Palantrou v Knight

[2009] NSWSC 677

CITATION:	Palantrou v Knight [2009] NSWSC 677
HEARING DATE(S):	19 June 2009
JURISDICTION:	Equity Division
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	19 June 2009
DECISION:	See paragraph [26] of the judgment.
CATCHWORDS:	COMPANIES - Corporations Act - whether breach of duties owed under ss 181, 182 and 183 - whether to grant interlocutory injunction under s 1324. - COMPANIES - directors - whether breach of fiduciary duties.
LEGISLATION CITED:	Corporations Act 2001
CATEGORY:	Procedural and other rulings
PARTIES:	Palantrou Pty Limited (First Plaintiff) Dr John Tyler (Second Plaintiff) Dr Kim Matthews (Third Plaintiff) Dr David Charles Knight (First Defendant) Dr Georgiana Tang (Second Defendant) BHealthy Pty Limited (Third Defendant) Demeter Laboratories Pty Limited (Fourth Defendant)
FILE NUMBER(S):	SC 2836/09
COUNSEL:	M Cashion SC / M R Cairns (Plaintiffs) M J Leeming SC / E G H Cox (Defendants)
SOLICITORS:	Heckenberg & Koops Lawyers (Plaintiffs) Norton White Lawyers (First, Second and Third Defendants) Addisons (Fourth Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

McDOUGALL J

19 June 2009 (ex tempore - revised 3 July 2009)

2836/09 PALANTROU PTY LIMITED v DR DAVID CHARLES KNIGHT & ORS

JUDGMENT

1 HIS HONOUR: The first plaintiff (Palantrou) carries on business under the name Next Generation Fertility. In essence, its business operations comprise two elements. The first is the provision of assisted reproductive therapy, or ART, laboratory services. The second is the provision of administrative assistance to medical practitioners.

2 The shareholders in Palantrou (at least according to its register) are the second and third plaintiffs, Dr Tyler and Dr Matthews, and the first and second defendants, Dr Knight and Dr Tang. Doctors Matthews, Knight and Tang are medical practitioners. Dr Tyler is not.

3 The way in which the business model operated includes, as an element, that each of the medical practitioners involved carried on his or her own practice individually. There was no partnership or joint venture in respect of the medical practice. It follows that each patient was the patient of the particular medical practitioner. That having been said, where a patient needed ART laboratory services, the practitioner would refer them to Palantrou.

4 The relationship between the shareholders is, and since 26 June 2008 has been, governed by a shareholders' agreement. By clause 6.2 of that agreement, Doctors Knight and Tyler were required to use their best endeavours to promote and develop Palantrou's business "in providing services related to assisted reproductive technology services". By clause 9 of that agreement, all parties agreed that they would not either during the currency of the deed or otherwise divulge information concerning the business transactions secrets or affairs of Palantrou, and that they would use their best endeavours to prevent the disclosure of such information by third parties. There was of course an exception relating to the proper performance of their duties as employees or directors.

5 For reasons that it is unnecessary to recount, Doctors Knight and Tang have sought to sever their connections with Palantrou. They have resigned as directors. Their associated service agreements either have come to an end or will shortly come to an end. Further, they have set up, or are interested in, the third and fourth defendants. It is suggested that the third and fourth defendants carry on businesses that are in some way competitors of the business of Palantrou, because those businesses also involve the provision of ART laboratory services.

6 In those circumstances, the plaintiffs move for interlocutory injunctive relief. The relief that is now sought is quite carefully defined. For convenience, I will set out the relevant prayers of the amended notice of motion filed in court today:

1. Order that until further order, the First and Second Defendants, their servants and agents and any entity of which either of them is a Director (including but not limited to the Third Defendant) be restrained from directly or indirectly:

(a) Establishing, promoting, carrying on or participating in any business which is or includes an Assisted Reproductive Therapy laboratory service; or
(b) Assisting, aiding, abetting, counselling or procuring any person or persons to do any of the things referred to in (a) above.


2. An order that the First Defendant deliver up to the First Plaintiff the First Plaintiff’s Patient Management System Software (“PMSS”) and laptop computer.

3. An order that the First Defendant be restrained from using, duplicating, transferring or otherwise dealing with, or making available to any third party, the First Plaintiff’s PMSS.

4. An order that the First and Second Defendants, their servants and agents and any entity of which either of them is a Director (including but not limited to the Third Defendant), be restrained from soliciting or approaching any persons whose names became known to them from records of or information obtained from records of the First Plaintiff, for the purpose of providing or offering to provide such persons with Assisted Reproductive Therapy laboratory services.

5. An order that the First and Second Defendants, their servants and agents and any entity of which either of them is a Director (including but not limited to the Third Defendant), be restrained from soliciting or approaching any employee of the First Plaintiff for the purpose of employing or offering to employ that person to provide Assisted Reproductive Therapy laboratory services or any related service.

7 Mr Cashion of Senior Counsel who appeared with Ms Cairns of counsel for the plaintiff put the case for interlocutory relief on three bases. They were:

1. A breach of clauses 6.2 or 9 of the shareholders’ agreement.

2. Under section 1324 of the Corporations Act 2001, for breaches of the duties imposed by sections 181, 182 and 183.

3. For breach of fiduciary duty arising from the fact that the defendants Doctors Knight and Tang were directors of Palantrou.

8 Dr Leeming of Senior Counsel who appeared with Mr Cox of counsel for the first to third defendants, resisted the grant of interlocutory relief. He submitted in substance that each of the bases identified was either legally misconceived or weak; and that, in addition, there were strong discretionary reasons tending against the grant of relief. In that context, each of Doctors Knight and Tang offered to the Court an undertaking, in effect, to keep proper records, presumably against the event that there might at some stage be an order for an account of profits.

9 I start with the case based on the shareholders' agreement. The difficulty with that case is that under the constitution of Palantrou, by clause 9.9, any shareholder who is a contracted medical practitioner of Palantrou (which is the case with Dr Knight and Dr Tang), is deemed to have given an irrevocable and immediate transfer notice in respect of all his or her shares once that relationship, as contracted medical practitioner, comes to an end. The effect of clauses 9.5 and 9.6 of the constitution is that upon a transfer notice being given, the shares are to be offered to the other shareholders and to the extent that other shareholders do not take them Palantrou is to buy back the shares.

10 Clause 9.9 does not operate other than in the most direct and mandatory terms. It seems to me that the effect of clause 9.9, in the events that have happened, is that whilst Dr Knight and Dr Tang might in law be shareholders (because they are still registered as such), in equity they are to be treated as having transferred or sold back their shares in accordance with the processes set out in the earlier provisions of clause 9 of the constitution. Certainly, having regard to the terms of the constitution, it is unlikely in the extreme that any great weight should be given to the ongoing operation of clause 6.2 of the shareholders' agreement. Clearly enough, that is directed to a situation where Dr Knight (he being the only defendant bound by it) continues to be involved in the business.

11 The claim under clause 9 stands or falls with the claim for confidentiality under section 183 of the Corporations Act, to which I will turn in a moment.

12 The case for injunctive relief under section 1324(4) of the Corporations Act, depends on it being shown that Doctors Knight and Tang have engaged, are engaging or propose to engage in conduct that constitutes (and I omit most of the statutory verbiage) a contravention of the Act. Thus, one is thrown back to the sections in question.

13 By section 181 of the Act, directors of a corporation are required to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose.

14 The difficulty with section 181 is that it has not been shown what powers or duties have not been exercised or discharged other than in accordance with the statutory requirements of good faith and proper purpose. Mr Cashion submitted that I could infer from the evidence that Doctors Knight and Tang (or Dr Knight at least), whilst still directors (or a director) set up the business of the third and fourth defendants, with a view to resigning from their relationship with Palantrou and sending business to the third or fourth defendants. I am prepared to proceed on the basis that there is an arguable case that this is so. But it does not follow that, in doing that, Doctors Knight and Tang were (or Dr Knight was) exercising their or his powers or discharging their or his duties. There is no suggestion that either Dr Knight or Dr Tang was obliged to devote the whole of his or her attention and time to the business of Palantrou. Nor could any such suggestion be made, in circumstances where they carried on individual medical practices. If, having regard to the governing assumption, they were using some of their time to set up the business of the third or fourth defendants whilst they were still directors of Palantrou, it simply means that in so doing, they were not exercising powers or discharging duties with respect to Palantrou. It does not demonstrate that they exercised their powers or discharged their duties as directors other than in accordance with the requirements of section 181.

15 Essentially similar considerations apply to the case under section 182. That section provides that a director, et cetera, of a corporation must not improperly use his or her position to gain an advantage for him or herself or someone else or cause detriment to the corporation. Again, assuming that there is an arguable case that the business of the third and fourth defendants was set up as I have indicated whilst Doctors Knight and Tang were directors of Palantrou, it does not follow that they were using their position as directors of Palantrou to do so. They were, at most, operating along parallel paths.

16 Section 183 prevents persons who have obtained information because they are or have been directors of corporations from using that information improperly to gain an advantage for themselves or others or to cause detriment to the corporation. For an injunction under section 1324 based on breach of section 183 to have any prospects of success, two things would need to be shown. The first, involving considerable precision, is what the information is that was used improperly. The second is that that information, being information of the corporation or gained in the course of the performance of duties as director, was confidential to the corporation. Of course, section 183 does not talk in terms of confidentiality and clause 9 of the shareholders agreement does. But in each case, the requirement is that the information be identified with precision; and in the case of an injunction in aid of clause 9, there is the super-added requirement that I have noticed.

17 In this case, Mr Cashion was unable to identify any information except at the level of the utmost general reality; information as to the business of Palantrou, the way it was carried on, and the like. He was not able to identify any aspect of the business, or the way in which that business was performed, that was unique or confidential, or otherwise requiring protection.

18 This is not a case, of a kind often seen, where a business has some secret or confidential aspect. Nor is it a case, again of a kind often seen, where the customer base of the business is its real asset and where knowledge of that is exploitable. In this case, the customers of the business of Palantrou are the patients of the medical practitioners who refer them. To the extent that Doctors Knight and Tang know the identity of their patients (and one would hope that they did) they know it precisely because they are their patients. They do not know it because those patients are customers of Palantrou.

19 In my view, the case for an injunction based on section 183 is weak in the extreme, and the case based on clause 9 is weaker.

20 I turn to the case based on breach of fiduciary duty. There are a number of peculiarities in the way that this case was put. One is that, as Mr Cashion properly acknowledged, Doctors Knight and Tang are free to refer their patients to any other ART laboratory provided that they do not control it. In other words, Doctors Knight and Tang could refer their patients to an existing ART laboratory that was a competitor of Palantrou, and Palantrou would have no complaint. However, Mr Cashion submitted, Palantrou had a legitimate complaint if the patients were referred to the third or fourth defendants, because the setting up of those defendants involved a breach of the fiduciary duties then owed to Palantrou.

21 It will be observed that the loss or damage to Palantrou is the same in either case: the loss of the custom of the patients. But in the first case - referral to a competitor other than the third or fourth defendants - Palantrou has no recourse, and no claim against doctors Knight or Tang. In the other case - referral to the third or fourth defendants - Palantrou does, on its case, have a remedy. It would be entitled to an account of profits from Doctors Knight and Tang or from the third or fourth defendants. It is, as I have indicated, somewhat remarkable that Palantrou is seeking to restrain conduct that may offer it some hope of obtaining recompense for its alleged damage.

22 For that reason alone, and descending for a moment from the question of a serious question to be tried to the question of balance of convenience, I am not persuaded that interlocutory relief should be granted on the basis of an alleged breach of fiduciary duty. There are other reasons why this is so. One is that even if the setting up of the third and fourth defendants does amount to breach of fiduciary duty, the ongoing referral of patients to them does not in my view have the same consequence in law. Thus, in terms of ongoing referrals, I am not satisfied that there is a serious question to be tried on breach of fiduciary duty.

23 For those reasons, the interlocutory relief sought by prayers 1, 4 and 5 of the amended notice of motion should not be granted. I turn to prayers 2 and 3.

24 One immediate problem with prayer 2, at least so far as it refers to a laptop computer, is that there is convincing evidence that the computer in question has been stolen. Dr Knight has sworn that this is so, and that has not been challenged (the force of that latter observation is somewhat muted by the fact that this is an interlocutory application). Further, an employee of the practice actually went to the premises on the occasion of the theft, and saw someone, presumably the thief, leaving. She has given a statement of her observations to the police and that statement is in evidence before me. It provides what might be called convincing evidence in support of Dr Knight's assertion.

25 Dr Knight has said also that he has no copy of the patient management system software. Again, and with the same comment as to the force of the observation, he has not been challenged on that. Further, he says, the software in question is a form of database that has been adapted by him for his own uses, to include clinical observations; and he says that the database used by Palantrou, under the Name Patient Management Software system, is different. Whether or not that is so, it does not seem to me that there is any real case for the grant of injunctive relief in terms of prayers 2 and 3. If, contrary to his oath, Dr Knight does have the software and is using it, that is a matter that will turn up (assuming it is discovered) on any account of profits. If he does not have it, it will not. In other words, in my view, this is a case where the alternative remedies available tell strongly against the grant of interlocutory relief, even if (contrary to my view), there were a strong factual case for the grant of that relief.

26 The result is that the amended notice of motion must be dismissed with costs, and I so order.

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