Mitchell Asset Management Pty Ltd v Di Pasquale
[2025] VSC 307
•30 May 2025
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2022 04903
| MITCHELL ASSET MANAGEMENT PTY LTD | Plaintiff |
| v | |
| MARISSA DI PASQUALE | Defendant |
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JUDGE: | Cosgrave J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 12, 16, 17, 18, 19 and 26 September 2024 |
DATE OF JUDGMENT: | 30 May 2025 |
CASE MAY BE CITED AS: | Mitchell Asset Management Pty Ltd v Di Pasquale |
MEDIUM NEUTRAL CITATION: | [2025] VSC 307 |
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EQUITY — Fiduciary duties — Duties of company directors — Duty to act in good faith and in the best interests of the company — Whether subjective or objective test to be applied — Duty to act for a proper purpose — Duty to avoid conflicts of interest — Duty to avoid unauthorised benefit — Where director caused assignment of intellectual property to another company for nominal value — Where director caused company to incur research and development expenditure following the assignment of the intellectual property — Fiduciary duties not breached.
CONSUMER LAW — Competition and Consumer Act 2010 (Cth) sch 2 — Australian Consumer Law s 18 — Misleading or deceptive conduct — Where representations made by way of contractual warranties — Whether warranty representations were false — Whether silence amounted to misleading or deceptive conduct — Accessorial liability — Australian Consumer Law s 236(1).
EVIDENCE — Valuation of intellectual property — Expert valuation reports unsatisfactory.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M McKillop with Ms P Blackadder | Gadens |
| For the Defendant | Mr J Ribbands with Mr T Gorton | Walpole Johnson |
HIS HONOUR:
Introduction
This case concerns the consequences of a company’s failure to repay a loan. The plaintiff, Mitchell Asset Management Pty Ltd (“MAM”), is a boutique financial services firm providing customised wealth management, investment, custody lending and trust services to clients. The defendant (“Di Pasquale”) is the sole director of Cashtivity Pty Ltd (“Cashtivity”). Initially, Di Pasquale established Cashtivity in order to develop a financial literacy tool for school students. Some years later, Di Pasquale changed the nature of the software from its focus on entrepreneurship and financial literacy to a focus on applied maths. Di Pasquale was aware that the Commonwealth government offered subsidies for research and development work performed by companies provided they satisfied certain criteria. In general terms, if a business satisfied the criteria, then it would recover a rebate of 45% of the research and development expenditure incurred in the preceding financial year. So, for example, if a business spent $1 million on eligible research and development and made no profits, then it would receive a rebate of $450,000.[1]
[1]Initially, the rebate was 45% but it later dropped to about 43.5%.
MAM lent money to Cashtivity in 2018. It lent an amount equal to approximately 80% of the anticipated rebate which Cashtivity expected to receive. MAM had a general security deed over the assets of Cashtivity but no personal guarantee from Di Pasquale or any other security.
Cashtivity did not receive the anticipated rebate and did not repay the loan to MAM.
MAM appointed receivers over Cashtivity and those receivers assigned to MAM Cashtivity’s choses in action against Di Pasquale.
MAM is now suing Di Pasquale for recovery of the loan on two bases. It alleges that Di Pasquale:
(a) engaged in misleading or deceptive conduct by not informing MAM that it assigned Cashtivity’s intellectual property to another company in 2015 (and again in 2018 after the second loan was made) so that there were no intellectual property assets available to MAM against which to enforce its security; and
(b) breached her fiduciary duties to Cashtivity in certain ways: by transferring the intellectual property of Cashtivity to another party for $1 on each occasion and failing to have Cashtivity’s intellectual property independently valued; and by causing Cashtivity to continue incurring research and development costs after the assignments.
Di Pasquale denies that any conduct by Cashtivity or her was misleading or deceptive, or that she breached any fiduciary duties to the company.
Issues
The parties have agreed that the issues which the Court must determine in this case are as follows:
1. Did the defendant breach her fiduciary duties as the sole director of Cashtivity in December 2015 by causing the present and future intellectual property of the company to be assigned to Cashtivity Inc for $1?
2. Did the defendant breach her fiduciary duties as the sole director of Cashtivity by directing the company to incur the research and development expenditure in circumstances where the 2015 Transfer Deed assigned its intellectual property to Cashtivity Inc, a US company that became Cashtivity’s parent company?
3. Did the defendant breach her fiduciary duties as the sole director of Cashtivity in October 2018 by causing the company’s present intellectual property to be assigned to Mindsets Learning Pty Ltd (“Mindsets Learning”), another subsidiary of Cashtivity Inc?
4. Did the defendant (either directly or as an accessory) breach s 18 of the Australian Consumer Law (“ACL”)[2] by reason of the following issues:
[2]Competition and Consumer Act 2010 (Cth) sch 2 (“ACL”).
(a) Were the Warranties representations (as defined in the second further amended statement of claim dated 17 September 2024 (“FASOC”)) pursuant to the 2018 Facility Agreement false because Cashtivity had failed to disclose:[3]
[3]The Warranties representations are set out at paragraph 235 of these reasons.
(i) the existence, terms or effect of the 2015 Transfer Deed;
(ii) that Cashtivity Inc was the owner of the Company’s intellectual property; and
(iii) that by reason of those matters, the Cashtivity’s application for the research and development rebate was likely to be rejected?
(b) Was it misleading or deceptive to fail to disclose to MAM the 2015 Transfer Deed and the effect the same would have on the research and development rebate?
5. Did MAM rely upon the truth of the Warranties representations in respect of those matters in entering into the 2018 Facility Agreement?
6. If the Company had disclosed the 2015 Transfer Deed and its effect to the plaintiff, would the plaintiff have entered the 2018 Facility Agreement and make the advances pursuant to that facility?
7. What was the value of the intellectual property transferred by the 2015 Transfer Deed, and the 2018 Transfer Deed?
8. If the defendant has breached her fiduciary duties as sole director of Cashtivity either in respect of 1, 2 or 3 above, what loss and damage did the plaintiff suffer as a result?
9. If the defendant is found to have engaged in misleading or deceptive conduct what loss and damage flows as a result?
Background
In 2008, John Mitchell, the driving force behind the plaintiff, made a takeover offer for a financial services business called Almane Pty Ltd which held an Australian Financial Services Licence. Mitchell renamed the company Mitchell Asset Management Pty Ltd. The company acts as trustee of the Mitchell Asset Management Innovation Finance Fund (“IFF”).
Mitchell had an extensive background in finance. He began working casually for Macquarie Bank in the late-1980s and remained there for about 10 years before joining Merrill Lynch Australia in 2000. In 2007, he became interim Chief Executive Officer of Carnbrea & Co, a private wealth fund established by the Nicholas family. During this time, he applied for his own Australian Financial Services Licence. He has been the responsible manager and Chief Executive Officer of MAM since 2007.
In 2008, MAM was a wealth management firm conducting stockbroking activities through Berndale Securities, the Merrill Lynch third party clearing house. The business was transactional in nature and had unpredictable revenue. Mitchell changed the business to include retail financial planning, wealth management and the operation of an ANZ mobile lending franchise from 2013. He did this with the aim of providing predictable annualised revenue which would enable him to expand the business using retained earnings.
From 2012, MAM engaged in funds management via a hedge fund called Blue Charm Capital. This was done in conjunction with a domestic fixed income fund as a way to build a successful record in managing external funds on behalf of institutional and sophisticated clients.
In 2014, MAM established an investor visa product which was set up to comply with the investment requirements of the Business Innovation and Investment (Provisional) Visa for foreign investors seeking an Australian class 188C visa.
MAM created the IFF in 2016. This fund has grown from an initial investment of $500,000 to now having completed loans in excess of $248 million. The IFF is a unit trust which sells units to investors. Mitchell said that MAM was a custodian or trustee of clients’ monies. The clients vary from mum and dad investors to high-net-worth individuals, family offices, universities and wholesale investors. Mitchell was aware of the company’s responsibilities as a trustee of the investors’ funds. The value of the units fluctuates from time to time. It is an open-ended fund. When investors wish to leave the fund, they apply to redeem their units. The trustee does not guarantee any return on the investment in the fund or indeed the return of the capital invested. Such matters are governed by the performance of the fund. The fund warns investors that the risks of providing loans to borrowers may be higher than those accepted by traditional banks. This is because, inter alia, the borrowers seeking these loans often have no reliable income and have limited access to cash. Indeed, Mitchell acknowledged at one point that he established the IFF to make loans of the very kind in this case — to borrowers with no cash flow and secured by the rebate under the statutory research and development tax incentive (“RDTI”) scheme.
In the information memorandum produced by MAM in October 2020, MAM said that it intended to produce income for the IFF by providing loans to borrowers who were eligible to receive a refundable tax offset under the Commonwealth government’s RDTI program. The document says that once the manager identifies an investment opportunity, it will, through its due diligence process, analyse the opportunity to ensure it presents a suitable risk profile for the IFF. Every borrower must satisfy the key lending criteria:
·the borrower must be an eligible business and R&D entity as required by the tax legislation;
·it must self-assess its R&D activities as eligible activities for the purposes of the legislation;
·the eligible business must be registered with the RDTI program and be eligible for the refundable tax offsets under the program; and
·the borrower must have a unique registration number from either the self-assessment process or through the manager’s verification with an accounting firm which, in the opinion of the manager, has suitable experience in R&D tax credits.
In addition to the above, the manager will analyse and assess the risk of each opportunity by taking into account factors such as:
·the capacity of the prospective borrower to repay the loan;
·the collateral available to support the lender’s security position; and
·the character or quality of the prospective borrower’s management personnel.
When lending to a borrower, MAM will typically enter into a specific security agreement with the borrower over the borrower’s entitlement to receive a rebate from the Australian Taxation Office (“ATO”). If there is a default by the borrower, the trustee has a charge over that receivable. MAM also said that, where appropriate, as advised by the manager which the trustee appointed to manage the investments of the fund,[4] it will also enter into a general security deed over all the assets of the borrower. Again, this means that if the borrower defaults, the trustee has a charge over all the borrower’s assets.
[4]The manager is Mitchell Investment Management Pty Ltd.
Di Pasquale completed a Bachelor of Science at the University of Melbourne in 1985 and was recruited by Monash University in 1987 to set up its technology transfer company. She later worked as a project manager in the defence and major projects area between 1989 and 1992 and was a consultant and executive in the government accounts team from 1992 to 1995. From 1995, she worked for a subsidiary of Telstra setting up internet ventures and partnerships, Bigpond products and services. In 1997 she returned to Telstra to set up internet-based products and partnerships.
Between 1998 and 2000, she went to the United Kingdom and worked in projects and technology for the investment bank Dresdner Klin Benson.
From 2000 to 2006, she formed a consulting company with several Telstra colleagues. The aim of the business was to assist Telstra and other Australian companies in developing customers and products on the internet. During this time she also sat on two boards connected to the Victorian government.
In 2006, she returned to Melbourne University and completed a post-graduate law degree. Thereafter, she worked in the legal profession for three years from 2008.
From around 1997, Di Pasquale wanted to create a globally scalable company which solved a large problem or was capable of transforming an entire market. In 2009, Di Pasquale conceived the idea of developing a software-based tool which could teach children financial literacy. She was aware that the Commonwealth government subsidised research and development for novel and start-up businesses provided certain criteria were satisfied. The subsidies were provided for eligible research and development in accordance with the RDTI scheme. The RDTI encouraged investment in research and development to help companies grow and innovate to generate benefits for the Australian economy. The scheme was administered by the Department of Industry, Innovation and Science, sometimes referred to as AusIndustry. A description of the types of eligible activities was set out in the Income Tax Assessment Act 1997 (Cth). It was a self-assessment program and it was an applicant’s responsibility to ensure that the research and development activities satisfied the legislative requirements.
Di Pasquale incorporated Cashtivity in August 2011. She was the sole director and secretary of the company. There were three shareholders, each with 80 shares: Di Pasquale, Soho Finance Pty Ltd (“Soho Finance”), which was the trustee of Di Pasquale’s family trust and Soho Frontiers Pty Ltd (“Soho Frontiers”), which was the trustee of her superannuation fund. Cashtivity was, at its foundation, a company designed to develop software to educate children about financial literacy.
In 2012, Di Pasquale made her first application for a RDTI rebate. The application was in the sum of $135,000 and was successful.
In 2013, Di Pasquale made her second application for a RDTI rebate. The application was for $175,000 and was again successful. Di Pasquale would go on to be successful in obtaining a RDTI rebate in subsequent years until 2018.
Also in 2013, Di Pasquale met Andrew Strachan who, along with others, would advise Di Pasquale about Cashtivity and its business operations.
Di Pasquale registered the company Team Cashtivity Pty Ltd (“TCPL”) in December 2013. She is the sole director and shareholder of that company. TCPL was related to Cashtivity. It did not trade but attended to administrative functions like paying wages.
Between 2011 and 2019, Cashtivity was funded from Di Pasquale’s personal funds or money provided by Soho Finance or Soho Frontiers, government grants and RDTI subsidies. From 2014, Di Pasquale received some further funding from external investors.
By early 2015, Di Pasquale had realised that, due to the regulation of the Australian education market, Australia was not a viable market for the product which Cashtivity was developing.
In 2015, LearnLaunch, an educational technology incubator for startup businesses based in America, invited Di Pasquale to attend their September 2015 program. Di Pasquale attended the program which finished in about early 2016. The program included LearnLaunch investing some money in the business and providing mentoring to Di Pasquale.
On 23 November 2015, Di Pasquale incorporated Cashtivity Inc in America as a consequence of LearnLaunch’s requirements.[5] She became a director and shareholder in Cashtivity Inc.
[5]LearnLaunch’s requirements will be discussed later in this judgment.
On 31 December 2015, Di Pasquale prepared and executed an intellectual property transfer deed which transferred the current and future intellectual property of Cashtivity to Cashtivity Inc (“the 2015 Transfer Deed”).
Between November and December 2016, Di Pasquale, on behalf of Cashtivity, worked towards, and obtained, a loan from MAM (“the 2016 loan”). Cashtivity repaid MAM $240,804.81 together with interest of $22,844.67 in November 2017 after the RDTI rebate was received.
Cashtivity sought another loan from MAM for 2018. Initially, Strachan was opposed to the idea. He told Di Pasquale that MAM was unlikely to grant another RDTI loan because the loans to Cashtivity were too small. Strachan suggested some other lenders who might accommodate Cashtivity. One of these lenders later required Cashtivity to engage a preferred R&D advisor to assist with Cashtivity’s RDTI application for 2018. Di Pasquale chose PwC.
When Di Pasquale made Strachan aware of this, he advised her that he knew Marcus Tierney of PwC and Strachan facilitated an introduction to Tierney. Tierney was a Partner in the Incentives & Innovation section at PwC.[6]
[6]Tierney left PwC in about July 2022 and became a member of the investment committee at MAM in about August 2022.
After some interaction with PwC around December 2017, Di Pasquale again approached Strachan to ask if the plaintiff would reconsider its position and advance Cashtivity another RDTI loan. Ultimately, MAM agreed but it classified Cashtivity as a higher risk borrower. This was reflected in the interest rate and terms which MAM offered on the new loan.
As part of the due diligence process, MAM obtained a copy of the opinion which PwC gave Cashtivity regarding its RDTI application for 2018. PwC interviewed Di Pasquale and reviewed various financial and other documents which it sought from Cashtivity. PwC concluded that:
·Cashtivity satisfied the requirements of the RDTI legislation; and
·the estimated cash benefit payable to Cashtivity was $388,786.
In February 2018, MAM lent Cashtivity $280,000 (“the 2018 loan”). As part of this loan, Cashtivity executed a facility agreement (“the 2018 Facility Agreement”) and a general security deed in favour of MAM over all its present and after acquired property.
In August 2018, Cashtivity lodged its application for a RDTI rebate for the financial year ending June 2018.
In about September 2018, Di Pasquale changed the name of Cashtivity Inc to Mindsets Learning Inc.
On 30 September 2018, Cashtivity was due to repay the 2018 loan to MAM.
On 4 October 2018, Di Pasquale:
·incorporated in Australia a company called Mindsets Learning which was to be the Australian subsidiary of Mindsets Learning Inc; and
·executed a further intellectual property transfer deed which sought to transfer any intellectual property developed by Cashtivity between 31 December 2015 and 4 October 2018 to Mindsets Learning (“the 2018 Transfer Deed”).
In February 2019, Cashtivity’s 2018 RDTI application was rejected.
On 7 March 2019, MAM issued a default notice to Cashtivity pursuant to the 2018 loan.
After Cashtivity failed to repay the loan or remedy the default, MAM appointed receivers in May 2019.
In November 2022, Cashtivity’s receivers assigned to MAM any and all rights which the company might have against Di Pasquale for alleged breaches of fiduciary duty.
The witnesses
The issue of credit arises in this case because there was a lack of relevant documentation in respect of some important issues.
The Court is left to record its impression of witnesses as they appeared in the witness box. Notwithstanding that most judges worked as barristers before joining the bench and spent considerable time in court dealing with witnesses, I am not convinced that that they all have a special talent for determining the credit of witnesses solely on the basis of their demeanour in court. A court can be more confident in its credit findings where it has regard to the overall context created by contemporaneous documents and compares that evidence and the framework which it creates with the oral testimony given by witnesses. Courts should also take into account the internal coherence of a witness’s evidence and how it sits with agreed or objectively established facts, the inferences which can be reasonably drawn from such matters and the apparent logic of events.
John Mitchell
Mitchell is plainly an intelligent man with more than 30 years’ experience in finance. He established the IFF in 2016.[7] In the present context the relevant qualification to Mitchell’s experience is that MAM first became involved in RDTI funding around 2015.[8] Hence, MAM’s expansion into this field was relatively recent when it lent funds to Cashtivity in December 2016.[9] He is well aware of the responsibility which the plaintiff bears in this matter. It is part of MAM’s business as trustee to obtain funds from investors and to invest that money advantageously so as to provide an attractive rate of return to the investors. To that extent, MAM must take reasonable measures to protect investors’ funds and not expose them to unnecessary risk. It can do this by conducting thorough due diligence and performing the usual kinds of checks which a prudent lender would undertake.
[7]First witness statement of John Mitchell dated 20 October 2023 at [17].
[8]Ibid at [25].
[9]Ibid at [33].
Mitchell was confident in giving evidence. This stemmed partly from presenting as a confident personality and partly from being asked about matters associated with his work which he felt well able to understand and address.
I accept much of the evidence which Mitchell gave. It was often uncontroversial or supported by contemporaneous documents.
The main area of dispute between the parties is fairly narrow. But it is Mitchell’s evidence regarding this disputed part of the case which troubles me. Mitchell made two witness statements, his initial witness statement on 20 October 2023 and a second witness statement on 9 September 2024. He made the second witness statement a few days after Di Pasquale’s solicitor sent a letter to the plaintiff’s solicitor in which he said the following:
“It is not controversial that there is no evidence as to reliance in either the statements of evidence of Strahan [sic] or Mitchell. Furthermore, there is no evidence in the investment committee documents some of which your client finally discovered after we pointed out in our letter dated 18 October 2023 that the destruction of documents by your client would be contrary to s 1101E of the Corporations Act 2001.”
In the second witness statement, Mitchell referred to paragraph 25 of his first witness statement where he said that “for practical lending purposes, MAM operated on the basis that the applicant would need to own the IP subject of the application”. He added that, if the loan applicant did not own the intellectual property the subject of the RDTI rebate, MAM does not proceed and would not have proceeded with the loan.
A major area of dispute in the case concerns whether Cashtivity should have disclosed to MAM before it took out the 2018 loan that it had transferred its intellectual property to Cashtivity Inc pursuant to the 2015 Transfer Deed. MAM says that the failure to disclose this information constituted a breach of warranty under the 2018 Facility Agreement and misleading or deceptive conduct. MAM also alleges that the failure to disclose constituted misleading or deceptive conduct.
Mitchell’s second witness statement says several things:[10]
·MAM’s lending operates on the basis that a borrower must own its intellectual property and that is the reason MAM takes a general security deed over all assets of a borrower;
·MAM requires the general security deed so it has extra security and additional comfort that there are other assets available to MAM to ensure the borrower repays the loan if there is no RDTI rebate; and
·if MAM had known that Cashtivity did not own its intellectual property, it would not have lent any money to Cashtivity. Alternatively, MAM would have required more security such as a general security deed from the owner of the intellectual property or a guarantee from the director of the owner company.
[10]Second witness statement of John Mitchell dated 9 September 2024 at [6]–[8].
There are several aspects of this witness statement which I find troubling.
First, the essential nature of the plaintiff’s case and the alleged significance of Cashtivity’s silence about the assignment were well known in October 2023. Mitchell did not include any evidence in his first statement about reliance. This seems to be a serious oversight and there was no explanation offered for its omission. It looks self-serving and questionable to include the evidence noted in paragraph 54 above only after the defendant has identified the missing evidence.
Secondly, Mitchell says that MAM operated on the basis that the borrower had to own the intellectual property the subject of the RDTI rebate. If this were true, then I would expect that MAM, as trustee of the IFF and responsible for the investors’ funds, would take effective measures to check this when performing the due diligence. This is especially so if the failure to own the intellectual property is a crucial and determinative factor in deciding the outcome of the loan application. But, on the evidence, MAM made no enquiries about the ownership, content or value of the intellectual property in relation to which Cashtivity sought the loan, even though Cashtivity produced all the documents and information which MAM sought in connection with the loan application. It is difficult to treat ownership of the intellectual property as akin to a pre-condition of the loan if MAM ignores the issue.
Thirdly, Mitchell implied in his witness statement and said in his oral evidence that MAM always required the borrower to enter into a general security deed when obtaining an RDTI loan. He said this gave MAM further security and comfort that there were other assets available to realise if the ATO refused to grant the RDTI rebate. The reasoning in this answer is defective. Whether or not having a general security deed provides the lender with greater security and the comfort of additional assets depends on the facts of each particular case. A general security deed is of no practical utility unless there are assets to which it might attach. MAM did not adduce or refer the Court to evidence which showed that it conducted any search, examination or enquiry about what assets of Cashtivity fell within the scope of the general security deed. Unless MAM performed such a task, it could not know that there were any assets apart from the RDTI rebate covered by the general security deed. If there were no valuable assets to which the general security deed could attach, then MAM had no greater security for its loan and could not ensure that the borrower repaid the loan.
Fourthly, Mitchell says that if MAM had known that Cashtivity did not own its intellectual property, it would not have lent it any money. That is an unqualified statement of MAM’s lending policy. Then, in the same paragraph, he says alternatively, that MAM would have lent Cashtivity money but required additional security. I am concerned by Mitchell’s approach to this part of his evidence. He makes statements which are on their face inconsistent without offering any explanation about what factors would cause MAM to act in one way rather than another. This approach to the truth does not sit comfortably with the fact that Mitchell is plainly intelligent and a sophisticated operator in the finance world.
Fifthly, I do not accept Mitchell’s evidence that MAM would not lend money to a borrower where the borrower did not own the intellectual property.[11] It is apparent from this case MAM was prepared to do that very thing. As appears later in the judgment, on the balance of probabilities, I am comfortably satisfied that Di Pasquale informed Strachan about the transfer of the intellectual property under the 2015 Transfer Deed well before 2018. It follows from this that either Strachan did not pass this information to the investment committee or he did advise the investment committee and it decided to make the 2018 loan anyway. In either case, the likely explanation is that Strachan or the investment committee was not troubled by this fact because the IFF’s prime focus was the RDTI rebate. Given Cashtivity’s history of successful claims, the change of direction in Cashtivity’s research and the positive views expressed by PwC regarding the RDTI rebate application for 30 June 2018, MAM expected Cashtivity to repay the 2018 loan from the RDTI rebate. This was evident from Mitchell’s evidence at trial.
[11]Ibid at [6].
At one point, the defendant’s counsel queried Mitchell about the steps taken to ascertain that Cashtivity owned the intellectual property the subject of its RDTI application. Mitchell said that MAM enquired about the ownership of Cashtivity and he understood that an Australian company undertaking the eligible activity got a full rebate and a non-Australian company did not. Mitchell said that this understanding arose from his experience as a lender. He also said that MAM lent against the RDTI rebate and not the intellectual property of the borrower.
Mitchell later repeated that, when lending in relation to the RDTI rebate, MAM’s predominant interest was the eligibility of the expenses claimed by the borrower and the likelihood that the ATO would pay the rebate. Mitchell’s point was that, though MAM examined the Personal Property Securities Register (“PPSR”) registration and insisted upon being the senior secured entity, that was not the main focus.
Again, Mitchell referred in the latter part of his cross-examination to MAM’s usual procedure — this was to consider the eligible activity and the historical spend by the borrower and to become the senior secured entity on the PPSR. Mitchell’s evidence showed that the plaintiff’s focus was on the RDTI rebate rather than any consideration about the actual value of the borrower’s assets. Other evidence such as the screening documentation reinforced the same point. The risk checklist in that document concentrated on issues regarding the entitlement to the RDTI rebate, not other assets which could provide extra security for the loan.
Mitchell’s evidence was also unsatisfactory in other ways. He was evasive about what he himself did to assess the value of the borrower’s intellectual property. He said that he was not the point man on the loan, as if that absolved him from responsibility. Mitchell failed to mention in that context that the investment committee vote to approve the loan had to be unanimous and therefore, that his approval was required for MAM to grant the loan to Cashtivity. Mitchell did not give any direct evidence about the steps he took to examine or assess the content or value of Cashtivity’s intellectual property. I find it more likely than not that Mitchell took no steps to investigate these matters. He said that the value of the intellectual property was partly a function of the money which Cashtivity had spent over time. Based on his experience, he thought the intellectual property value might be 10-15% of the money expended by Cashtivity on research and development. He gave no more detailed rationale to justify this calculation.
Mitchell also said that he believed Di Pasquale had applied for patents and that fact indicated there was value in the intellectual property. In saying this, Mitchell implied that the existence of patents was a relevant factor in forming his view about the loan to Cashtivity. However, there was no clear and detailed evidence about patent applications to support Mitchell’s evidence. Further, the plaintiff did not raise the question of patent applications in cross-examination with Di Pasquale.
More disturbingly, Mitchell said later in his evidence that whether or not Cashtivity had patent applications pending or registered did not factor into his assessment of the merits of the loan sought.
Another concern was Mitchell’s response to the question whether MAM had enquired about the assets of a borrower when making an RDTI loan. Mitchell said that the plaintiff did make enquiries about assets other than the RDTI rebate. When asked about the extent of the enquiries which MAM undertook, Mitchell said that MAM “generally” looked at the PPSR registration and the application to AusIndustry[12] to get an understanding of the ownership of the company and looked at the experimentation which the borrower was engaged in. He said that MAM seeks more detail about this aspect by getting the advice of a reputable tax agent involved in the borrower’s application for the RDTI rebate. That is why MAM signed the “hold harmless” letter to PwC. Upon providing this to PwC, MAM gained access to the opinion which PwC gave Cashtivity in connection with its RDTI application and the likely amount of the rebate.
[12]AusIndustry is the body which runs the RDTI rebate program.
In my view it is notable that none of the evidence from Mitchell actually addressed the concrete steps taken to make enquiries about assets other than the subject of the RDTI application. I infer from the evidence of Mitchell that there were no such enquiries made. To that extent, Mitchell’s evidence was misleading and unpersuasive.
Mitchell’s evidence was evasive in parts. He did not always address the obvious point of a question but gave answers which were non-responsive. At other times, he was determined, regardless of relevance, to make some point which he was anxious to convey. In that way, he was combative. As the founder of the business and the chief executive officer, I assume he felt some responsibility for MAM’s current situation. While that is understandable, it did not make him the most compelling witness. His conduct in the witness box drew attention to his significant interest in the outcome of this case. This included not only explaining the delinquent loan to investors, but also the scope for reputational damage. In my view, this affected his conduct and attitude in the witness box. A witness more intent on simply answering questions without calculating their potential impact on the case would not have been as argumentative, evasive or economical with the truth.
In short, while I accept much of what Mitchell said, his evidence on some important contested points was unsatisfactory. To that extent, I regard him as an unreliable witness whose evidence I would not accept where it clashes with the defendant’s evidence.
Andrew Strachan
In 2013, Strachan worked at Allen Partners, a capital advisory and fund placement fund. Strachan holds Bachelor of Commerce, Bachelor of Engineering and Master of Finance and Investment degrees. His main functions at Allen Partners were capital raising, strategy, investor relationships and investment advice. A major focus was assisting overseas fund managers to raise capital from Australian institutions. During the period from late November 2016 to late May 2017, Strachan worked as a contractor or consultant for MAM. In this role, he helped introduce potential investments to wholesale investors. On about 23 May 2017, he became a salaried employee at MAM with a title of “Director, Private Capital”. His role then focused primarily on MAM’s IFF. This involved finding potential borrowers and working with MAM’s investment committee to assess those borrowers. Strachan worked in this role until August 2022, after which he was employed elsewhere.
Strachan was, until August 2013, a member of the Australian Institute of Company Directors (“AICD”). In or around 2013, on the AICD’s online job board, he saw an advertisement for Cashtivity seeking assistance with a capital raising. He answered the advertisement and spoke to Di Pasquale. She explained that Cashtivity was an online education collaboration platform aimed at teaching schoolchildren about business and finance. Strachan thought it was important for children to learn these things and he was keen to help. He became a director and minority shareholder of TCPL in December 2013, and remained a director until his resignation in July 2016.
Strachan provided his services to TCPL free of charge. His primary responsibility was to find people or institutions who would invest in Cashtivity. He arranged introductions for Di Pasquale and attended meetings at which Di Pasquale pitched her ideas to prospective investors. He also reviewed and helped with the presentation of marketing material and other information which Di Pasquale prepared. Part of Strachan’s role was to present information about Cashtivity and its work in a way which was attractive to potential investors and easy to review.
Strachan was not an impressive witness. Even allowing for the fact that giving evidence is often an unfamiliar and challenging experience, Strachan was very ill at ease in the witness box. Over many years practising law, I have not seen a witness who was slower to answer questions. MAM sought to argue that Strachan’s approach to giving evidence was thoughtful and measured and the lengthy pauses bespoke a careful consideration of the question and a conscientious attempt to answer it. To me, he looked evasive and gave the appearance of someone who was calculating how best to answer in such a way that he reduced his potential exposure (and that of MAM) while still providing a sufficiently plausible answer to be credible.
There was a significant difference between the speed with which Strachan answered most questions and the speed with which he answered questions about the 2015 Transfer Deed. With the latter, there were no long silent pauses but a prompt rejection of the proposition that he was told about or received a copy of the 2015 Transfer Deed.
Apart from his frequent lengthy pauses, I found Strachan was evasive and unwilling to give direct answers to questions which were simple and dealt with matters which seemed uncontroversial.
First, he had a problem agreeing that MAM advertised in its information memorandum that he was the person responsible for the IFF even though that is precisely what the document said. Strachan denied he was the person responsible for the fund in 2017. He said he was not part of the trustee or a signatory to any documents. He ultimately said his work was managing the fund and there were four other people on the investment committee.
Next, he at first denied that his remuneration at MAM was dependent upon the performance of the IFF. However, he again conceded that he perceived the performance of the IFF was a contributory factor to the payment of his discretionary bonus.
Finally, it was put to Strachan that, in May 2018, he was still advising Di Pasquale and Cashtivity. This was based on an email dated 4 May 2018 which Di Pasquale sent to her advisory panel, including Strachan. Strachan said the email was addressed “Hi Team”, so he was not sure that all recipients of the email were on the advisory panel. He said that he was not advising Di Pasquale at that time. But he agreed that after he resigned as a director of TCPL in July 2016, he continued to act in an advisory capacity to Cashtivity even though he had no formal role. Strachan said that he put together some financial models for the company but not the information in those models.
Strachan also only reluctantly agreed that, after resigning from TCPL, he continued to effect introductions for Cashtivity by making Cashtivity aware of potential investors and vice versa. This work was consistent with Strachan’s prior professional experience in funds management and placement.
Strachan agreed that after receiving Di Pasquale’s witness statement, he made another witness statement in response. Strachan said that he felt some things raised by Di Pasquale were worth clarifying.
First, Di Pasquale said that she had a meeting with Strachan around September 2015. Strachan said he made no response to that part of her witness statement because he could not recall such a meeting. He said that, although he and Di Pasquale caught up for coffee occasionally, he could not recall the meeting. He acknowledged that the meeting may have happened as Di Pasquale said.
Secondly, Di Pasquale said that she had a phone call with Strachan on 26 November 2015, the day after her meeting with an Innovation Manager at NAB. The NAB meeting followed discussions and dealings between Di Pasquale and the Cashtivity accountant Hislop, Alex Glovsky, an American lawyer recommended by Jean Hammond of LearnLaunch,[13] and Gary Twomey, an Australian R&D advisor who had prepared the Cashtivity RDTI applications for the 2013 to 2016 financial years. The topic under consideration by these people was the best structure to adopt for the corporate move to America and the potential consequences on the RDTI rebate. Di Pasquale was concerned that, although Glovsky and Hammond said that American investors would prefer to invest in an American company which owned the assets of the business, including the intellectual property, this might affect Cashtivity’s ability to receive the RDTI rebate. However, Twomey satisfied Di Pasquale that the ownership of the intellectual property in America would not affect the RDTI application by Cashtivity.[14] What was important in the context of the RDTI rebate was that Cashtivity made the application, conducted the research and development on its own account and complied with the rules.
[13]Jean Hammond’s role is described at paragraph 144 of these reasons.
[14]Witness statement of Glenn Hislop dated 24 April 2024 at [19].
Di Pasquale did not expand on the detail of her discussions with NAB. However, I infer from the context that it concerned the Cashtivity business and the impending move to America. It was in this context that Di Pasquale said that she discussed with Strachan or told him about:
·the requirements of American investors;
·the incorporation of Cashtivity Inc;
·the change of research focus from financial literacy to applied mathematics;
·the adoption of the parent/subsidiary model; and
·the transfer of Cashtivity’s intellectual property to the new American company.
In his second witness statement, Strachan referred to Di Pasquale’s evidence on these matters and said that he was never:
·told of the 2015 Transfer Deed; or
·given a copy of the 2015 Transfer Deed.
He said that he became aware of the 2015 Transfer Deed only after the appointment of receivers to Cashtivity on 29 May 2019.
He agreed that he had a conversation with Di Pasquale about her meeting at NAB but maintained that there was no mention in that conversation about the assignment of the intellectual property from Cashtivity to the new American company.
In circumstances where:
·Cashtivity was struggling in Australia and had no future due to government regulation, the absence of a saleable product and a lack of investors;
·the move to America offered some hope for more investors and customers with the new focus of the software;
·the move to America was significant for Cashtivity’s future; and
·Di Pasquale was concerned about the structure of the reorganisation in America and had taken advice from various people about what was the most appropriate way to structure the business for the future,
I consider it more likely than not that Di Pasquale told Strachan about the 2015 Transfer Deed around the time it was executed.
This view is strengthened by other evidence which Di Pasquale gave and Strachan did not explicitly challenge. The failure to challenge is especially important in this case. The sequence of events was that Mitchell produced his initial witness statement on 20 October 2023 as did Strachan on 24 November 2023. The defendant produced her witness statement on 24 April 2024. Subsequently, Mitchell filed a second witness statement on 9 September 2024 and Strachan filed a supplementary witness statement on 7 June 2024. In that second statement, Strachan contested various aspects of Di Pasquale’s evidence. Di Pasquale put the plaintiff on notice as to the case she was advancing and the detail of her evidence. This was clear from a statement which ran to 235 paragraphs, together with three schedules comprising another 41 pages.
First, Di Pasquale said that, in the conversation with Strachan on 26 November 2015, she told Strachan about the following matters: the status of the incorporation of Cashtivity Inc; the requirements of American investors; the need to change the software focus to mathematics education; the need to incorporate Cashtivity Inc in America and to adopt a parent/subsidiary model; and the consequential transfer of Cashtivity’s intellectual property to Cashtivity Inc.
Secondly, Di Pasquale decided upon the parent/subsidiary model for a number of reasons, including:
·investors in America wanted the assets of the business to be located in that country. Government customers wanted the assets owned in America due to fears of foreign interference;
·in a parallel structure, it was impermissible to consolidate the accounting of the two entities. Losses in one entity could not be directly absorbed by the other entity; and
·if the American entity were to generate its own intellectual property as part of its operations, then a situation would develop where some intellectual property was owned in America and some was owned in Australia. That was unnecessarily complicated.
Di Pasquale said that she told Strachan about these matters and he agreed that the parent/subsidiary model should be adopted.
Thirdly, after getting Twomey’s advice in October 2015 about the ownership of the intellectual property not being a disqualifying factor in the context of the RDTI rebate, Di Pasquale told Strachan about the new structure and its relevance to the rebate.
Fourthly, in a discussion with Strachan in early 2016, Di Pasquale told Strachan about the incorporation of Cashtivity Inc in November 2015 and the assignment of the intellectual property which followed in December 2015. She also told him that Cashtivity would continue to conduct eligible research and development and seek reimbursement of its expenditure through the RDTI rebate.
Apart from Strachan denying in his evidence that Di Pasquale told him of the 2015 Transfer Deed, MAM and Strachan did not challenge the other aspects of these four matters in the cross-examination of Di Pasquale.
I find that Di Pasquale told Strachan about the 2015 Transfer Deed around 2016. Di Pasquale said that in November 2015 she spoke to Strachan and told him about:
·the requirements of investors in America; and
·the need to change the software focus to mathematics education.
I accept that, on balance, this conversation occurred as did others in which Di Pasquale and Strachan discussed the mechanism of the corporate reorganisation.
While Di Pasquale said that she provided Strachan with a copy of the 2015 Transfer Deed, she gave no details of when or where this occurred. On this point, I am less confident in accepting her evidence.
However, I reject Strachan’s claims that he had no knowledge of the intellectual property transfer before the parties entered the 2018 Facility Agreement. I say this for two reasons.
First, Strachan was a trusted adviser to Di Pasquale and acted as such for a number of years. His expertise and experience included funds placement. This was of crucial importance to Cashtivity because it needed investors to safeguard its future and to relieve the heavy financial burden on Di Pasquale. For this reason, it is likely, especially in the early days after Strachan became involved with Cashtivity, that he and Di Pasquale would have spoken and/or been in frequent contact. Di Pasquale’s decision to reorganise the corporate structure and create a parent company in America was a significant decision with major consequences. The reorganisation was forced by a combination of the bleak prospects for the Cashtivity product in Australia, the potentially brighter future and deeper pool of venture capital and investors which America offered and the requirements of those American investors and advisors. Di Pasquale sought advice from a collection of people, including Strachan, about the shift to America and the consequences of such a change.
In discussing the reorganisation and the move to establish a company in America, it is virtually inevitable that Di Pasquale explained the competing models and the consequences which flowed from adopting the parent/subsidiary structure or the parallel structure. One would expect that in providing information to Strachan as an advisor to Cashtivity, Di Pasquale would explain the situation fully, including the factors which influenced her and the consequences of the move to America. The latter were important because of their ongoing future effect. One such consequence was the transfer of the intellectual property from Cashtivity to Cashtivity Inc.
Second, Strachan acknowledged that he was aware in 2016 that:
·Cashtivity was to expand to America;
·this expansion involved the incorporation of a company in America; and
·the new company would become the parent of Cashtivity.
Given the matters referred to above, it is significantly more likely than not that Strachan was made aware of the transfer of the intellectual property before 2018.
Overall, I accept Strachan’s evidence to the extent that it was supported by documents or concerned matters which were either agreed or uncontroversial. However, where his evidence addressed matters in dispute and was different from Di Pasquale’s, I prefer her evidence. Strachan’s many repeated and lengthy silences, his evasion and the very different and quick denial of propositions which were damaging to MAM paint Strachan as a witness who is not credible or reliable. I found his evidence on the primary disputed issues unpersuasive.
Glenn Hislop
Glenn Hislop is a certified public accountant who works at Chambers & Partners. He has worked there since before 2005 when he was a student at RMIT. He has experience in small to medium-sized businesses. He began doing accounting work for Cashtivity around November 2014. From about 2015 until the appointment of the receivers to Cashtivity in May 2019, Hislop undertook various tasks for Cashtivity: annual tax returns; general book keeping; filing documents with ASIC; drafting correspondence to the ATO; drafting letters of comfort and providing general tax advice.
Hislop presented as a careful witness who sought to tell the truth as he saw it. His evidence was factual and based largely on contemporaneous documents.
Although the plaintiff cross-examined Hislop, it did not challenge him about the contents of his witness statement.
I consider Hislop a reliable and credible witness whose evidence I can readily accept. Further, Hislop had less of a vested interest in the outcome of the case than other witnesses. There was no suggestion that any work done or advice given by him or the firm was influential in the decision to establish Cashtivity Inc. The decision appeared to be more driven by the advice of people such as Hammond, Glovsky and Twomey and Di Pasquale’s assessment of what course of action was most likely to produce a successful future for the business.
Marissa Di Pasquale
Di Pasquale provided a detailed witness statement which covered her intellectual and business history in trying to develop a useful educational software program for students. She was obviously heavily invested in the project from 2011. This is reflected by the funding which she, directly or indirectly, provided and the fact that she moved to America for about two years to try to develop the project.
In giving her evidence, Di Pasquale’s responses were mixed. While she had a good command of the historical sequence of events, she was not always as strong in recalling details. Overall, this did not concern me greatly for a couple of reasons.
First, the cross-examination was not as precise and focused as it might have been. More often than is desirable, the questions were lengthy, addressed more than one topic or provoked objection from the defendant’s counsel. As a result, the cross-examination was a little messy because questions were withdrawn and repeated and answers were given which were ambiguous because it was not always clear what part of the question the witness was responding to.
Secondly, Di Pasquale was the founder of Cashtivity and the driving force behind the project. She was intimately involved in the whole process of developing the concept of the business and bringing the idea to fruition. She was engaged on a daily basis with meetings, emails and phone calls designed to achieve her objective. Given the volume of interactions she had with many people in Australia and overseas,[15] it would be understandable if she had difficulty recalling particular meetings or phone calls or differentiating one call or meeting from another.
[15]See schedule 1 to the witness statement of Marissa Di Pasquale dated 24 April 2024 (“Di Pasquale witness statement”).
Di Pasquale answered questions directly and was generally not evasive or argumentative. The plaintiff sought to attack her credibility by reference to changes to her pleadings, the timing of her introduction of Strachan to Hislop and the verification document generated by PwC. The gist of the attack was that her evidence was untrue.
MAM argues that the dispute had been on foot for some time before Di Pasquale belatedly said that Strachan knew about the 2015 Transfer Deed before Cashtivity entered the 2018 Facility Agreement. It also says that Di Pasquale “introduced” Strachan and Hislop about one year after the three of them allegedly spoke about the reorganisation of the Cashtivity business and the corporate move to America. Next, MAM submits that she gave false information to PwC about Cashtivity, and not Cashtivity Inc, owning the intellectual property generated through Cashtivity’s research and development work.
While it was proper for MAM to cross-examine the defendant about these matters, the outcome in my view was not to regard Di Pasquale as a less credible witness than Mitchell or Strachan.
I am normally reticent about criticising witnesses on the basis of their pleadings and disparities which might arise between the pleadings and their oral evidence. Once lawyers become involved in a case, their drafting, even though informed by and reliant upon their clients, tends to dominate. It is usually unfair and unhelpful to attack a witness for a document which they did not produce and reflects the judgment of their legal representatives.
The “introduction” point depends upon how one should interpret Di Pasquale’s witness statement. She said that in 2015, there were many discussions about the structure of the proposed corporate reorganisation in America “between me, Mr Strachan and Mr Hislop”. Later in her witness statement, she said that she received an email from Strachan in December 2016 asking her to introduce him to her contact at Cashtivity’s accounting firm, Chambers & Partners. The contact was Hislop. Di Pasquale responded by sending an email to Strachan (copied to Hislop) the same day or a day or two after, telling Strachan that the contact was Glenn Hislop and he would be able to answer any of his questions. In cross-examination, Di Pasquale insisted that her witness statement was correct and maintained that Strachan and Hislop had met each other prior to the December 2016 emails. She said that discussions between her, Strachan and Hislop in 2015 related to matters other than the RDTI rebate and that Strachan had contact with several people at Chambers & Partners who worked with Di Pasquale. Thus, the purpose of the December 2016 emails was to introduce Strachan to the right person to talk to at the firm about the RDTI rebate and for MAM’s due diligence for the 2016 loan. I accept her explanation.
PwC was involved in producing Cashtivity’s RDTI application in relation to the financial year ending 30 June 2018. During the course of preparation, PwC created an engagement verification document. The version in the court book records, at Question Number 1.6 of the document, that Cashtivity will own all the intellectual property which it generates through its research and development in that financial year and that no other entity, including Cashtivity Inc, will own that intellectual property. It was put to Di Pasquale that she saw and approved the document which contained the above information. Pasquale accepted that the statement regarding ownership was incorrect. But she denied giving the instructions recorded at Question Number 1.6 of the document.
Di Pasquale agreed that, as set out in the engagement verification document, she had a meeting with Tierney and Fon of PwC and a subsequent meeting with Ben Landsberg and Fon. She said that she saw at least three versions of the engagement verification document and made some comments which led to amendments of the proposed document. The only copy of the engagement verification document which the plaintiff had was the one in the court book. Di Pasquale could not say whether this was the final version of the document. Indeed, the evidence (as opposed to counsel’s statement from the bar table) did not disclose which version of the document was in the court book.
There were some emails in May and June 2018 about which Di Pasquale was questioned. In those emails between Fon and Di Pasquale, Fon said more than once that if the defendant were happy with the engagement verification document, she should sign and return it. In the absence of direct evidence, I infer that PwC produced the emails and the engagement verification document on subpoena. The plaintiff did not ask Di Pasquale and there was no evidence from her or anyone else about why this version of the engagement verification document (if it were the final version) was not signed by Di Pasquale. The evidence surrounding the document was vague and inconclusive. Given the uncertainty surrounding the evolution of the document and the absence of a signature, I accept that Di Pasquale knew the information in Question Number 1.6 of the engagement verification document was incorrect, and she did not approve it. She had made corrections to prior documentation proffered by PwC and denied giving the instructions embodied in the version of the document shown to her. Her failure to sign and date the document is consistent with her evidence.
An aspect of the defendant’s cross-examination which concerned me was the plaintiff’s failure to challenge parts of the defendant’s evidence in chief. For example, the plaintiff did not challenge the following:
·the defendant said that Strachan agreed that the defendant should adopt the parent/subsidiary model;
·Di Pasquale said she spoke to Strachan in early 2016 about the business’s activities in Boston, the incorporation of Cashtivity Inc and the 2015 Transfer Deed signed in December 2015;
·Di Pasquale said that, given Strachan’s expertise was approaching investors, writing business plans and models for prospective investors, she discussed, rehearsed and tested the pitch to investors with him in early 2016;
·Di Pasquale said that Strachan was at pitches, including to the Melbourne Angels in February 2017, where she referred to the assets of Cashtivity moving to America after the incorporation of Cashtivity Inc;
·Di Pasquale’s rationale for the transactions which the plaintiff said were in breach of her equitable duties as a director of Cashtivity; and
·Di Pasquale’s explanation of why she transferred Cashtivity’s intellectual property to Cashtivity Inc.
In addition, MAM also failed to put to Di Pasquale certain matters it sought to advance at trial. These included the following:
·she engaged in a “phoenix” operation regarding Cashtivity and its assets;[16]
·the documents and information which Di Pasquale supplied to Strachan as part of the due diligence process were misleading or deceptive because she did not refer to the 2015 Transfer Deed; and
·she deliberately or intentionally concealed the 2015 Transfer Deed from MAM and Strachan.
[16]The plaintiff’s counsel opened the case on the basis that Di Pasquale deliberately transferred Cashtivity’s intellectual property to another company so that, if called upon to repay MAM’s loan other than through the RDTI rebate, it was unable to do so and the general security deed had no practical effect (T92–3, T596–7). This position was maintained in final address (T596–7). The plaintiff said that Di Pasquale transferred Cashtivity’s assets to another company, leaving the debt in Cashtivity. Di Pasquale then left the debt in Cashtivity to “rot on the vine” after transferring the business to Cashtivity Inc in 2015 and any residual intellectual property in 2018 (T578). The plaintiff’s closing submissions ([29]) described “phoenixing” as “the intentional stripping of assets into another entity controlled by [Di Pasquale]”.
Overall, I consider that Di Pasquale did her best to tell the truth as she recalled it and I accept most of her evidence. Her recollection of the sequence of events was good and she gave reasonable explanations in connection with some of the evidence about which the plaintiff attacked her credit. Much of her evidence was reliant on contemporaneous documents and, to that extent, is supported by objective evidence. I found her credible and, apart from the vague evidence that she gave Strachan a copy of the 2015 Transfer Deed, I prefer her evidence on the other contested issues to that of Mitchell or Strachan. In particular, I find that she informed Strachan of the 2015 Transfer Deed before MAM entered the 2018 Facility Agreement.
Issue 1: Did Di Pasquale breach her fiduciary duties as the sole director of Cashtivity in December 2015 by causing the present and future intellectual property of the company to be assigned to Cashtivity Inc for $1?
MAM’s position
MAM contends that Di Pasquale breached her fiduciary duties to Cashtivity in 2015 by causing Cashtivity’s intellectual property to be assigned to Cashtivity Inc for $1. In the FASOC,[17] MAM says that Di Pasquale:
·improperly used her position as director to gain an advantage for Cashtivity Inc to the detriment of Cashtivity;
·failed to use her power as a director in good faith in the best interests of Cashtivity, for a proper purpose and with care and diligence;
·placed herself in a position of conflict between her duties to Cashtivity and the personal benefit she enjoyed as a director and shareholder of Cashtivity Inc; and
·appropriated the intellectual property of Cashtivity which was the subject of the two transfer deeds to the benefit of Cashtivity Inc.
[17]At [38].
In support of its position, MAM contends that the authorities make plain that a director who transfers a valuable corporate asset for only nominal value contravenes their fiduciary duty to the company. Such conduct deprives the company of a valuable asset without any corresponding benefit. MAM says that by transferring the intellectual property to Cashtivity Inc in 2015 and by failing to take steps to ascertain the proper value of the intellectual property being transferred, Di Pasquale breached her fiduciary duty to the company.
MAM submits that the expert evidence in the proceeding, particularly that of Campbell Jaski, is clear that the intellectual property, as it existed in 2015, was valued at up to $2 million and was not worthless as Di Pasquale contends. MAM argues that this position is supported by the documentary evidence. Because it had value, transferring the company’s intellectual property for the nominal consideration of $1 was not in the best interests of Cashtivity. In so acting, Di Pasquale deprived Cashtivity of its primary asset without any corresponding benefit.
MAM submits that, as both Mindsets Learning and Cashtivity are subsidiaries of Cashtivity Inc, Di Pasquale may have faced a conflict of interest in her role as director. It submits that her fiduciary obligation to Cashtivity should have prevented her from facilitating a transaction that, at Cashtivity’s expense, favoured another entity.
Di Pasquale’s position
First, Di Pasquale submits that the entry into the 2015 Transfer Deed must be considered in its context. She says that in 2015, Cashtivity was a failure because:
·it had no product, customers or significant investors (other than her or entities which she controlled);
·the experiments which formed the research and development were failures; and
·Di Pasquale had identified that, as a result of government regulation of school curricula in Australia, there would be no market for her financial literacy program in Australia.
Di Pasquale submits that, in 2015, she decided that as a result of Cashtivity’s failure, she was not going to continue funding Cashtivity as an Australian enterprise. Instead, Di Pasquale would pivot to America where there was a more fertile market both for education software and potential investors. She argues that her options were either to liquidate Cashtivity or to establish a parent/subsidiary model with an American company. Moreover, Di Pasquale accepted advice that Cashtivity would be more attractive to investors if Cashtivity Inc, the American parent company, was the ultimate owner of the relevant intellectual property. As a result, she decided that Cashtivity should assign its intellectual property to Cashtivity Inc.
Secondly, Di Pasquale emphasises that by transferring its intellectual property to Cashtivity Inc, Cashtivity established the circumstances by which Cashtivity Inc, Di Pasquale and her companies would continue to fund the company. She submits that by executing the 2015 Transfer Deed she had acted consistent with the best interests of Cashtivity — she had ensured a future for Cashtivity.
Thirdly, Di Pasquale says that she was not in a position of conflict between her role as director of Cashtivity and her interest as director of Cashtivity Inc.[18] She says that the existence of a transaction between the two companies did not allow a real possibility of conflict to arise as this was not a situation where the parent company, Cashtivity Inc, stripped Cashtivity of its assets. Instead, a restructure of the business had taken place whereby Di Pasquale moved the business to America where customers and investment might be found.
[18]In the further amended statement of claim (“FASOC”), MAM does not plead that Di Pasquale owed fiduciary duties to Cashtivity Inc or that a conflict arose from her duty to Cashtivity Inc as its director. MAM describes Di Pasquale as deriving a “personal benefit” from Cashtivity Inc and pleads that Di Pasquale placed herself in a position of conflict “between her duties to [Cashtivity] and the personal benefit she enjoyed as a director and shareholder of Cashtivity Inc”: FASOC at [38].
Moreover, Di Pasquale was already a shareholder of Cashtivity and, when the restructure concluded, the shareholders of Cashtivity Inc mirrored those of Cashtivity. Consequently, there was no real possibility of conflict arising from the transfer of membership of Cashtivity to Cashtivity Inc because it could not be said that Di Pasquale obtained for herself any profit or benefit.
Legal principles
The legal principles regarding a director’s fiduciary duty to a company are reasonably clear. Directors must:
(a) act in good faith and in the best interests of the company;[19]
(b) avoid any unauthorised conflict between their duty to the company as a director and either their personal self-interest or their duty to a third party;[20] and
(c) not obtain any unauthorised profit from acting as a director.[21]
[19]Australasian Annuities Pty Ltd (in liq) (rec and mgr apptd) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302 at [58], citing Re Smith & Fawcett Ltd [1942] Ch 304 at 306 and Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 at 182.
[20]See, eg, Naaman v Jaken Properties Australia Pty Ltd (2025) 421 ALR 227 at [81] (“Naaman”); Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd (2016) 340 ALR 580 at [3] and the cases cited therein.
[21]See, eg, Naaman (n 20) at [81].
(a) Acting in good faith
The case law in the area reflects conflicting views about whether the test for a bona fide duty to act in good faith and in the best interests of the company is subjective, objective, or a combination of the two. Under the subjective test, where a director acts bona fide in the sense of having an honest belief that the course of action adopted is in the best interests of the company, no breach arises. By contrast, under the objective test, a court must consider whether in light of all the relevant circumstances, a reasonable director would have acted in the way which the director in question did.[22] Other decisions in this Court have considered this question.[23] The Court of Appeal, in relation to the analogous statutory duty, which has been described as being of similar character to the equitable or fiduciary duty,[24] has addressed the appropriate test in the decisions of Mernda Developments Pty Ltd v Alamanda Property Interests (No 2) Pty Ltd (“Mernda”)[25] and Australian Securities and Investments Commission v Geary (“Geary”).[26]
[22]See VicBeef Holdings Pty Ltd v Chen [2021] VSC 546 at [149] (“VicBeef”).
[23]See, eg, ibid at [149]–[204]; GJB Building Pty Ltd v AI&PB Property Pty Ltd [2023] VSC 782 at [2046]–[2058] (“GJB”).
[24]VicBeef (n 22) at [113]; Landsville Huynh Pty Ltd v Huynh [2023] VSC 55 at [145] (“Landsville”). In VicBeef, M Osborne J considered both the statutory and the equitable duty of good faith as both were pleaded: at [20(b)], [113]–[116], [149]–[204]. His Honour noted at [201] that he was bound by the decision of Mernda to apply an objective test (but having regard to subjective beliefs and intentions of the director). His Honour considered that the same objective test set by Mernda applied to both the statutory and equitable duties.
[25](2011) 86 ACSR 277 (“Mernda”).
[26](2018) 332 FLR 201 (“Geary”).
In Mernda, the Court said that it is now generally accepted that a court should apply an objective test.[27] In Geary, the Court endorsed the objective test but also stated that
“[a]lthough the test is objective, based on what a reasonable person in a similar position would be expected to have done in the circumstances, the subjective beliefs and intentions of the director or officer may still be relevant.”[28]
[27]Mernda (n 25) at [33].
[28]Geary (n 26) at [409].
The cases emphasise that, irrespective of the test which is applied, it is crucial that the Court focuses on analysing the facts. Depending upon the evidence in a particular case, it may or may not support an inference that the interests of an individual company were served by a decision which conferred a benefit on a corporate group or other entities within the group.[29]
[29]VicBeef (n 22) at [203].
Thus, even when a court applies an objective test, as originally propounded by Pennycuick J in Charterbridge Corporation Ltd v Lloyd’s Bank Ltd,[30] in assessing how a reasonable director would have acted, it can take into account evidence of the actual conduct of the director in question.[31]
[30][1970] Ch 62 at 74.
[31]In VicBeef (n 22), M Osborne J stated that “[e]ven the application of a wholly objective [test] such as in Charterbridge, requiring an assessment as to how a reasonable director would have acted, is carried out in light of such facts as evidence the actual conduct of the director in question”: at [204].
Allied to the duty to act in good faith and in the best interests of the company is the obligation upon a director to act for a proper purpose. As a fiduciary, a director can exercise powers only for the purposes for which they were conferred and not a collateral or improper purpose.[32] To establish such a complaint about a director’s actions, a party must show that the substantial purpose pursued by the director was improper or collateral to his or her duties as a director.[33] A director can act honestly but still act improperly where the director acted for a collateral purpose.[34] The Court must determine whether, but for the improper or collateral purpose, the director would have engaged in the impugned act.[35]
[32]Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218.
[33]Ibid.
[34]Ibid.
[35]Ibid.
(b) Conflicts of interest
As a fiduciary, a director is obliged to avoid conflicts of interest. Directors cannot place themselves in a position where there is a real or substantial possibility of conflict between the director’s duty to the company and either the director’s own interests or the director’s duty to another entity, whether that be a company, a person or a trust of which the director is trustee.[36] In the present case, the emphasis is on any conflict with Di Pasquale’s personal interests. MAM does not allege any conflict which could arise from any duty which Di Pasquale might have to Cashtivity Inc as a director of that company.
[36]VicBeef (n 22) at [121]–[123]; Landsville (n 24) at [142].
(c) Unauthorised profits or benefits
It is well established that a director is liable to account for any profit, benefit or gain obtained in circumstances where there is a conflict or possible conflict of interest and duty or which has been obtained by reason of their fiduciary position or by taking advantage of an opportunity or knowledge derived from holding that position. Hence, a director is obliged to account for any benefit or gain obtained or received due to the fiduciary position or opportunity or knowledge derived through it.[37] The objective is to preclude a fiduciary from being affected by considerations of personal interest and from misusing their fiduciary position for personal advantage.[38]
[37]Chan v Zacharia (1984) 154 CLR 178 at 198.
[38]Warman International Limited v Dwyer (1995) 182 CLR 544 at 557, citing Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 394.
Analysis
When dealing with this question, the Court needs to examine whether Di Pasquale:
(a) acted bona fide and in the best interests of the company;
(b) acted for a proper purpose;
(c) was in a position of conflict; and/or
(d) derived or received some unauthorised profit or benefit from her directorship.
Did Di Pasquale act bona fide and in the best interests of Cashtivity?
I am satisfied that Di Pasquale acted bona fide or honestly and in the best interests of the company in assigning Cashtivity’s existing and future intellectual property to Cashtivity Inc for $1. I accept her evidence that it was best for the future of the company to assign the intellectual property to the American company, Cashtivity Inc. There was no future for the software product in Australia because of the absence of investors and the inhibiting effect of government regulation upon sales in the Australian market. Moreover, it was not put to Di Pasquale that she was dishonest in her evidence about this issue or that she did not believe that it was the best option for the company.
In determining whether Di Pasquale failed to act in the best interests of Cashtivity in 2015 by assigning the intellectual property, the Court needs to consider what the best interests of Cashtivity were at the time of signing the 2015 Transfer Deed, having regard to such matters as the circumstances facing the company and the valuation of the intellectual property.
The circumstances of the company
I turn first to the circumstances of the company at the time that Di Pasquale signed the 2015 Transfer Deed. By the end of 2015, Di Pasquale had been working on the financial literacy software for about four years. During that time, notwithstanding her own best efforts and those of the various people who assisted her, she had not developed a successful product. There was no product which she could market or sell, and there was no specific tangible outcome from the research and development which could be monetised. In other words, compared to Di Pasquale’s initial hopes of creating a globally scalable company which solved a large problem or transformed an entire market,[39] her work with Cashtivity was a failure. She would not rival the likes of Messrs Gates, Bezos or Zuckerberg in creating a novel, global business with her financial literacy product.
[39]Di Pasquale witness statement (n 15) at [21]–[26].
From inception, Cashtivity relied primarily upon Di Pasquale to fund its activities either directly or indirectly through family companies or trusts. Di Pasquale established Cashtivity in August 2011. She was interested in the idea of financial literacy in part because she knew the Commonwealth government, together with ASIC, was developing a national curriculum for financial literacy. The Commonwealth, however, abandoned this plan the following year.
By late 2015, Cashtivity had reached a point where it had failed to develop a software product for marketing or sale. The company had developed no assets of substantial worth and could not obtain finance in the usual way from banks or other lending institutions. It was forced to borrow from specialised funders like the IFF which involved providing considerable information about the business and paying higher interest rates to reflect the level of risk associated with the loan. On any objective criteria, Cashtivity’s business was a failure and there was no evidence to suppose that there would be a major improvement in the fortunes of the company in Australia. Indeed, the future there looked grim.
Before 2015, Di Pasquale spent some time in America attending conferences and meeting teachers, educators and curriculum decision-makers. By March 2015, Cashtivity had won two awards in America: the “LearnLaunch” award in Boston, and the NASDAQ Edtech award in New York. In May that year, Di Pasquale met Jean Hammond of LearnLaunch. Hammond was the managing partner of LearnLaunch and became an advisor to Cashtivity Inc from 2015 until 2019. LearnLaunch was a Boston-based incubator for start-up businesses in the educational technology space. It invited applications from prospective start-ups. When LearnLaunch accepted a business into its program, it invested in the business and provided mentoring for three months. Di Pasquale was invited to attend the program which ran from September 2015 until the end of January 2016.
As a result of the program, Di Pasquale decided to base herself primarily in America from 2015 until about September 2017. She researched customer needs and investors while continuing to work on her educational product. Hammond recommended that Di Pasquale seek assistance from an American lawyer, Alex Glovsky, in connection with the transfer of the business from Australia to America.
[51](2023) 277 CLR 186.
[52]Ibid at [80]–[83].
The Victorian Court of Appeal in Protec Pacific Pty Ltd v Steuler Services GmbH & Co KG comprehensively summarised the principles governing the issues of causation and loss.[53]
[53][2014] VSCA 338 at [540].
An important part of MAM’s case is that Di Pasquale’s silence about the 2015 Transfer Deed was misleading or deceptive both innately and due to the context of the warranties contained in cl 10 of the 2018 Facility Agreement.
The law has developed some specific principles regarding the question of silence and how a failure to reveal something can constitute misleading or deceptive conduct.
The authorities support the following principles:
·silence is to be included as a relevant factor in assessing conduct just like any other factor;[54]
·there is no such concept as mere silence because the significance of silence always depends upon the context in which it occurs;[55]
·the context might include facts which give rise to a reasonable expectation that, in the circumstances, if particular matters existed, they would be disclosed;[56]
·if such an expectation arises, then the failure to disclose a fact could give rise to an inference that the fact does not exist;[57]
·unless the circumstances give rise to a reasonable expectation that if a relevant fact existed it would be disclosed, it is hard to see how mere silence could support the inference that the fact does not exist;[58]
·in examining the context, the Court can consider factors such as the knowledge of the person to whom the conduct is directed, the existence of common assumptions and practices established between the parties or prevailing in the profession, trade or industry in which they do business, how commercially sophisticated the parties are, their level of experience in the field, their shared knowledge and assumptions engendered by a course of dealing or commercial practice;[59]
·a failure to make enquiries can be a relevant consideration in assessing conduct although it will not automatically defeat a plaintiff’s claim;[60]
·generally, s 18 of the ACL does not require a party to commercial negotiations to volunteer information which will be of assistance to the decision making of the other party. It does not impose on a party an obligation to volunteer information in order to avoid the consequences of the careless disregard for its own interests of another party of equal bargaining power and competence;[61] and
·reasonable expectation is irrelevant when the undisclosed fact is the falsity of a representation made. Thus, a party who makes a false representation in pre-contractual negotiations and fails to reveal the truth will, in all likelihood, be found to contravene the ACL.[62] A similar outcome is likely when a party makes a representation which was true at the time it was made but then fails to advise the other party when, due to changed circumstances, it becomes untrue. Again the same result is likely if, either originally or due to new developments, an unqualified representation is only partially true. A statement which is literally true can be misleading where it is incomplete in a material respect or subject to an unexpressed qualification.[63]
[54]Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 (“Demagogue”); Addenbrooke Pty Ltd v Duncan (No 2) (2017) 348 ALR 1 at [482] (“Addenbrooke”).
[55]Demagogue (n 54) at 32.
[56]Ibid.
[57]Rafferty v Madgwicks (2012) 203 FCR 1 at [278].
[58]Demagogue (n 54) at 41, quoting Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) ¶46-054 at ¶53,195.
[59]Addenbrooke (n 54) at [78], quoting Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 (“Miller”) at 384–5.
[60]Wormald v Maradaca Pty Ltd [2020] NSWCA 289 at [111], citing Miller (n 59) at 384–5.
[61]Addenbrooke (n 54) at [78], quoting Miller (n 59) at 371.
[62]Ibid.
[63]See, eg, Warner v Elders Rural Finance Ltd (1992) 41 FCR 399 at 404–5.
Analysis
The essence of MAM’s complaint is that Di Pasquale breached s 18 of the ACL because it: (a) falsified important warranties in the 2018 Facility Agreement; and/or (b) failed to disclose the existence of the 2015 Transfer Deed, which was misleading or deceptive per se.
As to the first limb of Issue 4, I consider that Di Pasquale did not engage in misleading or deceptive conduct in making allegedly false representations in the 2018 Facility Agreement. That is because the warranty representations were not in fact false. I accept the defendant’s submissions on this point.
As to the second limb of Issue 4, I find that even if Di Pasquale did fail to disclose the 2015 Transfer Deed (which I do not accept), such silence was not misleading or deceptive. This is because of MAM’s lack of interest in Cashtivity’s intellectual property, which was reflected in the loan applications and due diligence process undertaken by MAM in regard to the 2017 and 2018 loans.
The 2016 loan
On 21 November 2016, Di Pasquale approached Strachan regarding a possible loan. About a week later, Strachan sought the following from Di Pasquale: details of Cashtivity’s previous RDTI applications and evidence of payment; an introduction to Cashtivity’s current RDTI agent; details of Cashtivity’s cash burn for the year and estimates of what Cashtivity would claim for the current year’s RDTI rebate.
By 29 November 2016, Strachan had prepared an initial screening document for the proposed loan. The screening document contained proposed key terms for the loan as well as an assessment of Cashtivity’s credit and details of its anticipated RDTI rebate. The document contained no reference to the scope or substance of Cashtivity’s intellectual property nor any comment as to its value. However, the document did say that while MAM would conduct its standard due diligence, it needed to understand the impact of moving Cashtivity’s operations and holding company to America. This suggests to me that the parties discussed the issue of Cashtivity’s move to America, the incorporation of Cashtivity Inc and the reasons for, and ramifications of, such a move.
On 1 December 2016, Strachan provided Di Pasquale with draft facility documents being a facility agreement, a general security deed and a bank account control deed. The last mentioned document was designed to secure the bank account into which the RDTI rebate would be paid.
On the following day, Strachan asked Di Pasquale for further information and documents. Although the information sought was detailed, no part of it involved a reference to the scope or substance of Cashtivity’s intellectual property or its value.
On 5 December 2016, Strachan wrote to MAM’s investment committee and attached a screen document regarding the proposed loan to Cashtivity. Neither Strachan’s screening document nor his email made reference to any aspect of Cashtivity’s intellectual property. Similarly, no member of the investment committee responded to the documents by making any query or comment about Cashtivity’s intellectual property.
On 6 December 2016, MAM’s investment committee met. Later the same day, Strachan emailed Di Pasquale to tell her that the committee had met and discussed her loan. He advised that the discussion centred around the security of the loan and the use of the company accountant’s bank account to receive the RDTI rebate. Strachan said that for MAM, the security of the loan was more important than the interest rate charged. Strachan asked Di Pasquale to effect an introduction for him to Cashtivity’s contact at its accountants, Chambers & Partners.
On 7 December 2016, Strachan met with Hislop of Chambers & Partners. It was decided that they would set up a bank account to which MAM and Di Pasquale were joint signatories and into which the RDTI rebate payment would be made.
On 14 December 2016, Strachan presented Di Pasquale with the final loan documentation. Included in the documents was a further due diligence document headed “Borrower information to be provided”. The document provided a checklist of information and documents which MAM required on the topics of corporate information and research and development information. Included in the list of requirements were:
·correspondence with the ATO or AusIndustry about Cashtivity’s eligibility for the RDTI rebate including evidence that Cashtivity was an eligible business for the rebate within the meaning of the tax legislation;
·a letter from Cashtivity’s RDTI agent providing an opinion as to the appropriateness of Cashtivity’s current year RDTI claim; and
·evidence of earlier RDTI applications made by Cashtivity.
As will appear later, Strachan confirmed that MAM received all the information and documentation which it required in deciding whether to make the 2016 loan to Cashtivity. On that basis, I infer that MAM was satisfied from the evidence provided that Cashtivity was an eligible business within the meaning of the RDTI legislation. I similarly infer that:
·Cashtivity’s RDTI agent provided a positive opinion regarding the appropriateness of Cashtivity’s current year RDTI claim; and
·MAM received copies of the RDTI applications made in respect of earlier years.
On 16 December 2016, Strachan wrote to Di Pasquale asking her to arrange the removal of an existing PPSR registration granted by Cashtivity to a third party.
On 21 December 2016, Di Pasquale wrote to Strachan attaching further documents and information sought by MAM.
Also on 21 December, Strachan sought additional material from Di Pasquale and she responded the same day.
On about 22 December 2016, Strachan prepared an approval document for consideration by the investment committee.
On 23 December 2016, Cashtivity and MAM entered into a facility agreement (“the 2016 Facility Agreement”) and general security deed. MAM’s current formulation of its case stresses the importance of the general security deed for a couple of reasons. First, it gives security over the payment of the RDTI rebate. Secondly, it enables MAM “to put a foot” on the assets of the borrower. In other words, it enables MAM to leverage its control over whatever assets fall within the scope of the general security deed. Thus, a borrower cannot, in practical terms, use or deal with its assets, including the research and development work in respect of which it sought the RDTI rebate, unless it repays the debt owed to MAM. Again, this attitude reflects MAM’s approach of focusing on the RDTI rebate and its control of the borrower’s assets, rather than being concerned about the detail of the security. It assumed that the borrower would want to continue with the research and development work which it was undertaking and would pay MAM whatever was owed to retain that access and control over its work.
Additionally, Schedule 1 of the general security deed made express reference to “Intellectual Property”. Typed in this section of the document were the words “Not applicable”. Di Pasquale sought to argue that this reflected MAM’s lack of interest in Cashtivity’s intellectual property. While I accept the submission that MAM showed no interest in the substance or value of Cashtivity’s intellectual property, Di Pasquale’s contention on this point is incorrect. Taken in context, where the document provided space to include specific reference to designs, patents, plant breeders rights and trademarks, the words “Not applicable” should not be read as meaning any more than that none of these categories was applicable to the intellectual property in question.
The essential conclusion to be drawn from MAM’s due diligence process in relation to the 2016 loan was that, notwithstanding the demanding process whereby MAM sought extensive information and documents, neither Strachan nor any member of the investment committee sought information about the substance or value of Cashtivity’s intellectual property. There was no evidence that Cashtivity’s intellectual property was a matter of relevance or concern to MAM in relation to the granting of the loan.
The 2018 loan
On 18 December 2017, Di Pasquale wrote to Strachan asking whether MAM would make another loan to Cashtivity for the 2018 financial year.
On 10 and 11 January 2018, Strachan provided the MAM investment committee with information about the proposed loan.
On 11 January 2018, Di Pasquale provided Strachan with Cashtivity’s latest information pack. On 12 January 2018, Strachan wrote to Di Pasquale indicating the investment committee’s preliminary approval of the loan but noted that further information was required and that certain conditions precedent would need to be satisfied. None of the information requests nor conditions precedent related to Cashtivity’s intellectual property. Di Pasquale promptly provided the documents and information sought including a letter from the company’s accountants confirming Cashtivity’s prior successful RDTI applications.
On 29 January 2018, Strachan wrote to Di Pasquale requesting further financial information and evidence of Cashtivity’s compliance with its taxation obligations.
On 2 February 2018, Strachan provided the investment committee with an approval document for the loan.
On 6 February 2018, Strachan wrote to Di Pasquale informing her of additional conditions precedent required by the MAM investment committee. This included the monthly provision of certain information and an executed contract by which PwC became Cashtivity’s RDTI agent.
On 15 February 2018, Di Pasquale executed on behalf of Cashtivity the 2018 Facility Agreement with MAM and the associated general security deed. Even after the execution of these documents, MAM sought further documents and information from Di Pasquale.
As with the 2016 loan, none of the information sought or documents MAM requested from Cashtivity related to the content or value of Cashtivity’s intellectual property. Similarly, Strachan agreed that everything which he or the management committee sought from Cashtivity was provided. He said that he had requested everything he considered material to the proposed loan and that the investment committee had been satisfied with the material provided to it. There was no evidence that the content or value of Cashtivity’s intellectual property had any relevance to MAM’s consideration of the grant or otherwise of the loan in 2018.
In short, on the evidence before me, I find that during the period of negotiation and due diligence leading up to the entry by MAM into the 2016 Facility Agreement and the 2018 Facility Agreement:
·MAM did not raise with Cashtivity any issue about the existence, content or value of Cashtivity’s intellectual property;
·MAM obtained from Cashtivity all the documents and information which it sought and considered necessary in deciding whether to enter the 2018 Facility Agreement with Cashtivity;
·when deliberating internally about whether to enter the 2018 Facility Agreement with Cashtivity, no one at MAM, including the members of the investment committee, gave any consideration to the existence, content or value of Cashtivity’s intellectual property; and
·the conduct of MAM indicated that, although it was a sophisticated lender in a specialised market, it was not interested to enquire about the existence, content or value of Cashtivity’s intellectual property or the existence, content or value of any other property which might fall inside the scope of the general security deed. In making the latter observation, I accept that MAM ascertained that Di Pasquale owned no real property. However, there was no evidence of any enquiries made about property or assets owned, for example, by a spouse, relatives or a trust in which she had an interest.
Given the facts as I have found them, there was no proper basis for MAM to hold a reasonable expectation that Cashtivity would have revealed that, in 2015, it had assigned its intellectual property to Cashtivity Inc. Because MAM made no enquiry about Cashtivity’s assets in general, or intellectual property in particular, there was no reason for Cashtivity to think that this was a matter of interest to MAM. MAM’s conduct exemplified its focus on the RDTI rebate, seeking information and reassurance about the rebate and securing the bank account into which any rebate would be paid so as to ensure that MAM was repaid its loan before Cashtivity could access any excess funds which remained in the account.
Therefore, any failure to mention the 2015 Transfer Deed and the assignment of the intellectual property would not have been misleading or deceptive in contravention of s 18 of the ACL.
Di Pasquale as an accessory
MAM also argues that Di Pasquale should be held liable as an accessory or “person involved” in Cashtivity’s contravention of the ACL. Section 236(1) of the ACL provides:
“If:
(a) a person (the claimant) suffers loss or damage because of the conduct of another person; and
(b) the conduct contravened a provision of Chapter 2 or 3;
the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.”
A person was “involved” in a contravention of the ACL if the person:
“(a) has aided, abetted, counselled or procured the contravention; or
(b) …
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention …”[64]
[64]ACL (n 2) s 2.
A person can aid or abet a contravention only if they know the facts giving rise to the contravention. They must know the essential factual elements of the contravention, even if they do not know that such facts constitute a contravention of the law.[65] To be relevantly involved or a party to a contravention, a party must have actual, and not constructive, knowledge of the essential factual matters constituting the contravention.[66]
[65]Yorke v Lucas (1985) 158 CLR 661 at 670, 676.
[66]Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [9], citing Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 5; Anchorage Capital Master Offshore Ltd v Sparkes (2023) 111 NSWLR 304 at [327].
In the present case, MAM relies upon an allegation that it was Cashtivity’s misrepresentation by silence which caused MAM to lend the money to Cashtivity and ultimately suffer loss. This means that for Di Pasquale to be accessorily liable, MAM must establish that she deliberately or intentionally withheld this information. MAM argued that Di Pasquale’s conduct showed “a pattern of deliberate concealment to meet her own objectives”.
Di Pasquale denies that she could be liable as an accessory for an alleged breach of the ACL. In order to be liable, Di Pasquale says that she had to be “involved” in Cashtivity’s contravention of the ACL. To be involved in, or party to, a contravention, MAM has to establish that Di Pasquale had actual, and not constructive, knowledge of the essential matters which constituted the contravention. Given that MAM alleges that Cashtivity engaged in misleading conduct by silence in not revealing the 2015 Transfer Deed, Di Pasquale could be involved or a participant in such conduct only if Cashtivity was deliberately silent on the matter, intentionally concealing what it knew it ought to have revealed. If the omission were something which should have been disclosed (which Di Pasquale denies), then she says she was not “involved” within the meaning of the ACL because the omission was not deliberate.
Analysis
There are three reasons why I find that MAM has not established accessorial liability against Di Pasquale.
First, MAM has not proved that Cashtivity engaged in misleading or deceptive conduct. Hence, there is no contravention in respect of which Di Pasquale can be liable as an accessory.
Secondly, I find that Di Pasquale did not act deliberately or intentionally to conceal the 2015 assignment from MAM. Indeed, I have found that Di Pasquale revealed the 2015 Transfer Deed to Strachan before MAM entered the 2018 Facility Agreement. Even if I were not satisfied of this revelation, I would not have found that Di Pasquale’s failure to reveal the intellectual property transfer was deliberate rather than innocent. Given the history of dealings between the parties in relation to the loans made in December 2016 and February 2018, it would have been reasonable for Cashtivity to conclude that its intellectual property was of no concern to MAM. As observed previously, throughout two detailed due diligence exercises, MAM had not asked Cashtivity for any information or data about its intellectual property and had not raised the issue internally within the investment committee.
Thirdly, MAM failed to squarely address the topic of deliberately withholding information from MAM. In its submissions, MAM argued that Cashtivity deliberately chose not to inform it of the 2015 Transfer Deed. Hence, it was not a thoughtless or unintended failure to disclose the deed. Rather, it was part of a calculated plan to keep MAM in the dark. This is a serious allegation. For practical purposes, it is tantamount to accusing Di Pasquale, as the sole director and controlling mind of Cashtivity, of deceit. Notwithstanding the significance of the allegation, MAM did not put it to Di Pasquale in cross-examination. I regard it as inappropriate for a party to advance in final submissions a major allegation which it did not raise with the witness primarily implicated in the allegation. Long-established practice and the rules of fairness require that the accused witness be given the chance to respond to such an allegation. Di Pasquale was not given that opportunity.
Conclusion
For the reasons set out above, I consider that MAM has failed to prove that Di Pasquale breached s 18 of the ACL in the manner asserted under Issue 4.
Issue 5: Did MAM rely upon the truth of the warranties representation in respect of the matters stated in Issue 3 in entering the 2018 Facility Agreement?
MAM contends that the ownership of the intellectual property and the availability of the RDTI rebate were material factors in MAM’s decision to provide finance under the 2018 Facility Agreement. It says that it relied on the truth of the warranties representations when entering into that facility agreement. MAM says that it relied on the representations believing that Cashtivity’s financial position and the additional security it was offering over the intellectual property pursuant to the general security deed was sound. MAM argues that the warranties created a false impression that Cashtivity owned its intellectual property and was eligible for the RDTI rebate. As a result, MAM says that a reasonable person in its position would have been misled.
In oral submissions, counsel for MAM stated that their written submissions referred to the trial decision[67] and the Court of Appeal decision of Viterra Malt Pty Ltd v Cargill Australia Ltd.[68] Apart from observing that the Court of Appeal judgment showed that warranty representations could be relied upon to enter into an agreement and the reliance could be contemporaneous with the signing of the agreement, counsel did not explain the facts of the case or take the Court to any part of either judgment.
[67]Cargill Australia Ltd v Viterra Malt Pty Ltd (No 28) [2022] VSC 13.
[68][2023] VSCA 157.
Analysis
I find that MAM did not rely upon the truth of the warranty representations in entering the 2018 Facility Agreement. I say this because, as a result of Di Pasquale telling Strachan about the transfer of Cashtivity’s intellectual property to Cashtivity Inc well before MAM entered into the 2018 Facility Agreement, MAM knew about the transfer. To that extent, it could not have relied upon the representations as alleged as it knew the true position with respect to Cashtivity’s intellectual property.
Issue 6: If the Company had disclosed the 2015 Transfer Deed and its effect to the plaintiff, would the plaintiff have entered the 2018 Facility Agreement and made the advances pursuant to that facility?
For the reasons already given, I have found that MAM was aware of the 2015 Transfer Deed and its effect well before it entered the 2018 Facility Agreement. Strachan knew about the deed and became the person at MAM primarily responsible for dealing with Cashtivity in relation to the 2018 loan and the 2018 Facility Agreement. He reported to, and was part of, the investment committee which decided whether or not to grant the loan. I find MAM would have entered the 2018 Facility Agreement and did so.
Issue 7: What was the value of the intellectual property transferred by the 2015 Transfer Deed and the 2018 Transfer Deed?
The Court cannot value with precision the intellectual property transferred pursuant to the 2015 Transfer Deed or the 2018 Transfer Deed. Primarily, this is because the evidence about value is unsatisfactory.
The Jones evidence makes some irrefutable points about Cashtivity’s lack of success in creating a product which can be sold in the market. The absence of product, customers and income after a lengthy period of development beginning in 2012 compels him to say that the intellectual property has no commercial value.
The Jaski evidence is too broad and uncertain. His valuation range is $0 to $2 million for 2015 and $0 to $4.5 million for 2018. The higher figure in each case reflects the amount spent on research and development up to that point.
In my opinion, it is fanciful to suggest that someone would pay the total sunk cost of Cashtivity’s accumulated failures to obtain its intellectual property. The fact that the range is so broad, Jaski gives no guidance as to the critical factors or criteria which could affect the valuation and there is no specific figure nominated suggests to me that his estimate reflects guesswork and speculation rather than expert professional opinion.
Mitchell did not produce any valuation evidence in his witness statements. But in his cross-examination, he suggested that the intellectual property could be worth 10-15% of the expenditure incurred on the research and development work. Mitchell said he arrived at this percentage through 38 years’ experience in the finance industry and understanding the nature of an intangible asset. He suggested, at least implicitly that he was entitled to an opinion on the worth of an item of property in the same way that he understood the value of a car through working at Pickles Auctions. But prior to Mitchell’s involvement in the IFF, he had no experience in lending against intellectual property. Further, I infer from his failure to mention it that Mitchell did not gain any useful experience regarding the valuation of intellectual property after establishing the IFF. Also, I note that Mitchell did not say that he used or relied upon his 10-15% valuation at the time of approving and making the 2018 loan to Cashtivity.
In the circumstances, I attach minimal weight to Mitchell’s views. If, before establishing the IFF, he had no experience in lending against intellectual property and he referred to no other relevant knowledge or experience between establishing the IFF and making the loan to Cashtivity, then Mitchell has no specialised knowledge or experience which would justify relying upon his views.
It appears from the plaintiff’s closing submissions that it is aware of the problem with its valuation evidence. MAM said that, in relation to the calculation of equitable damages designed to put Cashtivity in the position it would have been in but for the defendant’s breach of fiduciary duty, it accepts that the assessment of damages may need to be the subject of further expert determination.
MAM further contended that, if the Court wished to undertake the valuation exercise, it should assess the value of the intellectual property in the range of $1 to $1.5 million. It said that this valuation took proper account of:
·the defendant’s evidence of attracting $260,000 of investor funds; and
·Jaski’s ceiling of up to $2 million.
MAM also argued that it was an appropriate range on the evidence and aligned with the principles of economic compensation.
The plaintiff’s submissions do not explain or set out with any precision a reasoning process to justify the valuation of $1 to $1.5 million which it advanced. That being so, and given Mitchell’s lack of valuation expertise, the Court cannot determine the validity or reasonableness of the calculation or quantification process.
I do not favour the parties adducing further evidence or having an expert determination on the value of the intellectual property. MAM claimed equitable compensation in the initial statement of claim and each subsequent iteration of the statement of claim. It raised this as an issue in the proceeding and should have been in a position to prove its case (assuming it suffered loss or harm). Subject to the usual rules of practice, I do not propose to authorise or entertain any further evidence or submissions on this issue. The plaintiff is bound by the evidence produced at trial.
If MAM suffered loss or harm arising from a breach of fiduciary duty, it did not discharge its onus of proving how that loss or harm should be calculated or quantified.
There was some evidence about investors from the Melbourne Angels group and investors in America contributing money to Cashtivity. The problem with this evidence was that there was no indication of the share or percentage of the business which the investors obtained through their contribution. Because this information was missing, it was not possible to use this evidence to perform an approximate valuation of the business.
Issue 8: If the defendant has breached her fiduciary duties as sole director of Cashtivity either in respect of Issues 1, 2 or 3 above, what loss and damage did the plaintiff suffer as a result?
For the reasons given in relation to Issues 1, 2 and 3, I find that MAM did not prove that it suffered loss and damage from any alleged breach of fiduciary duty.
Further, if I am wrong about that and MAM did suffer loss and damage, I find that it did not satisfactorily prove any particular amount of equitable compensation. In this respect, it failed to discharge its onus of proof.
Issue 9: If the defendant is found to have engaged in misleading or deceptive conduct, what loss and damage flows as a result?
If the defendant did engage in misleading or deceptive conduct (which I reject), MAM would have suffered loss as a result of entering a loan transaction with Cashtivity. MAM conducted the trial on the basis that it was a no-transaction case — that is, but for relying on Cashtivity’s misleading or deceptive conduct, it would not have been induced to lend Cashtivity $280,000 in the 2018 loan. Hence, MAM would be entitled to the loan amount as damages.
MAM also claims loss on two other bases:
(a) compensation for the cost of funds. This is an amount which reflects what MAM says it could have earned if, instead of lending to Cashtivity, it had lent the funds to another borrower or otherwise deployed the funds in an alternative investment; and
(b) the costs incurred by MAM as a result of the receivership. These costs amounted to $450,749.68 and are said to be recoverable pursuant to cl 16.2 of the 2018 Facility Agreement. MAM’s argument is that there was ample scope to recover losses which flowed from the impugned transaction.
In my view, while MAM would have been entitled to the loan principal as damages, it is not entitled to the other amounts claimed.
The cost of funds claim depends on a document which the plaintiff’s counsel tendered when Mitchell gave evidence. The document is an investor quarterly report dated December 2023 for the IFF. The report includes a table which set out the annual return generated by the IFF (after fees and costs) in the financial years ending 30 June 2018 to 30 June 2023 inclusive. The lowest return was 8.83% in the 2023 financial year and the highest was 11% in the 2020 financial year. The return in the 2019 financial year was 8.85%. The report was simply tendered and the plaintiff’s counsel asked Mitchell no questions about it.[69] MAM contends that in the period since February 2018 when he lent the money to Cashtivity, the IFF had averaged an annual return of 10%. Hence, it claimed that the damages under the ACL should include, in effect, an interest component or loss of use component comprising a 10% interest rate on the principal from the date of the loan until judgment.
[69]Nor did the plaintiff’s counsel ask Mitchell any questions about the IFF Information Memorandum document dated October 2020 which he tendered at the same time.
The cost of funds claim assumed that the funds were placed in some other investment within the IFF and that such investment was profitable.
In my opinion, the evidence to support these submissions was inadequate. As observed, there was no specific evidence about what use MAM would have made of the investors’ capital had there been no loan to Cashtivity. Even if there were evidence about another potential borrower, there were no guarantees that the alternative investment would perform better than the loan to Cashtivity. MAM warned investors that entities that borrowed within the IFF framework normally had little or no income and there was no guaranteed return either of interest or the capital lent. MAM said that investors had to be prepared to lose the whole of their investment.
Had MAM established loss relating to the loan transaction with Cashtivity, it could have reasonably expected to receive an order for statutory interest on the principal sum from the date it issued the proceeding.
I do not accept that any alleged misleading or deceptive conduct caused MAM to incur the receivership expenses. It is true that, on this hypothesis, if:
·Cashtivity had not engaged in misleading or deceptive conduct, MAM would not have lent Cashtivity money;
·if MAM had not lent money to Cashtivity, it would not have breached the 2018 Facility Agreement; and
·if Cashtivity had not breached the 2018 Facility Agreement, then MAM would not have appointed the receiver over Cashtivity and incurred fees of $458,749.68 (which were significantly more than the loan amount).
However, I consider the alleged misleading or deceptive conduct did not cause MAM to incur the receivership fees in the relevant sense required by the ACL. As a result of Cashtivity’s failure to repay the loan, MAM had the option to appoint the receiver and chose to do so. It also had power to determine the extent of the costs and expenses generated in the receivership. Accordingly, the fees in establishing and carrying out the receivership, including the examination process, were due to the actions of MAM rather than Cashtivity.
Conclusion
For the reasons set out, I consider that the plaintiff’s claim should fail and the proceeding be dismissed.
I direct that the parties confer about these reasons for judgment with a view to agreeing upon the final orders to be made giving effect to the judgment including orders for costs. If the parties cannot agree, then they should file:
(a) any affidavit material on which they rely together with an outline of submissions by 4:00pm on 6 June 2025;
(b) any reply material and submissions by noon on 11 June 2025.
The submissions are limited to five A4 pages, and the reply submissions are limited to two A4 pages. Each set of submissions should have a minimum 12-point typeface, 1.5 spacing and 40mm margins on either side of the page. Unless I consider it otherwise necessary, I will decide the issue of costs and the form of final order on the papers.
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