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Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd

Omnilab Media Pty Ltd v Digital Cinema Network Pty Ltd

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FEDERAL COURT OF AUSTRALIA
Omnilab Media Pty Limited v Digital Cinema Network Pty Ltd [2011] FCAFC 166

Citation: Omnilab Media Pty Limited v Digital Cinema Network Pty Ltd [2011] FCAFC 166

Appeal from: Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited (No 2) [2011] FCA 509

Parties:
OMNILAB MEDIA PTY LIMITED ACN 002 585 391 and OMNILAB MEDIA CINEMA SERVICES PTY LTD ACN 145 363 855 v DIGITAL CINEMA NETWORK PTY LTD

MICHAEL GEOFFREY SMITH v DIGITAL CINEMA NETWORK PTY LTD, OMNILAB MEDIA CINEMA SERVICES PTY LTD ACN 145 363 855 and OMNILAB MEDIA PTY LIMITED ACN 002 585 391

File number(s): VID 535 of 2011
VID 625 of 2011

Judges: JACOBSON, RARES AND BESANKO JJ

Date of judgment: 19 December 2011

Catchwords:
CORPORATIONS – directors – fiduciary and statutory duties owed by directors to company – whether director breached his duties to company by disclosing particular information to rival company – whether director breached his duties to company by diverting a business opportunity to a rival company – whether finding of dishonest and fraudulent breaches on the part of the director open to primary judge

CORPORATIONS – accessorial liability – whether rival companies were knowingly involved in the director’s breaches of fiduciary and statutory duties – whether rival company knowingly assisted the third respondent with his breaches of fiduciary duties – whether knowing involvement in breach negated by inability to pursue opportunity

Legislation: Corporations Act 2001 (Cth), ss 79, 180, 181, 182, 183 and 184.
Wrongs Act 1958 (Vic), s 24

Cases cited:
Baden v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France S.A. [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
Birchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
Boardman v Phipps [1967] 2 AC 46
Branir v Owston Nominees(No 2) (2001) 117 FCR 424
Canadian Aero Service Ltd v O’Malley [1974] SCR 592
Chan v Zacharia (1984) 154 CLR 178
Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194
Devries v Australian National Railways Commission (1993) 177 CLR 472
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172
Mordecai v Mordecai (1988) 12 NSWLR 58
R v Byczko (No 2) (1977) 17 SASR 460
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Warman International Ltd v Dwyer (1995) 182 CLR 544
Yorke v Lucas (1985) 158 CLR 661

RP Austin, HAJ Ford and IM Ramsay, Company Directors, Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005)
RP Meagher, JD Heydon & MJ Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis Butterworths, 4th ed, 2002)

Date of hearing: 23 and 24 August 2011

Place: Melbourne

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 283

IN VID 535 OF 2011

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2011] FCAFC 166
Decision Date: 19 December 2011

CaseChat Overview and Summary

Omnilab Media Pty Ltd and Digital Cinema Network Pty Ltd were the parties involved in a dispute concerning alleged breaches of fiduciary and statutory duties by a director of Digital Cinema Network Pty Ltd. The dispute reached the Federal Court of Australia, where it was determined whether the director had breached his duties by disclosing information to a rival company and diverting a business opportunity to them. Additionally, the court examined whether the rival companies were complicit in the director's breaches. The central issue was whether the findings of dishonest and fraudulent breaches by the director were sustainable. The court also considered whether the rival companies' knowledge of the breaches and their involvement negated the director's defence.

The court approached the case by meticulously examining the documentary evidence and the primary judge's findings. The director argued that the rival company lacked the capacity to meet the film studios' requirements and that he was acting in the best interest of the company by negotiating with the studios. However, the court found that the director's actions created a real sensible possibility of conflict and breached his fiduciary duties. The court further found that the rival companies were knowingly involved in the breaches, despite their claims to the contrary. The court held that the director's conduct was dishonest and fraudulent, and that the rival companies' involvement did not negate the breaches.

In its judgment, the court dismissed the appeal and affirmed the primary judge's findings. The court held that the director's breaches were both dishonest and fraudulent, and that the rival companies were complicit in these breaches. The court also determined that the rival companies' inability to pursue the business opportunity did not absolve them of their involvement. The final orders of the court granted leave to appeal on certain issues but dismissed the appeal on the merits, with the appellants ordered to pay the costs of the application and the appeal.

Orders

Orders of the court

1. Leave be granted to the First and Second Appellants to appeal against Orders 1 & 2 of the orders made by Gordon J on 31 May 2011.

2. The appeal be dismissed.

3. The First and Second Appellants pay the costs of the application for leave to appeal and the appeal.

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

1. Leave be granted to the Appellant to appeal against Order 1 of the orders made by Gordon J on 31 May 2011.

2. The appeal be dismissed.

3. Leave to appeal against Gordon J’s order as to the extent of the contribution to be awarded to the Second and Third Respondents against the Appellant be refused.

4. The Appellant pay the costs of the application for leave to appeal and the appeal.

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

Background

Background to the litigation

The substance of Mr Smith’s defence appears to be that DCN did not have the capacity to satisfy the “critical mass requirement” of the film studios, that ICAA was the only entity which could negotiate with the studios and that his conduct of the negotiations with the studios did not give rise to a real sensible possibility of conflict.Overview of Background Facts The primary judge gave a detailed exposition of the facts covering the period from the mid 2000s to September 2010. Her Honour divided the factual narrative into 15 separate time periods, although some may be seen to be more critical than others. Since her Honour relied principally upon the documentary record in reaching her decision, it will be necessary to set out some of the documentary record in considering the issues raised by the proposed appeal.Mid-2000s to 2007 The factual background commences in mid-2000s when the United States film studios began providing financial assistance to cinemas to upgrade their projection equipment to digital. As stated above, the financial assistance was the particular form of subsidy called a VPF. From at least August 2007, ICAA sought to assist its members, who were the owners or operators of independent cinemas, to obtain the best possible arrangements for their upgrade to the digital era. Mr Smith was the owner of an independent cinema in or near Melbourne. From about August or September 2007, he was proposing to, and in fact did, meet with some of the film studios to discuss the conversion of independent cinema owners in Australia to digital. He held those meetings independently of ICAA.May 2008 to December 2008 Mr Mark Sarfaty was the CEO of ICAA. In late May or early June 2008 Mr Sarfaty met Mr Smith. They had a discussion, in general terms, about the effect on independent cinemas of the digital age. As at 4 June 2008 Mr Smith was in the throes of establishing DCN as a “partnership” between his company, MGS, and digitAll Pty Ltd (‘digitAll’) , a company controlled bv two brothers, Mr Martin Gardiner and Mr James Gardiner. At that time, the intention of the DCN “partners” was for DCN to supply and install a digital turn-key solution to enable cinemas to convert from analogue to digital. There was no mention at that time of DCN entering into VPF agreements with the film studios. However, as DCN’s business plans began to unfold, it was clear by August or September 2008 that DCN intended to negotiate with the film studios for a VPF agreement and that DCN wished to enlist the support of independent cinema owners to include their screens in VPF negotiations with the studios. Mr Smith made a presentation to the Australian International Movie Convention (“AIMC”) in September 2008 at which he asked cinema owners to support DCN in its VPF negotiations with the studios. Mr John Fleming was the General Manager of a subsidiary of Omnilab Media. That company described itself as Australia and New Zealand’s largest independently owned vertically integrated media company. It was therefore a potential competitor of DCN.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.

Citation:		Omnilab Media Pty Limited v Digital Cinema Network Pty Ltd [2011] FCAFC 166
Appeal from:		Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited (No 2) [2011] FCA 509
Parties:		OMNILAB MEDIA PTY LIMITED ACN 002 585 391 and OMNILAB MEDIA CINEMA SERVICES PTY LTD ACN 145 363 855 v DIGITAL CINEMA NETWORK PTY LTD MICHAEL GEOFFREY SMITH v DIGITAL CINEMA NETWORK PTY LTD, OMNILAB MEDIA CINEMA SERVICES PTY LTD ACN 145 363 855 and OMNILAB MEDIA PTY LIMITED ACN 002 585 391
File number(s):		VID 535 of 2011 VID 625 of 2011
Judges:		JACOBSON, RARES AND BESANKO JJ
Date of judgment:		19 December 2011
Catchwords:		CORPORATIONS – directors – fiduciary and statutory duties owed by directors to company – whether director breached his duties to company by disclosing particular information to rival company – whether director breached his duties to company by diverting a business opportunity to a rival company – whether finding of dishonest and fraudulent breaches on the part of the director open to primary judge CORPORATIONS – accessorial liability – whether rival companies were knowingly involved in the director’s breaches of fiduciary and statutory duties – whether rival company knowingly assisted the third respondent with his breaches of fiduciary duties – whether knowing involvement in breach negated by inability to pursue opportunity
Legislation:		Corporations Act 2001 (Cth), ss 79, 180, 181, 182, 183 and 184. Wrongs Act 1958 (Vic), s 24
Cases cited:		Baden v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France S.A. [1993] 1 WLR 509 Barnes v Addy (1874) LR 9 Ch App 244 Birchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 Boardman v Phipps [1967] 2 AC 46 Branir v Owston Nominees(No 2) (2001) 117 FCR 424 Canadian Aero Service Ltd v O’Malley [1974] SCR 592 Chan v Zacharia (1984) 154 CLR 178 Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 Devries v Australian National Railways Commission (1993) 177 CLR 472 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172 Mordecai v Mordecai (1988) 12 NSWLR 58 R v Byczko (No 2) (1977) 17 SASR 460 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 Warman International Ltd v Dwyer (1995) 182 CLR 544 Yorke v Lucas (1985) 158 CLR 661 RP Austin, HAJ Ford and IM Ramsay, Company Directors, Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005) RP Meagher, JD Heydon & MJ Leeming, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis Butterworths, 4th ed, 2002)
Date of hearing:	23 and 24 August 2011
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	283
IN VID 535 OF 2011