One.Tel Limited (in liquidation) v John David Rich

Case •

[2003] NSWSC 522

•

13 June 2003

No judgment structure available for this case.

Reported Decision:

 (2003) 45 ACSR 466

Supreme Court


CITATION: One.Tel Limited (in liquidation) v John David Rich & Ors [2003] NSWSC 522
HEARING DATE(S): 13 June 2003
JUDGMENT DATE:
13 June 2003
JURISDICTION:
Equity Division
Commercial List
JUDGMENT OF: Einstein J
DECISION: Leave to be given to replead or furnish further particulars on the bringing in of short minutes of order.
CATCHWORDS: Practice and Procedure - Pleadings - Particulars - Application to strike out summons - Pleading of breaches of fiduciary and other duties - Onus of proof of informed consent of principal
LEGISLATION CITED: Corporations Act 2001
Corporations Law
CASES CITED: Agar v Hyde (2000) 201 CLR 552
Aequitas v AEFC [2001] 19 ACLC 1006
Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214
Birtchnell v Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384
Breen v Williams (1996) 186 CLR 71
Bruce v Odhams Press Limited [1936] 1 KB 697
Commercial Bank of Australia Ltd v Thomson (1964) 81 WN (Pt 1) (NSW) 553
Dare v Pulham (1982) 148 CLR 658
Dey v Victorian Railways Commissioners (1949) 78 CLR 62
Ellis v Grant (1970) 91 WN (NSW) 920
Emmerton v University of Sydney [1970] 2 NSWR 633
General Steel Industries v Commissioner For Railways (NSW) (1964) 112 CLR 125.
Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
H 1976 Nominees Pty Limited v Galli (1979) 40 FLR 242
Kelly v Kelly (1950) 50 SR (NSW) 261
McSpedden v Harnett (1942) 42 SR (NSW) 116
Pinson v Lloyds and National Provincial Foreign Bank Limited [1941] 2 KB 72
R v Associated Northern Collieries (1910) 11 CLR 738 Saunders v Jones (1877) 7 Ch D 435
Turner v Dalgety & Co Ltd (1952) 69 WN (NSW) 228
Vrisakis v ASC (1993) 11 ACSR 162

PARTIES :

 One.Tel Limited (in liquidation) (Plaintiff)
John David Rich (First Defendant)
LifeCell Pty Limited (Second Defendant)
Bradley William Keeling (Third Defendant)
Bradley Keeling Management Pty Limited (Fourth Defendant)
Rodney Stephen Adler (Fifth Defendant)
John Huyshe Greaves (Sixth Defendant)
FILE NUMBER(S): SC 50207/02
COUNSEL: Mr MJ Slattery QC, Mr RA Dick (Plaintiff)
Mr DL Williams, Mr MJSteele (First and Second Defendant)
SOLICITORS: Kemp Strang (Plaintiff)
Joanne Kelly (First and Second Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 13 June 2003 ex tempore
Revised 17 June 2003

50207/02 Onetel Limited (in Liquidation) v John David Rich & Ors

JUDGMENT

1 There is before the court a Notice of Motion brought by the first and second defendants, Mr John David Rich and LifeCell Pty Limited (“LifeCell”), seeking to strike out the summons in these proceedings pursuant to part 15 rule 26 of the Supreme Court Rules and seeking in the alternative, for further and better particulars of the plaintiff’s claim to be ordered pursuant to part 16 rule 7 of the rules.

2 The proceedings are brought by One.Tel Ltd (in Liquidation) ("One.Tel") against six defendants. The third defendant is Mr Bradley William Keeling. The fourth defendant is a company alleged to have been controlled by him known the Bradley Keeling Management Pty Ltd. The fifth defendant is Mr Rodney Stephen Adler. The sixth defendant is Mr John Huyshe Greaves.

3 Mr Rich was the former Chief Executive Officer of One.Tel. After 4 November 1996, he was apparently engaged to fill that role via a consultancy agreement between One.Tel and LifeCell under which LifeCell provided Mr Rich’s services to One.Tel. The proceedings relate to two sets of amendments to that consultancy agreement dated 5 August 1998 and 29 April 1999.

4 Some of the background in particular which requires to be taken into account is that:

· pursuant to the 5 August 1998 amendments, LifeCell became entitled to the payment of a bonus of US$1 million if a market capitalisation of A$1 billion was achieved for One.Tel and a further bonus of US$2.5 million if a market capitalisation of $2 billion was achieved; and

· pursuant to the 29 April 1999 amendments, these arrangements were apparently altered so as to:

· increase the market capitalisation figure for payment of the second bonus to A$2.4 billion; and

· provide for further bonuses of US$1 million to be payable for each A$1 billion increase in the market capitalisation of One.Tel beyond that figure.

5 The summons identifies the nature of the dispute in the following terms:

· The dispute relates to the payment by the plaintiff (“One.Tel”) of certain bonuses to the second defendant (“LifeCell”) and the fourth defendant (“BKM”) which companies were controlled by the joint chief executive officers of One.Tel, respectively the first defendant (“Rich”) and the third defendant (“Keeling”). The bonuses were described as “Over Achievement Bonuses” and were paid in July and August 1999 and February 2000 pursuant to contracts between One.Tel and each of Rich and LifeCell and Keeling and BKM. These payments are described in this Summons as “the Payments”.

· The Payments were made by One.Tel prior to the appointment of joint liquidators to One.Tel which occurred on 24 July 2001. The total amount of the Payments was $13,877,528.74.

· One.Tel contends that the making of the Payments and the relevant provisions of the contracts pursuant to which the Payments were paid involved contraventions by all of the defendants of the related party benefit provisions of the Corporations Act 2000 and breaches by each of Rich, Keeling, Adler and Greaves of their duties as directors owed to One.Tel.

6 The summons identifies the principal issues likely to arise as:


          (a) whether by reason of the making of the Payments (and each of them) to LifeCell and BKM, One.Tel gave financial benefits to related parties in breach of s 243H(1) of the Corporations Law and section 208 of the Corporations Act 2001 ;

          (b) whether by reason of the matters in (a), Rich and Keeling, BKM and LifeCell contravened s 243ZE(2) Corporations Law and section 209(2) of the Corporations Act 2001;

          (c) whether each of Adler and Greaves was involved in or directly or indirectly recklessly concerned in or party to the contraventions referred to in (a)-(b) in contravention of section 243ZE(3) of the Corporations Law and section 209(2) of the Corporations Act 2001 ;

          (d) whether in all the circumstances relating to the making of the Payments (and each of them) and inter alia their lack of disclosure to the One.Tel Board at and before the meetings of the Board on 7 October 1999 and 28 March 2000, each of Rich, Keeling, Adler and Greaves breached their statutory, common law and equitable duties as directors owed to One.Tel;

          (e) whether One.Tel is entitled to be compensated for the loss and damage it has suffered by reason of the making of the Payments.

7 Relevant background as pleaded is as follows:

          “2. On 24 July 2001 the creditors of One.Tel resolved at a meeting convened under section 439A of the Corporations Act that One.Tel be wound up and that Mr Walker and Mr Sherman be appointed as joint liquidators of One.Tel, these proceedings being brought pursuant to section 477(2)(a) of the Corporations Act in the name of and on behalf of the company:

          3. The second defendant (“LifeCell”) and the fourth defendant (“BKM”) are bodies corporate able to be sued in and by their said respective corporate names and styles.

          4. The first defendant (“Rich”) and the third defendant (“Keeling”) were at all material times after the incorporation and commencement of operations of One.Tel:
              (a) joint chief executive officers of One.Tel; and
              (b) executive directors of One.Tel.
          5. After the incorporation of One.Tel and until 12 April 2001 and 30 March 2001 respectively:
              (a) the fifth defendant (“Adler”) and the sixth defendant (“Greaves”) were non-executive directors of One.Tel;

              (b) Greaves was the chairman of the board of directors of One.Tel (“the Board”);

              (c) Greaves and Adler were the sole members of the Remuneration Committee of the Board of One.Tel (“the Remuneration Committee”) and Greaves was the chairman of the said Committee.

          6. One.Tel commenced trading in or about March 1995 as a proprietary company carrying on the business of reselling telecommunication services.
          7. By at least November 1996 the Remuneration Committee had been established. At all material times between November 1996 and 30 March 2001 the Remuneration Committee had the following responsibilities:


              (a) to consider the remuneration of officers and executives of One.Tel;

              (b) to consider the issuing of shares and options to executives and employees of One.Tel;

              (c) to consider the payment of any ex gratia bonus; and

              (d) to consider any other topics defined by the Board,
              and in practice the Remuneration Committee approved the payment or provision of remuneration to executives of One.Tel.

          8. In order to discharge those responsibilities, the Remuneration Committee was authorised by the Board to obtain outside legal or other independent advice (including from One.Tel’s external auditor) and to procure the attendance of external consultants with relevant experience and expertise if the Remuneration Committee considered it necessary to do so.

          9. The Remuneration Committee was a committee appointed by the Board from the independent non-executive directors of One.Tel and was constituted as a committee consisting of not less than two members.
          10. The Remuneration Committee was authorised by the Board of One.Tel to investigate any activity in the discharge of its responsibilities and was further authorised to seek any information it required from any employee of One.Tel to assist in the discharge of those responsibilities.

          11. On 25 September 1997 One.Tel issued a prospectus containing an offer to the public of a total of 500,000 shares at a price of $2 each, seeking to raise $1,000,000.

          12. In November 1997 One.Tel listed on the Australian Stock Exchange Limited (“ASX”).”

8 For the purpose of dealing with the motion, it is necessary to note that the pleading alleges the amendment of the two agreements earlier referred to; the LifeCell Consultancy Agreement between Mr Rich of LifeCell of the one part and One.Tel of the other part, first made on 4 November 1996, and the BKM Consultancy Agreement between Mr Keeling and BKM of the one part and One.Tel of the other part, first apparently made on or about 23 March 1995. These were apparently agreements for the provision by the second and fourth defendants of consultancy services to One.Tel.

9 Paragraphs 22 to 45 of the summons are of importance to the arguments addressed on the motion. These were in the following terms:

          The August 1998 Amendments

          Content of the Amendments

          22. By deeds made on 5 August 1998 the LifeCell Consultancy Agreement and the BKM Consultancy Agreement were amended in identical terms (“the August 1998 Amendments”).

          23. The LifeCell Consultancy Agreement and the BKM Consultancy Agreement were varied by the August 1998 Amendments to the following relevant effect:
              (a) clauses 2.2 and 2.3 of the LifeCell Consultancy Agreement and clause 3.1 of the BKM Consultancy Agreement each of the LifeCell and BKM Consultancy Agreements:

                  (i) were continued until 30 June 2002, and

                  (ii) could be extended for a further two year period by agreement made before 1 January 2002.
              (b) clause 4.5(d) of the LifeCell Consultancy Agreement and clause 5.2(d) of the BKM Consultancy Agreement were each deleted and replaced by provisions:

                  (i) providing for the payment of a bonus of $200,000 for the financial year ending 30 June 1999 subject to One.Tel's audited financial statements for that financial year disclosing consolidated operating profit before interest tax depreciation and amortisation (“EBITDA”) of not less than A$14,100,000; and

                  (ii) providing a mechanism for the payment of $100,000 of that bonus within seven days prior to 31 December 1998 and the balance within seven days prior to 30 June 1999 on the meeting of specific EBITDA targets described in that clause; and

                  (iii) creating a right in One.Tel to a refund of such bonus if EBITDA of A$14,100,000 is not achieved for the full financial year.
              (c) a new clause 4.5(e) was added to each of the LifeCell and BKM Consultancy Agreements which provided for the payment of further bonuses such as may be agreed between each of LifeCell and BKM respectively and One.Tel for each financial year following the financial year ending 30 June 1999 subject to One.Tel’s audited financial statements for a particular financial year disclosing consolidated EBITDA of not less than the amount disclosed in the business plan adopted by the Board for the particular financial year, such amount to be paid by a mechanism more fully described in clause 4.5(e) but which was similar to that provided for the 1999 financial year in clause 4.5(d).
              (d) a new subclause 4.5(f) was added to each of the LifeCell and BKM Consultancy Agreements which provided for the payment of over achievement bonuses (“the Over Achievement Bonuses”) as set out in Schedule 1 of the LifeCell Consultancy Agreement and the BKM Consultancy Agreement subject to One.Tel attaining the market capitalisation milestones referred to in Schedule 1 on or before the dates set out in Schedule 1, such bonuses to be paid within 30 days of attainment of the milestone.


          Schedule 1

          Date Milestone Over Achievement Bonus
          30 June 1999 Issuance of Hi Yield Note by the Company or NASDAQ listing of the Company’s shares US$100,000
          30 June 2000 Company market capitalisation of A$1,000,000,000 US$1,000,000
          30 June 2002 Company market capitalisation of A$2,000,000,000 US$2,500,000
          Deficiencies in the Content of the August 1998 Amendments
          24. As a result of the making of the August 1998 Amendments the terms for the payment of the Over Achievement Bonuses in the LifeCell and BKM Consultancy Agreements did not include terms that:
              (a) required each market capitalisation milestone not only to be attained within the time period specified by Clause 4.5(f) and in Schedule 1 but also to be sustained for:

                  (i) a reasonable period of time; or

                  (ii) a period of time from which it would be sufficient to infer that the market capitalisation milestone was likely to be sustained over the long term; or

                  (iii) a period of time fixed by reference to market practice for the payment of bonuses by publicly listed companies in comparable circumstances;
              (b) gave One.Tel a right not to pay the Over Achievement Bonuses:
                  (i) upon the occurrence of:

                      (1) any material adverse change in One.Tel’s financial circumstances or market reputation, or

                      (2) an event which the Board reasonably believed may result in an adverse change in One.Tel’s financial circumstances or market reputation in the future; or
                  (ii) if their payment were to exceed a maximum amount that might be paid as Over Achievement Bonuses within a particular financial reporting period; and

                  (iii) if their payment were to exceed an agreed proportion of EBIT or EBITDA for the financial reporting period during which they would be paid;

                  (iv) if One.Tel were to report an EBIT or EBITDA loss for a particular financial reporting period during which period the Over Achievement Bonuses were otherwise payable;
              (c) permitted One.Tel to renegotiate the LifeCell or the BKM Consultancy Agreements where there had been any significant favourable change to the circumstances of any of Rich, LifeCell, Keeling, BKM or in relation to One.Tel;
              (d) allowed One.Tel in its discretion to substitute shares or options in One.Tel or other non-cash consideration for the payment of the Over Achievement Bonuses in cash;

              (e) that prevented market capitalisation milestones being reached by including in the calculation of the attainment of the milestone, share price movements that were also reflected in the whole ASX securities market or in its telecommunications sector;

              (f) prevented the Over Achievement Bonuses being paid to the extent that the required market capitalisation milestones were attained by reason of the issue by One.Tel of securities and their placement with investors;

              (g) required there to be maintained an agreed ratio between the total remuneration including the Over Achievement Bonuses paid to each of Rich and Keeling and the total remuneration paid to each of the other senior executives of One.Tel and capped the amount of the Over Achievement Bonuses that could be paid to LifeCell and BKM in order to maintain such ratio;

              (h) required the payment of the Over Achievement Bonuses to be contingent on One.Tel consistently exceeding certain levels of earnings, key performance indicator targets or certain rates of growth in shareholders funds, so as to ensure the quality of One.Tel’s financial performance in conjunction with its attainment of the market capitalisation milestones;

              (i) required LifeCell and BKM to repay the Over Achievement Bonuses in the event that following their payment the market capitalisation milestones were not sustained for:

                  (i) a reasonable period; or

                  (ii) a period of time reflecting market practice with respect to the payment of bonuses to senior executives in comparable circumstances;
              (j) required the Over Achievement Bonuses to be paid in United States dollars rather than in Australian currency when One.Tel did not:

                  (i) derive substantial revenues in US dollars to offset liabilities incurred by One.Tel in that currency; or

                  (ii) conduct a significant proportion of its business operations in the United States of America; or

                  (iii) have any hedging facility to protect One.Tel in meeting US dollar denominated obligations against adverse movements in the Australian dollar/US dollar exchange rate;
              (k) discount or reduce the amount of the Over Achievement Bonuses that might be paid under the LifeCell or BKM Consultancy Agreements on account of any of the factors described in this paragraph;
              all of which shall hereinafter be described as the “Absent Terms”.
          Events Leading up to the August 1998 Amendments

          25. In or about July 1998 Keeling authorised Rich to carry out on Keeling's behalf any negotiations with Greaves and Adler on behalf of One.Tel that were necessary to bring about the amendment of each of the LifeCell and BKM Consultancy Agreements so as to include within them amendments in the general form of the August 1998 Amendments.

          26. At all material times from the time of such authorisation until 5 August 1998 Rich acted as agent for Keeling and BKM in the conduct of negotiations with One.Tel for the effecting of the August 1998 Amendments.
          27. Prior to 2 July 1998 LifeCell and Rich in consultation with the accountants, Stirling Warton Williams, prepared a written proposal for and draft terms for the amendment of the LifeCell and BKM Consultancy Agreements which were in terms substantially the same as the August 1998 Amendments.
          28. On 8 July 1998 Rich and Keeling by his agent Rich presented the draft August 1998 Amendments to the LifeCell Consultancy Agreement and the BKM Consultancy Agreement including the Over Achievement Bonuses directly to Messrs Freehill Hollingdale & Page, the solicitors for One.Tel (“Freehills”).
          29. On 17 July 1998 at the request of Rich, and Keeling by his agent Rich, Freehills forwarded to Rich and One.Tel by letter, a draft of the August 1998 Amendments (“the Deeds of Amendment”) and in substance advised Rich, Keeling and One.Tel (“the Freehills Advice”) inter alia that:

              (a) as had been previously advised by Freehills to Rich, One.Tel was subject to the related party benefit provisions of the Corporations Law , which provisions prohibit a public company from giving financial benefit to a related party, which included a director or a company controlled by a director;

              (b) the limited exceptions to that prohibition included:

                  (i) the giving of reasonable remuneration to an officer of the company; and

                  (ii) the giving of financial benefits on terms and conditions no more favourable to the related party than those on which it is reasonable to expect that One.Tel would give the benefit if dealing at arms length in the same circumstances; and
              (c) a literal reading of the reasonable remuneration exception in (b)(i) may only apply to a benefit given to an officer of One.Tel and not to an entity controlled by an officer;

              (d) the directors of One.Tel should satisfy themselves that the arm’s length exception in (b)(ii) applied in respect of the revised consultancy fees to be paid under each of the LifeCell and BKM Consultancy Agreements then being proposed in the Deeds of Amendment;

              (e) that each of Rich and Keeling had a material personal interest in the proposed Deed of Amendment to effect the August 1998 Amendments between each of Rich and Keeling and One.Tel;

              (f) resolutions approving the August 1998 Amendments would need to be passed by the One.Tel Board and further, Freehills provided to One.Tel draft circular resolutions able to be passed by the Board of One.Tel relating to One.Tel’s entry into amended LifeCell and BKM Consultancy Agreements, which resolutions inter alia identified that each of Keeling and Rich was disqualified under section 232A of the Corporations Law from considering his Deed of Amendment by reason of his material personal interest in the matter;

              (g) that the other directors of One.Tel were required to satisfy themselves of the matters in subparagraph (d) above prior to One.Tel being able to enter into the Deeds of Amendment incorporating the August 1998 Amendments;

              (h) by reason of the personal interest of Rich and Keeling as described in subparagraph (e) that neither of them should assent to a resolution relating to their own Deeds of Amendment; and

              (i) if there were any questions arising out of the contents of the said advice or letter, or if Freehills were required to prepare execution copies of the Deeds of Amendment, then Rich, Keeling or One.Tel should inform Freehills of this.
          30. Between 17 July 1998 and 5 August 1998 Rich spoke to each of Greaves and Adler about the proposed August 1998 Amendments and Greaves and Adler agreed on behalf of One.Tel on or before 5 August 1998 to the making of the August 1998 Amendments.

          31. In dealing with Rich in relation to the August 1998 Amendments and then in approving the August 1998 Amendments, each of Greaves and Adler were performing functions both as directors of One.Tel and as members of One.Tel’s Remuneration Committee.

          32. In exercising their functions as members of the Remuneration Committee in relation to the August 1998 Amendments in relation to the proposed August 1998 Amendments, Greaves and Adler each:

              (a) failed to make any enquiries as to the existence or availability of any legal advice about the matters under the Corporations Law that it was their duty to consider as directors of One.Tel and as members of the Remuneration Committee to decide whether or not to approve the August 1998 Amendments;

              (b) failed to rely on any legal advice as to the manner in which they should discharge their duties as members of the Remuneration Committee in considering and approving the August 1998 Amendments;

              (c) failed to make any inquiries in the market place or of any professional remuneration expert as to either:
                  (i) any market practice as to the payment of senior executive remuneration by publicly listed companies in comparable circumstances; or
                  (ii) what it would be reasonable to expect that One.Tel would give as a benefit if dealing directly with LifeCell, Rich, BKM and Keeling at arm’s length but otherwise in the same circumstances in relation to the August 1998 Amendments;
              (d) failed to consider the subject matter of or to perform the Remuneration Committee Duty as described below in relation to the August 1998 Amendments;
              (e) received and accepted a proposal for the Over Achievement Bonuses which was designed and/or advanced by Rich without:

                  (i) seeking or having regard to information about any alternatives to the August 1998 Amendments which alternatives may have better suited the interests of One.Tel;

                  (ii) considering or ascertaining whether there were likely to be any disadvantages to One.Tel in agreeing to the August 1998 Amendments;
              (f) failed to ascertain from Rich and Keeling what period of time that Rich and Keeling were likely to continue in the service of One.Tel in the absence of the making of the August 1998 Amendments;

              (g) failed to inquire or ascertain whether there were any likely disadvantages or adverse consequences for One.Tel arising from the absence from the August 1998 Amendments of any of the Absent Terms in relation to the Over Achievement Bonuses being proposed by Rich;

              (h) failed to ensure that the August 1998 Amendments were considered by the Board of One.Tel, or in the alternative, to inform the Board of the failure of Greaves and Adler to take each of the steps described in this paragraph;
              (i) failed to:

                  (i) make any enquiries about the then market practice as to the practical upper limit on the gross value of remuneration paid to a sole chief executive officer by publicly listed companies in comparable circumstances; and

                  (ii) to halve or otherwise discount or modify the amount payable under the package of the August 1998 Amendments to each of LifeCell/Rich and Keeling/BKM so as to take into account the fact that the Over Achievement Bonuses were proposed to be paid to two persons acting in the role of joint chief executive officers of One.Tel rather than as one chief executive offer of the company;
              (j) failed to inquire on what rational basis in the interests of One.Tel the Over Achievement Bonuses described in the August 1998 Amendments were to be paid in United States dollars rather than in Australian currency, when One.Tel did not:

                  (i) derive substantial revenues denominated in US dollars to offset liabilities incurred by One.Tel in that currency; or

                  (ii) conduct a significant proportion of its business operations in the United States of America; or

                  (iii) have any hedging facility to protect One.Tel in meeting US dollar denominated obligations against adverse movements in the Australian dollar/US dollar exchange rate;
              (k) failed to consider in the interests of One.Tel the inclusion in the LifeCell and BKM Consultancy Agreements of any of the Absent Terms;
              (l) failed to take any steps to assess or evaluate the anticipated benefits that Rich, LifeCell, Keeling and BKM would be likely to derive during the remaining term of LifeCell and BKM Consultancy Agreements without the August 1998 Amendments in their respective capacities as:

                  (i) shareholders directly or indirectly in One.Tel;

                  (ii) holders of options in One.Tel; and

                  (iii) under the LifeCell and BKM Consultancy Agreements;
              (m) failed to take any steps to inquire of One.Tel’s internal accounting staff or auditors:

                  (i) whether the Over Achievement Bonuses were a tax effective way for One.Tel to reward its chief executive officers, and

                  (ii) whether or not there was a more tax effective way in One.Tel's interests to reward One.Tel’s chief executive officers;
              (n) failed before agreeing to or implementing the August 1998 Amendments to engage in any process of:

                  (i) identifying Rich and Keeling’s actual need (if any) to accrue a right to receive and One.Tel’s interests (if any) to incur a liability to pay, the Over Achievement Bonuses proposed by the August 1998 Amendments; and

                  (ii) designing a type of remuneration plan for Rich and Keeling into which some alternative form of the Over Achievement Bonuses could be fitted to meet the identified needs of Rich, Keeling and the identified interests of One.Tel; and

                  (iii) taking responsibility for the final design of the remuneration plan and legal documentation;
              all of which failures by Greaves and Adler will be referred to in this Summons as the “Process Defects”.
          33. In the conduct of the discussions about the August 1998 Amendments Rich for himself and as agent for Keeling:

              (a) did not refer to the existence of or pass on any of the contents of the Freehills Advice to Greaves or Adler in relation to the August 1998 Amendments although Rich was aware that neither Greaves nor Adler had sought other legal advice on behalf of One.Tel;

              (b) failed to inform either Greaves or Adler that each of Rich and Keeling were prepared to continue to work as joint chief executive officers of One.Tel in accordance with the LifeCell and BKM Consultancy Agreements and without the August 1998 Amendments whether or not they were paid the Over Achievement Bonuses;

              (c) failed to provide information as to the value of the shareholding and options held by them in One.Tel and all the financial benefits derived by them or reasonably expected to be derived by them as joint chief executive officers under each of the LifeCell and BKM Consultancy Agreements during the term of such Agreements which information was material to consideration by Adler and Greaves of whether or not to agree on behalf of One.Tel to the August 1998 Amendments;

              (d) did not disclose to Adler and Greaves that:

                  (i) Keeling had not made any request of Rich to seek or to negotiate for the payment of the Over Achievement Bonuses; and

                  (ii) Keeling was satisfied with the BKM Consultancy Agreement in the form that it existed before the August 1998 Amendments and was content that the request for the August 1998 Amendments not be made by Rich,
              all of which non-disclosed information was material to the decision by Greaves and Adler to accept the August 1998 Amendments on behalf of One.Tel and is hereinafter referred to as the “Relevant Information”.
          34. Further in discussing the August 1998 Amendments with Greaves and Adler, Rich for himself and as agent for Keeling was aware:

              (a) that each of Greaves and Adler had failed to do or undertake on behalf of One.Tel each of the matters described in this section as Process Defects;

              (b) that Greaves and Adler had not in the negotiations with Rich and in the interests of One.Tel stipulated for or taken any legal or other professional advice about any of the matters described in this section as Absent Terms; and

              (c) that the Relevant Information had not been disclosed to Greaves and Adler,

              such that Rich and Keeling were aware that the interests of One.Tel were not being protected in the negotiations for the August 1998 Amendments.


          35. Each of the matters of which Rich for himself and as agent for Keeling was aware in relation to the August 1998 Amendments was information acquired by Rich by virtue of his position as an officer of One.Tel.

          36. Greaves and Adler were aware of the Process Defects by virtue of their acting in the position of directors of One.Tel exercising functions as the Remuneration Committee.

          37. Notwithstanding the existence of the Process Defects, the failure of One.Tel to stipulate for the Absent Terms, and Rich's knowledge of the non disclosure of the Relevant Information:

              (a) Rich's position as joint chief executive officer allowed him, on behalf of himself, and Keeling, to conclude the negotiations for and then to effect the making of the August 1998 Amendments, and

              (b) Greave’s and Adler’s positions on the Remuneration Committee allowed the August 1998 Amendments to be made.
          Application of Part 3.2A Division 4 of the Corporations Law to the August 1998 Amendments
          38. At the time of the making of the August 1998 Amendments One.Tel’s overall financial position was as described in the 1998 Financial Statements.
          39. At the time of the making of the August 1998 Amendments the circumstances of each of Rich and Keeling were that they:

              (a) had and had received existing entitlements by way of remuneration as are described in this Summons; and

              (b) had shareholding interests in One.Tel as are described in the 1998 Financial Statements.
          40. The August 1998 Amendments were made:

              (a) as a result of the Process Defects, and thereby

              (b) resulted in the Absent Terms not being included in the LifeCell and BKM Consultancy Agreements.
          41. At the time of the making of the August 1998 Amendments One.Tel was a public company within section 9 of the Corporations Law .
          42. At the time of the making of the August 1998 Amendments each of:

              (a) LifeCell and Rich; and

              (b) BKM and Keeling
              were related parties of One.Tel within section 243F(1)(a) and (f) of the Corporations Law .
          43. At the time of the making of the August 1998 Amendments to the extent that the LifeCell and BKM Consultancy Agreements included the terms and conditions for the payment of the Over Achievement Bonuses the financial benefits which might be conferred on LifeCell and Rich under the LifeCell Consultancy Agreement and on BKM and Keeling under the BKM Consultancy Agreement were on terms and conditions that were more favourable to each of LifeCell and Rich and BKM and Keeling than the terms and conditions on which it is reasonable to expect that One.Tel would give such financial benefits directly if dealing with LifeCell and Rich and BKM and Keeling at arm’s length in the same circumstances, within the meaning of section 243N of the Corporations Law .
          44. Section 243K of the Corporations Law did not apply to contracts made with and providing for the payment of remuneration to persons or entities other than officers of One.Tel such as the LifeCell and BKM Consultancy Agreements.
          45. In the alternative to the allegation made in the previous paragraph, at the time of the making of the August 1998 Amendments it was not reasonable within section 243K of the Corporations Law for a body corporate in One.Tel’s circumstances to make the LifeCell or the BKM Consultancy Agreements including terms for the payment of the Over Achievement Bonuses with an officer in Rich's or Keeling’s circumstances. “


The submissions advanced on the motion

10 The contentions as to alleged deficiencies in the summons were broadly as follows:

· First, that it alleges that, in negotiating his remuneration as Chief Executive Officer with the non-executive directors constituting the Remuneration Committee of the Board of One.Tel, by reason solely of his position as a director, Mr Rich was subject to fiduciary obligations to avoid placing himself in a position of conflict of duty and interest, to account to One.Tel for any gain obtained by reason of his position and to disclose to One.Tel, inter alia, the fact that he would have continued to work as CEO whether or not the bonuses were agreed. The Applicants contend that, as a matter of law, it cannot be that an executive director negotiating with the Remuneration Committee for his own remuneration, is under subject to fiduciary obligations such as those pleaded;

· Secondly, the Summons alleges in several places that Mr Rich “failed to disclose” information to the Board and that, as a result, the interests of One.Tel were not protected or the Board was put at a disadvantage, without alleging that the members of the Board were otherwise unaware of that information;

· Thirdly, the Summons pleads numerous breaches of duty in a general, “rolled up” fashion and fails to specify with clarity what conduct on the part of Mr Rich is alleged to constitute breaches of those duties. For instance, it is alleged that Mr Rich failed to exercise his powers and discharge his duties with due care and diligence without specifying what powers or duties he was discharging and what he failed to do in that regard that a reasonably diligent director would have done.

· Fourthly, the Summons pleads in a compendious fashion allegations as to the “financial position” of One.Tel at various times, not by setting out the material facts relied upon in that regard, but by simply referring to lengthy documents and pleading that the financial position of One.Tel was “as described” in that document;

· Fifthly, the Summons alleges that the bonus arrangements were “more favourable” than arms length arrangements would have been and exceeded what was “reasonable” but fails to state the respects in which this is so and the particulars provided purport to be “non-exhaustive” of the basis on which it will be alleged that the arrangements were “more than reasonable” or “other than what would be expected on an arms length basis”.

11 The convenient course is to deal with these contentions seriatim.

The first contention

12 The subject matter of this contention concerns the allegations as to the existence of particular fiduciary duties. In that regard, the relevant paragraphs are as follows:


          “46 In negotiating with Greaves and Adler in relation to the August 1998 amendments, Rich and Keeling, by Rich, as chief executive officers and directors of one One.Tel, were the fiduciaries of One.Tel.

          47 In the circumstances of the negotiations Rich and Keeling owed the following fiduciary duties to One.Tel:
              (a) a duty not to permit a conflict or the significant possibility of a conflict to occur between Rich and Keeling's personal interests and their duties as directors to act in the interests of One.Tel;

              (b) a duty to account to One.Tel for any benefit or gain obtained or received by Rich or Keeling by reason of or by the use of their fiduciary position;

              (c) a duty when dealing as an interested party with One.Tel in respect of any matter where their tasks as fiduciaries included the giving of advice or information to disclose and furnish to One.Tel all relevant knowledge and information which Rich and Keeling possessed and to conceal nothing from One.Tel that might reasonably be regarded as relevant to the decisions being made by One.Tel to engage in dealing with Rich and Keeling.

          all of which duties are collectively described in the summons as the fiduciary duties.”

13 Plainly enough the essential fiduciary obligations in particular circumstances are to avoid conflicts between interest and duty or between duty and duty, and profits arising out of the fiduciary office, in the absence of fully informed consent. [cf Aequitas v AEFC [2001] 19 ACLC 1006 per Austin J citing Breen v Williams (1996) 186 CLR 71]

14 The submissions advanced by the applicants include:

· One.Tel’s solicitors were asked in correspondence (Ex JK1):


              “Are any facts, matters and circumstances relied upon as giving rise to the alleged fiduciary relationship between Rich and One.Tel in relation to his negotiations with Greaves and Adler for the August 1998 Amendments, other than the fact that at the date of those negotiations he was a chief executive officer and director of One.Tel?

· The response given (Exhibit JK2) was “No”.

· What is being alleged, therefore, is that any executive director of a company, in negotiating his remuneration arrangements with a committee of non-executive directors constituted by the Board for that purpose, is bound by the duties set out above.

· It is submitted that this is clearly not the law. If it were so, then an executive director could effectively never negotiate his own remuneration with the company which employed him.

· As a matter of common sense, it is submitted that it cannot be correct to allege, as is alleged in paragraph 33(b) of the Summons, that in negotiating his remuneration, a CEO is obliged to disclose to the Remuneration Committee that he would accept less money then he is asking for.


· It is submitted that there is no authority for an obligation of the breadth pleaded by the plaintiff in the Summons and that such an obligation does not exist in law on the facts pleaded.

· Rather, the case is analogous to that decided by the Court of Appeal in Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543, where the Court refused to hold that the parties negotiating for an end to their relationship were in a fiduciary relationship because, as was said by Cripps JA at 588:

              “… it is difficult to see how the appellants were entitled to expect that the respondents would act in their interests and accord them that selfless loyalty that a fiduciary owes to a beneficiary.”

· As Mason J observed in Hospital Products at 155, the critical feature of the traditional fiduciary relationships was the undertaking or agreement by the fiduciary to act for or on behalf of or in the interests of another person in the exercise of power or discretion which will affect in a legal or practical sense the interest of the other person. What “power or discretion” entrusted to him by One.Tel is Mr Rich alleged to have been exercising in negotiating his own compensation with the Remuneration Committee?

· Further, it is submitted that:


              (a) Insofar as the existence of the fiduciary obligation pleaded in paragraph 47(c) of the Summons is said to arise when Mr Rich is “dealing as an interested party with One.Tel in respect of any matter where their tasks as fiduciaries included the giving of advice or information” the pleading:

                  (i) Does not specify what “task” as a fiduciary Mr Rich is alleged to have been engaged in in negotiating his own compensation arrangements with the Remuneration Committee of the Board;

                  (ii) Lacks any allegation that Mr Rich was in such a position at the various points in time alleged in the Summons; and

                  (iii) Lacks any pleading of the facts, matters and circumstances said to give rise to such an obligation as to “the giving of advice or information” ;
              (b) The fiduciary duties pleaded in paragraph 46 and 47 arise, on their terms, only in connection with the negotiation of the bonus arrangements with Mr Greaves and Mr Adler in July/August 1998. Yet unspecified breaches of unspecified fiduciary duties are also alleged in connection with other events, including:

                  (i) Mr Rich’s alleged conduct at the time of making of the amendments to the bonus arrangements in April 1999 – paragraph 80(a);

                  (ii) Mr Rich “arranging for and facilitating” the passing of a resolution of the Remuneration Committee for the payment of bonuses which had accrued under the arrangements and in “receiving” those payments in June 1999 – paragraph 88(a) – August 1999 – paragraph 96(a) and February 2000 – paragraph 122(a); and

                  (iii) Mr Rich’s alleged conduct at the time of the passing of a resolution of the Board ratifying the actions of the Remuneration Committee in October 1999 – paragraph 113(a) – and March 2000 – paragraph 131(a).

· This is no mere technical deficiency in the pleading. The Applicants submit that, as a fundamental matter of law, an executive director negotiating his own compensation arrangements with the company cannot be held to have the fiduciary obligations pleaded in the Summons, in any event not solely as a result of the fact that he is a director of the company as is alleged by the plaintiff here.

Dealing with the submissions

15 One may immediately observe that to a certain extent these submissions seek to treat with a challenge to the existence in law of at least certain of the alleged fiduciary obligations.

16 The principles to be exercised by the court in connection with an application to strike out pleadings are well established and articulated in General Steel Industries v Commissioner For Railways (N.S.W.) (1964) 112 CLR 125.

17 The power to strike out pleadings because they disclose no reasonable cause of action should, I accept, only be exercised in plain and obvious cases. Barwick CJ in General Steel at 129 to 130 adopted summary of authorities by Dixon J, as His Honour then was, in Dey v Victorian Railways Commissioners (1949) 78 CLR at 91:


          "A case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff submitting his case for determination in the appointed manner by the court with or without a jury. The fact that a transaction is intricate may not disentitle a court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process or is vexatious. But once it appears that there is a real question to be determined whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the action as frivolous and vexatious and an abuse of process.”

18 Barwick CJ goes on to comment at 130:


          "In my opinion great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal."

19 In particular I accept that great care ought to be exercised in cases such as this involving allegations of breach of fiduciary obligations, allegations of tangential or related contraventions of sections of the Corporations Law and of the Corporations Act and allegations of breaches of alleged common law and equitable duties where the outcome of the matter will be very much determined by the manner in which the evidence comes out.

20 However, it may be taken as a given that "the plainest and most fundamental of all the rules of pleading" is that "all the material facts constituting the cause of action ought already to have been plainly stated in the pleading itself". [Pinson v Lloyds and National Provincial Foreign Bank Limited [1941] 2 KB 72 at 75; H 1976 Nominees Pty Limited v Galli (1979) 40 FLR 242 at 246-7]

21 Further, whereas the object of particulars is to prevent the opposite party being taken by surprise at the trial of an action and to identify the issues of fact to be investigated at the hearing, it is simply not the function of particulars to take the place of necessary averments in the pleading of the material facts: [Saunders v Jones (1877) Ch D 435 at 451; R v Associated Northern Collieries (1910) 11 CLR 738 at 740; Bruce v OdhamsPressLimited [1936] 1 KB 697 at 712-3; McSpedden v Harnett (1942) 42 SR (NSW) 116 at 119; Kelly v Kelly (1950) 50 SR (NSW) 261 at 265; Turner v Dalgety & Co Ltd (1952) 69 WN (NSW) 228 at 229; Commercial Bank of Australia v Thomson (1964) 81 WN (Pt 1) (NSW) 553 at 557, 558; Ellis v Grant (1970) 91 WN (NSW) 920 at 924, 925; Emmerton v University of Sydney [1970] 2 NSWR 633 at 635; Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214 at 219, 220, 221; Dare v Pulham (1982) 148 CLR 658 at 664]

22 Turning to the applicants' submissions, it does not seem to me that they have established that the pleaded obligations do not exist in law on the facts pleaded. Certainly a General Steel approach to the contentions does not justify the striking out of any part of paragraphs 46 or 47.

23 I take into account in this regard the request for particulars of paragraph 47 seeking particulars as to: "What facts, matters and circumstances are comprised in the reference to: the circumstances of the negotiations". The response was:


          "The matters pleaded in the plaintiff's contentions and in particular those matters pleaded in paragraphs 25 to 46 of the plaintiff's contentions."

24 Particulars had been sought in relation to paragraph 46 as to whether there were any facts, matters or circumstances relied upon as giving rise to the alleged fiduciary relationship between Mr Rich and One.Tel in relation to his negotiations with Mr Greaves and Mr Adler for the August 1998 amendments, other than the fact that at the date of those negotiations, he was a chief executive officer and director of One.Tel. The request was met with the response "No".

25 Although in a somewhat different context, the observations of Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde (2001) 201 CLR 552 at 557 are instructive:


          "The result is that frequently the conventional form of pleading in an action of negligence will not reveal the alleged duty with sufficient clarity for a court considering an application for summary termination of the proceeding to be sure that all of the possible nuances of the plaintiff's case are revealed by the pleading. Further, and no less importantly, any finding about duty of care will often depend upon the evidence which is given at trial. Questions of reliance or knowledge of risk are two obvious examples of the kinds of question in which the evidence given at trial may take on considerable importance in determining whether a defendant owed the plaintiff a duty of care."

26 In the result, the first of the applicants' contentions is, in my view, without substance.

The second contention

27 The contention here is:

· “the Summons pleads in a number of places that:


              (a) Mr Rich failed to “disclose” information to the Remuneration Committee or the Board, or to “inform” those persons of certain information, or to “provide” information to those persons; and

              (b) This led to the “interests of One.Tel … not being protected in the negotiations” or put the Board “at a disadvantage” in making particular decisions,
              without pleading that the members of the Remuneration Committee or the Board were otherwise ignorant of those matters.

· This is particularly striking because at least some of the items of information pleaded are matters which one might think would be well known to the members of the Remuneration Committee, including, for example, information “as to the value of the shareholding and options held by [Rich and Keeling] in One.Tel” – paragraph 33(c).

· This difficulty arises in relation to each of the following paragraphs of the pleading:


              (a) Paragraph 33, which pleads that Rich “did not refer to the existence of” and “failed to inform” and “failed to provide” and “did not disclose” certain information to the members of the Remuneration Committee, all of which “non-disclosed information” is alleged to have been “material to” the decision of the Committee to agree to the proposed bonus arrangements (the information then being defined for the purposes of the pleading as the “Relevant Information”);

              (b) Paragraph 34, which pleads that Rich was aware that the Relevant Information had not been “disclosed” “such that Rich [was] aware that the interests of One.Tel were not being protected in the negotiations”;

              (c) Paragraph 70, which pleads that in negotiating later amendments to the bonus arrangements Rich “continued to fail to disclose” certain matters to the Board, “failed to disclose” other matters to the Remuneration Committee and “failed again to disclose” the Relevant Information. All of this “non-disclosed information” is then alleged to have been “material to” the decision of the Committee to agree to the proposed bonus arrangements (the information then being defined for the purposes of the pleading as the “Further Relevant Information”);

              (d) Paragraph 86, which pleads that, in requesting the Remuneration Committee to convene to consider the payment of the bonuses which had accrued under the terms of the bonus arrangements, Rich “failed to ensure” that a certain document was “made available” to the Remuneration Committee “with the effect that” certain information was “not apparent or likely to be apparent” to them, “failed to disclose” certain matters to the Board, “failed to draw the attention of” the Board to certain information and “continued to fail to disclose” the Relevant Information and the Further Relevant Information to the Board;

              (e) Paragraph 94, which more or less repeats the allegations in paragraph 86, but this time in the context of a further request to the Remuneration Committee in relation to payment of further bonuses which had accrued under the terms of the bonus arrangements;

              (f) Paragraph 110, which pleads that, at a meeting of the Board which ratified the conduct of the Remuneration Committee in authorising the payment of the bonuses, Rich “failed to disclose or to cause to be disclosed in the board papers” “the matters pleaded herein that had not previously [been] disclosed”;

              (g) Paragraph 112, which pleads that “by reason of the continuing failures to disclose to the Board by Rich … the Board was at a disadvantage in deciding whether or not it was in the best interests of One.Tel to pass the October 1999 Resolution” ;

              (h) Paragraphs 120 and 128, which more or less repeat the allegations in paragraph 110, but this time in the context of further resolutions of the Remuneration Committee authorising the payment of the bonuses which had accrued under the bonus arrangements and of the Board ratifying those actions of the Remuneration Committee; and

              (i) Paragraph 130, which asserts that “by reason of the continuing failures to disclose to the Board by Rich … the Board was at a disadvantage in deciding whether or not it was in the best interests of One.Tel to pass the March 2000 Resolution” .

· In each case, these “failures” to disclose information to the Board are alleged to give rise, in a manner which is not clearly pleaded, to breaches by Mr Rich of fiduciary and other duties alleged to be owing by him to One.Tel – see paragraphs 52(a), 80(a), 88(a), 96(a), 113(a), 122(a) and 131(a).

· It is submitted that, as a matter of logic and common sense, that the allegations made in this regard carry with them the implicit allegation that the members of the Remuneration Committee and the Board to whom the pleaded information is alleged not to have been “disclosed” were ignorant of those matters. How else is it, that it can be alleged that the failure to make the disclosures resulted in:


              (a) “the interests of One.Tel … not being protected in the negotiations”, as is pleaded in paragraph 34;

              (b) The Board being “at a disadvantage in deciding whether or not it was in the best interests of One.Tel to pass the October 1999 Resolution”, as is pleaded in paragraph 112; or

              (c) The Board being “at a disadvantage in deciding whether or not it was in the best interests of One.Tel to pass the March 2000 Resolution”, as is pleaded in paragraph 130

· It is submitted that, on this basis, the pleading of breach of duty causing loss by reason of a failure to disclose the information alleged cannot stand and should be struck out as failing to disclose a reasonable cause of action.”

28 The applicants make the point that these questions have been asked of the respondents in correspondence. Hence:


          “(a) In her letter of 24 February 2003 ( Exhibit JK1 ), the solicitor for the Applicants asked, in relation to the above paragraphs, whether it was alleged that the members of the Remuneration Committee and the Board were unaware of the matters referred to in each paragraph;
          (b) In their response of 19 March 2003 ( Exhibit JK2 ), the solicitors for One.Tel responded by stating that:
              “There is no allegation in the plaintiff’s contentions concerning the state of mind or knowledge of Greaves or Adler as to the particular matters referred to …”
              This answer was repeated in relation to each of the above paragraphs.
          (c) On 7 April 2003, the solicitor for the Applicants wrote ( Exhibit JK3 ) and queried whether One.Tel was truly alleging that a duty to “disclose” arose regardless of whether the Board were already aware of the matter in question and that it was definitely not being alleged that the Board were unaware of any of the matters alleged;
          (d) On 17 April 2003, One.Tel’s solicitors again confirmed ( Exhibit JK5 ) that they were making no allegation of any particular state of mind or knowledge on the part of the members of the Remuneration Committee and the Board.”

29 In my view, the allegation of a failure to disclose information carries with it implicitly and as a given, the unstated premise that the subject information was information in respect of which, the remuneration committee or the board were ignorant or unaware.

30 Further, as it seems to me, the decision of the High Court of Australia in Birtchnell v Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384, is authority for the proposition that at least in so far as breaches of fiduciary obligation are concerned, the onus of proof of informed consent is on a defendant. The matter was put as follows by Isaacs J in Birtchnell at 398:

          “..in a case like the present, equity has always held that the fiduciary relation itself imposes on the party bound to fidelity the obligation of justifying any private advantage he obtained in the course of his trust, or by reason of an interest conflicting or possibly conflicting with his duty.”

31 In short it seems to me that on the authorities, it is sufficient to plead the fiduciary relationship and the fact that the fiduciary gained a benefit in the course of the relationship.

32 I take into account in the decision in relation to the second contention the substance which it seems to me inheres in Mr Slattery's submission that a close examination of the precise terms of the request for particulars of the state of mind of, relevantly, Mr Greaves and Mr Adler was as follows:


          "Is it alleged that Greaves or Adler were unaware of the matter referred to in subparagraph (b)? If so, is it alleged that Rich was aware or ought to have been aware of their ignorance of that alleged fact? If it is alleged that Rich "ought to have been aware" of their ignorance of that alleged fact, please specify the facts, matters or circumstances which it is alleged exist from which Rich ought to have acquired either by observation or by inference that knowledge."

33 For those reasons, it seems to me that there is no substance in the second contention.

The third contention

34 It is in relation to the third contention that it seems to me that there is substance in the applicants' complaint. The complaint is that the pleading is defective in the way in which it fails to specify with clarity the breaches of duty which are alleged in a rolled-up fashion in paragraphs 52, 80, 88, 96, 104, 113, 122 and 131.

35 In what follows, the submissions of the applicants are generally adopted, at least in so far as portion of those submissions are set out below.

36 This defect can, I accept, be illustrated by reference to paragraphs 33 to 52 of the summons:

          “What is pleaded against Mr Rich in paragraphs 33 to 34 is essentially that:
          (a) In July/August 1998, Mr Rich negotiated with the board-appointed Remuneration Committee for a change to his and Mr Keeling’s remuneration arrangements to include certain bonuses;
          (b) In doing so, he did not inform the members of the Remuneration Committee the information:

              (i) That he had received advice as to the nature of the exceptions under the Corporations Law for remuneration for officers who were also related parties;

              (ii) That he and Keeling were prepared to continue to work as joint CEOs of One.Tel whether or not they were paid the bonuses in question;

              (iii) As to the value of the shareholding and options held by him and Keeling in One.Tel;
              (iv) As to the financial benefits which he would or might derive under their existing remuneration arrangements;
              (v) That Keeling had not requested Rich to seek to obtain the bonuses in question; and
              (vi) That Keeling was satisfied with the arrangements as they stood.
          (c) He was aware that the members of the Remuneration Committee had not been told by him about the above matters and that they had not taken any legal or other professional advice about the proposed bonus arrangement or given consideration to a number of other matters defined in paragraph 32 as “Process Defects” such that he was “aware that the interests of One.Tel were not being protected in the negotiations” for those bonus arrangements.”

37 Following the pleading in general terms of the fiduciary duty referred to above and of the duties to:

· exercise care and diligence in exercising powers and discharging powers as a director;

· not improperly use information acquired by virtue of one's position as an officer of a company to gain an advantage or cause detriment to the company; and

· not improperly use one's position as an officer of a company to gain an advantage or cause detriment to the company


      it is asserted that "in negotiating, arranging and executing" the amendments, Mr Rich acted in breach of each of the above duties and in breach of the alleged fiduciary duties.

38 I accept as of substance the applicants' submission that there is no attempt to specify with precision what conduct on the part of Mr Rich constituted breach of which duties - the allegations, as was submitted, are simply asserted in a rolled-up form.

39 The result is, I accept, that the reader is left to speculate on such fundamental questions as:

· whether each of the aspects of Mr Rich's conduct pleaded is relied upon as a breach of each of the pleaded duties or some only;

· what is alleged to constitute the ‘improper use” by Mr Rich of his position as an officer of One.Tel;

· how is it said that Mr Rich “used” his position as CEO to “conclude the negotiations” for the amendments;

· what is alleged to constitute the “improper use’ by Mr Rich of his alleged awareness that the interests of One.Tel were not being protected in the negotiations;

· what conduct on the part of Mr Rich is said to depart from the standard of due care and diligence pleaded or what it is alleged a diligent director would have done in the circumstances which he did not do;

· what aspects of Mr Rich's conduct in relation to the negotiation of the new bonus arrangements are said to include “the task’’ of “giving advice or information”?

40 The applicants have submitted, and I accept that they are entitled to know with specificity how it is said that their conduct in the matter was improper, negligent and in breach of fiduciary duty.

41 As the applicants point out, in Vrisakis v ASC (1993) 11 ACSR 162 at 207 to 208, Ipp J held that in a case involving complex commercial transactions:


          "The issues should as far as possible be closely defined and, moreover, particulars of the steps it is alleged the defendant should be have taken should be provided so as to confine the evidence within reasonable limits and to enable the defendant to resist the reception of irrelevant evidence."

42 In the result, and notwithstanding the request for particulars and the furnishing of such particulars as the respondent was disposed to furnish, it seems to me that those responses can be seen to be inadequate. The proper order is to direct the plaintiff to furnish the above described particulars.

The fourth contention

43 Here again, as it seems to me, there is substance in the applicants' contentions. However, in so far as the applicants have contended that the documents in respect of which particulars have been furnished do not purport to relate to the financial position of One.Tel at the date at which the defendants are asked to admit, not admit or deny, whether they fully and accurately describe the financial position of One.Tel at that date, this is really a question for the plaintiffs' case as Mr Slattery has correctly submitted. If the plaintiffs properly pleading and particularising their case end up by having selected inappropriate dates, naturally that case to that extent could not succeed. This is not a pleading matter. This is a question of substance for decision at a final hearing.

44 There is substance, as it seems so me in the submission that the pleading in a number of places seeks to plead the "financial position" of One.Tel, not by setting out the material facts relied upon in that regard but by simply referring to lengthy documents and pleading that it was as described in those documents. As the applicants have submitted, that defect does, it seems to me, appear in:

· Paragraph 21, which pleads that immediately prior to 5 August 1998 the share structure and financial position of One.Tel was “described in the financial statements for One.Tel and its controlled entities for the year ended 30 June 1998”.

· Paragraph 38, which pleads that at 5 August 1998 “One.Tel's overall financial position was as described in the information memorandum to the 12 April 1999 shareholders extraordinary general meeting”. That document, I accept, dated 11 March 1999, does not do otherwise in seeking to describe the financial position of One.Tel than appears in the content of the independent experts' report by BDO Nelson Parkhill Securities Pty Limited.

45 Certainly I accept that documents, pleaded only in a way which contain literally innumerable assertions of fact which potentially describe the financial position of One.Tel, represent an inappropriate approach to the proper pleading and furnishing of particulars, where the financial position of an entity is sought to be relied upon.

46 The submission by the respondents has been that the particulars, but most particularly the letter of 12 June 2003 from Kemp Strang to Ms Kelly, correct any shortcomings in the otherwise furnishing of appropriate particulars as to financial position. I am not of that view. As Mr Williams in referring to this document, which became exhibit R3 on the motion, pointed out, the type of particularity in terms of identification of the financial position of an entity sought to be relied upon by a plaintiff, certainly in proceedings of the gravity of these proceedings, may be exemplified by paragraphs (a) to (h) appearing at the top of page 8 of that letter.

47 In short, it does seem to me that there is substance in the fourth submission by the applicants. This is an area in respect of which the appropriate direction or order is to order further particulars to be furnished.

The fifth contention

48 Clearly enough, particulars to the effect that the particulars are not to be taken as "exhaustive" contain no more information than that the case which, taking a snapshot of the proceedings at the particular point in time when the particulars are furnished, is required to be met by the defendants, is that case, then so particularised. Clearly enough, if and when the plaintiffs should determine to seek to expand particulars, an appropriate application in that regard may have to be made by the plaintiff or, in the alternative, the defendants may make an application, which could, of course, involve the requirement for further discovery or other or different interlocutory processes.

49 There is nothing offensive, of course, in the statement in particulars that these are the only particulars which are capable of being furnished at this point in time. However, my own understanding has been that that reservation can never be any more than that. The case must move on. It moves on in terms of the current pleading and particulars, and if and when a change to those pleadings or particulars is sought to be mobilised, both parties are protected for obvious reasons.

50 Outside of this particular matter, which is essentially, as I understand it, only a very minor part of the subject of the fifth contention, that contention seems to me to be of no substance at all. To my mind, the pleading is entirely acceptable, as it seems to me, in terms of its present content in so far as the allegations concerning the bonus arrangements being more favourable than arms-length arrangements would have been and having exceeded what was reasonable and the like. The particulars furnished make plain that the reasonable or arms-length arrangements to be relied upon would have incorporated the so-called absent terms set out in paragraph 24 of the summons. Use of the words "at least" does not, it seems to me, for the reasons already given, further the matter at all.


      I certify that paragraphs 1 - 50
      are a true copy of the reasons
      for judgment herein of
      the Hon. Justice Einstein
      given on 13 June 2003 ex tempore
      and revised on 17 June 2003

      ___________________
      Susan Piggott
      Associate

17 June 2003


Last Modified: 07/07/2003

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Cases Cited

15

Statutory Material Cited

2

Breen v Williams [1996] HCA 57
Breen v Williams [1996] HCA 57
Associated Dairies Ltd (ACN 004 124 118) v Central Western Dairy Ltd (ACN 002 336 192) [1993] FCA 601