nib Holdings Ltd v Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust; Raffy Nominees Pty Ltd v nib Holdings Ltd

[2023] NSWSC 715

Supreme Court

New South Wales

Medium Neutral Citation:

nib Holdings Ltd v Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust; Raffy Nominees Pty Ltd v nib Holdings Ltd [2023] NSWSC 715

Hearing dates:

8 and 9 May 2023

Date of orders:

28 June 2023

Decision date:

28 June 2023

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

Nib Proceeding

(1)   Judgment for the plaintiff in the sum of $1,601,640.69;

(2)   The crossclaim be dismissed;

(3)   Stand the matter over to 9.15 am on 12 July 2023 or such other date as is agreed with my Associate to deal with the question of costs.

Raffy Proceeding

The plaintiff pay the defendants’ costs of the proceeding on an indemnity basis.

Catchwords:

CONTRACTS — Breach of contract — Plaintiff seeks to recover debt under loan agreement — Defendant seeks rescission — Joint Venture — Where corporate structure and shareholders agreement leave no room for existence of fiduciary duties between parties in alleged joint venture — No breach of fiduciary duties — No connection between alleged breaches of fiduciary duties and loan agreement

COSTS — Party/Party — Bases of quantification — Indemnity basis — Where plaintiff made application to discontinue proceedings at start of hearing — Where claims time-barred

CIVIL PROCEDURE — Discontinuance of proceedings — Leave of court — Terms on which proceedings discontinued — UCPR r 12.3 — Where defendants seek a term for no new proceedings to be brought relying on the same allegations after leave already granted and exercised

Legislation Cited:

Civil Procedure Act 2005 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64

Murdoch v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12

Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; (2012) 88 ACSR 689

United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1

Category:

Principal judgment

Parties:

Nib Proceeding

nib Holdings Ltd (Plaintiff | Cross Defendant)
Raffy Nominees Pty Ltd as trustee of the Whitecoat Holding Trust (Defendant | Cross Claimant)

Raffy Proceeding

Raffy Nominees Pty Ltd (Plaintiff)
nib Holdings Ltd (First Defendant)
nib Health Funds Ltd (Second Defendant)
Michelle McPherson (Third Defendant)

Representation:

Counsel:
J Arnott SC with A Osborn Brodie (Plaintiff | Cross Defendant in nib Proceeding and First & Second Defendants in Raffy Proceeding)
RD Marshall SC with R Johnson and M Wells (Defendant | Cross Claimant in nib Proceeding and Plaintiff in Raffy Proceeding)
DL Cook SC (Plaintiff in Raffy Proceeding)
J Hutton SC with S Murray (Third Defendant in Raffy Proceeding)

Solicitors:
Mallesons Stephen Jaques (Plaintiff | Cross Defendant in nib Proceeding and First & Second Defendants in Raffy Proceedings)
Stewart & Associates (Defendant | Cross Claimant in nib Proceeding and Plaintiff in Raffy Proceeding)
Gilbert+Tobin (Third Defendant in Raffy Proceeding)

File Number(s):

2021/256915 and 2023/104671

Publication restriction:

None

JUDGMENT

Introduction

1. Before the Court are two proceedings. In one (the nib Proceeding), the plaintiff, nib Holdings Ltd (nib), seeks to recover from the defendant, Raffy Nominees Pty Ltd in its capacity as the trustee of the Whitecoat Holding Trust (Raffy), a debt of $1,449,171.92 plus interest arising under a loan agreement entered into on 16 December 2016 (the Loan Agreement). Raffy has filed a crossclaim in that proceeding by which it relevantly seeks recission of the Loan Agreement and an order that nib repay to Raffy an amount of $500,000 which it (Raffy) paid under the agreement.

2. In the second proceeding (the Raffy Proceeding), which was commenced by Raffy on 31 March 2023, and which is now largely resolved, Raffy sought to recover from nib, nib Health Funds Limited (nib Health), a wholly owned subsidiary of nib which is the principal operating and employing company in the nib group, and Ms Michelle McPherson, an employee of nib Health, damages or equitable compensation. On the first day of the hearing, Raffy sought leave to discontinue that proceeding. That leave was granted and a notice of discontinuance has been filed. The only questions that remain are whether the defendants should be entitled to recover their costs on an indemnity basis and whether a condition should be imposed on the discontinuance preventing Raffy from bringing further proceedings arising out of the same subject-matter. Those issues are addressed at the end of this judgment.

Background

3. The sole director of Raffy is Mr Matthew Donnellan, who is also the sole director of TouchToBuy Pty Ltd (TTB). TTB is in the business of developing apps for mobile phones.

4. In 2014, Mr Donnellan was on friendly terms with Mr Mark Fitzgibbon, the CEO of nib. During a casual conversation they had about the use of technology by healthcare professionals, Mr Fitzgibbon mentioned that nib was looking at setting up a website called “Whitecoat” and raised the possibility of Mr Donnellan providing it with some assistance. Following further discussions, they decided that nib and TTB should consider forming a joint venture.

5. On 10 June 2014, TTB and nib Health executed a non‑binding term sheet. The term sheet records that the parties were in discussion to establish a joint venture in which each held a 50 percent interest. The business of the joint venture was said to include development of:

●   application for processing claims and payments including point of sale transactions; and

●   applications for nib distribution channels to facilitate interaction with nib by providers.

6. Under the heading “Operation of the Joint Venture” the term sheet included the following bullet point:

●   The Joint Venture will work on a cost-recovery basis, such that TTB’s project-related salary costs and out-of-pocket expenses will be covered by the Joint Venture. TTB will not generate an operating profit in providing its services to the Joint Venture.

7. Clause 4 of the term sheet set out the services to be provided by nib and TTB to the joint venture.

8. On 8 August 2014, Digital Health Ventures Pty Ltd (DHV) was incorporated with each of nib and TTB holding 50 percent of its issued share capital, consisting of one $1 share each. Its directors (until 20 March 2020) were Mr Donnellan, Mr Brendan Mills and Ms McPherson. Like Ms McPherson, Mr Mills was an employee of nib Health.

9. On 27 August 2014, DHV entered into the following agreements:

1. A shareholders agreement with nib and TTB;

2. A management and development services agreement with TTB;

3. A service level agreement with nib Health; and

4. A loan agreement with nib.

10. Clause 2.2 of the shareholders agreement states that the objectives of DHV were to “carry out the Business”. “Business” is defined to mean “the development and commercialisation of the Property for use by nib …”. “Property” is defined relevantly to mean “digital health applications and services”.

11. Clause 2.5 of the shareholders agreement provides:

Contributions

(a)    Without limiting clause 2.4, the Shareholders agree to make the following contributions to the Business and the Company:

(i)    in the case of nib, subject to any existing contractual obligations:

(A)    provide brand support for Property (such support to be agreed as part of approval of that part of the Business Plan relating to that Property);

(B)    make available its distribution channels to distribute approved Property;

(C)    make available its employees to assist where and when required by the Company; and

(D)    provide general expertise relating to the provision of health insurance to assist the Company; and

(ii)    in the case of TTB:

(A)    provide technical skills in the development of the Property;

(B)    enter into and comply with the Intellectual Property Assignment Deed;

(C)    develop new Property for the Company; and

(D)    manage the day-to-day affairs of the Company, including development of Property, cash flow and profitability.

(b)    The contributions set out in clause 2.5(a) are to be provided by each Shareholder under the relevant Services Agreement.

12. Clause 2.7 of the shareholders agreement provides:

Relationship of Shareholders

This agreement does not create a relationship of employment, trust, agency or partnership between the Shareholders. Each Shareholder is responsible for its own obligations arising under this agreement and is not liable for any other Shareholder's obligations.

13. Clause 3.2 of the shareholders agreement states that the parties intend that DHV will be self-funding. Clause 3.3 requires DHV to enter into and comply with the terms of the loan agreement with nib.

14. Clause 6 of the shareholders agreement provides:

Management

(a)    The Company and the Business are to be managed on a day-to-day basis in accordance with the Service Agreements, the Budget and Business Plan, the policies and directions of the Board and this clause 6.

(b)    On the Effective Date, the Company, TTB and nib (as relevant) must enter into each Service Agreement by which TTB and nib (as relevant) will provide services to the Company.

(c)    Any service provided by TTB or nib (as relevant) will be provided on a cost recovery basis only and otherwise in accordance with the relevant Service Agreement.

(d)    It is not intended that the Company will employ any persons.

15. Clause 20.13 of the shareholders agreement provides:

Entire agreement

This agreement and the Constitution constitute the entire agreement of the parties about the subject matter and supersede all previous agreements, understandings and negotiations on that subject matter, including the term sheet signed between the Shareholders and dated 10 June 2014.

16. Under cl 2 of the service level agreement, nib Health agreed to provide services in accordance with annexure A. Annexure A set out various accounting, corporate affairs, information technology and marketing services to be provided by nib Health and the frequency with which those services would be provided.

17. As is apparent from the terms of the shareholders agreement, neither nib nor TTB contributed equity capital to DHV. Instead, nib agreed to lend DHV the sum of $3,000,000 in accordance with the loan agreement. Money advanced under the loan agreement was repayable on the “Exit Date”. Clause 1.1 states that “Exit Date has the meaning given in the Shareholders Agreement”. “Exit Date” is not defined in the shareholders agreement. However, it appears to be the date on which nib acquired TTB’s shares in DHV in accordance with cl 10 of the shareholders agreement.

18. On 23 January 2015, at a meeting of the board of directors of DHV, which was attended by Mr Donnellan, the board agreed that DHV would acquire a database developed by nib, referred to variously as the “Whitecoat IP” and the “Raven database” for $475,000 plus GST. DHV paid nib Health that amount on 25 February 2015. Subsequently, on 25 June 2015, nib Health and DHV executed an agreement by which the Whitecoat IP was assigned to DHV. The agreement was signed in counterparts. One counterpart was signed by Mr Donnellan on behalf of DHV. The other counterpart was signed by Mr Mills on behalf of DHV and by Mr Fitzgibbon and Ms McPherson on behalf of nib Health.

19. Following establishment of DHV, DHV developed mobile and digital services for the healthcare sector using services provided by TTB.

20. By late 2015, it had become apparent that DHV would need additional capital. To that end, in late 2015 and early 2016, Mr Donnellan had discussions with other health insurers to join the Whitecoat platform and become investors. Bupa Innovations (ANZ) Pty Ltd (Bupa) and HBF Wellness Holdings Pty Ltd (HBF) agreed in principle to do so.

21. The negotiations with Bupa and HBF were protracted with the result that DHV required additional capital pending finalisations of those negotiations. That additional capital was provided by nib in the form of a short-term loan which was originally limited to $2,000,000 but was increased to approximately $2,460,000.

22. By about late October 2016, the structure by which Bupa and HBF were to invest in the business had been agreed in principle. That structure was described in a transaction memo prepared by King & Wood Mallesons (KWM), who acted for nib. The memo relevantly recorded that nib had made a loan of $3,000,000 to DHV and an additional short-term loan of $1,700,000. The memo also recorded:

(e)   All parties to the transaction have agreed to the following principles:

(i)    a new company will be established (Whitecoat) and that entity (or a new wholly owned subsidiary of Whitecoat) will hold the business assets (i.e. there is a strong preference not to use DHV as the operating entity going forward);

(ii)    Matt Donnellan would prefer to hold equity in Whitecoat through a discretionary family trust and not TTB;

(iii)    the shareholding in Whitecoat is to be as follows:

Shareholder	%	Consideration payable
Nib	35%	Existing loans converted to equity
Matt Donnellan (or his family trust)	35%	$1.5 million
Bupa	20%	$3 million
HBF	10%	$1.5 million

23. The memo stated that the $1.5 million to be invested by Mr Donnellan would be lent to him by nib. KWM sent a draft of the transaction memo to Mr James Lonie on 26 October 2016. Mr Lonie was a partner of HWL Ebsworth, who acted for Mr Donnellan on the transaction.

24. As part of the transaction, it was agreed that a proportion of the new equity to be invested by Bupa and HBF would be used to repay nib’s short-term loan to DHV of $1,700,000. According to a paper prepared for nib’s board meeting held in February 2017:

The reason that the additional short term funding has not been reimbursed is due to BUPA and HBF being adamant about capping the amount that would be reimbursed at $1.7 million, regardless of the delays that occurred in executing and completing the agreements. In consultation with Mark and as advised to the Chairman, this position was accepted given the strategic significance of the transaction. All efforts were made to complete as quickly as possible.

25. On 14 December 2016, Raffy, which became the entity through which Mr Donnellan invested in the new company, was incorporated.

26. On 16 December 2016, Whitecoat Operating Pty Ltd (Whitecoat OpCo) and Whitecoat Holdings Pty Ltd (Whitecoat HoldCo) were incorporated. At about the same time:

1. Whitecoat OpCo entered into a business purchase deed with DHV, TTB, Raffy and nib under which Whitecoat OpCo agreed to purchase the business carried on by DHV and certain assets of that business for $4,700,000;

2. Whitecoat HoldCo entered into a shareholders agreement with nib, Bupa, HBF, and Raffy.

27. Also at about the same time, Raffy entered into the Loan Agreement.

28. Clause 2.1 of the Loan Agreement provides:

Lender to fund

The Lender agrees to provide the financial accommodation requested by the Borrower under this agreement on an unsecured, interest free and, in the event of a Borrower Exit, a limited recourse basis.

29. Clause 2.3 of the Loan Agreement provides:

Other financial accommodation

The parties acknowledge and agree that:

(a)   the Lender has provided a loan to the Borrower for an amount equal to A$1,500,000 prior to the date of this agreement (“Prior Financial Accommodation”); and

(b)   the Lender may provide financial accommodation to Digital Health Ventures Pty Ltd (ACN 601 152 130) on or after the date of this agreement (any such financial accommodation, “Further Financial Accommodation”).

30. Clause 5 of the Loan Agreement provides:

Payments

The Borrower agrees to repay the Total Financial Accommodation or, in the event of a Borrower Exit, the Borrower agrees to repay the Total Financial Accommodation (or such portion of it) out of the Net Exit Proceeds:

(a)    on the Maturity Date; and

(b)    not later than 10am in the place for payment; and

(c)    in Australian dollars in immediately available funds; and

(d)    without set-off or counterclaim; and

(e)   to the Lender by payment into the account nominated by the Lender, or by payment as the Lender otherwise directs.

…

31. “Total Financial Accommodation” is defined in the Loan Agreement to mean “the aggregate of the Loan, the Prior Financial Accommodation and an amount equal to 50% of the Further Financial Accommodation”.

32. “Maturity Date” in respect of the Loan, the Prior Financial Accommodation and the Further Financial Accommodation, is defined relevantly to mean “if a Borrower Exit occurs, the day which is 10 Business Days after the Borrower receives the Net Exit Proceeds …” . “Borrower Exit” is defined to mean “where the Borrower sells all of its interests in Whitecoat on or after the third anniversary of the date of this agreement”. “Net Exit Proceeds” is defined to mean “the net cash proceeds of sale paid to the Borrower for the sale of all of … its interests in Whitecoat ….”.

33. Clause 7 of the Loan Agreement relevantly provides that notwithstanding any other provision in the agreement, in the event of a Borrower Exit:

(a)   the recourse of the Lender to the Borrower under or in connection with this agreement if a Borrower Event occurs (including in relation to repayment of the Total Financial Accommodation) is limited to repayment of the Total Financial Accommodation (or so much of it as may be repaid) out of the Net Exit Proceeds …

(b)   the Lender must not:

(i) take any action personally against the Borrower … to recover any part of the Total Financial Accommodation in excess of the amount in clause 7(a) …

….   

34. The sale of the Whitecoat business and other assets of DHV to Whitecoat OpCo completed on 2 February 2017. On 13 February 2017, DHV paid a total amount of $4,700,000 to nib by transferring to nib two promissory notes with an aggregate value of $3,000,000 and by paying nib $1,700,000 in cash.

35. Between 21 December 2016 and 29 June 2017, nib advanced the aggregate amount of $907,792 to DHV to permit it to pay invoices issued by TTB.

36. On 3 May 2021, the shareholders in Whitecoat HoldCo sold their shares in that company to the Commonwealth Bank of Australia for $42,503,994.

37. On 18 May 2021, Raffy paid nib $500,000 in respect of its obligations under the Loan Agreement.

38. On 31 May 2021, nib sent Raffy a letter demanding the amount it now claims in these proceedings. It commenced these proceedings on 8 September 2021.

39. On 27 February 2023, DHV was placed into liquidation.

40. On 13 March 2023, the liquidator of DHV assigned to Raffy all rights of action it had against relevantly, nib, nib Health and Ms McPherson. Relying on that assignment, Raffy commenced the second proceeding on 31 March 2023. It applied successfully to have the two proceedings heard together on the basis that evidence in one be evidence in the other. At the time of making the application, Raffy indicated that it did not propose to serve any additional evidence in support of the claims it made in the second proceeding.

The issues

41. nib’s case is simple. It submits that, under the terms of the Loan Agreement, Raffy is required to pay nib the Total Financial Accommodation on the Maturity Date. That date occurred 10 business days after Raffy received the proceeds of sale of its shares in Whitecoat HoldCo. It is common ground that that has happened. nib also submits that it has an equitable charge over the proceeds received by Raffy from the sale of its shares in Whitecoat HoldCo.

42. Raffy’s response to this claim is not easy to discern from its list response and crossclaim. It was reformulated by Raffy in its closing written submissions. As finally put, it has the following steps:

1. There was a joint venture between nib and TTB;

2. That joint venture gave rise to fiduciary duties;

3. The joint venture continued following incorporation of Whitecoat HoldCo;

4. nib breached its fiduciary duties by recharging staff and other overhead costs of the nib Group to DHV (said in Raffy’s final written submissions to total at least $160,000) and by attributing a sale price of $4.7 million to the business conducted by DHV;

1. It would, therefore, be unconscionable for nib to enforce the loan agreement;

2. Consequently, the Court should grant equitable relief by rescinding the loan agreement and should order that nib repay the $500,000 that Raffy paid under it.

43. Raffy also submits that nib has not proved that the Further Financial Accommodation as defined in the Loan Agreement is owing.

44. In my opinion, there are problems with each step of Raffy’s primary argument. I am also satisfied that the Further Financial Accommodation was owing.

Was there a joint venture giving rise to fiduciary duties?

45. It is convenient to take the first two issues together.

46. The relationship between nib and TTB was defined by the structure they established (that is, the incorporation of DHV, in which each had a 50 percent interest) and the agreement they entered into (the shareholders agreement) to govern that relationship. Even if some prior relationship existed between nib and TTB arising from the negotiations, that relationship was superseded by that structure. Whether the relationship they established is described as a joint venture or not, the important point is that there was no other joint venture between the parties that somehow or another sat above or encompassed the relationship that the parties formed when they incorporated DHV and entered into the shareholders agreement. That is made clear by cl 20.13 of the shareholders agreement, which specifically states that the shareholders agreement supersedes any other agreements or understandings between the parties, including the term sheet signed on 10 June 2014. No reason is advanced by Raffy for why effect should not be given to that clause.

47. Classification of the relationship between nib and TTB as a joint venture does not automatically mean that the relationship is a fiduciary one. As Mason, Brenan and Deane JJ explained in United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11:

… whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. If the joint venture takes the form of a partnership, the fact that it is confined to one joint undertaking as distinct from being a continuing relationship will not prevent the relationship between the joint venturers from being a fiduciary one. In such a case, the joint venturers will be under fiduciary duties to one another, including fiduciary duties in relation to property the subject of the joint venture, which are the ordinary incidents of the partnership relationship, though those fiduciary duties will be moulded to the character of the particular relationship: …”

48. As Mason J explained in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64 at 96-97 (Hospital Products), the critical feature that distinguishes a fiduciary relationship from other types of relationship is “that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.”

49. Contractual and fiduciary relationships can co-exist, but in that case the fiduciary obligations must conform to the contractual ones. As Mason J said in Hospital Products (at 97):

That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

50. In my opinion, in the present case the corporate structure of the relationship and the terms of the shareholders agreement leave no room for the existence of fiduciary duties owed by nib to TTB. Clause 2.7 of the shareholders agreement specifically states that the agreement does not create a relationship of “employment, trust, agency or partnership”. That clause is not conclusive of the legal relationship that exists between the parties: see Murdoch v Mudgee Dolomite & Lime Pty Ltd (in liq) [2022] NSWCA 12 at [89] per Leeming JA (with whom Macfarlan and Gleeson JJA agreed). But in this case, the clause reflects the fact that the parties chose to have the rights and obligations between them governed by their shareholding in DHV and the agreements they executed, including the service agreements which identify in some detail the services each shareholder is to provide to the company. Those rights and obligations leave no room for the operation of fiduciary duties. There is no basis on which it could be said that nib agreed to act on behalf of the interests of TTB. It may be that, as a result of what happened, nib or nib Health owed fiduciary duties to DHV. But no claim is brought by or on behalf of DHV.

Did the joint venture continue following incorporation of Whitecoat HoldCo?

51. Raffy gives no explanation for how it could be said that the joint venture between nib and TTB continued as a joint venture between nib and it after the incorporation of Whitecoat HoldCo. At the time Whitecoat HoldCo was incorporated, DHV continued to operate. Several months later, DHV transferred its principal business to Whitecoat OpCo. But that did not bring an end to whatever joint venture existed between nib and TTB. That only happened on the liquidation of DHV in February 2023. The fact that nib and a new company established by Mr Donnellan were investors in a new company that ultimately acquired the business previously conducted by a joint venture between nib and TTB cannot mean that the rights and obligations arising from that joint venture carried into a new relationship established by different entities.

Did nib breach its fiduciary duties?

52. It is impossible to see how the charging by nib Health of fees to TTB could give rise to a breach of duty owed to Raffy. Raffy did not even exist at the time the fees were charged. Under the terms of the shareholders agreement, DHV and the business it carried on were “to be managed on a day-to-day basis in accordance with the Service Agreements”. The reference to the “Service Agreements” clearly included a reference to the service agreement between DHV and nib Health. It is reasonable to infer that nib health was acting as nib’s agent for the purpose of discharging nib’s obligations under the shareholders agreement. Under the shareholders agreement, nib was entitled to charge for those services “on a cost recovery basis”. It cannot have been a breach of any duty owed by nib to TTB for nib to have done so.

53. Raffy takes objection to particular fees charged by nib. As nib pointed out in final oral submissions, that was a claim for DHV to bring to the extent that the claim was not statute barred. The services were provided to DHV and DHV paid for them. That claim was advanced in the discontinued proceedings.

54. It appears that the invoices about which Raffy complains in its final written submissions are the following:

Invoice Description	Invoice Date	Invoice Amount (including GST)	Date Paid
Invoice 3555	2 September 2015	$2,047.19	29 October 2015
Invoice 3581	30 September 2015	$5,668.74	30 September 2015
Invoice 3596	29 October 2015	$4,495.54	29 October 2015
Invoice 3756	15 June 2016	$10,235.94	28 June 2016
Invoice 3815	1 September 2016	$41,970.94	13 December 2016
Invoice 3833	4 October 2016	$22,299.79	13 December 2016
Invoice 3857	1 November 2016	$14,488.36	13 December 2016
Invoice 3879	30 November 2016	$21,181.57	13 December 2016
Invoice 3913	5 January 2017	$1,100.42	16 February 2017
Invoice 3944	1 February 2017	$22,380.78	16 February 2017
Invoice 3966	1 February 2017	$16,497.80	9 March 2017
TOTAL (INCLUDING GST)		$162,367.07

The date paid is the date that nib Health arranged for the relevant amount to be paid by electronic funds transfer from one of two bank accounts in the name of DHV to nib Health.

55. In fact, Raffy’s pleaded case in its crossclaim is that nib Health was not entitled to the payment of $99,940.60 because those expenses had not been authorised by the board. Consequently, what appears to be alleged is that nib Health was not entitled to charge for the services referred to in invoices 3815, 3833, 3857 and 3879, which total $99,940.60. The remainder of the invoices can be put to one side since there is no pleaded case in relation to those.

56. Although the payment of the invoices was not approved by the DHV board, nib Health prepared for each board meeting of DHV a finance report which included, among other things, an income and expenditure statement, a balance sheet and a statement of cash flow for DHV. The income and expenditure statements contained line items under the heading “Operating Expenses”, which included, among other things, line items described as “Employee Costs”, “Other Management Expenses” and “Fees – Accounting/Legal/Consulting”. There is no evidence to suggest that Mr Donnellan ever queried any of those expenses at the board meetings.

57. It is unclear why the work was required to be approved by the DHV board. The question is whether the work was covered by the services agreement between DHV and nib Health. Raffy advances no reason for why it was not.

58. The evidence is that the four invoices cover (1) a proportion of the salaries paid to a number of nib Health executives during the period from September 2016 to November 2016, when there were intensive negotiations for the sale of DHV’s business; (2) management fees; and (3) consultancy services.

59. In relation to (1), the executives were Mr Fitzgibbon, Ms McPherson (who occupied a finance role), Mr Mills (nib’s chief information officer), Ms Toms (nib’s general counsel) and Mr Treadwell (nib’s head of finance). It does not appear to be seriously contested that each of those persons did work that was of benefit to DHV. Mr Donnellan conceded as much in relation to some of them in cross-examination. The suggestion seems to be that nib Health should not have charged for the time of those executives because the agreement with Bupa and HBF benefitted nib and nib itself was a party to the relevant transactions. But the purpose of the transaction was to enable DHV to sell its business at a price that enabled it to repay its debt. DHV had no staff itself to negotiate the transaction. Its staff were provided by nib Health, which was entitled to charge for the services it provided. There was no breach of fiduciary duty in those circumstances.

60. In relation to (2), the management fees consist of one amount charged for internal audit work and amounts charged for travel, accommodation and insurance. The travel and accommodation expenses were incurred in connection with the negotiations with Bupa and HBF. The insurance expenses are a proportion of the premium paid by nib for group wide insurance. Again, it is unclear why nib Health was not entitled to charge these amounts in accordance with the services agreement.

61. In relation to (3), the consultancy services were provided by Ms Carroll, a marketing manager with nib Health. Although in cross-examination, Mr Donnellan said he had no idea whether Ms Carroll did any work for DHV, it is plain that he budgeted for the services that she provided, and later he conceded that she had done some work. There is no reason to doubt that she provided services to DHV. Ms Carroll’s costs of providing those services were plainly payable under the services agreement.

62. It is also alleged that nib breached its fiduciary duties by failing to obtain an independent valuation of DHV’s business at the time that it was sold to Whitecoat OpCo. The suggestion seems to be that the business was sold for an amount more than its true value, although no evidence was led to that effect. Moreover, why nib owed TTB an fiduciary obligation to obtain an independent valuation of the business is not explained. The sale was part of a transaction by which Bupa and HBF were to invest in the business. The transaction was structured in a way and occurred at a price that permitted DHV to pay its debt to nib. That was of benefit to DHV and indirectly to TTB, as a 50 percent shareholder in DHV. Mr Donnellan, the sole director of both TTB and Raffy, obtained independent legal advice on the transaction. It must have been obvious both to him and to his legal advisor, and therefore both to TTB and to Raffy, that the $4.7 million purchase price was chosen because it was a price that was both acceptable to Bupa and HBF and was a price that enabled DHV to repay the debt it owed. There could be no breach of fiduciary duty by nib in those circumstances.

Would it be unconscionable for nib to enforce the loan?

63. Raffy submits that the Loan Agreement was unconscionable “on the basis of nib’s breach of fiduciary duty” (to quote from Raffy’s final written submissions). However, the submissions do not explain what the connection is between the alleged breaches of duty and the Loan Agreement. Under the terms of the Loan Agreement, nib advanced funds to Raffy to enable it to invest in Whitecoat HoldCo and Raffy agreed to pay 50 percent of further advances made by nib to DHV to enable DHV to pay amounts it owed to TTB. As a consequence of the loan, Raffy obtained an indirect interest in Whitecoat OpCo, which was subsequently sold at a profit. TTB plainly benefitted from the further advances made by nib to DHV.

64. It might be said that, absent the breaches of duty, Raffy would not have entered into the Loan Agreement. But if that is correct, nor would it have obtained an interest in Whitecoat HoldCo. In that event, it would not have earned a profit on the sale of Whitecoat OpCo. How Raffy could be said to have suffered a loss in those circumstances is not explained.

65. There is a further difficulty with Raffy’s case. Even assuming that the Loan Agreement could be set aside, it does not follow that nib would not be entitled to recover the amount of its loan to Raffy. It would still have an action in debt for the amount that it actually lent. Given that the case that the Loan Agreement should be set aside fails for other reasons, it is not necessary to consider the precise amount that nib would be entitled to recover in those circumstances.

Has nib proved that the Further Financial Accommodation is owing?

66. Raffy asserts that the evidence demonstrates that nib wrote off the amount owing to it by DHV above $4.7 million. It submits that it follows that the Further Financial Accommodation was not owing by DHV and there is no basis on which that amount could be transferred to Raffy.

67. That submission is a mis-characterisation of events and ignores the terms of the Loan Agreement. It is apparent that Bupa and HCF would not agree to WhiteCoat OpCo paying more than $4.7 million for the Whitecoat business. That money was not sufficient to enable DHV to pay all its debts including amounts it owed to TTB for the services TTB had provided to DHV. Consequently, nib agreed to fund the difference between the $4.7 million and DHV’s total liability provided Raffy agreed to reimburse nib for half that amount on the sale of the business. That obligation was included in the Loan Agreement. nib is not seeking to recover from Raffy an amount originally owing by DHV and subsequently written off by nib. It is simply seeking to recover an amount payable in accordance with the terms of the Loan Agreement.

68. It follows that Raffy is entitled to recover the amount that it claims.

Additional relief

69. In its summons, nib also seeks an order that Raffy held the Net Exit Proceeds (as defined in the Loan Agreement) “and any property into which they have been converted, charged in favour of the Plaintiff to the extent necessary to satisfy the Defendant’s obligation to repay to the Plaintiff the debt of $1,449,171.92”. nib also seeks an injunction restraining Raffy from dealing with the Net Exit Proceeds, and any property into which they have been converted, until the $1,449,171.92 is paid. Both forms of relief depend on nib establishing that it held an equitable charge over the Net Exit Proceeds.

70. The relevant legal principles were set out by Bathurst CJ (with whom Beazley JA and Tobias AJA agreed) in Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134; (2012) 88 ACSR 689 in these terms:

29   What is clear from the authorities is that for either an equitable mortgage or equitable charge to come into existence there must be an intention to create an immediate proprietary interest or immediate right of recourse to identifiable, present, or in the case of a charge, future property.

…

31   … [T]he question depends, in my view, on the construction of the clause in question. If the provision on its true construction confers an immediate equitable interest in particular property, or grants an immediate right of recourse to present or future property, then the grantee will be secured to the extent of his or her interest in, or right to, the property. If it does not, the creditor will be unsecured.

71. In my opinion, there are two difficulties with the relief sought by nib. First, it could not be said that the Loan Agreement creates an immediate right of recourse to the Net Exit Proceeds. Although taken alone cll 5 and 7 appear to have that effect, they must be read together with cl 2.1 which specifically states that the financial accommodation provided under the agreement is provided on “an unsecured, interest free and, in the event of a Borrower Exit, a limited recourse basis …”. The statement that the financial accommodation was on an “unsecured” basis negates any intention that nib was to have a proprietary interest in the Net Exit Proceeds. Moreover, although cl 7(a) states that if a Borrower Event occurs the recourse of the Lender to the Borrower “is limited to repayment of the Total Financial Accommodation … out of the Net Exit Proceeds”, cl 7(b) plainly contemplates that nib may bring a personal action against Raffy provided that the amount sought to be recovered does not exceed the amount referred to in cl 7(a).

72. Second, as a matter of discretion, I would not be prepared to give relief in the broad terms sought by nib. It would be one thing to make orders in terms of those sought by nib in relation to the actual Net Exit Proceeds, assuming that any part of them still exists. It is another to make orders that have an unclear operation and apply to all property into which the Net Exit Proceeds might be traced without knowing what that property is. If nib wanted an order in respect of property into which the net assets had been converted, it was incumbent on it to identify that property and to establish that it was appropriate to give equitable relief in respect of it.

The second proceeding

73. As I have explained, in the second proceeding, Raffy, relying on an assignment of rights it took from the liquidator of DHV, made claims against nib, nib Health and Ms McPherson, one of the nib appointees to DHV’s board. The claims concern (1) the amounts totalling $162,367.07 which were paid to nib Health by DHV for services said to be provided by nib Health; (2) the amount of $475,000 paid by DHV to nib Health for the Raven database; and (3) the amount of $4.7 million received by nib in connection with the sale of DHV’s business.

74. The allegation in relation to the $162,367.07 was that those amounts were paid in breach of the service level agreement and were arranged to be paid by Ms McPherson in breach of her duties as a director of DHV. The allegation in relation to the $475,000 is that unbeknown to Mr Donnellan or TTB, and without a resolution of the board of DHV, that amount was paid to nib Health for the Raven database. That is also said to have involved a breach by Ms McPherson of her duties as a director. nib and nib Health were said to be recipients of that amount knowing of Ms McPherson’s breaches of duty. The allegation in relation to the $4.7 million is that following the payment of that amount to DHV by Whitecoat OpCo, DHV paid that amount to nib. That payment was not authorised by the board of DHV. Accordingly, it was said that the moneys were had and received by nib, with the result that Raffy as assignee is entitled to recover the payment.

73. Two issues remain. One is whether the Court should impose a condition on the discontinuance that Raffy not be entitled to commence fresh proceedings arising out of the same facts. The other is whether the defendants are entitled to recover their costs on an indemnity basis.

74. Rule 12.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides:

12.3    Effect of discontinuance

(1)    A discontinuance of proceedings with respect to a plaintiff’s claim for relief does not prevent the plaintiff from claiming the same relief in fresh proceedings.

(2)    Subrule (1) is subject to the terms of any consent to the discontinuance or of any leave to discontinue.

77. It might be thought that in the circumstances of this case it was intended that the discontinuance would resolve the issues between the parties. Leave to discontinue was sought at the commencement of the hearing and in circumstances where the Court would continue to hear a proceeding in which similar allegations to those made in the discontinued proceedings were made in a crossclaim, albeit by Raffy in a different capacity. There were obvious problems with the claim (about which more will be said shortly). It was on Raffy’s application that the two proceedings were heard together.

78. However, the terms of UCPR r 12.3 are clear. At the time the application to discontinue was made, the defendants indicated their consent, subject to reserving a right to apply for costs on an indemnity basis. The Court gave leave to Raffy to discontinue on that basis. The following day, nib did indicate to the Court that it proposed to seek the imposition of a term on the leave to discontinue under UCPR r 12.3(2) that no new proceedings could be brought relying on the same allegations. However, by that stage the leave had already been given and at the time nib made submissions in support of its application the proceeding had been discontinued. It is not open to the Court to impose a condition on leave that has already been granted and exercised, particularly where the effect of the grant and the exercise of the leave was to bring the proceeding to an end.

79. As to the question of costs, in my opinion, this is an appropriate case in which to order that the plaintiff pay the defendants’ costs on an indemnity basis. In my opinion, it must have been apparent at the time the claims were brought that they were not reasonably arguable.

80. I have already explained in relation to part of the $162,367.07 why the claim that that amount was not payable in accordance with the service level agreement could not be sustained. With one exception, the other amounts that make up the $162,367.07 relate to the same items of expense. The exception is that included in the $162,367.07 is an amount of $17,998 paid to Cormorant Consultancy Services ($3,000), KWM ($3,243.88) and PwC R&D Services ($11,754.12). It was for Raffy to prove that these amounts were not properly attributable to services provided to DHV. However, it led no evidence on the matter.

81. More significantly, the invoices were issued between 2 September 2015 and 1 February 2017. The last of them was paid on 9 March 2017. The causes of action on which Raffy sued must have accrued no later than that date. The proceeding was not commenced until 31 March 2023, which was outside the six year limitation period. Raffy gave no explanation for why the claims were not time barred.

82. The position in relation to the other two amounts is even clearer. Contrary to Raffy’s assertions, the acquisition of the Raven database for $475,000 was approved at a DHV board meeting which Mr Donnellan attended and Mr Donnellan signed a copy of the agreement by which the acquisition occurred. The allegation that Mr Donnellan was unaware of or did not approve the transaction should never have been made. The amount of $4.7 million was an amount that was lent to DHV by nib. DHV had a contractual obligation to repay that amount. The amount was repaid as part of a transaction which was agreed to by Mr Donnellan and in respect of which he had independent legal advice. There was no arguable basis in those circumstances for asserting that the repayment of the loan required board approval.

83. The history of the matter is also relevant. As I have said, Raffy commenced the proceeding and sought to have it heard at the same time as the other proceeding. The Court, and ultimately the other parties, accommodated that request. Despite that, it sought leave to discontinue the proceeding on the first day of the hearing.

Orders and costs

84. It follows that nib is entitled in the nib Proceeding to judgment in the sum of $1,449,171.92. It also claims interest under s 100 of the Civil Procedure Act 2005 (NSW) from 18 May 2021 (the date the amount was due under the Loan Agreement) until the date of judgment. No reason was advanced by Raffy for why interest should not be paid. nib is not seeking interest on the loan. It is seeking to recover statutory interest on an amount due under the Loan Agreement that was not paid.

85. Interest on the $1,449,171.92 from 18 May 2021 to the date of judgment is $152,468.77, making a total of $1,601,640.69.

86. I will hear the parties in relation to the costs of the nib Proceeding if costs cannot be agreed.

87. Accordingly, the orders in the nib Proceeding are:

1. Judgment for the plaintiff in the sum of $1,601,640.69;

2. The crossclaim be dismissed;

3. Stand the matter over to 9.15 am on 12 July 2023 or such other date as is agreed with my Associate to deal with the question of costs.

88. The order in the Raffy Proceeding is that the plaintiff pay the defendants’ costs of the proceeding on an indemnity basis.

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Decision last updated: 28 June 2023