Lifeplan Australia Friendly Society Ltd v Woff
[2016] FCA 248
•15 March 2016
FEDERAL COURT OF AUSTRALIA
Lifeplan Australia Friendly Society Ltd v Woff [2016] FCA 248
File number: SAD 99 of 2012 Judge: BESANKO J Date of judgment: 15 March 2016 Catchwords: EQUITY – fiduciary duties – consideration of fiduciary relationship between employer and employee – consideration of duty of confidence – breaches of fiduciary duties – where employee takes steps to establish new business while still employed – where employee takes confidential or valuable information prior to resigning – where employee uses confidential or valuable information for purpose of advancing a business proposal in their own interests – where employee solicits employer’s clients for new business venture
EQUITY – liability for breach of fiduciary duties – where former employee now employed with new employer – consideration of whether new employer can be vicariously liable for the equitable wrongdoing of its employee – consideration of knowing assistance and the second limb of Barnes v Addy
EQUITY – remedies – account of profits – consideration of when an account of profits might be granted – consideration of the measure of an account of profits – principles of causation – where no profit in consequence of breach – consideration of whether salaries of individuals can be recovered as profits
CONTRACTS – employment contract – breaches of terms implied in law – duty of fidelity and good faith – consideration of the relationship between implied contractual duties and the fiduciary duties an employee owes employer
CORPORATIONS – breaches of statutory duties of employees and officers – ss 181, 182 and 183 of the Corporations Act 2001 (Cth) – consideration of definition of “officer” – consideration of the relationship between statutory duties and the fiduciary duties an employee owes employer – involvement in breaches - s 79 of Corporations Act – consideration of power to award profits in relation to contraventions of Corporations Act – s 1317H(2) of Corporations Act
TORTS – inducing a breach of contract – consideration of elements of common law tort of inducing a breach of contract – where prospective employer induces employee to breach current contract of employment
TORTS – passing off – consideration of elements of passing off – where similarities between disclosure documents, marketing flyers and other administrative forms – where some evidence of confusion in market – where no direct evidence that relevant consumers were actually deceived or likely to be deceived – where insufficient evidence of damage
Legislation: Corporations Act 2001 (Cth) ss 9, 79, 180, 181, 182, 183, 232, 471B, 1317E, 1317H, 1317HD, 1317J
Life Insurance Act 1995 (Cth) s 16C, 21
Partnership Act 1890 (UK) s 10
Cases cited: Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37
Apand Pty Ltd and Another v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568
Australian Broadcasting Corporation v Lenah Game Meats Pty Limited [2001] HCA 63; (2001) 208 CLR 199
Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345
Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 105 ACSR 116
Baden and Others v Sociéte Générale pour Favoriser le Dé veloppement du Commerce et de l’Industrie en France SA Note [1993] 1 WLR 509 at 575-576, 582; [1992] 4 All ER 161
Barnes v Addy (1874) LR 9 Ch App 244
Blyth Chemical Limited v Bushnell (1933) 49 CLR 66
Breen v Williams (1996) 186 CLR 71
Cadbury‑Schweppes Pty Ltd v Pub Squash Co Pty Ltd (1980) 2 NSWLR 851; (1980) 32 ALR 387
Chan v Zacharia (1984) 154 CLR 178
Clayburn Industries Ltd v Piper [1998] BCJ No 2831
Coca-Cola Company v PepsiCo Inc (No 2) [2014] FCA 1287
Colbeam Palmer Limited v Stock Affiliates Pty Limited (1968) 122 CLR 25
Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Corke Instrument Engineering Australia Pty Ltd (2005) 223 ALR 480; [2005] FCA 799
Conagra Inc v McCain Foods (Aust) Pty Ltd (1992) 33 FCR 302
Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 176 ALR 693
Consul Development Pty Limited v DPC Estates Pty Limited (1975) 132 CLR 373
Coulthard and Others v State of South Australia (1995) 63 SASR 531
Dart Industries Inc v Decor Corporation Pty Ltd and Another (1993) 179 CLR 101
DC Thomson & Co Ltd v Deakin [1952] Ch 646
Decor Corporation Pty Ltd and Another v Dart Industries Inc (1991) 33 FCR 397
Dubai Aluminium Co Ltd v Salaam and Others [2003] 2 AC 366
Erven Warnink BV v J Townend & Sons (Hull) Ltd [1979] AC 731
Faccenda Chicken Ltd v Fowler and Others [1987] Ch 117; (1985) 6 IPR 155
Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89
Forkserve Pty Ltd v Pacchiarotta and Anor (2000) 50 IPR 74
Futuretronics.com.au Pty Limited v Graphix Labels Pty Ltd [2007] FCA 1621
Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 2
Grimaldi v Chameleon Mining NL and Another (No 2) [2012] FCAFC 6; (2010) 200 FCR 296
Hospital Products Limited v United States Surgical Corporation and Others (1984) 156 CLR 41
Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157; [2001] FCA 1040
Howard v Commissioner of Taxation [2014] HCA 21; (2014) 253 CLR 83
Jones v Dunkel and Another (1959) 101 CLR 298
Lifeplan Australia Friendly Society Ltd v Woff [2013] FCA 613
Lifeplan Australia Friendly Society Ltd v Woff [2013] FCA 1092
Lloyd v Grace, Smith & Co [1912] AC 716
57134 Manitoba Ltd v Palmer [1989] BCJ No 810
Microsoft Corporation and Another v Atifo Pty Ltd and Others (1997) 38 IPR 643
Pilmer and Others v Duke Group Ltd (In Liquidation) and Others (2001) 207 CLR 165
Polyaire Pty Ltd v K-Aire Pty Ltd & Ors [2012] SASC 75
Qantas Airways Ltd v Transport Workers’ Union of Australia & Ors (2011) 280 ALR 503
Reckitt & Colman Products Pty Ltd v Borden Inc and Others [1990] UKHL 12; (1990) 17 IPR 1
Robb v Green [1895] 2 QB 1
Robb v Green [1895] 2 QB 315
SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079
Spotless Group Ltd & Others v Blanco Catering Pty Ltd and Another [2011] FCA 979; (2011) 93 IPR 235
State of New South Wales v Lepore and Another (2003) 212 CLR 511
TGI Friday’s Australia Pty Ltd and Another v TGI Fridays Inc and Another (1999) 45 IPR 43; [1999] FCA 304
Timber Engineering Co Pty Ltd and Others v Anderson and Others [1980] 2 NSWLR 488
University of Western Australia v Gray (2009) 179 FCR 346
V-Flow Pty Ltd and Others v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16; (2013) 296 ALR 418
Warman International Limited and Another v Dwyer and Others (1995) 182 CLR 544
Yorke v Lucas (1985) 158 CLR 661
Zhu v Treasurer of New South Wales (2004) 218 CLR 530
Dates of hearing: 1-5, 9-12, 15, 25, 26 June 2015 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance & Insurance Category: Catchwords Number of paragraphs: 486 Counsel for the Applicants: Mr P Collinson QC with Mr M Douglas Solicitor for the Applicants: Ashurst Australia Counsel for the First and Second Respondents: Mr J Loewenstein Solicitor for the First and Second Respondents: Esser Legal Counsel for the Third Respondent: The third respondent did not appear Counsel for the Fourth Respondent: Mr R Macaw QC with Mr D Gration Solicitor for the Fourth Respondent: Turks Legal
Table of Corrections 29 March 2016 In paragraph 2, third sentence, the word “the” has been deleted before the words “duties of confidence”. 29 March 2016 In paragraph 33, the word “not” has been deleted between the words “was” and “something”. 29 March 2016 In paragraph 40, the word “the” has been deleted between the words “of” and “Lifeplan’s”. 29 March 2016 In paragraph 79, the words “on line” has been replaced with “on-line”. 29 March 2016 In paragraph 85, the word “licence” has been replaced with “Licence”. 29 March 2016 In paragraph 236, the words “Mr Hughes” between the words “to” and “of” has been replaced with “him”. 29 March 2016 In paragraph 283, the word “the” has been inserted between the words “in” and “sales”. 29 March 2016 In paragraph 318, the word “the” has been deleted between the words “in” and “FPA’s”. 29 March 2016 In paragraph 405, the word “of” has been deleted between the words “and” and “his”. 29 March 2016 In paragraph 472, the word “the” has been inserted between the words “was” and “cost”. 29 March 2016 In paragraph 484, the word “to” has been deleted after the word “Annexure B”. ORDERS
SAD 99 of 2012 BETWEEN: LIFEPLAN AUSTRALIA FRIENDLY SOCIETY LTD ACN 087 649 492
First Applicant
FUNERAL PLAN MANAGEMENT PTY LTD ACN 003 769 640
Second Applicant
AND: NOEL WOFF
First Respondent
RICHARD CORBY
Second Respondent
FUNERAL PLANNING AUSTRALIA PTY LTD (IN LIQUIDATION) (and another named in the Schedule)
Third Respondent
JUDGE:
BESANKO J
DATE OF ORDER:
15 March 2016
THE COURT ORDERS THAT:
1.The applicants file and serve within seven days draft minutes of order reflecting the conclusions expressed in these reasons and containing any other orders they seek.
2.The proceeding be adjourned to a date to be fixed for the making of final orders.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
Introduction
[1]
The Application to Amend
[21]
Witnesses
[27]
Discovery
[63]
The Facts
[68]
Lifeplan and FPM
[69]
Foresters
[84]
Lifeplan and Mr Woff and Mr Corby
[93]
The investigation by Mr Walsh
[112]
The BCP and the events leading up to it
[144]
Tobins
[194]
Approaches to other funeral directors
[214]
Inducing Mr Corby to leave his employment with Lifeplan
[227]
Failure to disclose a business opportunity to the applicants
[229]
Taking and using the FPM Business System
[230]
Taking other confidential and/or valuable business intelligence
[247]
Steps towards establishing a new business whilst still employed by Lifeplan
[250]
Matgraphics and the pre-paid funeral contract pads
[261]
Melbourne Mailing and the applicants’ list of funeral directors
[267]
The cause of action for passing off
[282]
Other events
[283]
Involvement of Foresters in the conduct of Mr Woff and Mr Corby
[293]
Breaches of Duty
[327]
Principles
[327]
The BCP
[377]
Tobins
[382]
Approaches to funeral directors other than Tobins
[386]
Inducing Mr Corby to leave his employment with Lifeplan
[390]
Failure to disclose a business opportunity to the applicants
[393]
Taking and using the FPM Business System
[396]
Taking other confidential and/or valuable business intelligence
[398]
Steps towards establishing a new business whilst still employed by Lifeplan
[400]
Matgraphics and the pre-paid funeral contract pads
[403]
Melbourne Mailing and the applicants’ list of funeral directors
[405]
The cause of action for passing off
[407]
The Account of Profits
[414]
What profits are claimed?
[414]
Relevant principles
[422]
Are the applicants entitled as against Foresters to the profits earned and to be earned by Foresters in relation to the Foresters Funeral Fund?
[442]
The applicants’ claim for an account of profits against Mr Woff and Mr Corby
[446]
Conclusions with respect to the account of profits
[448]
The value of the Foresters Funeral Fund and the expert evidence
[449]
Conclusions
[482]
Appendix A
Appendix B
BESANKO J:
Introduction
This proceeding involves claims made by Lifeplan Australia Friendly Society Ltd (“Lifeplan”) and Funeral Plan Management Pty Ltd (“FPM”) for declarations, an injunction, an order for delivery up of documents and an account of profits against Noel Geoffrey Woff, Richard Corby, Funeral Planning Australia Pty Ltd (in liquidation) (“FPA”) and the Ancient Order of Foresters in Victoria Friendly Society Limited (“Foresters”). The events which are said to give rise to the applicants’ claims took place in 2010 and 2011. In 2010, Mr Woff and Mr Corby were employees of Lifeplan. In late 2010, they left the employ of Lifeplan and became employees of Foresters. Shortly prior to the cessation of their employment with Lifeplan, they established FPA. They were the two directors and two shareholders of the company. On 31 December 2010, FPA entered into an agreement with Foresters whereby it agreed to provide promotional and marketing services to Foresters in return for the payment of a commission. The promotional and marketing services related to an investment product issued by Foresters known as funeral bonds. Lifeplan also issued funeral bonds.
The applicants’ case is that Mr Woff and Mr Corby acted in breach of the duties they owed to them and they identify those duties as fiduciary duties, duties of confidence and contractual duties. The applicants also allege that, in the case of Mr Woff, he contravened sections of the Corporations Act 2001 (Cth) dealing with the duties of officers and employees of a corporation. Foresters is a third party to the breaches and is said by the applicants to be liable for knowingly assisting the breaches by Mr Woff and Mr Corby of their fiduciary duties and duties of confidence, and for inducing them to breach their contracts of employment. Foresters is also said to have been involved in Mr Woff’s contraventions of the Corporations Act. The applicants also make a claim for passing off against Mr Woff, Mr Corby and Foresters. Finally, the applicants claim that Foresters is vicariously liable with respect to some of the equitable “wrongdoing” of Mr Woff and Mr Corby.
FPA traded for approximately two and-a-half years, commencing in early 2011. On 12 June 2013, it was wound up in insolvency by order of the Supreme Court of Victoria. I have granted the applicants leave to proceed against it under s 471B of the Corporations Act up to the entry of judgment (Lifeplan Australia Friendly Society Ltd v Woff [2013] FCA 1092). FPA has taken no effective part in the proceeding since I granted leave and it did not appear at the trial. The limited relief the applicants seek against FPA is described below.
During closing submissions, the applicants identified the orders they seek against the respondents. They seek declarations dealing with the alleged breaches by Mr Woff and Mr Corby, and the involvement of Foresters. The declarations they seek are as follows:
1.Noel Jeffrey Woff and Richard John Corby between July 2010 and the present date breached duties and obligations owed by each of them to Lifeplan Australia Friendly Society Ltd and to Funeral Plan Management Pty Ltd:
a. as a fiduciary of each of those companies;
b. pursuant to duties and obligations of confidence which each of them owed to each of those companies;
c. pursuant to each of their contracts of employment (employment contract) with Lifeplan Australia Friendly Society Ltd;
d. pursuant to Confidentiality and Intellectual Property Declarations which each of them signed with those companies; and
e. pursuant to the Information Technology Declaration which each of them signed with those companies.
2.Ancient Order of Foresters Friendly Society in Victoria Ltd:
a. induced Noel Jeffrey Woff and Richard John Corby to breach their employment contracts;
b. knowingly assisted Noel Jeffrey Woff and Richard John Corby to breach their fiduciary duties and obligations of confidentiality.
The applicants also seek an injunction and orders for delivery up against all four respondents in relation to 61 documents. There were two annexures to the Statement of Claim as it was until shortly prior to trial. In Annexure A, the applicants identified documents they contended contained confidential information taken and used by the respondents. In Annexure B, the applicants identified what they claimed were their copyright works and materials. Shortly prior to trial, the applicants abandoned their claim for infringement of copyright. They now contend that the documents identified in Annexures A and B contain their confidential or valuable information or both which has been taken and used by the respondents. I attach a modified version of Annexures A and B to these reasons. As will be seen, Annexure A identifies 36 documents and Annexure B 60 documents (number 43 not used). Thirty five of the documents identified in Annexure B are documents identified in Annexure A.
The orders sought by the applicants in relation to the documents in Annexures A and B are as follows:
3.Noel Jeffrey Woff, Richard John Corby, Funeral Planning Australia Pty Ltd (in liquidation) and the Ancient Order of Foresters Friendly Society in Victoria Ltd whether by themselves, their agents, employees or related entities (as defined by s 9 of the Corporations Act 2001 (Cth)) be permanently restrained from using or publishing the documents described in Annexure A and B of the Third Further Amended Statement of Claim and attached as Annexure 1 to this Order.
4.Noel Jeffrey Woff, Richard John Corby, Funeral Planning Australia Pty Ltd and the Ancient Order of Foresters Friendly Society in Victoria Ltd within 14 days:
a. deliver to the Applicants all hard copies of the documents described in Annexures A and B of the Third Further Amended Statement of Claim and attached as Annexure 1 to this Order in each of their possession, custody or control; and
b. permanently destroy all electronic copies of the documents described in Annexures A and B of the Third Further Amended Statement of Claim and attached as Annexure 1 to this Order in each of their possession, custody or control.
In terms of monetary relief, the applicants made an election well before trial for an account of profits rather than damages or equitable compensation. They did not seek to prove any specific loss or damage which they suffered as a result of the respondents’ conduct. As against Mr Woff and Mr Corby, the applicants seek the salaries they were paid by Foresters and some small amounts (relatively speaking) that Mr Woff and Mr Corby received through FPA. As against Foresters, the position is as follows. In 2010, Foresters had a relatively small funeral fund upon which it earnt a management fee. From the time Mr Woff and Mr Corby became employees of Foresters, the fund grew very substantially and Lifeplan’s funeral fund business has diminished. For bonds or plans written from 2011 onwards, Foresters earns a 2% management fee in relation to the fund. The 2% management fee is calculated by reference to the funds under management (“FUM”). This fund is predicted to grow as new bonds or plans are written. The applicants’ primary claim against Foresters is for an account of profits being the net present value of the profits earned and to be earned by Foresters with respect to the fund. The applicants’ case is that an account of profits against Foresters results in a figure in the order of $30 million.
In their pleadings and affidavits of evidence filed before trial, the applicants advanced a broad case concerning the scope of the respondents’ wrongdoing. They alleged that absent the wrongdoing, Foresters had neither the financial capacity nor the skills and systems to obtain and then operate the business it did from 2011 onwards. They alleged that FPM had a business system which they described as the “FPM Business System” and which comprised market facing documents, interfaces with funeral directors, support systems and business intelligence, and that the respondents took and used that system. I do not think that the applicants advanced a case in closing that Foresters did not have the financial capacity to establish and operate the business it did from 2011 onwards. In any event, I am satisfied on the evidence that Foresters did have that capacity. With respect to the allegation concerning the taking and use of a FPM Business System, whilst Mr Woff and Mr Corby took certain documents and reproduced them in documents used by Foresters, the evidence does not support a finding that the respondents took and used the applicants’ system of operating, or that all aspects of that system were unique.
As the applicants’ case was developed at trial, it concentrated on 11 acts or courses of conduct by Mr Woff and Mr Corby which were said to involve breaches of duty on their part. As my findings of fact are organised around these 11 matters, it is convenient that I identify them at the outset.
The business concept that Mr Woff and Mr Corby had in mind in the second half of 2010 involved them working together with Foresters to develop a successful funeral fund business. Mr Woff and Mr Corby were to leave their employment with Lifeplan and become employees of Foresters, and Foresters would engage their company FPA to promote and market the business in return for the payment of a commission. The proposal would involve substantial set-up costs to be borne by Foresters and there was a risk that the business would not succeed. The Board of Foresters had to approve the proposal and, it may be assumed, would only do so if satisfied the risks were worth taking. In order to persuade the Board of Foresters that the business concept was commercially viable, Mr Woff and Mr Corby, in the name of FPA, prepared a paper to present to the Board entitled “Funeral Fund Business Concept”. I will refer to this paper as the Business Concept Plan or BCP. The applicants’ case is that Mr Woff and Mr Corby used their confidential and valuable information in preparing the BCP and, indeed, included some of it in the BCP. The applicants’ case is that Foresters knew that the BCP contained the applicants’ confidential and valuable information.
Secondly, the applicants’ case is that between October and December 2010, Mr Woff, whilst still an employee of Lifeplan, and Mr Corby tried to solicit the business of one of the applicants’ major clients, Tobin Brothers Funerals (“Tobins”). In other words, they tried to persuade Tobins to transfer its business from the applicants to the proposed business with Foresters. Tobins was a major client which, unlike other funeral directors, entered into a contract (usually for three years) with the fund manager it selected.
Thirdly, the applicants’ case is that between October and December 2010, Mr Woff and Mr Corby, and in particular Mr Woff, whilst still employees of Lifeplan, approached other funeral directors with a view to soliciting the business of those funeral directors for the proposed business with Foresters.
Fourthly, the applicants’ case is that in July 2010, Mr Woff, whilst still an employee of Lifeplan, and with the knowledge and encouragement of Foresters, induced Mr Corby to leave his employment with Lifeplan.
Fifthly, the applicants’ case is that Mr Woff and Mr Corby, whilst still employees of Lifeplan, became aware of Foresters’ desire to increase its funeral products business and yet failed to disclose that “business opportunity” to the applicants.
Sixthly, the applicants’ case is that Mr Woff and Mr Corby took and used their FPM Business System. As developed, the primary documents which were the subject of this allegation were disclosure documents, stationery request forms, marketing flyers, claim forms and pre‑paid contract forms.
Seventhly, the applicants’ case is that Mr Woff took other confidential and/or valuable business intelligence of the applicants. They point to the large number of their documents which Mr Woff sent to one or other of his private email addresses between July and December 2010.
Eighthly, the applicants’ case is that Mr Woff and Mr Corby took extensive steps whilst still employed by Lifeplan to establish FPA and to ensure that the proposed business with Foresters was in a position to commence immediately upon the cessation of their employment with Lifeplan. The applicants’ case is that the steps taken went well beyond what the law permits an existing employee to do.
Ninthly, the applicants’ case is that Mr Woff and Mr Corby prevailed upon a printing firm, Matgraphics and Marketing Pty Ltd (“Matgraphics”), which had been engaged by Lifeplan to print pre-paid funeral contract pads to provide to funeral directors, to use its electronic templates to print pre-paid funeral contract pads for Foresters to provide to its funeral directors. This was done without the applicants’ permission.
Tenthly, the applicants’ case is that Mr Woff and Mr Corby sent the applicants’ list of funeral directors to a mailing house, Melbourne Mailing, which then used it as Foresters’ mailing list of funeral directors.
Finally, the applicants’ case is that because of the similarity between the applicants’ key documents and those of Foresters, there was, at least for a time, confusion in the market between the applicants’ business and the business of FPA and Foresters. The applicants’ case is that FPA and Foresters were passing off their business as that of the applicants.
The Application to Amend
The applicants made an application to amend their Second Further Amended Statement of Claim shortly before the trial. The application was supported by an affidavit from their solicitor. Mr Woff swore an affidavit in opposition to the application. After hearing submissions, I granted leave to amend and a Third Further Amended Statement of Claim was filed. A brief description of the amendments and my reasons for allowing them is as follows.
The first class of amendments related to Annexure A to the Statement of Claim. Annexure A of the Second Further Amended Statement of Claim had identified 35 documents which were described as “confidential” or “commercially sensitive and/or proprietary”. Annexure A was amended to identify one additional document involving Melbourne Mailing and to refer to “confidential” or “commercially sensitive, confidential or valuable information”. There were corresponding minor changes in the body of the Statement of Claim. The addition of the reference to “valuable” information was designed, I think, to enable the applicants to argue that, in addition to misusing confidential and commercially sensitive information, Mr Woff and Mr Corby breached their duties to the applicants by copying documents containing valuable information during their employment with a view to using the documents after their employment had ended. “Valuable” was said by the applicants to mean no more than non‑trivial (Spotless Group Ltd & Others v Blanco Catering Pty Ltd and Another [2011] FCA 979; (2011) 93 IPR 235 at 242-243 [27] per Mansfield J; Faccenda Chicken Ltd v Fowler and Others [1987] Ch 117 at 136; (1985) 6 IPR 155 at 164). It seemed to me that the amendment involved no more than a further characterisation of information already identified. I could not see any prejudice to the respondents in allowing this amendment.
The second class of amendments related to Annexure B. As I have already said, Annexure B of the Second Further Amended Statement of Claim had identified 60 documents which were said to be the subject of copyright in favour of the applicants and which the respondents were alleged to have infringed. There were also allegations of infringement of copyright in the body of the Statement of Claim. By this class of amendments, the applicants sought to add one additional document to Annexure B, add a reference alleging that the information in the documents was valuable (with corresponding minor changes in the body of the Statement of Claim), and delete all references to copyright in Annexure B and in the body of the Statement of Claim. In other words, the thrust of this amendment was the abandonment of the copyright claim and that was not seriously opposed by the respondents. The other amendments in this class were unlikely to cause any prejudice to the respondents. I granted leave to amend in relation to Annexure B and, insofar as it contained claims of copyright infringement (and inserted references to the information being valuable), the body of the Statement of Claim.
The third class of amendments involved the addition of a claim under s 1317H(2) of the Corporations Act for the profits made by Foresters as a result of Mr Woff’s contraventions of the Act. Section 1317H is in the following terms:
1317H Compensation orders—corporation/scheme civil penalty provisions
Compensation for damage suffered
(1)A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:
(a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
Note:An order may be made under this subsection whether or not a declaration of contravention has been made under section 1317E.
Damage includes profits
(2)In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.
Damage includes diminution of value of scheme property
(3)In determining the damage suffered by the scheme for the purposes of making a compensation order, include any diminution in the value of the property of the scheme.
(4)If the responsible entity for a registered scheme is ordered to compensate the scheme, the responsible entity must transfer the amount of the compensation to scheme property. If anyone else is ordered to compensate the scheme, the responsible entity may recover the compensation on behalf of the scheme.
Recovery of damage
(5)A compensation order may be enforced as if it were a judgment of the Court.
The applicants alleged in their Second Further Amended Statement of Claim that Mr Woff had contravened ss 180, 181, 182 and 183 of the Corporations Act. Whilst it was never made clear why s 1317H(2) had not been pleaded earlier, I accepted the applicants’ submission that the “liability” plea (i.e., the plea of the contraventions of the Corporations Act) was already in the Second Further Amended Statement of Claim and that the parties had addressed the issue of the profits made in the evidence filed for use at trial in connection with the claim in equity for an account of profits. In those circumstances, I allowed the amendment.
Finally, the applicants sought to introduce a plea into their Statement of Claim that Foresters was vicariously liable for the conduct of Mr Woff and Mr Corby to the extent that such conduct occurred whilst each of them was employed by Foresters. This amendment was opposed by Foresters on the ground that it was not arguable that Foresters was liable for the equitable wrongdoing of Mr Woff and Mr Corby. I decided that the matter was arguable and that the amendment should be allowed. I have now had full argument on the issue and I have decided that Foresters is not vicariously liable for the equitable wrongdoing of Mr Woff and Mr Corby.
Witnesses
Mr Matthew Peter Walsh was the principal witness called by the applicants. He swore four affidavits which were read as his evidence-in-chief. The affidavits set out the applicants’ case, largely by reference to the documents which had been retrieved from Mr Woff’s computer, or discovered or produced on subpoena. At times, some of Mr Walsh’s statements were more in the nature of submissions rather than statements of fact.
Mr Walsh’s employment history and position at Lifeplan is as follows. He has been employed by Lifeplan since 1993 and he was the information services manager for Lifeplan from that date until 1998. In that position, he supervised the information technology functions of Lifeplan. In 1998, he became the general manager for strategic development and in that position, he was responsible for the business strategy functions, sales and marketing, product maintenance and development, customer services and information technology. His responsibilities also encompassed the business conducted by FPM and he had executive responsibility for that company and general oversight of its operations. After the merger of Lifeplan and Australian Unity Investments Ltd (“Australian Unity”) in August 2009, Mr Walsh held the position of Head of Lifeplan and General Manager of Specialised Products for Australian Unity and he also oversaw the management of FPM. Mr Walsh said that in his position as Head of Lifeplan and General Manager of Specialised Products for Australian Unity, he is responsible for the Lifeplan business as part of his role as head of the specialised products business of Australian Unity with a total of $2 billion funds under management, and over 100,000 clients in 2012.
Mr Walsh was cross-examined at length, principally by counsel for Foresters. An important aspect of the cross-examination was to suggest to Mr Walsh that the loss of business by Lifeplan and the securing of business by Foresters was not due to the alleged wrongdoing of Mr Woff and Mr Corby, but rather to other factors, including the poor performance in terms of investment returns of one of Lifeplan’s funeral benefit funds (i.e., Funeral Benefits Fund No. 2) and, to a lesser extent, cost cutting measures put in place after the merger of Australian Unity and Lifeplan. It seems that the performance of Funeral Benefits Fund No 2 was affected by the Global Financial Crisis and it may also have been affected by a depreciation in unlisted assets. There was a reference in the course of the evidence to collateralised debt obligations. There was a sale of equities before December 2008 and the fund was temporarily closed to new business. It has not to date been reopened to new business. It remains “open” for those making regular contributions into the fund (i.e., those paying by instalments). Lifeplan has established a new funeral benefit fund called the “Tax Minimiser Fund”. Those making regular contributions into the Funeral Benefits Fund No 2 number in the region of 100 to 150 of the 350 funeral directors who had an interest in the fund upon its closure. The fund paid returns of 0.25% in 2009, and 0.5% in 2010. During the same years, the Tax Minimiser Fund returned 4.30% in 2009, and 3.57% in 2010. Other funds returned in excess of 2.5% in these two years. The Consumer Price Index in 2009 was 1.46%, and in 2010 it was 3.05%.
Mr Walsh was quite defensive about the performance of the Funeral Benefits Fund No 2. At one point in his evidence, he described the return during the 2009 year as an excellent return in the circumstances. Although I accept the substance of Mr Walsh’s evidence, I think he took an unduly optimistic view of the performance of Funeral Benefits Fund No 2 in 2009 and 2010, and tended to downplay the likely reaction to the fund’s performance from the funeral directors who had invested in it. As I have said, another aspect of the cross‑examination was to establish that cost cutting measures were put in place following the merger between Australian Unity and Lifeplan. I find that there were such measures and that they affected marketing (including sponsorships), travel and entertainment expenses. Mr Walsh was also cross-examined about the decline in staff numbers in the FPM sales team in the second half of 2010 and my findings in relation to that matter are set out below. Mr Walsh accepted in cross-examination that the financial documents suggested that Foresters had the capital to expand its business.
Counsel for Mr Woff and Mr Corby submitted that the applicants were not frank with their funeral director clients as to the reasons for the poor performance of Funeral Benefits Fund No 2. This was said to have two consequences. Mr Woff and Mr Corby were left to bear the brunt of the funeral directors’ annoyance as to the performance of the fund, and this is a reason they were prepared to leave Lifeplan. Furthermore, Lifeplan’s “misrepresentation” or “non-disclosure” as to reasons for the poor performance of the fund is a reason in equity why the applicants’ claim for an account of profits should be refused.
I think Funeral Benefits Fund No 2 performed poorly in terms of investment returns. I think funeral directors would have been angry or annoyed about that fact. I think that conclusion is supported by the evidence of the three funeral directors who gave evidence before me (see at [53] below). I will come back to the reasons for the poor performance of Funeral Benefits Fund No 2 and the alleged misrepresentations or non-disclosures to funeral directors when addressing Mr Woff’s evidence.
The other matter which Mr Walsh was cross-examined about at some length was the FPM Business System. There can be no doubt that FPM had a business system, but I am not persuaded that it was particularly unique or was something that was not, for the most part, the product of the nature of the business. In any event, as I will explain later in these reasons, I am not satisfied that other than in respects I identify, the respondents took and used the FPM Business System.
Subject to noting these matters, I consider that Mr Walsh was a satisfactory witness and that I can rely on his evidence.
The applicants tendered affidavits of the following persons as the evidence-in-chief of those persons:
(1)Ms Michelle Anne Rawe (employee of Lifeplan and executive assistant to Mr Walsh);
(2)Ms Sharon Patricia Ferguson (employee of Lifeplan and a service and support manager);
(3)Mr Christopher James Pullen (employee of Australian Unity and a senior infrastructure engineer);
(4)Mr Michael Francis Hutton-Squire (employee of Australian Unity and head of technical services/business technology); and
(5)Mr Jean-Pierre du Plessis (partner of Ferrier Hodgson specialising in computer forensics and data recovery, among other things).
Other than Ms Ferguson, these witnesses were involved in the investigation carried out by Lifeplan which I describe below. Ms Ferguson described events surrounding an information request made by Mr Woff in 2010. None of these witnesses were required for cross‑examination and I accept their evidence.
The applicants called two experts, one an expert in accounting (Ms Dawna Wright), and the other an expert in actuarial calculations (Mr Michael Dermody). Both were credible and reliable. I discuss their evidence (and that of Foresters’ experts) below.
Mr Woff’s evidence-in-chief was contained in a number of affidavits which he had sworn and which were tendered. The affidavits were, in part, not in proper form because they were argumentative and expressed in terms of submissions rather than statements of fact. Some of the topics addressed were not relevant. For example, Mr Woff tried to explain his decision to leave Lifeplan by reference to a lack of opportunity for further career advancement and reference to his dissatisfaction with Lifeplan’s future intentions in respect of the expenses FPM might incur to increase its business, such as marketing rebates and discretionary spending. Mr Woff gave his opinion as to the reasons Lifeplan’s business declined and he suggested that it was, in part at least, the author of its own misfortune. He also gave his opinion as to the reasons Foresters was able to succeed in building up the Foresters Funeral Fund and in doing so he attributed a good deal of the success to the skills he and Mr Corby were able to bring to the Foresters’ business.
For reasons I will give, I do not accept Mr Woff’s evidence except where it is corroborated by evidence which I do accept. There were not many references to Mr Woff’s evidence‑in‑chief in his counsel’s closing submissions. Subject to one matter, I will refer to those aspects of Mr Woff’s evidence which were relied on by his counsel during his closing submissions in the context of particular topics.
The one matter which I deal with at this point is as follows. Mr Woff and Mr Corby submitted that the applicants were not entitled to the equitable remedy of an account of profits because they had not acted equitably. They submitted that the cause of the poor performance of Lifeplan’s Funeral Benefits Fund No 2 was poor investment decisions by Lifeplan and not, or not simply, the Global Financial Crisis. They submitted that the applicants misrepresented, or at least did not disclose, the true position to funeral directors. Mr Woff deposed to a conversation he had in June 2010 with a Mr Tony di Girolamo who was employed by one of the applicants as the Head of Specialised Products Lifeplan Funds Management. Mr di Girolamo allegedly told Mr Woff that in 2008, Lifeplan had made risky investment decisions resulting in a loss of $20 million which had been transferred to Funeral Benefits Fund No 2. In due course, an amount of $8 million was borrowed from the management fund to ensure the solvency of the fund. Mr di Girolamo allegedly said that Mr Walsh told him not to tell Mr Woff these things. I do not think this last matter, even if true, is sinister. Mr Walsh may have simply wished to keep control of the situation.
Counsel for Mr Woff pointed out that Mr Woff was not cross-examined about this conversation. Although that is correct, it does not mean that I have to accept the evidence in circumstances where there was a sustained attack on his credibility and reliability, and where I have found that I will not accept his evidence except where it is corroborated by evidence which I do accept. There are strands of evidence which bear on the poor performance of the Funeral Benefits Fund No 2, but I would hesitate to make a finding as to the cause or causes of that poor performance even if it was important that I do so because I think that the evidence was far from complete. However, I do not think that it is important that I do so because the evidence does not establish the alleged misrepresentations or non‑disclosures to funeral directors. Furthermore, and in a sense this is the short answer to the submission, it was never explained and no authority was referred to which might assist in explaining how any conduct by Lifeplan in relation to Funeral Benefits Fund No 2 bars the applicants from making what is otherwise a proper claim against Mr Woff and Mr Corby.
A number of the matters which form the basis of my conclusion that I will not accept the evidence of Mr Woff except where it is corroborated by evidence which I do accept are set out in my discussion of particular facts. At a more general level, I base my conclusion on the following.
In the second half of 2010, Mr Woff sent a number of emails with the applicants’ documents attached from his Lifeplan email account to one or other of two private email addresses, [email protected] and [email protected]. Except where it is necessary to refer to one of these private email addresses in particular, I will refer to them collectively as Mr Woff’s private email address. Mr Woff admitted in cross‑examination that he “double‑deleted” a number of emails from his Lifeplan account shortly before leaving the employment of Lifeplan and that, in hindsight, it was the wrong thing to do. He would not provide a direct answer to the question of whether he had doubled-deleted the emails in order to ensure that Lifeplan would not discover them. Mr Woff also admitted sending emails with attached information to his hotmail address and “that it was a mistake and in hindsight is something I shouldn’t have done”. He admitted referring to one or two of the emails for the purposes of preparing the BCP and that it was wrong.
In my opinion, Mr Woff’s explanation for not discovering emails and attachments sent to his [email protected] email address to the effect that a virus had attacked it and he shut the account, is completely implausible and a fabrication. The explanation is belated and I found his evidence on the topic entirely unconvincing.
In my opinion, Mr Woff’s evidence that he sent the emails through to his [email protected] email address for future reference and not to further the proposed business with Foresters was implausible and I reject it. The description of the subject of some of these emails, for example, “Recipe” and “New Food Conditions” was designed, I find, to avoid detection of what he was doing by the applicants.
I found Mr Woff’s evidence concerning the proposed role of FPA at the time of the BCP to be evasive, although he eventually acknowledged the position.
Mr Woff admitted that what he told Mr Walsh about where Mr Corby was going after he left Lifeplan was untrue and he said that he put his own personal interests above those of Lifeplan. A little later he said that he lied because he was negotiating his contracts with Foresters at the time. I think he also accepted that he was not entirely accurate in describing to Mr Walsh his proposed role at Foresters.
Mr Woff admitted on a number of occasions that the discovery given by Mr Corby and himself was inadequate. He was not able to provide an explanation for failure to give proper discovery. On a number of occasions during the course of his cross‑examination when he was asked to explain the reason he had not discovered a document, he said that it was an oversight and he apologised to the Court.
There were occasions in cross-examination where Mr Woff’s logic was difficult to follow. For example, he asserted that it was irrelevant that he and Mr Corby had made statements in their proposal to Tobins in 2010 which reflected poorly on the applicants because Tobins was never going to award the new contract to the applicants. That is either a submission, or if intended to be evidence of a fact, it is illogical. It is illogical because if the statements were irrelevant, then they would not have been included. I reject his suggestion that they were included because Lifeplan is the benchmark.
Mr Corby did not give evidence. He is the second respondent to the proceeding and an employee of the fourth respondent, Foresters. As will become clear, there are events and circumstances in issue in this case about which Mr Corby could have given evidence. Mr Corby’s absence from the witness box in circumstances where there is nothing to suggest that he could not have given evidence means that I can infer that his evidence would not have assisted his case. Where there are competing inferences, Mr Corby’s absence from the witness box might enable me to be more confident in drawing one of the available inferences. These principles are well known (Jones v Dunkel and Another (1959) 101 CLR 298 at 308 per Kitto J; at 312 per Menzies J and 320-321 per Windeyer J; Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at 412-414 [164]‑[170] per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ).
To the extent that Foresters disputes the applicants’ case relating to the events and circumstances about which Mr Corby could have given evidence, I think the same approach applies to it. Mr Corby was and remains an employee of Foresters and I think it was to be expected that Foresters would call him if it wished to challenge the applicants’ version of the relevant events and circumstances.
Foresters referred to the fact that Mr Corby was separately represented and that the whole of his affidavit evidence was subject to objection. Foresters submitted that it could not be expected to have arranged a new affidavit from Mr Corby. It submitted that no inference should be drawn against it. I reject that submission. If the submission is that in some way the pre-trial orders lead to the conclusion that the absence of Mr Corby from the witness box cannot give rise to the inferences I have identified, then I reject it. Foresters could have obtained affidavit evidence from Mr Corby or applied to lead oral evidence from him. If the submission is that nothing Mr Corby could have said was relevant to Foresters’ defence of the claim that it did not knowingly assist and was not involved within s 79 of the Corporations Act, then clearly if the premise is correct, the conclusion follows. The position with respect to Foresters and the absence of Mr Corby from the witness box might be different if there was clear evidence of a conflict between the two, but there is no such evidence. Mr Corby is still employed by Foresters.
Mr Woff and Mr Corby called three funeral directors to give evidence. They were Mr Craig Murphy of Murphy Family Funerals, Mr John Scott of TJ Scott and Son, and Mr Paul Graham of Graham Family Funerals. Each of these funeral directors was on friendly terms, to varying degrees, with either Mr Woff or Mr Corby or both. Nevertheless, there is no reason not to accept the substance of their evidence.
Mr Murphy owns Murphy Family Funerals and that business had investments with FPM. The returns on the investments were poor. Mr Murphy was contacted by Mr Corby in March 2011 and Mr Corby told him that he and Mr Woff had left FPM and commenced with Foresters. In November 2011, Mr Murphy started placing his investments with Foresters. He did not think that he had been told the truth about the reason for the poor performance of Lifeplan’s Funeral Benefits Fund No 2.
Mr Scott is the owner of TJ Scott and Son and that business had investments with FPM. He moved his investments from FPM to Foresters in March 2011 because he wanted to maintain a personal relationship with Mr Woff and Mr Corby. He said that neither Mr Woff nor Mr Corby solicited him for business for Foresters whilst they were employed by Lifeplan.
Mr Graham is the managing director of Graham Family Funerals and that business had investments with FPM. Mr Graham became dissatisfied with the low returns on the FPM pre-need funeral products and, in July 2011, he started placing his investments with Foresters. Mr Graham said that it was FPM’s poor rate of return that led him to move to Foresters.
The evidence of the funeral directors establishes, I think, that there was a perception amongst at least some funeral directors that Lifeplan’s Funeral Benefits Fund No 2 had performed poorly and that at least some funeral directors considered that they have suffered a loss where investment returns do not keep pace with the increase in funeral costs. It also establishes that the reasons a funeral director may transfer from one fund to another include the quality of the investment returns and the extent of the personal relationship with the salesmen representing the fund.
Foresters called four witnesses.
Mr Theodore Fleming is the non-executive Chairman of the Board of Foresters. He has held that position since 1995. Between December 1993 and 1995, he was a non-executive director of Foresters. Mr Fleming is a legal practitioner. He has practised law for nearly 40 years and he is the principal partner of the legal practice, Fleming & Rhoden Lawyers.
Mr Fleming swore an affidavit which was tendered as his evidence-in-chief. He was cross‑examined at some length by counsel for the applicants. On occasions, Mr Fleming reformulated counsel’s question in a more extreme form and then denied it, or commented upon it. Nevertheless, I accept the substance of Mr Fleming’s evidence.
Mr Kerry Allan Hughes has been the chief executive officer of Foresters since October 2000. He swore seven affidavits which were tendered as his evidence-in-chief. He was cross‑examined about a number of matters, including events in 2010, the adequacy of Foresters’ discovery and the decision to put FPA into liquidation in 2013. I accept much of what Mr Hughes said, although there are a couple of areas, which I will identify, where I do not accept his evidence.
Foresters also called two experts, one an expert in accounting (Mr Campbell Jackson), and the other an expert in actuarial calculations (Ms Caroline Bennet). Like the applicants’ experts, both were credible and reliable. Their evidence is discussed below.
Discovery
The applicants allege that the respondents have not made proper discovery. They refer to orders for discovery made in the proceeding and, in particular, orders made on 22 October 2013 and 3 June 2014 respectively. They have put before the Court correspondence which has passed between the respective solicitors for the parties and affidavits about discovery filed by Mr Woff, Mr Corby and Mr Hughes respectively.
The applicants contend that the failure to make proper discovery means that I can and should infer that the applicants have been disadvantaged in their ability to prosecute the proceeding, and that the documents would have assisted the applicants in proving the breaches by Mr Woff and Mr Corby, and in proving the knowing assistance of Foresters.
It is trite that issues of discovery and, in particular, whether there has been adequate discovery are ordinarily dealt with before trial. Nevertheless, the failure to produce a document where there is an obligation to do so may lead to an adverse inference in certain circumstances (Microsoft Corporation and Another v Atifo Pty Ltd and Others (1997) 38 IPR 643). It would be necessary to show that the document exists, that there was an obligation to produce it, and that there has been an intentional withholding of the document. There would then need to be a precise identification of the inference to be drawn from the failure to produce the document. For example, the party seeking the inference would need to identify the precise process of reasoning from the absence of, say, document X, or a class of documents to the particular conclusion. The applicants have not done that. For example, in the case of Mr Woff and Mr Corby, it is said (among other allegations) that they have failed to discover documents concerning Foresters’ purported loans to FPA, Mr Woff and Mr Corby, and have failed to discover documents regarding the hybrid trust arrangement, but it is not made clear how it is said that these documents would have assisted the applicants to prove the breach of duties alleged. If it is said that these documents are relevant not to breach but to the account of profits, one may ask rhetorically, what are the competing inferences to which these documents relate. The applicants’ written submissions tended to focus almost entirely on the deficiencies in the discovery and not also on these issues.
Having said that, there is no doubt that the discovery of Mr Woff and Mr Corby has been deficient in a number of respects. Mr Woff admitted as much on a number of occasions in the course of his cross-examination. I do not think I need to pursue this any further because I think I can make clear findings about the conduct of Mr Woff and Mr Corby from the evidence which has been put before me.
The position with Foresters is somewhat different. Except for the fact that Mr Hughes has not searched for the FPA proposal to Tobins or caused any person at Foresters to carry out a search for this document, there appears to be a dispute about whether the orders for discovery have been complied with. In their closing written submissions, the applicants identified the deficiencies in Foresters’ discovery in similar terms to a letter from their solicitors dated 30 January 2014. I note that Foresters denied any deficiencies in the letter from their solicitors dated 12 February 2014. I am not prepared to find that Foresters deliberately failed to make proper discovery.
The Facts
I now set out my findings of fact. Many of the background facts are not in dispute as they are clearly established by the evidence of Mr Walsh or the documents put in evidence. Where there is a dispute, I will identify the dispute and the way in which I resolve it.
Lifeplan and FPM
Lifeplan described itself and FPM in its 2009 Disclosure Documents in the following terms. Lifeplan is a leading Australian specialist fund manager and provider of investment products. It is a provider of Funeral Bonds, tax effective investment products and Education Savings Plans. It holds an Australian Financial Services Licence. FPM is a wholly-owned subsidiary of Lifeplan and it is a specialist business dedicated to providing funeral benefits, investment management and customised administration services for funeral directors and their clients. Lifeplan and its funeral products are regulated by its constitution, the Corporations Act and the Life Insurance Act 1995 (Cth). Its funeral bond product is regulated by the Australian Prudential Regulation Authority (“APRA”) under the Life Insurance Act.
Mr Walsh expanded on this description with particular emphasis on Lifeplan’s funeral bond business as follows. Lifeplan is in the business of funds management and the provision of investment products. In conjunction with FPM, Lifeplan provides professional administration, investment products and information on aspects of planning for a funeral in advance of a customer’s death. Lifeplan has been involved in the funeral products business since 1984. FPM promotes, markets and distributes Lifeplan’s funeral products. As at 2012, these products were sold through 250 Australian funeral directors. FPM both recruits and maintains relationships with funeral directors for this purpose. FPM has the capacity and had prior to 2012, promoted the products of entities other than Lifeplan. It previously promoted and distributed funeral bond products of another friendly society, KeyInvest Limited. FPM no longer promotes and distributes KeyInvest funeral bond products but does administer them on behalf of KeyInvest Limited. FPM’s business planning includes a strategy of seeking out and securing other friendly society funeral product providers.
A funeral bond is a funeral investment product offered by a friendly society through a benefit fund. In the usual course, there is a requirement that the monies which have been invested be paid out only on the death of the client and used for the purpose of their funeral. The idea of a funeral bond is that it allows individuals to set aside funds to meet the costs of future funeral expenses.
Mr Walsh said, and I accept, that the ways in which funeral bonds can be used relate to the type of sale and the mechanism by which the benefit is paid to the funeral director. Funeral directors use funeral bonds in two principal ways. First, the most common way is to use the funeral bond in association with a pre-paid funeral contract that sets out the desired funeral arrangements and stipulates a fixed price for the funeral services. This type of funeral bond is called a Funeral Plan Pre-Paid Bond. The maximum amount of the bond is the cost of the funeral service under the pre-paid funeral contract. The pre-paid funeral plan can be paid out to the funeral director on the death of the client and following confirmation from the funeral director that the funeral has been conducted in accordance with the pre-paid funeral contract. The second way in which a funeral bond can be used is through a transaction referred to as a Funeral Plan Bond. The client executes a document containing specified funeral services, but without a contractual commitment as to the pricing of those services. In the case of this type of funeral bond, when the client dies the funeral director would requote the funeral based on the pre-arranged details and any further modifications based on the prices current as at the date of death. The funeral bond is used to contribute to the cost. There is a maximum amount allowed for the bond. In Lifeplan’s 2009 Disclosure Document, it is stated to be $10,750. Under both types of bond, payments may be made by instalments.
The largest sales channel for funeral bonds is through funeral directors. Funeral directors introduce funeral bonds to customers on behalf of friendly societies because it enables them to promote and sell their own services prior to the death of the individual in what is known as the “pre-need” market. In 2010, the applicants had a large share of the market in the order of 70%.
Funeral bonds can also be sold through financial planners and there is no contact with funeral directors at this time. Such funeral bonds can be converted at a later time to one of the bonds referred to above. Funeral bonds can also be bought directly from a friendly society.
Mr Walsh explained the relationship between the client and a particular funeral director in relation to the bonds. I accept his explanation. The first and most common mechanism is that the funeral bond is “assigned” by the client to the funeral director when it is taken out, making the funeral director the owner of the bond, with the client being the “life assured”. The effect of such an arrangement is that the client has assigned all the rights and benefits of the bond, and monies can only be paid to the funeral director upon the death of the life assured. The second mechanism is one whereby the funeral director is nominated as the beneficiary of the bond and on the death of the client, the bond is paid to the funeral director. The client remains the owner of the bond and is able, during their lifetime, to change the nominated beneficiary if they see fit. The third mechanism is for the client to hold the bond as the legal and beneficial owner thereof and, in that case, the funeral director relies on the executor acting for the deceased estate, to honour any pre-arrangement that may be in place.
Mr Walsh said, and I accept, that in the case of each method of sale and mechanism through which the benefit is paid to the funeral director, the essential element of a funeral bond is that it can only be claimed following the death of the client and for the purposes of contributing to their funeral expenses.
In 2010, Lifeplan and FPM had two main funeral investment products, being a funeral bond, known as the FuneralPlan Bond, and a pre-paid funeral plan known as the FuneralPlan Pre‑Paid. Lifeplan manages investment funds for funeral bonds and pre-paid funeral plans and it receives a management fee for those services. FPM markets, distributes and administers the funeral bonds and pre-paid funeral plans through funeral directors. Mr Walsh said, and I accept, that FPM has a commercial relationship with those funeral directors who utilise Lifeplan funeral products in order to support their funeral planning business. FPM provides marketing materials, standard contractual documents and other stationery to those funeral directors and it may also provide specialist sales and marketing advice. FPM may also provide a marketing budget to certain funeral directors to use in promoting Lifeplan’s funeral products. FPM administers the payment of claims out of the Lifeplan Benefit Fund. Mr Walsh said, and I accept, that FPM’s commercial relationships and arrangements with funeral directors provide the key distribution channel for Lifeplan funeral products.
Lifeplan owns and has created and developed a suite of documents in relation to the promotion and administration of its funeral bonds and pre-paid funeral plans. Mr Walsh identified these documents as being marketing materials and administrative documentation. The marketing materials include a marketing brochure entitled “The Guide to Pre-Paid Funerals”, a disclosure document entitled “Funeral Plan Pre-Paid”, and a disclosure document entitled “Funeral Plan Bond”. The administrative documents include a pre-paid funeral plan contract, including terms of agreement, a funeral benefit fund claim form, and a stationery request form.
Lifeplan maintains template funeral contracts and terms of agreement. They are provided to funeral directors so that they can use them in entering into pre-paid funeral contracts with customers. The contracts comprise a coversheet to be filled in recording the client details, the services agreed upon, and details of the document’s execution and a page of standard terms of agreement. Lifeplan provides the funeral contracts to their funeral directors by way of a contract pad. Lifeplan arranges for funeral directors to include their name, trade mark and contact details on the upper left hand side of the contract. The contracts contain a branding of FPM and references to FPM on the front page and in the terms and conditions. Lifeplan also provides funeral directors with access to the contracts on-line, and if that facility is used, the contracts may be printed and executed in hard copy form.
FPM prepares a stationery order form for funeral directors to order supplies of the contracts and Lifeplan promotional materials. It also provides a funeral benefit fund claim form which is completed by the funeral director when the beneficiary of the funeral product dies, and there is either a pre-paid funeral contract in place or a funeral bond which has been assigned or where the funeral director has been nominated as the beneficiary of the funeral bond.
In 2001, Lifeplan merged with Norwich Union Friendly Society Ltd (“NUFS”) and as part of that merger, Lifeplan purchased the share capital in Norwich Union Funeral Plan Management Pty Ltd (“NUFPM”) from Norwich Union Holdings Australia Ltd. Before the acquisition, NUFPM promoted and distributed funeral products on behalf of NUFS, and after the acquisition, NUFPM promoted and distributed Lifeplan funeral products through the use of the Norwich Union Funeral Fund Customer Information Brochure. On 25 June 2001, NUFPM changed its name to Funeral Plan Management Pty Ltd (“FPM”). Mr Woff was part of the NUFPM business and after the acquisition, he reported to Mr Walsh in the latter’s executive capacity as general manager, strategic development.
Lifeplan merged with Australian Unity in August 2009. Lifeplan is a subsidiary of the Australian Unity Group, and its parent company is Australian Unity Limited.
Australian Unity is based in Melbourne. Lifeplan is based in Adelaide. Until shortly prior to May 2012, there was an FPM office in Melbourne which dealt with marketing and distribution.
Foresters
Foresters described itself and FPA in its 2011 Disclosure Documents in the following terms. Foresters is a public company registered under the Corporations Act and a traditional friendly society. It manages the Foresters funeral bond Fund under rules of the Fund and is subject to the Corporations Act and the Life Insurance Act. It administers the Fund and it stated in its disclosure documents in 2011 that FPA promotes and markets the Fund. It describes FPA in those documents as a specialised funeral planning company providing customised administration and marketing services for funeral directors and their clients Australia wide.
Mr Hughes expanded on this description in his evidence as follows. Foresters is a public company limited by shares and guarantee. It is registered under s 21 of the Life Insurance Act and has been determined by the APRA to be a friendly society under s 16C of that Act. Its principal activities are the marketing and management of investment and insurance products, including friendly society bonds, funeral bonds, and death and distress benefit funds under an Australian Financial Services Licence. It is regulated by the Australian Securities and Investments Commission under the Corporations Act and prudentially regulated by the APRA under the Life Insurance Act. Foresters currently operates five funeral funds, the two largest being the STL Funeral Benefit Fund established in 1997 and with assets worth $33 million (as at March 2013), and the Funeral Benefit Fund established in 1990 with assets worth $40 million (as at March 2013).
There was very significant growth in the business of Foresters between 1997 and 2011. Benefit fund assets comprising funeral benefit fund increased from $19.1 million as at 30 June 1997 to $220.1 million as at 30 June 2011. Management fund assets increased from $3 million as at 30 June 1997 to $14.6 million as at 30 June 2011.
The increase in size of the business of Foresters between 2000 and 2010 resulted from the acquisition of various smaller friendly societies, or the transfer of funds operated by them. In October 2000, Foresters had two funeral bond products. In the years that followed, it acquired the businesses of a number of other friendly societies. Until 2008, the State Trustees which in the 2007/2008 financial year had an operating revenue of almost $60 million, invested in the Foresters funeral bond. Tobins invested in Foresters pre-need funeral bond product until 2008.
Mr Fleming said, and I accept, that by 2010, the Board of Foresters had concluded that there was limited scope for further growth through the acquisition of other friendly societies or the transfer of other friendly society funds and it directed the chief executive officer, “to identify opportunities for organic growth in our existing funds”.
The funeral funds which Foresters had under management increased significantly from 2011 when Mr Woff and Mr Corby were engaged as employees of Foresters. The funeral fund of Foresters which is the subject of the proceeding was established on 3 December 1990 and is known as the “Foresters Funeral Benefit Fund – Exempt and Taxable” (“Foresters Funeral Fund”). Foresters manages other funeral funds, including STL (or State Trustees), Funeral Benefit Fund and MUA Bluechip Funeral Fund. As at 30 June 2010, the balance of the Foresters Funeral Fund was $13,238,399, and as at 30 June 2013, the balance of the Foresters Funeral Fund was $62,940,608. The Foresters Funeral Fund is an “approval benefit fund” for the purposes of the Life Insurance Act.
Mr Hughes described the features of a funeral bond and his description does not differ in any material way from that given by Mr Walsh. In general terms, funeral bonds involve an investment by an individual so as to provide for the payment in due course of their funeral expenses, and the benefit of the investment may or may not be assigned to a funeral director. Pre-paid funeral plans involve an investment by an individual in conjunction with the execution of a fixed price funeral contract between the individual and a funeral director. Under the plan, the individual assigns the benefit of their investment, but not their membership of the fund, to the funeral director.
In the case of Foresters Funeral Fund, the individual and not the funeral director is always the member of the Fund and even if the individual assigns the benefit of the investment to a particular funeral director, the individual and not the funeral director remains the member of the Fund. The Foresters Funeral Fund is and always has been capital guaranteed and this means that the “guarantee” is supported by the solvency reserves maintained by Foresters in accordance with APRA regulatory requirements.
In 2010, Foresters had a disclosure document in relation to each of its funds.
Lifeplan and Mr Woff and Mr Corby
Mr Woff commenced employment with NUFPM as a funeral fund manager on 2 April 1990. His employment was transferred to Lifeplan following the acquisition of NUFPM and the terms of his employment are recorded in a letter dated 27 March 2001.
Mr Woff operated the FPM office in Melbourne where he supervised on average four to five staff members. He reported to Mr Walsh. The FPM office in Melbourne was engaged in the promotion and distribution activities of FPM and the administration of the funeral products was carried out in Lifeplan’s offices in Adelaide. Mr Woff’s position was described as “Manager, Funeral Plan Management”. Mr Walsh described that position as a senior management position and I accept that that was the case. Mr Woff was responsible for the oversight of the marketing and distribution arm of FPM and Lifeplan’s funeral director based funeral product business. Mr Woff’s remuneration in 2010, including salary and bonuses, was $333,000 per annum.
Mr Walsh said, and I accept, that Mr Woff had overall responsibility for maintaining and protecting Lifeplan’s distribution network of funeral directors. He, together with other staff, helped deliver Lifeplan’s package of products and services to funeral directors. He exercised a fair degree of autonomy in managing the day-to-day activities of the operation.
On 13 July 2006, Mr Woff executed a Confidentiality Declaration and an Intellectual Property Rights Declaration. In the Confidentiality Declaration he acknowledged that he would use all confidential information received in connection with his employment only for that employment and that, except in the proper performance of his duties, he would not copy or disclose to any person, any information with respect to the affairs of Lifeplan whilst an employee or after he had ceased to be an employee. In the Intellectual Property Rights Declaration he acknowledged that Lifeplan owned all intellectual property rights arising as a direct or indirect result of the performance of his employment. On 13 July 2006, Mr Woff executed an acknowledgement that he would abide by a Technology Usage Guide and Agreement which imposed restrictions on the usage of Lifeplan’s computer system, including in relation to confidential and sensitive information.
Mr Woff was an employee of Lifeplan and, therefore, subject to the duties in s 182 (not to use his position improperly), and s 183 (not to use information improperly) of the Corporations Act. The applicants also allege that he was an “officer” of both applicants and, therefore, subject to the duties in s 180 (to exercise reasonable care and diligence), and s 181 (to act in good faith in the best interests of the corporation and for a proper purpose) of the Corporations Act. The term “officer” is defined in s 9 of the Corporations Act to mean a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or who has the capacity to affect significantly the corporation’s financial standing; or in accordance with whose instructions or wishes the directors of the corporation are accustomed to act. In addition to the matters referred to in paragraphs 94 and 95, Mr Walsh said that Mr Woff made and participated in making decisions that affected the whole of the business of FPM and a substantial part of the business of Lifeplan. That evidence of Mr Walsh is a conclusion expressed in terms of paragraph (b)(i) of the definition of officer in s 9 of the Corporations Act. I do not think I should accept it without examining whether it is supported by specific evidence. Mr Walsh said, and I accept, that Mr Woff attended strategic business planning events for Lifeplan and, at least, one off-site strategic meeting of senior executives of Australian Unity Executives and presented on the strategic approach he would be implementing at FPM. Mr Woff’s job description included the following responsibilities:
… manage business unit with particular emphasis on relationship management to protect existing client bases, driving sales to increase market share and develop and implement specific business strategies to secure business units continued future success …
Maintain strong relationships with existing funeral firms and in particular the top ten accounts.
Mr Woff denied that he was an officer of either applicant. He gave evidence that in his 10 years at Lifeplan, he had attended only one, possibly two, meetings of the Board of Lifeplan. He gave evidence that the Australian Unity/Lifeplan group was a large organisation, that he reported to Mr Walsh, and that at the end of his employment he was the only person in the FPM office in Melbourne.
Notwithstanding those matters, Mr Woff was the senior manager of FPM charged with, among other responsibilities, the responsibility of creating and maintaining relationships with funeral directors. I think he made and participated in the making of decisions that affected the whole, or a substantial part, of the business of FPM and I hold that he was an officer of FPM within s 9 of the Corporations Act. Although I am prepared to accept that the funeral fund business was an important aspect of Lifeplan’s business and FPM was a wholly-owned subsidiary of Lifeplan, I do not think the conclusion that Mr Woff was an officer of FPM means that he was also an officer of Lifeplan. In order to address that issue, I would need evidence of Lifeplan’s overall business and the place of FPM’s business in that business. I do not have specific evidence on that matter and, in those circumstances, I am not prepared to hold that Mr Woff was an officer of Lifeplan.
Mr Woff resigned on 1 December 2010. His resignation was effective on 29 December 2010. At the time of his resignation, Mr Woff spoke to Mr Walsh on the telephone and told him that he was joining Foresters.
Mr Corby commenced employment as National Sales Manager for FPM on 16 December 2002. He signed a letter of employment dated 11 November 2002. Mr Corby was based in FPM’s office in Melbourne and he reported to Mr Woff. Mr Corby’s maximum annual remuneration in 2010, including salary and bonuses was $163,338. Mr Corby’s position required him to oversee the sales performance of the business unit and that required him to service existing clients and recruit new ones.
Mr Corby also signed a Confidentiality Declaration and an Intellectual Property Rights Declaration and a Technology Usage Guide and Agreement in July 2006. Mr Corby had, in fact, executed an earlier Confidentiality Declaration in November 2002.
On 28 October 2010, Mr Woff advised Mr Walsh that Mr Corby had handed in his resignation effective on 25 November 2010.
In June 2010, the FPM sales team consisted of Mr Woff, Mr Corby, Ms Alisha Nee and Ms Keira Anderson. Ms Anderson’s role was principally to provide administrative support for the FPM sales team of Mr Woff, Mr Corby and Ms Nee. For example, she prepared the paperwork for invoice payment, travel bookings, credit card statement reconciliations, and she organised the dispatch of documents to funeral directors.
Ms Nee’s role was principally to provide sales services to funeral directors and that included attending to the customisation of contract pads, stock control, organising the dispatch of documents to funeral directors, following up on inquiries, assisting with the training of funeral directors in the use of what was described as the FPM Business System, and general relationship management of Lifeplan and FPM’s funeral director client base. Ms Nee focussed on sales to smaller funeral directors.
On 23 July 2010, Ms Anderson handed in her notice of resignation. Mr Woff advised Mr Walsh that Ms Anderson’s role did not require a replacement, explaining that his remaining team members could absorb her workload. Ms Anderson’s last day at Lifeplan was 6 August 2010. On 7 October 2010, Ms Nee handed in her notice of resignation.
In October 2010, the work performed by Ms Anderson and Ms Nee was taken over by staff in the Adelaide office. In the same month, there was correspondence between Mr Woff and Mr Walsh concerning Ms Nee’s replacement. Mr Woff suggested that Lifeplan and FPM replace Ms Nee by employing another administrative person in Adelaide not Melbourne.
Ms Nee’s last day at Lifeplan was 28 October 2010. On the same day, Mr Corby handed in his notice of resignation. Mr Woff advised Mr Walsh that Mr Corby had indicated to him that he wanted to take a break and “then that he has a couple of business opportunities to pursue with friends in January”. Mr Woff later advised Mr Walsh:
From what I can gather he has an opportunity to either buy into or join a couple of mates in the recruitment field.
On 1 November 2010, Mr Woff wrote to Mr Walsh suggesting that there was no need to replace Mr Corby immediately, although he again suggested that there was a need for someone in Adelaide to perform administrative tasks. As previously noted, Mr Corby’s last day at Lifeplan was 25 November 2010.
On 1 December 2010, Mr Woff handed in his notice of resignation. Mr Woff spoke to Mr Walsh on the telephone and Mr Woff advised Mr Walsh that he had received an offer to move into a “general manager” role at Foresters with the potential to move into a CEO role when Mr Hughes retired. Mr Walsh contacted his superior and it was decided that Mr George Takianos would take over Mr Woff’s sales management role at FPM. On 3 December 2010, Mr Takianos recommended to Mr Walsh that Mr Trevor Holst replace Mr Corby. On 15 December 2010, Mr Takianos appointed Mr Holst as the business development manager for FPM. FPM advised funeral directors of the staff changes. On 15 January 2011, Ms Maria Messineo commenced as business development assistant/sales team coordinator for the sales team. She was based in Adelaide.
FPA was incorporated on 11 November 2010 and it signed a Marketing & Service Agreement with Foresters on 31 December 2010. Mr Corby commenced employment with Foresters on 6 December 2010, and Mr Woff commenced employment with Foresters on 4 January 2011.
The investigation by Mr Walsh
Shortly after 21 February 2011, Mr Walsh’s executive assistant, Ms Michelle Rawe, noticed an email on Mr Woff’s Lifeplan email account which caused Mr Walsh to investigate further. He took steps to search Mr Woff’s Lifeplan email account, but not much was revealed by those searches. He did search FPA and discovered that Mr Woff and Mr Corby were directors of that company.
I turn now to consider whether the Fund or the policies in the Fund at a particular point in time were attributable to Foresters’ knowing participation in the breach of fiduciary duty and of confidence of Mr Woff and Mr Corby.
Are the applicants entitled as against Foresters to the profits earned and to be earned by Foresters in relation to the Foresters Funeral Fund?
This is a claim by the applicants against Foresters. I have found that Foresters participated in breaches of duty by Mr Woff and Mr Corby in relation to the BCP and its preparation, the approaches to funeral directors other than Tobins, and aspects of the preparations for the new business. The issue is whether the profits earned and to be earned by Foresters in relation to the Foresters Funeral Fund are attributable to one or more of these breaches. I should add in case it is not clear, that Foresters will only be liable for profits made by it in consequence of the breaches it participated in.
I do not think it can be said that Foresters’ participation in the breaches of duty in relation to the BCP and its preparation resulted in the profits earned and to be earned on the Foresters Funeral Fund. The confidential information was not used to generate any of these profits. There is nothing to suggest that the information in Appendix B, the table in section 4.2, the information as to geographical spread or Appendix D were used to generate profits. The use of some of the information in Appendix B by FPA in its Board Reports in early 2011 is not a use that generated profits. The fact that the proposed business would not have gone ahead without the BCP and that the confidential information with respect to which I have found Foresters had knowledge within the relevant legal test, played a part in Foresters’ decision to proceed, is not sufficient to conclude that the profits claimed were attributable to those matters.
I can deal with the approach to funeral directors other than Tobins and the preparations for the new business together. Neither Mr Woff nor Mr Corby were subject to restrictive covenants and, other than Tobins, funeral directors did not enter into contracts with fund managers to invest in a particular fund for an agreed period. It was open to Mr Woff and Mr Corby after they left the employ of Lifeplan to approach funeral directors and seek their business, to prepare disclosure documents and to advise Foresters as to the rules of the Foresters Funeral Fund. In those circumstances, the breaches in which Foresters participated might have led to FPA and Foresters being able to establish the proposed business earlier than might have been the case had there been no breaches, but they did not lead to the profits earned and to be earned in relation to the Foresters Funeral Fund. As I have said, the applicants have not advanced a case on a headstart basis. There is evidence before the Court of the profits earned and to be earned on policies issued up to a particular date, but that was not advanced as a basis for assessing profits. It is not the traditional way in which profits for a limited period would be assessed as I think counsel for the applicants acknowledged. I am not aware of any authority which would enable me to assess profits on this basis.
The applicants’ claim against Foresters for an account of profits must fail.
The applicants’ claim for an account of profits against Mr Woff and Mr Corby
I have found that Mr Woff and Mr Corby breached various duties to the applicants. I think the aggregate effect of the conduct of Mr Woff and of Mr Corby in relation to approaching funeral directors, other than Tobins, preparing for a new business, Matgraphics and the pre‑paid funeral contract pads and Melbourne Mailing and the applicants’ list of funeral directors is that they were able to establish the FPA business and have it operating earlier than might otherwise be the case. It is difficult to be precise as to the period. I am not disposed to make any allowances or assumptions in favour of the defaulting fiduciaries, having regard to the blatant and deliberate nature of the breaches. I think one year is appropriate. I do not think that the applicants are entitled to the salaries of Mr Woff and Mr Corby because there is nothing to suggest a link between the breaches and the earning of the salaries. Mr Woff and Mr Corby were entitled to leave the employ of Lifeplan and join Foresters and be paid a salary. The drawings and distributions through the trust of which FPA was the trustee stand in a different position. I think that they can properly be regarded as profits in the hands of Mr Woff and Mr Corby. Doing the best I can with the figures set out in the Woff Class Beneficiaries Financial Report for year ended 30 June 2012 and the Corby Class Beneficiaries Financial Report for the year ended 30 June 2012, I find that the profits earned by Mr Woff for about a year from February 2011 total $24,238 and Mr Corby for the same period total $24,198.
As far as Tobins is concerned, FPA and Foresters did not secure the Tobins’ contract for 2011-2013. By the time Foresters secured the Tobins’ contract for 2014-2016, FPA had been wound up and Mr Woff and Mr Corby were no longer receiving any profits through that company.
Conclusions with respect to the account of profits
The applicants are not entitled to an award of an account of profits against Foresters. The applicants are entitled to an account of profits against Mr Woff in the sum of $24,238 and against Mr Corby in the sum of $24,198.
The value of the Foresters Funeral Fund and the expert evidence
Although it is not strictly necessary for me to do so, I propose to address the dispute between the experts as to the value of the Foresters Funeral Fund. I do that in case there is an appeal and I am found to be wrong.
The modelling by the applicants’ experts is complex and is based on a number of assumptions. Foresters makes a number of submissions in relation to this approach which I will deal with later in these reasons.
The applicants adduced evidence from Ms Dawna Wright who gave expert accounting evidence. Ms Wright is a senior managing director in the forensic accounting and advisory services practice of FTI Consulting. In that role, she provides forensic accounting, valuation and financial investigation services. Ms Wright has no actuarial qualifications. She was required to make assumptions in relation to the maturity rates which applied to pre-paid funeral products. For that purpose, she relied on the second expert witness called by the applicants, Mr Michael Dermody. Mr Dermody gave expert actuarial evidence. He is a Fellow of the Institute of Actuaries of Australia and a partner in the firm KMPG and a director of KMPG Actuarial Pty Ltd.
Foresters adduced evidence from Mr Campbell Jackson who gave expert accounting evidence. Mr Jackson is a chartered accountant and he is a partner in the forensic dispute practice of Deloitte Touche Tohmatsu. In that role, he provides expert assistance in relation to forensic accounting issues and disputes. Like Ms Wright, in preparing his report he relied on the expert opinion of an actuary. In his case, he relied on the opinion of Ms Caroline Bennet who is an actuary and a partner of Deloitte Touche Tohmatsu. Ms Bennet specialises in the provision of actuarial consulting services, with a particular focus on life insurance and banking.
Neither side challenged the expertise of the other side’s experts and I find that each expert had the necessary expertise to provide the opinions which they expressed.
Each expert provided one or more written reports containing their opinions and those reports were exchanged between the parties. The experts then met and discussed their opinions. They then prepared a joint expert report which set out the matters upon which they agreed and the matters upon which they disagreed. There was a table annexed to the report which set out joint calculations and which was described in the report as Appendix A.
Ms Wright was asked to value the business which is the Fund, including future business (i.e., policies to be written). Mr Jackson was not asked to do that, although he did value the business having regard to the policies in the Fund at particular points in time.
The applicants and Foresters agreed that it would be appropriate for the experts to give evidence together and that is what occurred. Before that took place, the parties tendered a document which set out 10 issues to be addressed by the experts (R 26). An Amended Appendix A was tendered (R 25). The Amended Appendix A was the result of a meeting between Ms Wright and Mr Dermody shortly before trial. I reproduce that table below.
This table was explained by the accounting experts. The two discount rates are 5% and 8.5%. The discount rate relates to the “run‑off” scenario which is the run‑off for infringing policies assuming no new policies after a particular date. Ms Wright’s discount rate for the run‑off period is 5%, and Mr Jackson’s discount rate is 8.5%. In order to make clear the information contained in the table, it is convenient to take an example. If a discount rate of 5% is taken in Scenario 1 (valuation date 30 June 2014) for the infringing period ending on 30 June 2014, the figures assume that new policies are written up until that date but not thereafter, and the existing policies run down to their maturity. The actual figure in the second column from the left ($1,026,932) is the actual financial result to 30 June 2014 which was the last date in respect of which the accountants had actual financial data. The projected figure of $6,304,662 represents the projected cash flows associated with those policies over a 10 year run-off period with what is called a terminal value to take into account those policies which mature after the 10 year period. Ms Wright said that it was common to take a discounted cash flow calculation over a fixed time period, and then use a “terminal value” calculation to estimate any profit expected to be generated beyond that date. Mr Jackson described the terminal value as a very sensitive number incorporating a run-down rate or a diminishing growth rate of minus 22% to reflect the fact that the policies are running off quicker the further out one goes beyond the 10 years. The total figure of $5,277,729 is the total of ($1,026,932) and $6,304,662. The total figure is the projected profit on policies written up to 30 June 2014 and assumes no new policies are written after that date.
It emerged from the evidence given by the experts that the valuation date of 30 April 2015 was the date which should be chosen because it reflects more up-to-date information.
The difference between Scenario 1 and Scenario 2 is to be explained by the fact that certain expenses are included in Scenario 1 which are not included in Scenario 2.
Mr Jackson explained in evidence that the forecast of future profits is based on Ms Wright’s projected growth of policies which in turn is based “on the history from Lifeplan falling into Foresters in terms of the amount of new policies that will be written over a period of time”. Ms Wright explained her revised calculation of net present value resulting in an increase in the order of $13 million which she made in her March 2015 report on the basis that she had additional information showing that the actual performance for the financial year ended 30 June 2014 was significantly better than the results included in her projection based on actual results to 30 June 2013. The contributions were higher than projected and the expenses lower than projected.
As far as expenses are concerned, the allocation of overheads, except for rental expenses which I will deal with separately, is not in dispute. The calculations have been performed based on the actual results and represent a percentage of the total expenses to the funds under management at a particular point in time.
The major difference between the accounting experts was as to the appropriate discount rate for the growth period and the run-off period. The experts agree that a discount rate is used to reflect the time value of money and the risk associated with the cash flows being projected. The experts agree that the Capital Asset Pricing Model (CAPM) can be used as a starting point, but that ultimately the selection of a discount rate is one of professional judgment. The accounting experts agree that the appropriate figures produced by CAPM are a rate of 10.15% at June 2014, and a rate of 8.86% at April 2015. The experts agree that the CAPM calculation needs to be adjusted for the risk profile of the business and cash flows in question. The elements of this model are a risk free rate, an equity premium and a beta factor. Ms Wright adjusted the figure of 8.86% down to 8%, and Mr Jackson adjusted the figure up to 13.15%.
Ms Wright’s discount rate for the growth period is 8.0% which she reduces to 5% for the run‑off period. Mr Jackson’s discount rate for the growth period is 13.15% which he reduces to 8.5% for the run-off period. The experts agree that a lower discount rate is appropriate for the run-off period because there is less risk as far as the cash flow is concerned.
Ms Wright’s lower discount rate for the growth period reflects her view that the risk is significantly lower than comparable companies because the funds cannot be withdrawn and the risk is lower because of the rigour provided by an actual actuarial analysis of the cash flow and because the payment of bonuses is discretionary. Ms Wright also relied on the fact that it is the funeral directors not the fund manager who bears the risks of inflation and that overall she considered that the figures which had been used were conservative. The discount rate for the run-off period was influenced by the starting point which was the discount rate for the growth period. Ms Wright was criticised, I think with some force, that she had adjusted her figure down when earlier she had adjusted her CAPM figure of 6.9% up to 8%. She explained that difference in approach by saying that she considered her earlier CAPM figure of 6.9% “too low and too aggressive”.
Mr Jackson’s higher discount rate for the growth period reflected the fact that he believed there should be, what he called, a small company risk premium, because Foresters being a small company had less liquidity, capital and cash reserves to withstand market volatility than larger companies. In addition, Mr Jackson relied on the fact that the risks also include competition from larger asset management companies with attractive capital guaranteed investment products and the risk of low returns due to poor portfolio management. Mr Jackson also had regard to the fact that Foresters’ ability to diversify in terms of its investment portfolio is more limited than a larger company, comparisons with Lifeplan’s growth are of limited assistance because of the different nature of the two companies and the certainty of the future cash flow is to an extent affected by the retention by Foresters of Mr Woff and Mr Corby. Mr Jackson also had regard to the fact that there are a limited number of funeral directors in Australia, and any matter which adversely impacts on them will also affect the performance of the business. Mr Jackson also emphasised that the forecast is for a substantial period of 25-30 years. Mr Jackson said that he had taken into account the fact that, once invested, funds cannot be withdrawn in the calculation of his rate factor.
Mr Jackson acknowledged that he had made two mistakes in his written report. He had applied his discount rate for the growth phase to the run-off phase and he had included business expenses to the run-off phase.
Both accounting experts were clear, concise and objective in the opinions which they expressed concerning the discount rates for the growth period and the run-off period. Both were doing their best to assist the Court. Both experts identified relevant matters and, although each of them identified a particular matter which they considered important (Ms Wright identified the fact that once invested, the funds cannot be withdrawn, and Mr Jackson identified the risks associated with a relatively small company), neither suggested that it was not appropriate to consider a range of matters, placing such weight on each matter as they considered appropriate.
The matter is one of judgment and much will turn on the weight placed on the relevant factors.
I have reached the conclusion that I should accept the opinion of Mr Jackson as to the appropriate discount rate for the growth period. I think Mr Jackson’s more conservative approach is the appropriate one for the following reasons. First, whilst it is true that it is important that the funds cannot be withdrawn once they are invested, that is only one part of the equation. The other is the risks associated with obtaining the funds in the first place. Secondly, I think caution is called for with the figures, bearing in mind that the substantially better performance of the Fund in the year ended 30 June 2014, led to such a difference in Ms Wright’s final figure for the net present value of the Fund being a figure in the order of $13 million. Thirdly, the evidence in this case suggests to me that the personal relationship between the Fund’s salesman and funeral directors is important in terms of obtaining business, and that Mr Woff and Mr Corby, and Mr Woff in particular, were good at fostering and maintaining good relationships with funeral directors. Some weight needs to be put on the risk that Foresters might lose Mr Woff and Mr Corby, or either of them, and separately, the risk that they might join a competing business. Finally, I am troubled by the fact that when Ms Wright reached a lower CAPM she increased it, and then when she agreed a higher CAPM she reduced it, albeit slightly. That is not to question her professionalism or objectivity, but is more an indication of the impressionistic nature of the exercise. Having regard to these matters and the matters Mr Jackson identified in his evidence, I am satisfied that I should accept his discount rate for the growth period. I find that the appropriate discount rate for the growth period is 13.15%.
This conclusion does not mean that, as a matter of course, I must accept Mr Jackson’s discount rate for the run-off period. However, there is nothing to suggest that I should accept Mr Jackson’s discount rate for the growth period and Ms Wright’s figure for the run-off period. Nor is there anything to suggest that I should pick my own figure for the run-off period, assuming that was an approach otherwise open to me. I find that the appropriate discount rate for the run-off period is 8.5%.
I turn now to particular costs and expenses which are in dispute.
There is a dispute about an item called the cost of capital which Mr Jackson told me he had built in as a cost in his original calculations. Ms Bennet explained that this was the cost of holding capital pursuant to prudential requirements. It is the difference between capital earning an investment return within the company and a shareholder return when money can be released from the company. Mr Dermody was not asked to address this issue.
The cost of capital is the cost of having to set aside capital to satisfy prudential requirements. This money is invested, but (on Foresters’ case) it cannot be deployed in a way which would earn higher returns. Ms Bennet was the only expert who addressed this issue. Mr Dermody said that he had not been asked to address it. Ms Wright was asked about it in evidence and her point was that she had not seen any evidence that Foresters could have deployed the capital elsewhere and earned higher returns. Again, the state of the evidence is not entirely satisfactory in that there is no evidence from Foresters as to the use of monies. Nevertheless, I think it appropriate to accept the evidence of the only witness who addressed the issue in a detailed way, Ms Bennet, and that there should be an allowance for the cost of capital.
There is a dispute about staffing costs. In the original table attached to the joint report, Scenario 1 included the costs of two administrative staff and one management staff for the duration of the projection period whereas Scenario 2 included one administrative staff with a salary cost that decreases over time in proportion to the declining infringing policy funds under management as a percentage of total funds under management. In their joint report the experts said:
20.However, the experts have made different assumptions in relation to the staffing required:
i.Mr Jackson is instructed that an additional administrative person salary should be allocated to the Account of Profits in the Historical Period in addition to the expense already included in the historical profit & loss information.
ii.Mr Jackson is instructed that the additional administrative person is required for the Projection Period.
iii.Ms Wright has assumed that an additional administrative person is required in the Projection Period. Ms Wright does not have any instructions in relation to an additional administrative person in the Historical Period.
iv.Mr Jackson has also included an additional cost for a suitably qualified manager with appropriate skills to assist with oversight and management of the fund.
v.Ms Wright has not assumed that this would represent an incremental cost (i.e., a cost not already incurred by Foresters).
vi.Based upon the above, Scenario 1 includes two administrative and one management staff for the duration of the Projection Period. Scenario 2 includes one administrative staff with a salary cost that decreases over time in proportion to the declining infringing policy FUM as a percentage of total FUM.
21.The experts agree that if there is an incremental expense related to staffing that is required to support the infringing revenue, then it should be included in the financial model. The experts do not have sufficient information to determine the staffing required (both skills and numbers) to support the infringing revenue.
22.This will be impacted by Court’s determination of the length of the infringing period, if any. It would also be impacted by whether or not the run-off scenario would require a “stand-alone” fund (as assumed by Mr Jackson), or whether the calculation is in relation to the cash flows associated with the infringing policies whilst they are part of another fund (as assumed by Ms Wright).
23.The resolution of these differences is a matter for the Court to decide. Accordingly, the joint financial model includes scenarios that include and exclude the additional staff costs. (See Summary tables at Appendix A.) Additional scenarios could be modelled at the request of the Court.
…
a)Growth Model
46.The agreed calculations reflect Ms Wright’s instructions and calculations, with a Valuation Date of April 2015. Mr Jackson has not been instructed to prepare growth model calculations. Growth Scenario 1 and 2 reflect the different rent expense assumptions and the staffing assumptions described at paragraph 20 i) to v). The experts have modelled the discount rate of 8% and 13.15%, as per the Wright Report and the Jackson Report, respectively.
13.15% 8%
Growth Scenario 1 $15,239,976 $30,181,353
Growth Scenario 2 $16,539,015 $32,255,501
b) Run-off Model
47.The experts do not have sufficient information to determine whether certain expenses relate to obtaining new policies, or to support the infringing revenue or whether additional expenses would be required to affect the run‑off of the fund. Accordingly, the joint financial model includes scenarios that include and exclude certain operational costs. The resolution of these differences is a matter for the Court to decide. (See Summary tables at Appendix A.) Additional scenarios, to include a different combination of, or further costs could be modeled [sic] at the request of the Court.
48Scenario 1 reflects the following assumptions:
i. One additional administrative person in the historical period.
ii. A further administrative person in the Projection Period.
iii.A management staff in the Projection Period (at approximately 75% of the salary cost of Woff or Corby).
iv.The following additional operational expenses are included: Travel, Meetings, Registrations, Accommodation & Food, Communication, Car Hire and Taxis.
v. Including rental expense.
vi.In order to assist the Court, for purposes of the joint expert report the experts have agreed to adopt comparable rates for illustrative purposes. Accordingly, discount rates of both 8.5% and 5.0% are adopted for each of the June 2014 and April 2015 Valuation Dates.
49. Scenario 2 reflects the following assumptions:
i. None of the additional salary or operational costs described above.
ii.In order to assist the Court, for purposes of the joint expert report the experts have agreed to adopt comparable rates for illustrative purposes. Accordingly, discount rates of both 8.5% and 5.0% are adopted for each of the June 2014 and April 2015 Valuation Dates.
iii.If it is assumed that the fund would be closed, the experts agree that additional costs (related to the closure) could be required, although they have insufficient information to determine the extent of those costs.
Mr Hughes gave evidence to the effect that, in his opinion, when the Fund exceeds $50 million there is a need for two administrative staff and one manager, when the Fund is between $50 million and about $20 million there is a need for one administrative staff and half the expense of a manager, and when the Fund is below $20 million there is a need for half the expense of one administrative staff and a quarter of the expense of a manager. Mr Hughes was not cross-examined on that evidence and, in the absence of any more compelling evidence, I accept it. That expense structure is reflected in Scenario 1 in Amended Appendix A. The staffing costs should be calculated on the basis identified by Mr Hughes in his evidence.
There is a dispute about additional operating expenses being the costs of travel, meetings, registration, accommodation and food, communication, car hire and taxis. A proportion of these costs based on the actual results for the financial year ended 30 June 2014 applied to the alleged infringing run-off funds under management, as management fees have been included in the calculations for Scenario 1. The dispute here is whether these expenses (or a portion of them) are only incurred in relation to new policies or whether they would also be incurred in relation to existing policies. Mr Hughes seemed to address the issue in one of his affidavits and Mr Jackson read Mr Hughes’ evidence as referring only to expenses associated with capturing new business or additional contributions.
The additional operating expenses are expenses in the run-off period. They are not business expansion expenses which have been excluded. Mr Hughes addressed expenses described as entertainment, travel and registration, and said that they would not be incurred in the run-off period. However, he did not make it clear whether he was only referring to business expansion expenses. I think Foresters should bear the consequences of that lack of clarity and these expenses should not be allowed.
There is a dispute about rental expenses and income in the run-off scenario. In the joint report, the experts said:
Rental
24.The second difference relates to rental expense. Ms Wright excluded the expense related to office rental because it appeared to be offset by rental income (as if the office space had been sublet).
25. Mr Jackson included rental expense in his financial model.
26.The experts agree that if there is an incremental expense related to office rent that is required to support the infringing revenue, then it should be included in the financial model.
27.The resolution of this difference is a matter for the Court to decide. Accordingly, the joint financial models include scenarios that include and exclude the office rental costs. (See Summary tables at Appendix A.)
Since the joint report, the issue between the parties has narrowed. Ms Wright’s approach is that the rental expense should not be allowed because the business of the Fund is located in the Foresters’ building as established by the evidence of Mr Hughes, and in the absence of a cash outflow related to the business no allowance should be made. That approach is reflected in Scenario 2. Mr Jackson’s approach is reflected in Scenario 1 and is that the business has to be “housed” somewhere and, in those circumstances, it is appropriate to allow a rental expense. He saw this issue as related to the issue of whether the run-off scenario should be treated as a stand-alone fund. Mr Hughes gave evidence that whilst Mr Woff and Mr Corby were initially located in separate premises, in November 2012 Foresters decided to locate all of its business premises to 51-57 Jeffcott Street, West Melbourne.
The rental expense has been allowed for the period during which Mr Woff and Mr Corby were in separate premises. Ms Wright would not allow it thereafter because there is no evidence that a separate cost has been incurred. Furthermore, there is no evidence of Foresters’ occupancy costs and the relationship between those total costs and the costs in relation to the operations of Mr Woff and Mr Corby. There is force in these points, but I think it would be unfair to Foresters to uphold them. To my mind, there is plainly an occupancy expense associated with the Foresters Funeral Fund operation and, as imperfect as the evidence may be as to actual cost, an allowance should be made.
Had it been necessary for me to do so, I would have given the parties the opportunity to rework the calculations in accordance with the findings in these reasons. However, for the reasons I have given, it is not necessary for me to take that course.
Conclusions
The applicants are entitled to a declaration against Mr Woff and Mr Corby to the effect of the declaration which they seek and which is set out above (at [4]).
I have found that Foresters knowingly assisted Mr Woff and Mr Corby in the breach of their fiduciary duties in the respects which I have identified, and induced a breach of their contracts in the manner set out above (at [402]), but that there are no profits which the applicants are entitled to recover from Foresters. In those circumstances, I wish to hear the relevant parties as to whether I should make the declaration sought in paragraph 2 of the proposed orders. I will hear the applicants and Foresters as to that matter.
The applicants are also entitled to the orders concerning the documents in Annexure A and Annexure B which they seek and which are set out above (at [6]). The orders should be made against FPA as well as Mr Woff and Mr Corby. FPA has not appeared to oppose the making of the orders and it is possible that it has some of the documents. I think the orders should also be made against Foresters. Relevantly, it is in the same business as the applicants and it has employed and continues to employ Mr Woff and Mr Corby.
Mr Woff must account to the applicants in the sum of $24,238 and Mr Corby in the sum of $24,198.
I will hear the parties as to the orders and costs. I will adjourn the proceeding to a date to be fixed for the making of final orders. To facilitate this process, I will order that the applicants file and serve within seven days draft minutes of order reflecting the conclusions expressed in these reasons and containing any other orders they seek.
I certify that the preceding four hundred and eighty-six (486) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate:
Dated: 15 March 2016
SCHEDULE OF PARTIES
SAD 99 of 2012 Respondents
Fourth Respondent:
ANCIENT ORDER OF FORESTERS IN VICTORIA FRIENDLY SOCIETY LIMITED
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