to fulfil all of my fiduciary duties and act at all times in the best interests of all shareholders.
However, I do not believe that your heart is in working on a day by day, full committed basis, and that this proposal would be in the best interests of all concerned, you, company, staff, and shareholders.
As you intend being away all of next week, I would appreciate us sitting down and discussing further, prior to your departure with a view to completing matters ASAP.[1]
[1]Emphasis added.
David did not respond immediately to Jeffrey’s email dated 7 February 2006. The next event leading to the purchase by Jeffrey of David’s interest was a meeting in about March 2006 between David and Mr Kent. Jeffrey described Mr Kent as an intermediary acting in the interests of both parties; that is, David as vendor and Jeffrey as purchaser. David said he believed Mr Kent had been engaged by Jeffrey. Jeffrey said that he was not paying any fees for the service provided by Mr Kent. Mr Kent was not called to give evidence.
Insofar as it is relevant, I regard Mr Kent as having been engaged by Jeffrey to assist him to negotiate the purchase of David’s interests in the business. It was not suggested by Jeffrey that David had arranged for Mr Kent or Mr Clements to attend meetings with David. I infer that Jeffrey had made those arrangements. One or both of Mr Kent and Mr Clements attended most of the meetings. I infer that Mr Kent and Mr Clements were acting as Jeffrey’s agents for the purpose of the negotiations.
Negotiations for the purchase by Jeffrey of David’s shares and the units were conducted primarily between David and Mr Kent. There were meetings in person and communications by email. Some meetings were also attended by Mr Clements and Jeffrey.
At the same time as he was negotiating the purchase of David’s shares and the units, Jeffrey was negotiating the sale of the business of the group to HJB. Jeffrey said that negotiations with HJB commenced around late June or early July 2006. By the end of July the commercial terms of a proposed transaction had been agreed and the parties were exchanging correspondence in order to settle the documentation. Negotiations over the documentation and due diligence inquiries by HJB, continued throughout August and into early September 2006, but Jeffrey said nothing to David of those events.
In the meantime, the negotiations between David and Jeffrey were proceeding on the basis of a valuation of David’s interest in the group at around $800,000. The parties eventually reached agreement on a valuation of $775,000; $200,000 of which was to be treated as having been paid by the release of DNM’s indebtedness to ITR Group.
David gave evidence that, during the negotiations for the sale of his shares and the units, there came a time when he perceived a sense of urgency on Jeffrey’s part to complete the transaction. This prompted him to ask Jeffrey during a meeting, also attended by Mr Kent, whether there was a “deal in the wings”. Jeffrey answered, “no”. Mr Kent was asked the same question on a different occasion, in Jeffrey’s absence, and responded, “not to my knowledge”. David alleges that Jeffrey’s answers were knowingly false.
On 7 September 2006 David, Jeffrey, Mr Kent and others assembled to execute the Sale of Units and Shares Agreement and Deed of Assignment. The combined effect of the documents was to transfer the whole of David’s interests in the group to Jeffrey and release DNM’s indebtedness to the group. At the same time Anne McKenzie and David gave a written direction to Jeffrey to pay to eQuus IT Recruitment the sum of $200,000. Thus, David’s entities were to receive a net sum of $375,000.
Under the contract of sale the vendors of the units were to receive $575,000 payable by instalments over three years. The contract expressly acknowledged the possibility of a future sale of the assets of the group . Clause 2.8 provided:
In the event of a sale of 30% or more of the Units or a divestiture of 30% or more of the assets of the Trust the full amount of the purchase price shall become due and payable immediately.
David said that on 7 September 2006, before executing the agreements, he again asked Jeffrey whether there was “a deal in the wings”, and Jeffrey responded, “no”.
A Contract of Sale of Business between IT Resources Group, a subsidiary of ITR Group, and HJB was executed on 11 September 2006. The total purchase price payable by HJB for the business, subject to adjustments, was $4,050,000.
The transaction was announced to the public and was soon brought to the attention of David. David telephoned Jeffrey and asked about the sale. Jeffrey said to him, “You won’t believe it, I talked to you on Thursday and bought your shares, on Friday they rang me, on the weekend I considered it, on Monday I executed a sale to HJB”. David’s evidence on this topic was not challenged. During that telephone conversation with Jeffrey, David sought to accelerate payment under cl 2.8 of the contract of sale. Jeffrey eventually agreed to a new payment schedule. The agreement is recorded in an email dated 14 September 2006 from David to Jeffrey to which Jeffrey responded, “I agree”. The relevant parts of David’s email are as follows:
Jeff, further to our conversations yesterday, I hereby confirm the terms of our new agreement. Since we signed on the 7th of September, you have sold the business of the Trust to HJB. In my opinion, this triggers the clause (2.8), which means the balance of the purchase price must be paid immediately. You don’t agree, for some reason. Nevertheless, we have agreed that you will pay the whole of the purchase price no later than the 30th of September 2007.
You have given your absolute promise to do so and you will continue to pay monthly payments as per our signed agreement, up until the time that you pay the balance of the total purchase price.
Apparently, you have already spoken with Anne and Alan, who have agreed to this new proposal for payment.
If that is true, then I, too, agree to this new payment plan, and I will not entertain making any demand under Clause 2.8.
Could you please confirm that you agree with this new payment plan? If requested, will you please also be prepared to sign a variation to the agreement?
Payments by Jeffrey under the modified payment schedule, agreed on 14 September 2006, continued for some time but stopped in late 2007. By that time Jeffrey had only paid $78,000 to David and his entities. $297,000 remained unpaid. Jeffrey refused to pay any more, claiming that David had misrepresented his entitlement to the units sold. Jeffrey’s solicitors, responding to a letter of demand from David’s solicitors, contended as follows:
Our clients have paid $78,000 to DNM Computer Consulting pursuant to the Agreement and they deny that they are liable to pay any further moneys to your clients on the basis that David Jones misrepresented his entitlement to the shares and units the subject of the Agreement. Indeed, our clients are of the view that DNM was not entitled to the moneys already paid to it and they reserve their rights in that respect.
Furthermore, our clients have entered into a separate agreement with Anne McKenzie in respect of moneys properly owing to her arising out of the subject matter of the Agreement.
Any proceedings will be defended and we are instructed that it will be necessary, in the defence of such proceedings, to canvass in detail the conduct of David Jones in all of his dealings associated with the Agreement.
The contention appears to be baseless. It has not been raised in this proceeding.
The issues
The issues raised in the pleadings were narrowed and clarified at trial. There was no longer a contest about the terms of the contract of sale or the agreement made on 14 September 2006, under which a new payment schedule was agreed. The remaining issues were as follows:
(1)When negotiating the sale of the business to HJB, did Jeffrey owe to David, as shareholder in ITR Group, and to the unit holders in the Trust, a fiduciary duty not to prefer his personal interests over the joint interests of the share holders in ITR Group and the unit holders in the Trust? If so, was his conduct in procuring a sale by David of his shares and units the shortly prior to the sale of the business to HJB a breach of that duty?
(2)Did Jeffrey falsely represent to David that there was no “deal in the wings”? If so, was the representation fraudulent or conduct in breach of s 9 of the Fair Trading Act 1999 (Vic)?
(3)Did the plaintiffs prepare and execute the Sale of Units and Shares Agreement and Deed of Assignment for an unlawful purpose? If so, are the agreements unenforceable or are the plaintiffs otherwise disentitled from the relief they have claimed in this proceeding?
(4)What, if any, compensation or damages should be awarded?
Breach of fiduciary duty
The plaintiffs claim equitable compensation from Jeffrey for his failure to disclose his negotiations with HJB. They submitted that as a consequence, Jeffrey and Ingriss Consulting obtained an improper benefit for which Jeffrey should compensate the plaintiffs.
The plaintiffs submitted that their relationship with Jeffrey was such that he was under a duty to disclose the negotiations. The defendants responded by submitting first, that no fiduciary duty arose; second, if there was a duty there was no breach by Jeffrey’s failure to disclose the negotiations; and finally, that even if there was a breach, Jeffrey had not gained any advantage and the plaintiffs had not suffered any consequential loss. The defendants submitted that the value of the consideration under the contract of sale and the deed of assignment was more than the benefit the plaintiffs would have derived had they remained as shareholder and unit holders.
The plaintiffs relied on Brunninghausen v Glavanics,[2] a decision of the Court of Appeal in New South Wales which, they submitted, involved similar facts to the present case. In Brunninghausen the Court of Appeal held that, notwithstanding the legal distinction between a company and its shareholders, a director in a proprietary company may, at least for some purposes, owe a fiduciary duty to shareholders. The duty may arise when negotiations for a takeover or an acquisition of a company’s business requires the director to promote the joint interests of all shareholders.
[2](1999) 46 NSWLR 538.
In that case two men, whose wives were sisters, owned shares in a company controlled by the defendant. Both were directors, although the plaintiff’s directorship was a mere formality which brought him no information or insight into the affairs of the company. The relationship between the two men broke down and eventually, with the assistance of their mother-in-law, they agreed upon terms under which the plaintiff would sell his shares to the defendant.
The plaintiff in Brunninghausen held only one sixth of the shares in the company. During the negotiations the defendant was approached by a potential purchaser for the business. As the negotiation for the sale of the business advanced the defendant sought the plaintiff’s agreement to the acquisition of his shares and forgiveness of a debt. Having obtained the plaintiff’s agreement, the defendant then agreed to sell the business for $2,l50,000. There were conditions precedent to completion and in the meantime the plaintiff and the defendant completed their transaction which involved the payment of $30,000 in cash, the transfer of stock to the value of $15,000 and forgiveness of the debt. The plaintiff was unaware of the sale of the business.
In Brunninghausen the defendant argued that Percival v Wright[3] decided that directors as such own no duty to shareholders to disclose the existence of the takeover negotiations. The defendant also argued that to have provided information to the plaintiff might have frustrated the negotiations with the purchaser of the business. There is a striking similarity between the defendant’s conduct in Brunninghausen and the Jeffrey’s conduct in this proceeding.
[3][1902] 2 Ch 421.
In Brunninghausen the Court of Appeal declined to follow Percivalv Wright. Handley JA delivering the principal judgment, said:
The general principle that a director's fiduciary duties are owed to the company and not to shareholders is undoubtedly correct, and its validity is undiminished. The question is whether the principle applies in a case, such as the present, where the transaction did not concern the company, but only another shareholder.[4]
…
In the present case the special knowledge acquired by the defendant in the course of his management of the company was of an opportunity for an advantageous sale of its undertaking. This was an opportunity available only to the company, although the transaction might have been structured as a sale of all its shares.
If the defendant had caused the company to sell its undertaking and had not purchased the plaintiff's shares, the benefit of the sale would have accrued to the shareholders pro rata. Any attempt by the defendant to secure an additional personal profit would have been a fraud on the minority. Any attempt to dilute the plaintiff's shareholding by a substantial fresh issue in favour of the defendant or his friends would have been invalid under Ngurli Ltd v McCann, and any attempt to intercept the gain by altering the rights attached either to his shares or those of the plaintiff would also have been invalid. Yet it is said on the authority of Percival v Wright that the defendant is entitled to take advantage of his special knowledge to acquire the plaintiff's shares at a gross under-value without disclosing that knowledge. Such a result appears anomalous.[5]
[4](1999) 46 NSWLR 538, 549 [57].
[5](1999) 46 NSWLR 538, 554 [85] and [86].
Having reviewed authorities extending the scope of a director’s duty beyond the company, Handley JA said:
The considerations emerging from this examination must be tested against the decisions of the High Court which have analysed the nature of fiduciary relationships. In Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 72 ; 55 ALR 417 Gibbs CJ approved the statement of this court that a fiduciary relationship exists where the facts of the case establish that in a particular matter a person has undertaken to act in the interests of another and not in his own. He added that a fiduciary may retain that character although he is entitled to have regard to his own interest in particular matters (at 68-69). Mason J at 96–97 said:
The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship … is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position …
It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed. [Emphasis supplied.]
At 107 Mason J held that a fiduciary is liable to account for a profit or benefit if it was obtained inter alia “by reason of the fiduciary position or by reason of a fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position”.
Earlier in Chan v Zacharia (1984) 154 CLR 178 at 198–9, Deane J had identified two themes which governed the liability of a fiduciary to account. The first need not be considered in this case. He continued:
The second … requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage … a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain … which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. [Emphasis supplied.]
Shareholders elect or appoint directors to manage the company for the benefit of themselves and the other members. This obvious fact was recognised by Jessel MR in Re Forest of Dean Coal Mining Co (1878) 10 Ch D 450 at 452 in a passage cited with approval in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 147 and 155. Persons who become shareholders after the company has been formed accept, at least for the time being, the existing directors and the articles providing for their appointment and removal. The plaintiff did not bargain for his shares and the division of powers between the directors and the shareholders in the company was not the product of negotiations with the defendant. The plaintiff's continuing directorship was an empty shell which the judge rightly disregarded. He was effectively a disenfranchised, minority shareholder, locked into the company. Any attempt to insist on his rights as a director would have led to his removal, if necessary by a court ordered meeting of members with a quorum of one. See Re El Sombrero Ltd [1958] Ch 900. The company had never been an incorporated partnership in any sense and his removal as a director would not have created a basis for winding up on the just and equitable ground.
The plaintiff therefore was almost totally powerless. He had no legal right as a shareholder to inspect the company's books of account or financial records. He was entitled to copies of the annual accounts but realistically chose not to exercise it. Those alone would not provide any real guide to the value of his shares. He had no effective right to be informed of the negotiations for the sale of the company's business.
The defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff. He could, if he saw fit, disclose information about the pending negotiations for the sale of the business but could not be compelled to do so. This gave him the capacity to affect the interests of the plaintiff “in a practical sense”, and in the context of the negotiations with him “a special opportunity” to exercise that capacity to the detriment of the plaintiff who was “at the mercy” of the defendant and “vulnerable to abuse” by the defendant “of his position”: Hospital Products ibid per Mason J at 96–7.
After 1983 the defendant did not undertake in any factual sense to act in the interests of the plaintiff, or in the joint interests of the plaintiff and himself. However he continued to occupy an office with the advantages referred to. In my judgment it is open to this court to hold that the office of director in a proprietary company is, at least for some purposes, a fiduciary one in relation to the shareholders. See generally P D Finn, Fiduciary Obligations, Law Book Co, Sydney, 1977 at Chs 2, 4. Fiduciary duties are imposed on the holders of such offices by operation of law. As Professor Finn said in Youdan, Equity, Fiduciaries and Trusts (1989) Carswell, Toronto, at 34–35:
But whether or not a real trust and confidence is there … the law simply prescribes that, in general, one party is entitled to expect that the other will act in his or their joint interests in those matters falling within the ambit of the [fiduciary] relationship … against the background of the relationship, its nature and its purpose [the law] asks for what purpose one party has acquired rights, powers and duties in the relationship: to promote his own interests, the joint interest, or the interest of the other party alone. Insofar as it is either of the latter two, the relationship will be fiduciary to that extent. [Emphasis supplied.]
Thus the question is not whether there is an expectation in fact, but whether the vulnerable party is “entitled to expect” a particular standard of conduct. Professor Finn continued (at 47):
… the expectation may be a judicially prescribed one because the law itself ordains it to be that other's entitlement. This may be so … because that party should, given the actual circumstances of the relationship, be accorded that entitlement irrespective of whether he has adverted to the matter …
In the present case there was a factual basis for some expectation on the part of the plaintiff. Mrs Lloyd had made known to both men her strong wish that they should settle their business differences so that harmony might be restored in the family. When the plaintiff accepted the defendant's last offer through Mr Abbott he said “I'll agree to that for the sake of family harmony”, and this was neither challenged nor denied.
The plaintiff had no idea of the real value of his shares to the defendant while the latter continued to operate the company, and made no attempt to find out. He would have had no reason to be unhappy if the company had continued to operate the business because he could not compare the true value of his shares with the value he received. In that event the transaction would probably have restored harmony in the family.
The sale to Gardner and Austen was bound to come to the plaintiff's notice. When it did its terms would demonstrate in a moment the gross disparity in price and the quick profit the defendant made from his purchase of the plaintiff's shares. The plaintiff's knowledge that in layman's terms he had been cheated by his brother-in-law was bound to destroy family harmony forever, even if it did not lead to litigation. In my view, although this finding is not necessary in this case, the family relationship, and the initiative taken by Mrs Lloyd, created a situation in which the plaintiff was “entitled to expect” that he would not be cheated by non-disclosure of negotiations such as those held with Messrs Gardner and Austen.
The sale of the plaintiff's shares to the defendant required a reconciliation of their competing interests in the transaction. A sale to outsiders in which both participated involved no such conflict. It would have enabled both plaintiff and defendant to receive full value for their shares without any conflict of interest necessarily arising between them.
A fiduciary duty owed by directors to the shareholders where there are negotiations for a takeover or an acquisition of the company's undertaking would require the directors to loyally promote the joint interests of all shareholders. A conflict could only arise if they sought to prefer their personal interests to the joint interest. That is the very conduct which would be proscribed by the duty.[6]
[6](1999) 46 NSWLR 538, 556-559 [94]-[106].
The defendants seek to distinguish Brunninghausen. They submitted that in Brunninghausen there was some expectation on the part of the plaintiff of a particular standard of conduct by the defendant. That expectation arose out of the expression by the mother-in-law of her strong wish that the plaintiff and defendant settle their business differences so that harmony might be restored in the family. Having mentioned those facts, Handley JA acknowledged that they were not findings necessary in the case. For reasons explained below, I have reached the conclusion that the factual basis for the fiduciary duty in the present case is stronger than it was in Brunninghausen.
The defendants further submitted that the terms of the Unit Holders Agreement, executed in 2004, militated against a fiduciary obligation as alleged by the plaintiffs. That agreement entitled each unit holder to appoint a director. David resigned as a director of ITR Group in February 2006. The defendants submitted that these factors were inconsistent with the existence of a relationship of trust and confidence and a fiduciary obligation imposed on Jeffrey. The submission, as it was developed, involved the following elements. The unit holders had agreed that they would protect their interest as such by the appointment of a director. Having voluntarily resigned as a director, David gave up his right to information and protection. The defendants also submitted that by resigning and leaving the burden of the business to Jeffrey, David could not expect Jeffrey to assume an obligation of responsibility to him or the unit holders.
In my opinion such a proposition misunderstands the circumstances under which the law imposes a fiduciary obligation. A sale of the business of the group would influence the value of all units in the trust. The value in the shares was control of the trustee, ITR Group. David and Jeffrey had joint interests in the business of the group. David was entitled to expect that Jeffrey would promote their joint interests. He was entitled to expect that Jeffrey would not attempt to obtain for himself a greater benefit than would flow to the other unit holders. The transaction was, after all, the sale of the whole of the business and undertaking of the group.
Jeffrey’s email to David of 7 February 2006 confirms David’s decision to resign all directorships. It is notable because Jeffrey gave an assurance to David that should David continue to remain as a shareholder, Jeffrey would “continue to fulfil all of my fiduciary duties and act at all times in the best interests of all shareholders”.
I do not regard the distinction between David’s interest as a shareholder in ITR Group and the interest of his entities as unit holders in the Trust, as material for the purpose of analysing the existence or otherwise of a fiduciary duty owed by Jeffrey to the shareholders and unit holders. Insofar as Jeffrey was under an obligation not to take advantage of his position to obtain a commercial advantage over a shareholder, the same duty extends to prohibit him obtaining a commercial advantage for his unit holder over other unit holders. It seems unnecessary, in the circumstances, to analyse the extension of the duty to cover unit holders where the value of the business is reflected in the value of units rather than the value of shares. There was a coincidence of control over the shares and units. In different circumstances the analysis may be assisted by calling in aid the duty imposed upon trustees to treat beneficiaries of the same class equally or by extending the duty of a director of a trustee company (ITR Group), in certain circumstances, to beneficiaries of the trust. No such complexity is necessary in the present case because of the coincidence of control and ownership.
The strong factual basis for the fiduciary duty in the present case is augmented by representations made by Jeffrey to David during the course of his negotiation with HJB. Jeffrey owed David and the unit holders a fiduciary duty not to misuse his position for his personal advantage. He breached that duty and must account to David and the beneficiaries for his benefit or gain.
I note in passing that the same solicitors acted for Jeffrey on the contract of sale of business to HJB and his purchase of units and shares from David. It would be surprising if the solicitors had not alerted Jeffrey to the very real risk to him of completing the purchase shortly before the sale. In his evidence Jeffrey pretended that the timing of the transactions was coincidental. I reject his evidence in that regard. It was not coincidental. It was essential to his plan that he first acquire all of David’s interest so that he could derive the whole of the benefit of the sale of the business to HJB at David’s expense.
Representations
A feature of the present case that distinguishes it from Brunninghausen are the representations alleged to have been made by Jeffrey to David during the course of Jeffrey’s negotiations with HJB. David gave evidence that prior to July or August 2006 negotiations had stalled for the sale of his shares and the units. At around that time they were reactivated by Jeffrey and appeared to became a matter of urgency. The sense of urgency caused David to believe that there must have been a “deal on the go”. He asked Mr Kent and Jeffrey whether that was so. David said that he made the enquiry on a number of occasions in general terms by asking whether there was “a deal in the wings”. On each occasion he asked Jeffrey, which was at least twice, he was told “no”. He asked Mr Kent who said that he had no knowledge of a deal.
Mr Kent did not give evidence, nor did any other person (apart from Jeffrey) said to have been in attendance at the various meetings at which David said he asked the question.
David said that there were probably four or five meetings. The first meeting David could recall, at which he made the enquiry as to whether there was “a deal in the wings”, was in a coffee lounge. Mr Kent and Mr Clements were present although Jeffrey was not. Mr Kent responded, “not to my knowledge”. Prior to the meeting Mr Kent had produced a document setting out proposed terms for the sale of the units and sent it by email to David. The document is dated 28 July 2006. David agreed, by reference to the document, that negotiations resumed in July.
At a later meeting, before 7 September 2006, at which Jeffrey was present, David asked Jeffrey, “is there a deal in the wings”? Jeffrey answered “no”. David said that on 7 September 2006, shortly prior to executing the sale documents, he again asked Jeffrey whether there was a “deal in the wings”? Jeffrey again replied “no”. David explained his persistent questioning because “Jeffrey all of a sudden wanted to buy my shares”.
David said that had he been told of a deal under negotiation he would have tried to work out a better price by reference to the value of the transaction. He said “there was probably room for negotiation”.
Jeffrey’s position in relation to the representations was to deny that he had ever been asked, “is there a deal in the wings?”. He said, however, that at one meeting, after the commencement of his negotiations with HJB, David did ask a question about his intentions. Jeffrey said that David inquired about a possible sale of the ITR Group as a whole. Jeffrey said that he responded to the question in the negative. He justified his response by saying that “at that point in time I did not have any intentions of selling the ITR Group”. He seemed to draw a distinction between a sale of the group as a whole and a sale of the business carried on by the group. David denied that he asked such a specific question.
It is, therefore, common ground that after the commencement of negotiations between Jeffrey and HJB, David made an enquiry of Jeffrey as to his intentions in relation to a sale of something. There is documentary evidence indicating that the commercial terms of a deal between Jeffrey and HJB had been concluded in principle by the end of July 2006. There is a detailed terms sheet, dated 31 July 2006, incorporating proposed settlement arrangements and price adjustments. At around the same time, Mr Kent had prepared detailed terms of a proposed acquisition of David’s shares and units. The document is dated 28 July 2006. In August the documentation for both transactions was being prepared by legal representatives.
If the version of events given by Jeffrey, concerning the specific inquiry made by David, about the sale of the group as a whole were to be accepted, his denial would have been misleading. At that time Jeffrey was negotiating the sale of the business carried on by the group and the purchase of David’s shares and the units. He was under a duty not to promote his own position over that of other shareholders and the unit holders. His silence may have been justified, for reasons of confidentiality, provided he did not seek to improperly derive an advantage for himself. If asked directly whether he had a deal to sell the ITR Group, a negative answer could only have been designed to throw David off the scent, pending the completion of the contract of sale. Accordingly, even accepting Jeffrey’s version of the conversation, I would find that his conduct contravened s 9 of the Fair Trading Act.
I do not, however, accept Jeffrey’s evidence on this matter and prefer the evidence of David. The nature of the inquiry, in the general terms and circumstances explained by David, is consistent with what might be expected to pass between them. I also prefer the evidence of David as a whole to that of Jeffrey. Jeffrey’s evidence in connection with the accounts of the group and a communication with Mr Verebes was so unsatisfactory as to reflect generally upon his credibility. When giving evidence he was opportunistic and cavalier with the truth. He gave the impression of a witness who cared little for the oath he had taken. I will elaborate below.
Fair Trading Act and Deceit
Preferring, as I do, the evidence of David on the topic, I accept that he questioned Jeffrey, on a number occasions during the period of Jeffrey’s negotiations with HJB, as to whether there was a “deal in the wings” and was told, “no”. Jeffrey’s answers were, in the circumstances, misleading and deceptive contrary to s 9 of the Fair Trading Act. The plaintiffs also rely upon Jeffrey’s responses as deceit. Contrary to the defendants’ submissions, each of the elements of the tort are made out[7]. The false denials by Jeffrey were made with the intention of persuading David to complete the sale of his units and the shares, ignorant of the deal Jeffrey was negotiating with HJB. The denials were intended to induce David to believe a state of facts which Jeffrey knew to be false.
[7]Magill v Magill (2006) 226 CLR 551 at para 114.
I am satisfied that had David been told the truth about the negotiation, he would not have entered into the contract of sale in the terms in which he did. He may, as he said, have sought to renegotiate the sale He would at least have sought detailed information about the terms of the sale to HJB or delayed his sale until such time as he could be confident that the value of his units sold reflected the benefit of the sale of the business to HJB. That being so, I find that he suffered damage which was caused by the false inducement. The damage is measured by the difference between the amount the plaintiffs would have received had they participated as unit holders in the sale of the business and the value attributed to the shares and units under the contract of sale and deed of assignment. The true measure of the loss and damage suffered by the plaintiffs, by reason of the deceit of Jeffrey, is the same as the loss and damage suffered by reason of the contravention of s 9 of the Fair Trading Act.
Illegality
The centrepiece of the defendants’ defence is that the agreements executed on 7 September 2006 formed part of a contrivance by the plaintiffs to reduce their liability for capital gains tax, with the intention of depriving the Commonwealth of Australia of revenue to which it would otherwise have become entitled. The defendants alleged that because the agreements were brought into existence for an unlawful purpose they were void and unenforceable.
There was some ambiguity about the way in which the defendants constructed their case of illegality. While acknowledging that an overriding intention to mislead or deceive the taxation authorities was generally required,[8] the defendants maintained that if the transaction was caught by Part IVA of the Income Tax Assessment Act 1936 (Cth), which contains general anti-avoidance measure in relation to tax, the necessary unlawful purpose was present. To support that proposition they relied upon Clements, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police.[9]
[8]Napier v National Business Agency Ltd (1951) 2 All ER 264.
[9](2001) 48 ATR 650 at [211].
The initial draft contract of sale included a provision for the release of the loan account. A separate deed of assignment was eventually prepared and executed. There was a dispute as to who initiated the separation of the assignment from the contract of sale. During opening submissions, prior to the plaintiffs calling of any witnesses, counsel for the defendants was asked to identify the solicitor alleged by Jeffrey to have explained to him that the reason for the separate deed of assignment was to reduce capital gains tax. Counsel said that Jeffrey would give evidence of a telephone call in which the caller “was possibly Chris Verebes but Mr Jones thinks it was Mr Slater”. Consequently, the plaintiffs called Mr Slater to give evidence on the topic before the plaintiffs closed their case.
When called, Mr Slater said that he had not telephoned Jeffrey and would not have done so because it would have involved communicating directly with the client of another solicitor. At the time Jeffrey was represented by Molomby’s. Mr Slater said that it was his invariable practice, and that of Mr Verebes on his instructions, not to communicate with a client of another solicitor. After Mr Slater had concluded his evidence and the plaintiffs closed their case, Jeffrey gave evidence that he had received the telephone call from Mr Verebes, who told him that “it was specifically to reduce the potential CGT liability”. I prefer the evidence of Mr Slater on this topic. It is inherently unlikely that he or Mr Verebes would have had direct communications with Jeffrey, knowing that he was represented by another firm of solicitors. Further, having regard to the opening remarks of his counsel and the decision of the plaintiff’s to call Mr Slater, the subsequent positive identification of Mr Verebes as the caller was nothing short of opportunistic. I do not accept Jeffrey’s evidence that he received any such telephone call.
By letter dated 18 August 2006 Mr Nolan, partner at Molombys wrote to Jeffrey in the following terms:
Following our meeting at your office yesterday, the 17th August 2006, we have made the required changes to the Agreement and the updated version is delivered herewith.
Subsequent to the meeting, we have received notification from Mr Seaburgh that based upon further information received concerning the negotiations that lead to the Heads of Agreement, the loan account under discussion and the off-set in the sale price should not be reflected in the Sale Agreement and that independent agreement for the forgiveness of the loan account debt with David Jones and the DNM would be prepared.
There has also been confirmed through a company search that the 44 shares in the company stand in the name of David Jones.
Finally, reference is now made in the Sale Agreement to the Special Par Unit held by eQuus Contracting Pty Ltd which should also be transferred. It appears that the Special Par Unit controlled by Mr Singer and Singer Software Pty Ltd had been omitted from that Sale Agreement but we are instructed that that position can be rectified with Mr Singer.
We envisage that the agreement will now be handed to David Jones for perusal and we await his response subject to any queries that you may have.
Although it is not clear who initiated the separation of the assignment from the contract of sale, David and Mr Slater took responsibility for modification of the draft deed of assignment. They said that it was their intention to ensure that no question could ever arise about the efficacy of the release to avoid the possibility of Jeffrey later contending that the loan account was something more than the sum under contemplation at the time of the sale of the units and shares. That may be so, but that objective could have been achieved within the contract of sale.
The defendants had little interest in the form of the deed of assignment and whether or not it was included as part of the contract of sale. If someone requested separate documents it seems more likely that it would have been David or his solicitor. Both, however, consistently denied any intention of avoiding the payment of capital gains tax properly payable on the transaction. Mr Slater said he assumed that the liability would be calculated on the basis of the whole amount of the sale proceeds, including the value of the release. David said he believed that capital gains tax would be calculated on the “grossed up” amount of $575,000, representing the value of the loan account released under the deed and the proceeds from the sale of shares and units after deducting the amount paid to a minor unit holder, Anne McKenzie.
The defendants made much of the fact that David’s unit holders (eQuus Contracting and DNM) had not returned the whole capital gain in their income tax returns and sought to infer from that failure an intention to deceive the tax authorities at the time the contract of sale and deed of assignment were executed on 7 September 2006. Subsequent acts of David are not irrelevant to establishing his intention at the time the documents were prepared and executed. They might constitute acts from which a relevant intention might be inferred. The landscape had, however, changed between September 2006 when the documents were executed and March 2008 when the income tax returns for the vendors of the units were prepared. In late 2007 Jeffrey stopped making the payments he had agreed to make under the contract of sale as varied on 14 September 2006. By that time Jeffrey had paid only $78,000 of the total sum of $375,000 payable to David’s unit holders. David said that he formed the view that Jeffrey was unlikely to pay anything more and instructed his accountant to return only as much as he had actually been paid as a capital gain.
David acknowledged that his instructions were contrary to his accountant’s advice. Whatever criticism may be advanced against David in the preparation of the taxation returns it is difficult to attribute much, if any, significance to those circumstances as evidence of his intention at the time the sale documents were executed on 7 September 2006.
The plaintiffs relied upon the evidence of David and his solicitor concerning their state if mind in relation to the tax consequences of the sale and the reason for the preparation of a separate deed of assignment in its final form. They also relied upon the minutes of meeting of the ITR Group dated 7 September 2006 which record the documents constituting the whole transaction. They submitted that the existence of formal executed documents and the minutes of meeting were inconsistent with any intention to deceive the tax authorities.
I am not persuaded that the mere fact of formal executed documents and minutes of a meeting of the ITR Group have the forensic weight attributed to them by the plaintiffs. Be that as it may, I am not satisfied that the plaintiffs’ purpose in the preparation and execution of the documents, in the form in which they were finally executed, was to defraud the Commonwealth. An attempt to structure a transaction so as to reduce the incidence of taxation is not of itself dishonest. The evidence does not support a finding of an intention to defraud when preparing and executing the agreements and I make no such finding.
Part IVA
The defendants’ reliance on Part IVA of the Income Tax Assessment Act was misconceived. They argued that if it could be demonstrated that the Commissioner of Taxation would be likely to exercise the power to apply that provision to the contract of sale and deed of assignment, the transaction would be so tainted by impropriety that the Court should refuse to enforce it. The defendants relied upon a decision of North J in Clements, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police[10] which concerned a challenge made by the AFP for access to communications between a solicitor and client on the grounds that they were part of an improper or illegal scheme and thus lost their privileged status. The particular passage relied upon by the defendants is at para 211 of the judgment where his Honour said:
The applicant argued that Pt IVA established an administrative mechanism designed to protect revenue, but that it did not render illegal schemes which fell within it. Section 177F gave the commissioner a discretion to cancel a tax benefit gained as the result of entering a scheme. Counsel for CDB emphasised the fact that the cancellation of the tax benefit was not automatic, but depended on the exercise of discretion by the commissioner. While this is so, the complete picture must take account of s 226 of the ITAA 1936 which provided that, where the commissioner cancelled a tax benefit, there was an automatic statutory penalty of up to 50% of the amount of tax payable as a result of the cancellation of the benefit. There is, therefore, a clear punitive aspect to the regime. In my view, the fact that the provisions of Pt IVA are applicable to the scheme renders the clients’ actions improper in the sense required for the application of the doctrine which limits the reach of client legal privilege.
Finally, there is prima facie evidence that the actions of the clients, through CDB, were illegal in the ordinary sense namely, that they constituted a criminal offence. Their actions, prima facie, constituted a breach of s 29D Crimes Act 1914 (Cth), which made it an offence to defraud the Commonwealth. It was a fraud on the Commonwealth to pretend that they had entered into transactions when they had not, and in particular, when those purported transactions permitted them to avoid tax which would otherwise have been payable.
[10][2001] FCA 1858; 48 ATR 650.
Having regard to other findings made by his Honour in Clements, Dunne & Bell, including a finding that the solicitors knew that the scheme being promoted by Mr Petroulis was a sham; knew that false declarations were made; and that there was prima facie evidence of the commission of a criminal offence contrary to s 29D of the Crimes Act 1914 (Cth), it was hardly necessary to allude to the tax consequence upon the application of Part IVA. I do not regard the forgoing observations as forming part of the ratio of the decision. I would respectfully disagree with the proposition that merely became Part IVA may be applied to a transaction, it is rendered illegal and unenforceable.
A decision by the Commissioner of Taxation to apply Part IVA does not have the effect of transforming an otherwise valid and enforceable contract into an illegal contract. The administrative act of a third party cannot determine whether a contract is illegal and unenforceable. Even if the application of Part IVA is confirmed by a court, that does not impugn the validity or enforceability of the agreements. The opinions of experts about the application of Part IVA and the likelihood of the Commissioner seeking to apply the provision are similarly irrelevant.
In response to the defendants’ illegality case, the plaintiffs obtained and initially sought to rely upon the opinion of Ronald John Jorgenson on the tax implications of the structure of the agreements, as if the tax consequence, which included some consideration as to whether Part IVA might apply and would be applied, had a bearing upon the question of illegality raised by the defendants. Mr Jorgenson proposed to give evidence that in his opinion, subject to the application of Part IVA, the forgiveness of the debt would not attract capital gains tax. He also proposed to give evidence that it was reasonably arguable that the Commissioner would not seek to apply Part IVA. The defendants proposed to adduce an expert opinion from Michael Yang Bearman, a barrister, to contradict Mr Jorgenson.
Neither party called their proposed expert and instead sought to rely upon the opinions as no more than a supplement to their submissions. It is unfortunate that the parties expended time and money procuring these opinions which were, for the most part, irrelevant. I did not find the supplementary submissions, for that is all they could be, of Michael Bearman and Ronald Jorgenson as of any great assistance.
Consequences of illegality
Assuming, against my conclusion, that the defendants case for illegality could be established by demonstrating that Part IVA of the Income Tax Assessment Act would be (or even had been) applied to the agreements, any consequential taint or impropriety surrounding the transaction would not require a court to refuse enforcement of the agreements. Nor would it deny to the plaintiffs the other remedies they seek under the Fair Trading Act or for compensation for breach of fiduciary duty. In Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd[11] Mason J, as he then was, observed:
The main considerations from which the principle ex purpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime.[12]
[11](1978) 139 CLR 410 at 429.
[12]Ibid, 429.
His Honour had earlier observed that:
There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished.
The policy considerations which require a court to refuse enforcement of an illegal contract have no application to the present circumstances. The so-called unlawful purpose attributed to David is a purpose which, if established, would attract the operation of Part IVA of the Income Tax Assessment Act. The scheme of that part of the Act, coupled with the offences created under the taxing legislation, provides a uniquely complete range of remedies to ensure that the enforcement of the agreements will not offer an inducement to crime or remove a restraint to crime.
I find that the contract of sale is binding and enforceable. The plaintiffs claim the unpaid balance of the purchase price. They are entitled to recover the sum of $297,000 together with interest.
Equitable compensation
Jeffrey must account to David and the unit holders controlled by him for his benefit or gain from the sale of the group business. The benefit is to be measured by the difference between the value paid to the plaintiffs under the agreements executed on 7 September 2006 and the value to which they would have been entitled as shareholder and unit holders participating in the sale of the business to HJB. The plaintiffs calculated the benefit by deducting from a proportional share of the proceeds from the sale of the business the value attributed to their shares and units in the Trust in the sum of $775,000. The value of the consideration paid by HJB for the business was $3,951,614. 44% of that sum is $1,738,710. After deducting $775,000, the measure of the benefit and thus loss is $963,710.
The plaintiffs’ calculation of loss and damage or compensation assumes that the whole of the value for the sale to HJB would have passed to the unit holders. The plaintiffs submitted that they are entitled to calculate their loss on that basis because the defendants, who have control of the books of account of the group, have made no attempt to adduce evidence to the contrary.
The defendants submitted that the plaintiffs had failed to prove any loss because they had failed to take into account the liabilities of the group. This submission was made primarily in relation to the claim for damages for deceit, although I will assume that it was intended to have a more general application, reducing any entitlement to compensation.
David had not been provided with financial information in relation to the group since about December 2005. Jeffrey was in control of each entity constituting the group. No evidence was called by the defendants to objectively analyse the financial position of the group and explain the impact of the sale on the value of the units in the Trust.
The defendants might well have advanced expert evidence of the financial position of the group as at the date of sale to HJB in order to demonstrate that the plaintiffs’ entitlement was something less than a proportionate share of the value of the sale to HJB. They did not do so. They relied instead on the financial reports for the group and, in particular, the financial report for ITR Group, renamed Islington Manor Pty Ltd. The primary report was for the year ended 30 June 2007, which was the year within which the sale of the business took place. Jeffrey propounded the financial reports as a reliable guide to the financial position of the group and the consequence of the sale to HJB.
Jeffrey gave evidence about payments made by HJB. He said that the first payment of $500,000 went to the National Australia Bank to repay the loans. He said that the bank also took a charge over that part of the consideration constituted by shares in HJB, issued to IT Resources. Jeffrey said that some of the other payments went to the bank, without being specific. He did not say what happened to the final payment, in excess of $1m. The HJB shares were sold. Jeffrey said that the proceeds from the sale was about $1.3m.
When shown a balance sheet for the ITR Group as at September 2006, Jeffrey said that it was accurate. The balance sheet records negative assets of $353,088.46. It records a number of inter-company transactions. ITR Group had apparently loaned about $1.025m to the owners of the units in the Trust. The debt due from Jeffrey’s company, Ingress Consulting, exceeded $800,000; while the debt due from DNM was about $278,000. This was the debt assigned and discharged under the deed of assignment. The fact that the debt is found in the accounts “as at September 2006” indicates that the balance sheet predated the sale of his shares and units and also the sale of the business to HJB.
Liabilities recorded in the ITR Group balance sheet included debts to the CBA in the sum of $346,906 and to the National Australia Bank in the sum of $50,873.11. The total inter company borrowings were $914,193,098. The major inter-company creditor was a subsidiary, eQuus Consulting, which was owed $1,000,588.83.
A review of the eQuus Consulting balance sheet as at 30 June 2006 revealed a liability to National Australian Bank of $166,986.27 and assets, comprising inter‑company loans, of $2,874,078.80, including a loan to the ITR Group of $1,032,379.93 and to the Peer Partnership of $1,072,274.65. There was a loan to IT Resources of $18,424.22 and to eQuus Resources Planning in the sum of $751,000.00.
At 30 June 2007 receivables in the accounts of ITR Group had increased slightly over the previous years, to $1,609,201, comprising inter-company loans and a loan of $1,091,614 to HJB. Liabilities, on the other hand, had escalated from $1,352,829.65 to $4,823,982. The liabilities were comprised mainly of two bank loans, which together accounted for $767,376 and a debt due to eQuus Resources Planning of $4,028,319. In the profit and loss statement for the year ended 30 June 2007, precisely the same amount ($4,028,319) had been recorded as written-off as a bad debt, thus increasing expenditure to be applied against the “profit on sale of non-current assets” in the sum of $3,882,658. The profit on sale reflected the consideration paid for the business by HJB.
For the year ended 30 June 2007, ITR Group recorded a small profit of $149,623,00 and a total negative equity in its balance sheet of $1,476,128. But for the same period eQuus Resources Planning recorded a new receivable of $4,028,419 and total equity of $2,854,643, an increase of $2,852,031 over the previous year. For the same period The Peer Partnership balance sheet improved by $2,083,798. Leaving net assets of $962,087.
What is reasonably clear is that the proceeds from sale of the assets of ITR Group were passed on to subsidiaries leaving ITR Group in much the same net financial position it had been prior to the sale. The evidence, constituted by the financial records upon which the defendants rely, does not support the claim that the financial position of the group was such that the benefit to the group of the sale of the business to HJB, as calculated by plaintiffs, should be discounted because of group liabilities. Jeffrey accepted, not surprisingly, that as sole director of each entity in the group he was intimately acquainted with their financial position. Even so he said that he had no idea what the liability of ITR Group to eQuus Resources Planning ($4,028,319), found in the 2007 financial accounts, related to. When asked whether he had anything to say about the way in which the accounts were prepared that might explain the liability in the balance sheet and the identical write-off in the profit and loss account of an identical sum, he said “no”.
Jeffrey said that it was his intention to propound the accounts as evidence of the financial position of ITR Group for the purpose of persuading the Court that it was a company suffering a significant deficit. They showed no such thing. I do not accept the accounts as an accurate record of the financial position of the group following the sale of the business to HJB. While the cash flowing from the transaction may have been employed to repay the bank, I am persuaded that the majority, if not all of the value of the transaction was transferred to other companies in the group and reflected in a significant improvement in their financial position.
In the absence of expert assistance and a detailed financial analysis of the group, I am left to do the best I can with the available information. The evidence of Jeffrey was most unsatisfactory in relation to the financial position of the group. Had evidence been available to him to demonstrate that the benefit to the plaintiffs of the HJB transaction was less than was alleged by them, I have no doubt that Jeffrey would have adduced the evidence. He was given adequate notice of the claim and of the challenge made to the accounts. Accordingly, I find that had the plaintiffs remained as shareholders and unit holders in the ITR Group, they would have derived a benefit from the sale of the business of $1,738,710. I will deduct from that amount the value to the plaintiffs of the contract of sale and deed of assignment in the sum of $775,000 and order compensation in the sum of $963,710.00.
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