Repose Nominees Pty Ltd v Phillip Capital Ltd
[2021] VCC 1736
•9 November 2021
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-18-01025
| REPOSE NOMINEES PTY LTD (ACN 071 300 895) | Plaintiff |
| v | |
| PHILLIP CAPITAL LIMITED (ACN 002 918 247) | Defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 5,6,7,10,14 August 2020, 7 September 2020 and 9 October 2020. | |
DATE OF JUDGMENT: | 9 November 2021 | |
CASE MAY BE CITED AS: | Repose Nominees Pty Ltd v Phillip Capital Ltd | |
MEDIUM NEUTRAL CITATION: | [2021] VCC 1736 | |
REASONS FOR JUDGMENT
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Subject: CONTRACT- EQUITY -
Catchwords: Fiduciary duties – consideration – damages – breach of contract
Legislation Cited: Companies Act 2006 (UK); Supreme Court Act 1986 (Vic)
Cases Cited:Breen v Williams (1996) 186 CLR 71; Chan v Zacharia (1984) 154 CLR 178; Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371; Farrington v Rowe McBride & Partners [1985] 1 NZLR 83; Focus Metals Pty Ltd v Babicci [2014] VSC 380; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; M.A & J Tripodi Pty Ltd v Swan Hill Chemicals Pty Ltd [2018] VCC 526; Norberg v Wynrib [1992] 2 SCR 226; Pilmer v Duke Group Limited (in liquidation) (2001) 207 CLR 165; P & V Industries Pty Ltd v Porto [2006] 14 VR 1; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Warman International Ltd v Dwyer (1995) 182 CLR 544
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J. Ribbands | Koya & Co |
| For the Defendant | Mr A. Kirby | Wotton & Kearney |
HIS HONOUR:
Introduction
1 This dispute concerns two matters. First, the plaintiff (“Repose”) claims damages against the defendant (“PCL”) for dealing wrongfully with shares which Repose held in 2Up Gaming Plc (“2Up”). Repose’s claim against PCL is based upon allegations of breach of contract and breach of duty, in particular, fiduciary duty.
2 Secondly, Repose claims the reimbursement of monies which it paid to PCL for share brokerage fees. The reimbursement claim is founded upon a breach of contract whereby PCL overcharged Repose for work done on share trades and Repose paid the full amount claimed.
3 PCL has denied any liability to Repose.
Background
4 Repose is a family company controlled by Antonio Murdaca (“Murdaca”) and his wife Nancy (“Mrs Murdaca”). Murdaca is an experienced businessman with commercial interests including the Bodycorp repair business. Repose is the trustee of the Murdaca family trust. Mrs Murdaca is the sole director of Repose. Repose was a company with capital of $2, no income or assets, or bank account.[1]
[1]T-125/20-126/11.
5 PCL is a licensed stockbroker. Until March 2012, it was called Austock Securities Limited (“Austock”). Intersuisse Ltd bought the company and its name changed to Octa Phillip Securities Limited before changing again to Philip Capital Limited in about January 2013.
6 2Up is an online gaming company incorporated in the United Kingdom in January 2011. 2Up was based in Melbourne with its head office located at King Street in the city. The business was founded by Marino Sussich (“Sussich”).[2] Murdaca met Sussich around late 2010 through one of his business associates, Tony D’Anna.[3] Sussich and D’Anna invited Murdaca to become involved in the company. They planned to build up the company and list it. They wanted to use Murdaca’s contacts in developing the business. Murdaca assisted Sussich in finding premises for the business together with furniture, computers and staff. Murdaca’s own daughter worked for 2Up for some time. Murdaca said that, apart from organising the lease for Sussich, plus phone systems and lawyers,[4] he also arranged for introductions so Sussich could use Murdaca’s connections in the business world.[5] Being a start-up company, 2Up had some funding issues.[6]
[2]T-158.
[3]T-97.
[4]T-100.
[5]T-128.
[6]T-135/12.
7 2Up adopted as its articles the Model Articles (“the Articles”) for public companies under the Companies Act 2006 (UK). In April 2011, 2Up issued to Repose 3.050 million ordinary shares valued at £0.10 each. The shareholding was evidenced by a share certificate certifying that Repose Nominees Pty Ltd of 39 Etzel Street, Airport West, Melbourne, Victoria, held shares in 2Up.
8 Repose applied in September 2011 to open an equities account with Austock.[7] There were detailed terms and conditions regarding the basis upon which Austock agreed to conduct equities trading on the stock market of the ASX Limited, that is, the Australian Stock Exchange.[8] Austock provided to Repose other documents including a CHESS sponsorship terms and conditions document, a disclosure statement by Penson Financial Services Australia Pty Ltd, a financial services guide for Penson Financial Services Australia Pty Ltd and an ASX brochure concerning CHESS. This engagement and the related documents were specifically directed to share trading on the Australian Stock Exchange. They were not relevant to the acquisition or holding of shares in 2Up because 2Up was never listed on the Australian Stock Exchange.
[7]CB 629.
[8]CB 635-45.
9 By a letter of authorisation dated September 2011, Repose authorised Austock to deposit/transfer all assets currently in its name into the broker nominee (omnibus) account registered in the name of Austock.[9]
[9]CB 646.
10 By letter dated 25 September 2011, signed by two directors, Marino Sussich and Peter Bentley (“Bentley”), 2Up authorised Austock to conduct off-market transfers between registered holders of its stock and third party investors. As part of this retainer, Austock was engaged to maintain the journals which recorded the off-market transfers of 2Up shares in Australia. PCL did this by journaling the transaction in the accounts of the buyer and the seller. It could produce a statement which itemised all the transactions occurring on the account of any client. When the retainer commenced, 2Up was listed on the Deutsche Borse Stock Exchange in Frankfurt. The stock was subject to an escrow restriction. The letter advised that, subject to the discretion of the directors, they expected to remove this restriction by November 2011.[10] While the escrow restriction remained in place, the shares could only be traded in off-market transfers and not on a public stock exchange.
[10]CB 649.
11 In February 2012, 2Up advised Nicholas Pereza-Mathews (“Pereza-Mathews”) of Austock that it had sold five million shares from its treasury stock to Repose. Treasury stock comprises that portion of a company’s shares which the company holds in itself. Subject to the laws of the applicable jurisdiction, a company can issue treasury stock to investors.
12 2Up engaged Computershare Investor Services PLC (“Computershare”), a share register company, to maintain its share register including certificated and electronic holdings. 2Up also engaged Austock to convert shareholders’ certificated holdings, including trading treasury stock, to electronic holdings. PCL discharged this responsibility by engaging a sharebroker in the United Kingdom, Killick & Co, to act as a form of custodian. In the United Kingdom these electronic holdings were not held directly but in the custodian’s nominee account. Another name for this account is an omnibus account. A major benefit of this custodian arrangement is that share transactions can be processed more quickly than using paper share certificates. This is particularly the case with a company incorporated overseas like 2Up.
13 In late February 2012, Murdaca confirmed to Pereza-Mathews that Repose was to receive five million shares in 2Up from treasury stock.[11]
[11]CB 653.
14 In May 2012, Murdaca and Mrs Murdaca reaffirmed the authority of Austock (now called Octa Phillip) to deposit/transfer all assets currently in the name of Repose into its broker nominee (omnibus) account.[12]
[12]CB 660.
15 By letter dated 30 May 2012, Peter Lombardo (“Lombardo”) of 2Up, wrote to Murdaca to inform him that Repose had not paid for the shares issued to it in March 2012. Lombardo required that Repose pay the outstanding amount owing of £500,000 within 21 days. Lombardo advised that, if payment were not made as requested, the shares could be forfeited.[13]
[13]CB 663.
16 Lombardo sent another letter to Murdaca dated 13 June 2012. He repeated the substance of his earlier letter to the effect that Repose had not paid the £500,000 due in respect of the shares in 2Up issued to it a couple of months earlier. He advised that, under 2Up’s Articles, the board was required to forfeit the shares at the end of the 14 day notice period. In this case, that date was said to be 29 June 2012. Lombardo stated that this was a final notice and that the board would forfeit the shares without further notice if Repose failed to make payment on or before 15 June 2012.
17 Also on 13 June 2012, Lombardo, by letter to Murdaca, advised him that 2Up had given instructions to cancel the Repose shares in 2Up for which Repose had not paid.[14] Lombardo’s correspondence to Murdaca was confusing due to its inconsistencies.
[14]CB 665.
18 Around the middle of 2012, Murdaca was overseas for some time seeking medical treatment for two of his children. He was not attending to everyday correspondence but was in communication from time to time with a business associate, Manny Stamatopoulos (“Stamatopoulos”).[15] Murdaca denied that he received the letters from 2Up dated 30 May 2012 and 13 June 2012 respectively.[16]
[15]T-112.
[16]CB 663/664.
19 By letter dated 8 November 2012, Sussich told Pereza-Mathews that the five million 2Up shares allotted to Repose by an off-market transfer were to be returned to 2Up for cancellation. He asked that Pereza-Mathews make the necessary changes to the PCL database to reflect this instruction.[17]
[17]CB 666.
20 On 12 November 2012, Mark O’Brien (“O’Brien”), a portfolio manager at PCL, advised Pereza-Mathews and Sussich that, consistent with the instructions from Sussich, the cancellation of 2Up stock returned from Repose had been completed.[18]
[18]CB 791. I note that during the case there was at times some confusion about the reference to the 2Up shares being cancelled. Repose’s counsel pointed out that, strictly, the cancellation of shares had some specific legal consequences (for example, it affected the company’s issued capital) and was different from reversing a share transaction and returning shares to their original owner (for example, reversing in November 2012 the allotment of shares to Repose made in March 2012 and returning the shares to 2Up’s treasury stock). At different times documents and witnesses used the term “cancellation” loosely when referring to the reversal of the share transaction. This email was an example of the inexact usage.
21 At a board meeting on 30 November 2012, the directors of 2Up resolved to suspend the trading of shares in 2Up on the Deutsche Borse First Quotation Board until the company was approved for listing on the GXG Market. This was another stock exchange in England suitable for companies such as 2Up. This suspension was to remain effective until 2Up was admitted to the GXG Market. As a result, any off-market transfer could occur only if approved by the board of 2Up.[19]
[19]CB 669.
22 On 6 December 2012, Murdaca advised PCL of five transfers of 2Up shares which he wanted PCL to arrange. On behalf of Repose, Murdaca agreed to pay the transfer fees for both parties in each case. On the following day, Huw Davies (“Davies”), a portfolio manager at PCL, informed Murdaca that PCL was now required to obtain approval from 2Up regarding all transfers of 2Up stock. He said that this could take a number of days.
23 By email on 20 December 2012, Sussich advised Lombardo, Davies, Pereza-Mathews, and O’Brien that 2Up was not allowing any off-market transfers until further notice. As a result, Davies then informed Murdaca that he would need to advise the purchasers of the stock that 2Up was not allowing the transfer of any restricted stock. Davies completed his email to Murdaca with the statement that:
“We are not involved with this aspect of the process and cannot act without further written consent from 2Up Gaming PLC’s directors”[20]
[20]CB 677.
24 Later, on 19 January 2013, the 2Up board gave permission to release the stock and allowed the five transfers which Repose sought to make.[21]
[21]CB 755.
25 The escrow restriction imposed by the company upon the shares in 2Up continued at least until 17 April 2013.
26 On 19 July 2013, 2Up lodged with the Companies House in the United Kingdom a notice of cancellation in relation to 95,698,669 shares in the company. The cancellation was said to take effect from 5 July 2013.[22]
[22]This was a cancellation in the strict sense.
27 Apart from this general summary of the background to the case, there are two important documents to note, a financial report for 2Up for the period from 21 January 2011 to 31 January 2012 and a director’s report for 2Up dated 29 January 2014.
28 The financial report for 2Up dated January 2012 contained the following information:
“Shares issued by the company
I) Issue of shares in exchange for listing services
During the period the company issued 52,985,369 Ordinary £0.10 shares to a number of companies in exchange for services provided to 2Up Gaming Plc in assisting it with its listing on the Frankfurt Stock Exchange.
The Directors have subsequently taken legal advice on the share issue and have been advised that they did not have the authority to allot such shares under their Articles of Association. Further, an allotment of shares in consideration of future services to be performed, or if in consideration of services already performed not independently valued, is in breach of UK Company law and the holder of the shares is liable to pay the company the nominal value and premium due for those shares.
As the shares were issued in consideration of services performed, the holders of the shares do not intend to pay the amount due under Company law, and the company is therefore intending to issue a call notice to the holders to recover the shares, following which the shares will be cancelled.
On the grounds that the shares are expected to be cancelled in the future and the unpaid share capital debtor as at 31 January 2012 is considered to be irrecoverable, the shares and the debtor have not been included in the share capital as at 31 January 2012 as it is felt this would not show a true and fair view.
II) Issue of shares to be held as Treasury shares
During the period the company issued 48,974,966 Ordinary £0.10 shares to be held as treasury shares by the company. Of these shares 38,274,966 had not been sold to third parties as at 31 January 2012.
The intention of the share issue was to have a number of shares ready for either:
· immediate share swap with potential acquisition targets to confirm contractual arrangements, and/or
· immediate provision to major investors as equity sales.
In the event neither of these scenarios occurred.
The company has subsequently received legal advice that the issue of shares by the company to itself was not in accordance with UK Company Law and therefore that these shares are void. No account has therefore been taken on these shares in the share capital as at 31 January 2012.
The Board has resolved to accept the legal advice including that the most appropriate course of action is to send a directive to the Registrar to have the register of members corrected by the removal of these shares.”[23]
I note that, although the report basically covers the 2011 calendar year, Sussich did not sign the report until 21 March 2013.
[23]CB 695.
29 In the directors’ report for 2Up and its subsidiary companies dated 29 January 2014, the directors said:
“In the 2012 report we advised shareholders that we had received legal advice that certain shares had been issued incorrectly. These shares comprised:
· Issue of 52,986,369 ordinary 10p shares in exchange for listing services provided to 2Up Gaming Plc in assisting it with its listing on the Frankfurt Stock exchange; and
· The issuing of 48,974,966 ordinary 10p shares to be held by the company as treasury shares for anticipated acquisitions or share sales.
Shares Issued by the Company (continued)
The Board resolved to accept the legal advice and commence the appropriate processes to cancel or remove these shares from the company’s share register. Those processes have now been completed and all the above shares, other than a small number of the “treasury” shares that had been legitimately sold to third parties, have now been cancelled and removed from the share register. The final cancellation was for 95,698,669 shares, leaving a total of 272,287,783 shares in the company.
As reported in the last period, none of these shares were included in the reported share totals as it was felt this would not show a true and fair view of the company. Similarly, none of the cancelled shares are included in this report.”[24]
[24]CB 759.
30 The upshot of these reports was that:
· between January 2011 and January 2012, the directors of 2Up had legal advice that the issue of 52.9 million shares in the company in exchange for services rendered was not authorised by the company’s Articles and, in the circumstances, was in breach of United Kingdom company law.
· Because the allotees of the shares were not intending to pay for the shares allotted to them (having already provided services to 2Up) the company was intending to recover the shares and cancel them.
· 2Up issued 48.9 million treasury shares to be held by the company. The company received legal advice to the effect that the issue of shares by the company to itself was not in accordance with United Kingdom company law and that the shares were void. The board of 2Up accepted that advice and took action to remove the shares from the company’s register.[25]
· By 2014, all the unlawfully issued shares, both the 52.9 million ordinary 10p shares and the 48.9 million ordinary 10p treasury shares, had been cancelled and removed from the company’s register.
[25]Save for some which were sold to third parties.
31 Apart from their intrinsic value, the reports are important in other respects.
32 First, they form part of the documentation which 2Up filed and lodged with the Companies House presumably in accordance with its statutory obligations. Because the company documents were filed with the corporate record keeper and were accessible to the public, I would infer that the company and its relevant officers sought to ensure that the contents of the documents were accurate.
33 Secondly, Repose did not contest or dispute:
· that 2Up received the legal advice referred to;
· the legal advice was to the effect that the 52.9 million shares and the 48.9 million shares held as treasury stock were issued incorrectly by 2Up and would be removed from the company’s register;
· that the board resolved to accept the legal advice and acted to cancel those shares or to remove them from the company’s share register;
· 2Up filed at the Companies House in July 2013 a notice of cancellation of 95,698,669 shares in the company. Apart from some treasury shares which had been validly sold to third parties, the rest of the shares were cancelled and removed from the share register.
34 However, Repose contended that there was no evidence that the specific five million shares which 2Up allotted to it were ever cancelled. The evidence suggested that there were about 6.26 million 2Up shares which were not cancelled.
35 I do not consider that this point has any substance. Repose obtained its 2Up shares in two ways. First, Sussich allocated a parcel of 3,000,050 shares to Repose in recognition of Murdaca’s assistance, both financial and otherwise, in helping to establish 2Up. The second was an off-market allotment of five million shares from 2Up’s treasury stock. Given the legal advice about the treasury stock, I would normally have inferred that all the treasury shares were void and hence, would have been within the share capital which was ultimately cancelled and notified to Companies House. However, the directors’ report indicated that a number of the treasury shares had been legitimately sold to third parties. Because I am not satisfied that Repose paid for all the treasury shares it received,[26] I do not accept that Repose’s parcel of shares was excluded from the treasury shares which were ultimately cancelled.
[26]See paragraphs 89-101 below.
Procedural matters
36 The proceeding commenced with the issue of the writ on 14 March 2018. The trial concluded initially on 14 August 2020. On the final day, I suggested to Repose that it should amend its Statement of Claim so that it conformed more closely with how it had conducted the trial. It had raised issues not expressly raised in the pleading and not pursued other matters which were in the pleading. Accordingly, I gave some directions about the filing of a proposed Amended Statement of Claim and permitted both parties to file submissions. After a contested hearing on 7 September 2020, I handed down written reasons permitting Repose to file an Amended Statement of Claim. This pleading involved deleting some matters that were abandoned at trial or no longer relevant and included a reference to other matters which Repose did rely upon. It is fair to say that between the issue of the writ and final address at trial, Repose’s case evolved.
37 Once Repose amended its claim, PCL sought an opportunity to address matters which it said were raised by the new pleading. PCL argued that, had Repose conducted the trial from the outset with the final version of the Statement of Claim, it would have conducted its defence differently. In the interest of fairness, I allowed PCL to file some further evidence from its expert Mr Francis.
38 I offered Repose the chance to cross-examine Mr Francis on his supplementary report, but that report went into evidence unchallenged.
39 The parties were permitted to file supplementary submissions and then returned to court on 9 October 2020 for additional oral argument.
40 There was substantial agreement between the parties about many of the relevant facts. To a greater degree, the dispute concerned the legal consequences which flowed from those facts.
Summary of parties’ positions
41 Repose said that it engaged PCL to act on its behalf as a sharebroker for the purchase and sale of various stocks. Repose appointed PCL to act as its sharebroker and to deal with current shareholdings and later transactions.[27]
[27]Plaintiff’s outline of argument dated 31 July 2020 at [1]-[2],
42 In March 2012, Repose executed a buy order to purchase five million shares in 2Up through an off-market transfer. The consideration for the shares was said to be $500,000.[28]
[28]The transaction was noted twice in the company’s records because the commission rate reported in the first transaction was wrong. The initial transaction was cancelled and another one recorded with the correct amount of commission.
43 Repose’s position was that, after the 2Up shares were allocated to it in March 2012, Repose became the owner of the shares. Repose signed the authority which authorised and enabled PCL to deposit or transfer Repose’s 2Up shares into the omnibus account held by Killick & Co. Repose contended that PCL owed it fiduciary duties. PCL was entrusted with Repose’s shares which they controlled in the United Kingdom on its behalf. In following the instruction of 2Up to remove the shares from the Repose account, Repose said that PCL breached its duty to Repose and acted unlawfully because Repose did not know about, consent to, or approve the removal of the shares. Repose intimated that, had it been informed of the threatened transfer of the five million shares from its account to that of 2Up, it could have addressed the matter with 2Up and challenged the transfer.[29] Nowhere in the evidence did Repose explain why it failed to challenge 2Up either immediately when it did find out about the transfer or at all. This failure by Repose was odd. Plainly, Repose was aware that addressing the issue with 2Up was an option. This made good sense when the agreement about the shares was between Repose and 2Up. PCL was not a party to that agreement and had no responsibility for the financial settlement of the off-market transfer.
[29]Plaintiff’s closing submissions dated 13 August 2020 at [13].
44 PCL denied any liability to Repose. While 2Up retained PCL to record the off-market transfers in its stock, PCL said that any interest in 2Up shares which a transferee like Repose obtained through an off-market transfer was governed by the agreement between 2Up and the transferee, 2Up’s Articles and the relevant legislation in the United Kingdom – and not by the conduct of PCL.
Issues
45 The issues to be decided in this case were as follows:
(a) What was the retainer between Repose and PCL?
(b) Did the retainer give rise to the contractual and fiduciary duties alleged by Repose?
(c) Did PCL breach any of these duties?
(d) If so, did PCL cause any and what loss to Repose?
(e) Did PCL owe Repose any monies for fees to be reimbursed?
What was the retainer between Repose and PCL?
46 The retainer which Repose alleged was set out in the final version of its claim.
47 In the Further Amended Statement of Claim, Repose alleged that:
· it retained PCL as its sharebroker and/or custodian of its shares in relation to share trading it undertook in 2Up;[30]
[30]Plaintiff’s Further Amended Statement of Claim, [3].
· pursuant to that retainer, PCL would[31] -
[31]Plaintiff’s Further Amended Statement of Claim, [6].
§ comply with lawful instructions of Repose;
§ act only in accordance with lawful instructions from Repose;
§ not act without specific instructions from Repose;
§ would act in good faith towards Repose;
§ would act in the best interests of Repose;
§ would act with the reasonable skill and care of a stockbroker when acting for a client;
§ would supervise its employees to ensure that they complied with their professional obligations and would not act without lawful instructions from Repose;
· PCL held the Repose shares in 2Up as custodian for the benefit of Repose;[32]
[32]Plaintiff’s Further Amended Statement of Claim, [6].
· PCL was in a position of trust and responsibility vis a vis Repose because it was a professional stockbroker which charged for its services and controlled Repose’s shareholding in 2Up;[33]
[33]Plaintiff’s Further Amended Statement of Claim, [7].
· PCL owed fiduciary duties to Repose whereby it would exercise its powers (if it chose to act) in the best interests of Repose and with the utmost integrity;[34] and
[34]Plaintiff’s Further Amended Statement of Claim, [8].
· PCL breached the terms of its retainer and/or its fiduciary duty by removing the five million 2Up shares from Repose’s account without its instructions, knowledge or consent.[35]
[35]Plaintiff’s Further Amended Statement of Claim, [9].
48 In its Defence, PCL pleaded that:
· there was an agreement with Repose whereby it agreed to conduct trading on the ASX on behalf of Repose;
· by letters of authorisation dated 16 September 2011 and 8 May 2012, Repose authorised PCL to deposit/transfer its 2Up shares and stock into the broker nominee (omnibus) account registered in the name of Austock and Octa Phillips Securities respectively, on the basis that this would not result in a change of beneficial ownership, and that Repose would retain full ownership of the shares and stock;
· this arrangement did not affect Repose’s title or rights to the 2Up shares or trading stock. Repose’s title and rights to the shares were governed by the agreement between the relevant transferor and transferee of such shares and stock, the 2Up articles and the Companies Act 2006 (UK);
· 2Up engaged PCL as its agent to conduct and record off-market transfers of 2Up’s stock and shares. This included maintaining journals for off-market transfers in Australia;
· if Repose acquired an interest in the shares the subject of the agreement between Repose and 2Up, then such interest was acquired not by reason of PCL recording the off-market transfer in the journals which it maintained, but through the terms of the agreement with 2Up, the 2Up Articles and the Companies Act 2006 (UK);
· any interest which Repose had in the said shares was not affected by PCL recording in its journals (maintained in accordance with its retainer from 2Up) the cancellation notice regarding the five million shares held by Repose in November 2012;
· Repose’s interest in the shares was governed by the terms of its agreement with 2Up, the 2Up articles and the Companies Act 2006 (UK), and not any notations made or records written up by PCL;
· PCL argued that, to the knowledge of Repose, PCL owed duties to 2Up under its retainer to carry out its instructions in relation to the journal entries for off-market transfers. It denied the terms of the retainer alleged by Repose. PCL denied controlling Repose’s shareholding in 2Up. PCL also denied that it owed fiduciary duties to Repose, that it breached those duties, or caused any loss to Repose.
Analysis
49 I accept that PCL was Repose’s broker to conduct transactions on its behalf on the Australian Stock Exchange. However, that retainer was the subject of a specific written agreement between the parties. Given that:
(a) 2Up was not listed, and its shares did not trade, on the ASX; and
(b) Repose acknowledged that the off-market transfers in 2Up were arranged by the transferor and transferees of the stock without any involvement of PCL in the making of the contractual arrangements or the payment for the shares;
that retainer is irrelevant in the present context.
50 The material retainer is that pertaining to PCL’s role in the off-market transfers. I find that when there was an off-market transfer of 2Up’s shares to a third party, the transferee purchaser had to open an account with PCL in order for PCL to record the transaction accurately in the sub-register and journals which it maintained. This sub-register related only to the off-market transfers and was distinct from the 2Up share register maintained for the company by Computershare.[36]
[36]CB 628.
51 An aspect of PCL’s role for transferors was to facilitate a situation whereby a shareholder like Repose could sell shares in 2Up to interested buyers through off-market transfers.[37] The evidence showed that PCL assisted buyers to open accounts with PCL. Once PCL received confirmation of the finalisation of the share sale, including the payment of the purchase price, it made the requisite notations in the journals and sub-registry.
[37]Murdaca said that, from time to time, Repose sold 2Up shares through off-market transfers.
52 In summary, I find that there was a retainer between Repose and PCL whereby PCL agreed to assist Repose such that its 2Up shares, bought through an off-market transfer, could be included in the shareholding of a nominee or custodian. The shareholding of the custodian (initially Killick & Co) was registered and recognised on 2Up’s share register maintained by Computershare. Further, PCL’s role included the making of journal entries to reflect acquisitions and sales by Repose of 2Up’s shares.
Did the retainer give rise to the contractual and fiduciary duties alleged by Repose?
Legal principles
53 Often, the duties owed by one party to another under a contract would be spelled out in the terms of the contract. In the context of the provision of professional services, the service provider would frequently be subject to an implied duty to exercise the skill and care of a reasonable service provider in his or her position.
54 Relationships giving rise to fiduciary duties are normally limited in nature. There are recognised categories such as trustee and beneficiary, agent and principal, solicitor and client, and partners.
55 In Hospital Products Limited v United States Surgical Corp,[38] Mason J said that the critical feature of 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 a power or discretion which will affect, in a legal or practical sense, the interests of that other person. His Honour said that:
“The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. …” [68]
[38](1984) 156 CLR 41.
56 It is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed, and because the latter is at the mercy of the former, that the fiduciary is obliged to exercise his power or discretion in the interests of the person to whom the duty is owed.
57 In Pilmer v Duke Group Limited (in liquidation),[39] McHugh, Gummow, Kirby, Hayne and Callinan JJ said that it was important to recognise the distinct character of the fiduciary obligation which set it apart from contract and tort. Their Honours quoted from the Canadian Supreme Court judgment of Norberg v Wynrib,[40] where McLachlin J said (at 272):
“The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest. Consequently, the law seeks a balance between enforcing obligations by awarding compensation when those obligations are breached, and preserving optimum freedom for those involved in the relationship in question. The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.”
[39](2001) 207 CLR 165.
[40][1992] 2 SCR 226.
58 The judges also specifically referred to the judgment of Sopinka J in the same case, where he said that fiduciary duties should not be superimposed on common law duties simply to improve the nature or extent of the remedy.
59 Contractual and fiduciary duties can coexist. Often the existence of a contractual relationship provides the foundation upon which the fiduciary relationship is built. The contractual foundation is critical because it regulates the rights and liabilities of the parties. The fiduciary relationship must, if it exists, conform to, and be consistent with, the terms of the contract. The fiduciary relationship cannot be foisted upon the contract in such a way that it prevents the contract from taking effect, as it was intended to, according to its true construction.[41]
[41]Breen v Williams (1996) 186 CLR 71, 109-110, quoting Mason J in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41, 97.
60 Relationships between people can be fiduciary in nature in relation to some aspects but not others.[42] For example, a doctor could be in a fiduciary relationship with a patient insofar as the patient reveals intimate confidential information to the doctor and is dependent upon the advice which the doctor gives regarding treatment. This does not mean that the doctor must necessarily make available his or her files to the patient. Similarly, a broker who provides advice about an investment in which the broker has a financial interest, can be a fiduciary.[43] Where the broker is not advising the client and just following instructions, the position is likely to be different.
[42]Breen v Williams (1996) 186 CLR 71, 107-108.
[43]Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371, 377.
61 Another point to note is the content of any fiduciary duty. Unlike the position in other common law jurisdictions like England and Canada, the obligations imposed upon a fiduciary in Australia are proscriptive rather than prescriptive. Principles of equity relating to fiduciaries in Australia do not lay down what fiduciaries must actively do or consider when performing their role. Rather, they specify what is forbidden.[44] There is, for example, no quasi-tortious duty to act solely in the best interests of the principal.[45] Unless expressly permitted to do so, a fiduciary is not to obtain any benefit or profit from the fiduciary relationship. Nor is a fiduciary allowed to be in a position where the fiduciary’s duty and personal interest conflict.
Analysis
[44] P & V Industries Pty Ltd v Porto [2006] 14 VR 1.
[45]Pilmer v Duke Group (2001) 207 CLR 165 at [74].
62 In the present case, Murdaca was clear that he did not rely upon PCL to advise him in relation to any of the off-market transfers involving the shares which Repose held in 2Up.[46] The payment of the purchase price for the shares was arranged exclusively between the vendor and purchaser – the money did not pass through or involve PCL.[47] In those circumstances, I consider, at least in relation to the acquisition by Repose of its treasury shares in 2Up, PCL’s role was such that it was not in a fiduciary relationship with Repose. Accordingly, it was not bound by the usual obligations owed by a fiduciary.
[46]T-144.
[47]T-136-137.
63 Repose alleged that PCL also owed fiduciary duties to it due to it acting as a custodian of Repose’s shares in relation to share trading in 2Up. By this I took Repose to mean that PCL had the connection with Killick & Co (and its successor) and PCL controlled and maintained the sub-register which recorded the shareholdings which entities obtained in 2Up through off-market transfers.
64 Fiduciary duties involve special obligations. Courts have traditionally recognised certain relationships as fiduciary in nature. However, courts should be astute not too readily to create a fiduciary relationship were none truly exists. Even in this further role which PCL undertook, I am not satisfied that it owed Repose fiduciary obligations. PCL operated and administered the sub-register at the request of 2Up. The company engaged PCL for this purpose in September 2011. PCL was to record the off-market transfers in 2Up’s stock and to maintain the journals which recorded the dealings. The system operated in such a way that anyone who sought to deal in 2Up’s stock through off-market transfers was obliged to open an account with PCL so that the details of the transaction could be recorded. While it was important for 2Up and entities like Repose who dealt in its stock that PCL maintained accurate records, there is no legal basis upon which one could say that PCL owed any fiduciary duty to Repose. The relationship was not within recognised categories of fiduciary relationships. In my view, it could not be a sufficiently special relationship to attract the “fiduciary” label where the critical agreement and relationship regarding the shares was between Repose and 2Up. PCL’s actions could not affect the legal rights and obligations flowing from a shareholder’s agreement with 2Up.
65 Repose relied additionally upon contractual duties. The basis of the contract allegations appears to be the two letters of authority given to PCL whereby Repose authorised PCL to deposit/transfer all assets registered in the name of Repose into the omnibus account in PCL’s name. There was no dispute that Repose gave the authority documents to PCL and that PCL acted upon them to the extent of recording details of Repose’s shareholding in 2Up and noting relevant details for the omnibus account.
66 As noted before, Repose has pleaded its contract case in a slightly unusual way. Normally, a claimant sets out the general nature or effect of the contract before alleging the specific terms relied upon, the breach or breaches of those terms and the resultant damage suffered. Here, Repose alleged a retainer to act as a stockbroker and/or custodian. Instead of being specific about what PCL agreed to do, Repose alleged a series of duties all but one of which was said to be an implied term of the retainer. The only other term alleged – namely, that PCL held Repose’s shares in 2Up as custodian for the benefit of Repose – was said to be partly written and partly implied. The written component comprised the two authorities given to PCL to deposit the shares in the omnibus account. The implication arose from doing the paperwork in relation to the acquisition of the five million shares from 2Up, depositing them with Killick & Co and maintaining the register.
67 Essentially, Repose relied upon the same facts for the creation of the fiduciary duty. Thus, Repose said that if PCL chose to exercise its powers, then it would do so in the best interests of Repose and with the utmost integrity.
68 In my opinion, Repose overlooked that PCL was fundamentally an administrator or record keeper. Whatever rights and title Repose had in relation to 2Up’s stock was not dependent upon PCL and its journal entries. Repose’s rights and entitlements were determined by its legal arrangements with 2Up. These included the specifics of any agreement about the allotment of shares, 2Up’s Articles and the law in the United Kingdom governing companies. Nothing which PCL did could affect this. It had no active role as a party in the contract between 2Up and Repose or later between Repose and those parties to whom it sold 2Up shares.
69 Repose sought to make much of PCL’s alleged power to deal with Repose’s property contrary to Repose’s best interests and without the instructions or agreement of Repose. This power was said to arise from PCL holding Repose’s shares in the omnibus account and noting the details in the sub-register. Repose contended that, in this way, PCL managed and controlled Repose’s shareholding.[48] It was on this basis that Repose argued that it held a beneficial interest in the shares but PCL or Killick & Co held the legal interest. Repose argued that whether PCL was, directly or indirectly a custodian, trustee or fiduciary was a matter of labelling.[49] What really mattered was the underlying concept.
[48]T-15-16 of the hearing on 7 September 2020.
[49]T-15 of the hearing on 7 September 2020.
70 In making this argument, Repose appeared to rely significantly upon the evidence of Jo Aernouts, a compliance officer employed by PCL. While she was not employed at the time of the events in question, she gave evidence about the nature of the transactions and the manner in which PCL fulfilled its obligations (as she saw them) to its clients. Repose argued that the effect of her evidence was an acknowledgement that PCL held Repose’s shares in 2Up on trust for Repose. She conceded that PCL acted inappropriately in removing the 2Up shares from the beneficial ownership of Repose and transferring them back to 2Up. She also said that once a contract for the sale of shares had been closed, in the sense that the transfer had occurred, the contract could not be reversed. She agreed that for PCL to remove shares from a client account without recourse to the client had the effect of removing the beneficially owned shares from the client’s holdings. In this case, that meant that PCL had reduced Repose’s shareholding by five million shares.
71 While I have no reason to doubt Ms Aernouts’ integrity or credibility, I am not bound to accept her characterisation of what is in substance a legal question. As noted earlier in the judgment, I do not consider that PCL owed duties as a fiduciary or trustee in its dealings with Repose. Moreover, Ms Aernouts’ evidence took no account of the illegality associated with the issue of the treasury shares and the fact that they were void.
72 I consider that PCL’s record keeping, while a convenient and useful way of tracking the shareholdings in 2Up, had no legal effect upon a party’s shareholding. As a matter of principle, an entity like PCL which records shareholdings cannot bring about a legal change in the shareholdings by wilfully or accidentally making notations which do not reflect the underlying facts. The administrative record keeping function does not operate in the same way as the register of title does in relation to Torrens law land. With the latter, the register itself confers title. Here, PCL was no part of the agreement between 2Up and Repose and its records cannot modify or vary the legal effect of the agreement between those parties. I consider that, in relation to the initial allotment of treasury shares by 2Up, the so called retainer between Repose and PCL did not give rise to the contractual and fiduciary duties alleged.
73 I regard the legal position as the same in relation to later transactions by Repose where it sold some of its 2Up shares to third parties. How PCL deals with journal entries cannot affect the underlying rights which Repose has. Hypothetically, PCL might attempt to act in a mischievous way by altering the records in the sub-registry in a way which does not accurately reflect Repose’s shareholding in 2Up. But PCL cannot actually effect a change in Repose’s rights because it lacks the legal capacity. The off-market transfers derive their legitimacy from the contractual agreements made between the transferor and the transferee of the shares. PCL was neither.
Did PCL breach any of these duties?
74 If my conclusion above is incorrect and PCL did assume the alleged fiduciary and/or contractual duties set out at paragraph 47 above, then the court must decide whether PCL breached any of those obligations.
Legal principles
75 Before I turn to my analysis, I will briefly outline the applicable law related to fiduciaries in regards to situations involving a conflict of interest.
76 In equity, a fiduciary must not enter into arrangements which may give rise to a conflict between the fiduciary’s personal interest and the fiduciary’s duties to the principal.[50] While breaches of fiduciary duties may commonly involve the fiduciary placing his or her own personal interest ahead of their obligations to the principal, this is not always the case. Situations can arise where a fiduciary is obliged to avoid acting in a way which puts them in conflict between their duties to one client/principal and their duties to another client/principal.[51] While equity may, in certain circumstances, permit a fiduciary to serve more than one principal, the fiduciary will ultimately be accountable to their principal for any profit or benefit received as a result of any breach.[52] When considering whether there might be a conflict between personal interest and a fiduciary duty, the possibility must be real as opposed to hypothetical.[53] The primary means of showing a defence to a claim for breach of a fiduciary duty is that the fiduciary was acting with the informed consent of the principal.
Plaintiff’s arguments
[50]Chan v Zacharia (1984) 154 CLR 178 at 198.
[51]Farrington v Rowe McBride & Partners [1985] 1 NZLR 83.
[52]Warman International Ltd v Dwyer (1995) 182 CLR 544.
[53]Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 at 89, 92 per Richardson J.
77 Repose submitted that, by acting solely on the instructions of 2Up without seeking instructions from Repose, PCL had placed itself in a position of conflict of interest which meant it was precluded from acting on behalf of two masters. It could not perform its obligations to 2Up without breaching its duties to Repose.[54]
[54]Plaintiff’s written closing submissions at 39.
78 Repose also argued that the fiduciary duty was not simply derived from the fact of the parties’ relationship, but rather in the task that PCL had agreed to undertake for Repose, being the management and preservation of Repose’s assets. By returning the shares to 2Up, it was said that PCL had committed a fundamental breach of its fiduciary duty to Repose as the asset manager/custodian for Repose.[55]
[55]Plaintiff’s written closing submissions at 40.
79 Further, Repose submitted that PCL’s conduct in transferring the 2Up shares from Repose back to the company constituted a breach of fiduciary duty because it arose from the conflict in PCL acting for both Repose and 2Up.
80 As observed earlier, if someone is a fiduciary, then equity imposes proscriptive obligations not to obtain an unauthorised benefit from the relationship and not to be in a position of conflict. If those obligations are breached, then the fiduciary must account for any profits received and make good any losses resulting from the breach.
81 If PCL owed Repose duties including duties to act only on instructions and to avoid conflicts of interest, then prima facie PCL appears to be in breach of its duties to Repose. There is no dispute that it purported to remove five million shares belonging to Repose and return them to 2Up. It did this upon the direction of 2Up. However, it is necessary to examine why PCL acted in this way to determine whether the prima facie case is made out.
82 The material suggested that there were two potential bases upon which Repose might lose the shares it held in 2Up. One was that the shares were cancelled because Repose did not pay for the shares in the time required by 2Up or, possibly, at all. The other was that 2Up ought never to have allotted the shares because it was unlawful to do so. Hence, the shares had to be treated as void and no longer form part of the company’s capital structure.
83 The first basis was unclear because the documents produced at court were confusing and inconsistent. The initial letter from 2Up signed by Lombardo said that Repose had to pay the outstanding debt of £500,000 on the shares within 21 days of 30 May 2012 or the shares could be forfeited.
84 Lombardo’s next letter, headed “Notice of Intended Forfeiture of Shares” and dated 13 June 2012,[56] said that under the Articles of 2Up, the board was required to forfeit shares if they were not paid for within 14 days of notice being given. Lombardo wrote that, for this purpose, the deemed date was 29 June 2012. The letter claimed that Repose owed £500,000 on the five million shares issued to it on about 14 March 2012. Later in the same letter Lombardo said:
“This notice is the final one and if you fail to make payment of the said sum of 500,000 Great British Pounds on or before 15th June 2012, then the board with forfeit all your shares without any further notice, with the intention to either return them to treasury or transfer them to an arm’s length third party for proper consideration at the Board’s total discretion.”
[56]CB 664.
85 In a separate letter of the same date headed “Forfeiture of Shares” Lombardo wrote to Repose that, because 2Up had not received the £500,000 due on the treasury shares, it had “made instructions” to cancel the shares.
86 These letters raised some issues:
· at the time he purportedly signed the letters as a director of Repose, Lombardo was in fact not a director of the company;
· in June 2012, Sussich acknowledged that Repose had paid for part of its treasury stock.[57] By 13 July 2012, which admittedly post-dated the letters to Repose, Sussich acknowledged receipt of $180,000 from Repose;[58]
· the claim was made for £500,000 when the share transfer allotment was undertaken in Australian Dollars.[59]
[57]CB 273.
[58]CB 767.
[59]CB 655 – 9.
87 The position is made more opaque by the unchallenged evidence of James Miller (“Miller”) who gave evidence for Repose. Miller was a director of 2Up between Mach 2012 and November 2012.[60] He said that there was no meeting of directors held by 2Up which resolved to:
[60]Miller said that the document in the court book stating that he resigned on 1 July 2012 was filed in August that year without his knowledge or agreement.
· effect a call on the shares as set out in clause 54 of the Articles;
· issue a notice of intended forfeiture of the shares as required by clause 57 of the Articles; or
· forfeit the shares as required by clause 59 of the Articles.
88 Repose suggested that the letters from Lombardo were concoctions which were not created at the date they bear. I do not need to resolve this issue. It is enough for me to say that I am not satisfied that the alleged failure to pay by the due date specified in the correspondence was a valid basis to justify the return of the shares to 2Up. First, the original transaction was conducted in Australian dollars and not British pounds. It made no sense to demand payment in the latter currency. Secondly, it is concerning when letters are signed by someone who purports to be, but was not at the time, a director of the company. Thirdly, the notice of intended forfeiture gave two different dates for payments. Initially it said to pay by 29 June 2012. Then some paragraphs later, it said that the shares would be forfeited unless Repose paid by 15 June 2012. A shareholder’s rights should not, and would not, be prejudiced where the advice from the company is conflicting and confusing. Finally, if there were no directors’ meeting regarding the letters, then there is a concern that they were not sent with the knowledge or approval of 2Up.
89 In reaching this view, I probably do not need to make a finding about whether Repose paid for the five million treasury shares it received from 2Up. However, if a finding were required, there were good grounds for finding that Repose did not pay the sum of $502,500 set out on the purchase confirmation note.[61] The evidence of Messrs Murdaca and Miller on the issue was far from persuasive.
[61]CB 658.
90 Murdaca’s evidence on this topic was vague. He said that he was overseas in the middle of 2012 and was focused on obtaining medical treatment for his two sick sons. While he said that he had some idea of events in Melbourne involving 2Up and Repose, he was not familiar with any details. Murdaca said several times in his evidence that Miller could answer questions about such accounting and finance issues, in particular, questions about the payment made for 2Up shares. Murdaca said that Miller had performed a reconciliation and forensic accounting of the monies which were paid into companies controlled by Sussich.[62]
[62]T-174/5.
91 Miller was a semi-retired forensic accountant, certified public accountant and auditor. He said that he worked as an auditor at Haskins & Sells (which later became part of Deloitte). He performed audits on major enterprises and publicly listed companies like Coles Myer Limited, General Motors Corporation and Dow Chemical.
92 Miller swore an affidavit in the proceeding in support of Repose’s case. The affidavit was included in the court book. I found aspects of his evidence a little confusing. One issue concerned how Murdaca came to join the board of 2Up. Miller said that he became a director of 2Up through his association with Murdaca[63] because Murdaca had engaged him to work on the prospectus for a company called Sofcom. Miller said that Murdaca and D’Anna wanted him to go on the board of 2Up to protect their interests.[64] Then later Miller agreed that Sussich asked him to join the board.[65]
[63]T-251.
[64]Miller said that it was similar to when he became a director of Coles Myer Limited and represented K-Mart Corporation’s 22% interest in Coles Myer.
[65]T-287.
93 The other issue concerned the work Miller did regarding Repose and its payment for the five million 2Up shares. Although Miller denied that when he joined the 2Up board in March 2012, he was also retained by Murdaca to do some accounting work for Repose,[66] he said that he did have a role in relation to the five million shares held in 2Up. Given Miller became a director of 2Up in March 2012, I infer that he received this task early on. Miller agreed that Murdaca gave him the task of showing how Repose paid for its five million shares in 2Up.[67]
[66]T-253.
[67]T-267.
94 Miller acknowledged that he received the email from Sussich dated 26 June 2012 advising that all unpaid treasury stock was to be paid for or returned by 30 June 2012.[68] The terms of the email indicated that Sussich expected Miller to take appropriate action to clarify the position.
[68]T-273.
95 A greater concern about Miller’s evidence was the level of professionalism displayed in carrying out his work in relation to the payment issue.
96 Sussich followed up his 26 June email with another email to Miller and Stamatopoulos on 13 July 2012 in which he said that:
· 2Up’s lawyers had advised that it was illegal for a company like 2Up to issue or transfer its shares below the par value of £0.10. The unpaid shares were to be paid for or returned immediately to treasury.
· he needed a confirmed list of payments made by Repose for the 2Up shares so he could be satisfied they were fully paid.
· the top ten shareholders, which included Repose if it had fully paid for the five million shares, were to execute declarations confirming their shareholding for the auditors and a prospectus.
97 Then on 26 July 2012, the 2Up in-house accountant Albert Sommer (“Sommer”) sent an email to Miller and Murdaca[69] in which he said that there were transactions in the 2Up bank statements over the preceding 18 months which the company could not identify. Sommer believed that many of them could relate to Murdaca. Sommer attached a list of the unidentified transactions and asked that they compare them with the Repose records to see if they could clear up as many transactions as possible.
[69]CB 275.
98 Miller said that he used bank statements on the X2Up account which Repose maintained at the ANZ bank in Melbourne. He compiled a list of transactions on that account. Miller also used cheque butts given to him by Murdaca to produce expenditure records. Miller made some notations on the list of payments. Miller said he concluded that Repose had paid the full purchase price for its 2Up shares.
99 One problem with the bank statements and card entries which Miller said he worked on was that they were not exclusively referrable to Repose’s transactions in 2Up. Murdaca used the X2Up account for other businesses including the Bodycorp car repair business and possibly Sofcom. Financial transactions occurring in these other ventures were included in the account.
100 Also, although Miller was aware that some of the payments which Repose and/or other Murdaca entities made to Sussich were in cash, he did not prepare a record of those cash payments.
101 Miller gave no evidence to the effect that he prepared a report for Sussich or other board members about Repose paying for its 2Up shares. Nor was there any oral or documentary evidence about a declaration from Repose as a top ten shareholder. Given his background and experience, I would have expected Miller to produce a proper report or at least a formal note or letter to Sussich or the board confirming that he was satisfied Repose had paid full value for the five million shares allocated to it. Similarly, the court book contained no contemporaneous document from Miller to Murdaca explicitly stating that Repose had paid the full price for the shares.
102 The second basis was the legality of issuing certain shares.[70] The 2Up board said that the shares in question were:
[70]See paragraph 82 above.
(a) 52.9 million ordinary 10p shares issued in exchange for services provided to 2Up to assist with the listing of the company on the Frankfurt Stock Exchange. The directors were informed that they lacked the authority under the Articles to issue these shares. Accordingly, 2Up issued a call notice to recover the shares, following which they were to be cancelled.
(b) 48.9 million ordinary 10p shares to be held by the company as treasury shares for anticipated acquisitions or share sales. The board was advised by its lawyers that the issue of the treasury shares to itself was not in accordance with United Kingdom company law and the shares were void.
103 In each case, the board resolved to accept the legal advice given and to take the steps necessary to implement it.
104 I note too that in the audit report for 2Up signed by Joanne Allen, senior statutory auditor at Moore Stephens LLP dated 22 March 2013, Ms Allen stated that the treasury shares issued were void because they were not issued in accordance United Kingdom company law.[71]
[71]CB 282.
105 PCL acted on instructions from 2Up when reversing in November 2012 the allotment of treasury shares made to Repose in March 2012. That PCL acted on the instruction of 2Up without giving prior written notice to Repose was not exceptional for a number of reasons. First, PCL recorded the allocation of shares to Repose in March 2012 on the instruction of 2Up as the transferor of the treasury shares. The process was essentially the same in reversing the allotment. Secondly, I accept the evidence of the expert, Peter Francis, that in the context of off-market transfers, an administrative record maker such as PCL would customarily take instructions from the seller or transferor. The seller initiated the transaction. If, for example, a seller informed PCL that a purchaser's cheque bounced when acquiring shares through an off-market transfer, and PCL had already made the appropriate change in the sub-register, PCL would then act on the seller’s instructions to unwind the transaction.[72] Thirdly, if there was a problem with the stock subject of an off-market transfer, especially one caused by the transferor, it was for the transferor to instruct PCL. The company for whom PCL maintained the sub-register could not permit a situation where there was stock in the off-market transfer market which was unlawfully issued. This created an inaccurate picture of the company’s capital position.
[72]In saying this, I acknowledge that the transfer of 2Up shares to Repose was completed in March 2012. To that extent, it could be argued that, by November 2012, Repose had become the transferor. However, the unlawful issue of treasury shares by 2Up affected Repose’s title to the shares and its ability to transfer such shares.
106 In circumstances where:
a) the 2Up board received the advice set out above about the treasury shares;
b) the board then acted upon the advice;
c) the auditors accepted the legal advice and the action taken by the board; and
d) Repose did not challenge the evidence on these matters,
I accept that the issue of the treasury shares was contrary to United Kingdom company law and the shares purportedly issued were not validly issued but were void. That being so, the board was obliged to take the requisite measures to restore 2Up’s capital position and its own records to the position the company ought to have been in without the void share issue. To that extent, if 2Up considered that it needed some document from PCL in order to assist with that process, PCL had no option but to comply with the request by 2Up.In my view, it remained the case that, insofar as Repose’s rights to the five million shares in 2Up were adversely affected as a result of the legal advice received and action taken, this was due to the agreement with 2Up being affected by 2Up’s failure to comply with the relevant company law and not any action taken by PCL.
107 In short, I do not consider that PCL breached any duty to Repose by reversing the allotment of five million 2Up shares in the sub-registry. If anyone interfered with Repose’s proprietary or legal rights in relation to the shares, it was 2Up. Repose’s right and title to its allotment of five million shares in 2Up originated from the contract or arrangement it made with 2Up. To the extent that 2Up (having received advice from its UK lawyers) directed PCL to reverse the allotment of shares so they could be cancelled, it was 2Up which potentially breached its agreement or arrangement with Repose. If Repose had a right of redress at common law or under 2Up’s Articles, that right existed against 2Up. But instead of suing 2Up as the entity from whom it accepted the allotment of shares and which later directed PCL to reverse the allotment, Repose elected to sue the administrative record keeper PCL. Murdaca never explained his rationale for acting in this way. However, as previously observed, I consider that Repose’s claim against PCL was misconceived because it wrongly assumed that what PCL recorded in the sub-register actually affected, and accurately reflected, Repose’s legal rights and entitlements regarding shares in 2Up.
108 Given that the transaction between 2Up and Repose in relation to the treasury shares was affected by illegality on the part of 2Up, I do not consider that PCL acted in breach of any duty to Repose, contractual or otherwise, by acting as it did.
109 Further, if PCL owed fiduciary duties to Repose, it could breach them only by obtaining an unauthorised benefit from the relationship or putting itself in a position of conflict. In my opinion PCL did neither of these things. It had a retainer from 2Up to maintain the sub-register and record the off-market transactions which took place in 2Up shares. While PCL received some payment for performing its record keeping work on each off-market transaction, this was not an unauthorised benefit. In following the instructions of 2Up to document the reversal of the share allotment, PCL was not putting itself in a position of conflict. It had to follow the instructions of 2Up where 2Up was seeking to remedy its own wrongdoing in failing to comply with the requirements of United Kingdom company law. Moreover, Repose knew about the retainer between 2Up and PCL and the work which PCL performed for 2Up. The position might well have been different had PCL used its position to purportedly sell shares belonging to Repose and retain the proceeds for itself.
If so, did PCL cause any and what loss to Repose?
110 If PCL breached either its contractual or fiduciary duties to Repose, the court must consider whether such a breach caused the loss alleged by Repose and the extent of that loss. It would be apparent from the earlier part of this judgment that I do not consider PCL caused any loss to Repose. However, I will canvass the matter in a little more detail.
Plaintiff’s arguments
111 From Repose’s perspective, the matter was beyond argument. Repose contended that, by transferring its shares to 2Up without affording it the opportunity to contest the basis for the transfer with 2Up, PCL caused the plaintiff the complete loss of its parcel of five million shares.[73]
[73]Plaintiff’s submissions at 48.
112 Repose said that it was the owner of the 2Up shares from March 2012 until November 2012 when the share transaction was reversed. As such, Repose argued that the whole value of the shareholding was lost and PCL was responsible.
113 Repose argued that the sales evidence in November 2012 gave an average price of 34 cents per share. Repose submitted that this was the minimum value to be attributed to each share and that some other sales at a higher price justified a value of 44 cents per share.
Defendant’s arguments
114 PCL submitted that, even had it informed Repose of the transaction reversal and Repose had subsequently given it instructions to not comply with the instruction from 2Up, Repose would be left in a position where it would be recorded on the register maintained by PCL as holding five million shares in 2Up treasury stock which had now in fact been cancelled.[74] Thus, even if Repose had the opportunity to prevent the allocation of 2Up shares being reversed, Repose could not in any event have sold the void stock through an off-market transfer. During final address, counsel for PCL argued that the result of the cancellation of the treasury stock was the same as if the shares had never existed and he labelled them as void ab initio. It follows that there can be no compensation awarded against PCL for a loss of opportunity where no shares existed as a matter of law for Repose to sell. It was said by counsel for PCL that an attempt to sell something which did not exist would be fraudulent and one cannot get damages for a loss of opportunity based on what would be illegal behaviour.
[74]Defendant’s closing submissions at paragraph 28.
115 PCL submitted that the situation Repose finds itself in highlights the risky nature of off-market transactions, given there are no protections like the ones afforded to a party dealing on a regular stock exchange.[75] In off-market transfers, a buyer is not guaranteed title and if there is a problem with the chain of title, a party in Repose’s position is exposed.[76]
[75]Defendant’s closing submissions at 29.
[76]Defendant’s closing submissions at 30.
116 Further, PCL submitted that Repose could not prove that it had provided consideration for the 2Up stock and that, without proving it had paid the purchase price to acquire a beneficial interest on the shares as it alleged, it could not bring a damages claim for a loss of opportunity in any case.[77]
[77]Defendant’s closing submissions at 34.
117 Finally, even if Repose could show it had provided consideration for the stock and that the stock had not been cancelled, it was submitted Repose has failed to prove on a counterfactual scenario that it could have sold five million 2Up treasury stock in the off-market transfer market in any event.[78] The reasons given by PCL in support of this argument included:
[78]Defendant’s closing submissions at 62-67.
· there was no evidence that buyers would have bought five million 2Up treasury stock;[79]
[79]Defendant’s closing submissions at 59.
· neither Repose nor Murdaca had an Australian financial services licence which would legally allow them to advertise, offer and trade the stock;[80]
[80]Defendant’s closing submissions at 59.
· there was no evidence led about the true value of 2Up and its stock- it was a start-up company with directors who were banned in Australia, had an online gaming licence in Vanuatu, had no properly maintained financial accounts, had minimal revenue and tangible assets and a large number of shares on issue, many of which were later cancelled;[81]
[81]Defendant’s closing submissions at 60.
· PCL’s expert witness’s report noted that it had taken Repose nine months to sell around three million shares in the off-market transfer market. In his opinion, it would have been hard, if not impossible, to sell five million shares in that market in 2012;[82]
[82]Defendant’s closing submissions at 62.
· by November 2012, being the date the contract between the parties was allegedly breached, there were even more significant issues with 2Up. The minutes of a directors’ meeting on 30 November 2012 showed that 2Up stock was suspended on the listed exchange and that all off-market transfers had to be approved by the Board.[83]
[83]Defendant’s closing submissions at 63.
· the evidence of trading in the off-market transfer market from December 2012 onwards showed few trades. On Repose’s statement of transactions, the last reference to a trade was the purchase of one million 2Up stock on 18 February 2013 (although Murdaca stated this transaction was cancelled and did not proceed);[84]
[84]Defendant’s closing submissions at 64.
· By 22 March 2013, the independent auditors Moore Stephens LLP stated that they did not believe that 2Up had kept adequate accounting records and that the parent company’s financial statements were not in agreement with accounting standards and returns. Consequently, any potential purchaser of 2Up stock in or after March 2013 was likely to have been more wary or unwilling to purchase its shares in an unregulated off-market transaction;[85] and
· Murdaca gave evidence that his daughter’s one million shares in 2Up stock, given in lieu of pay, were never sold. The overwhelming inference was that they could not be sold because no market existed to sell them in.[86]
[85]Defendant’s closing submissions at 65.
[86]Defendant’s closing submissions at 66.
118 Due to Repose leading no evidence of a counterfactual scenario where it could have sold the shares, PCL relied on authorities including Sellars v Adelaide Petroleum NL[87] as support for its proposition that the court should find that no damages for a loss of opportunity were payable to Repose.
Analysis
[87](1994) 179 CLR 332.
119 The short point is that the reversal of the transaction between 2Up and Repose, and the later cancellation of the stock held by Repose was effected through steps taken by 2Up. Repose should have brought a case against 2Up and not PCL for any losses which flowed from that action.
120 Repose argued that the damages should be the full five million shares valued at a minimum of 34 cents each. PCL contended the damages had to be assessed not as a loss of property by as a loss of opportunity to sell the five million shares. I have canvased the legal principles in relation to loss of opportunity damages in my judgment in M.A & J Tripodi Pty Ltd v Swan Hill Chemicals Pty Ltd[88] and will not repeat them. Given that the situation is contrived because I have found no relevant duty or breach by PCL causing any loss to Repose, I prefer the approach taken by Repose. The whole of its shareholding in 2Up has been lost and it is as if Repose has no shares in that company. However, even if it were the case that PCL had breached its duties to Repose and caused it to lose its five million shares in 2Up, because the shares were void, Repose could not have sold them. The loss which Repose might have otherwise suffered was the loss of monies expended in procuring the treasury shares from 2Up before it was known that the shares were void. As observed earlier, Repose did not establish with precision how much it paid for these shares. This would, or should, have been well within its sphere of knowledge and capable of being proved.
Does PCL owe Repose any monies for fees to be reimbursed?
[88][2018] VCC 526, [265] - [276]. This judgment was upheld in the Court of Appeal [2019] VSCA 46.
121 Repose submitted that PCL owed it $140,000 for monies which were erroneously paid to PCL for share brokerage fees. The claim was founded upon either a breach of contract or, alternatively, monies paid to PCL by Repose by mistake.[89]
[89]See paragraphs 12-12B of the further amended statement of claim.
122 Repose relied on the evidence given by Murdaca at trial that Pereza-Mathews had called to inform him that PCL had overcharged Repose. Following this phone call in November 2012, Murdaca said he went with Sussich to meet Pereza-Mathews and O’Brien. They told him that PCL had charged Repose extra fees for off-market trades in addition to the standard fee. In doing this, PCL was, in effect, acting unlawfully.[90] Murdaca said that Pereza-Mathews had told him that he had calculated that he would return between $140,000 and $170,000. Murdaca said that he left it to Pereza-Mathews to determine the precise amount.
[90]T-121/25.
123 At some time around December 2012 Pereza-Mathews ceased working as an employee of PCL. Murdaca spoke with David Barlow, an employee of PCL. Murdaca said that Barlow told him that he had taken over the position of Pereza-Mathews within the business. According to Murdaca, Barlow was uncooperative and told him that that PCL had nothing in writing with regard to the alleged agreement between Pereza-Mathews and Repose.
124 In closing submissions, counsel for Repose argued that PCL did not contest Murdaca’ s evidence in cross-examination, nor did it seek to call any evidence to rebut Murdaca’ s version of events. As there was no challenge to Murdaca’s credit, Repose must succeed in its claim for $140,000.
125 Repose also sought an order for interest pursuant to section 54 of the Supreme Court Act 1986 (Vic) to be calculated from the date when the reimbursement payment should have been made, which Repose contends is 1 January 2013.
126 PCL denied any liability and argued that, at its highest, the evidence showed only that there was a promise by Pereza-Mathews that he would sell his own stock and pay Repose back. PCL contended that this was, at best, an unenforceable promise by a non-party and that, given the absence of consideration, it was not a binding agreement.
127 PCL submitted that, while Repose asserted that the fees charged were illegal, there was no evidence about why they were illegal. Further, emails that were sent after the alleged meeting where the agreement to repay monies was said to have been made, showed that Repose committed to continue paying brokerage fees. This was said to contradict Murdaca’s evidence that he was told the fees were illegal.
128 In reply to the point regarding Repose continuing to pay the brokerage fees after the meeting between Murdaca and Pereza-Mathews/O’Brien, counsel for Repose submitted that the aforementioned emails were evidence as to an inquiry regarding the amount of brokerage and that the issue was not that Repose paid brokerage fees, but rather that it was overcharged for some of its fees and that PCL had recognised this overpayment and had sought to refund Repose.
Analysis
129 I find that PCL is not liable to pay the $140,000 claimed by Repose. I have reached this view for the following reasons.
130 First, Repose led no evidence about the management structure of PCL and the place which Pereza-Mathews occupied within that structure. In the particular context of commission charges, I do not know whether Pereza-Mathews had the authority to bind PCL to an agreement with Repose about the repayment of allegedly excess charges. Repose made no specific submissions about the extent of Pereza-Matthew’s actual and implied authority. As the plaintiff, Repose has the onus to prove its case.
131 Secondly, assuming Pereza-Mathews had the requisite authority, there was no binding agreement because:
(a) the precise amount to be repaid was never agreed;
(b) there was no consideration provided by Repose to PCL to create an enforceable agreement.
Repose pleaded this claim as one where there was an agreement to reimburse for fees charged on off-market transfers. There were alleged terms of the agreement that PCL would repay $140,000 and that it would make payment within a reasonable time. The evidence was different from the pleading to the extent that Murdaca said that Pereza-Mathews told him that he had not yet worked out the exact amount but he thought that it was between $140,000 and $170,000.
132 Any agreement was oral rather than written. There was no deed executed under seal eliminating the need for further consideration. The earlier payment of the excess fees by Repose did not constitute valid consideration for the alleged agreement because it was past consideration.
133 Thirdly, Repose provided no details of its claim to which PCL could respond. There was, for example, no table setting out the various transactions the subject of the allegation, the amount which ought to have been charged and the amount of fees charged in fact. Nor was there any explanation about why payments were illegal or excessive. PCL denied the alleged agreement and its terms and argued that the claim failed to disclose a proper cause of action and should be struck out due to the absence of material facts and proper particulars.
134 Finally, other than Murdaca’s oral evidence at trial, there was no other evidence to support the allegation. The amount involved was substantial. If the claim were soundly based, one might have expected that PCL would have written a letter or sent an email to Murdaca or Repose about the issue. Alternatively, and perhaps more importantly given the potential benefit accruing to the company, Repose should have been anxious to confirm the position with PCL. Murdaca could have emailed Pereza-Mathews or spoken to Sussich or possibly had his lawyers follow the matter up with PCL. The absence of any contemporaneous supporting documentation, be it a letter, email, demand, or request for details, troubles me. The context is a business one and not merely personal. But instead of a contemporaneous document, the court only has a claim in a writ issued in March 2018 nearly five and a half years after the conduct giving rise to the claim. Having observed Murdaca carefully while he gave his evidence, I am unwilling to simply accept his testimony on the issue without some corroboration.
135 Repose made much of PCL’s failure to call Pereza-Mathews and to challenge the evidence of Murdaca. While I accept that there was no evidence from PCL about efforts made to contact Pereza-Mathews, I note that he left PCL’s employment almost nine years ago. The court knows nothing about his current whereabouts or what he might recall of events which occurred in 2012. Equally, there was no evidence from Repose about any attempts which it made to contact Pereza-Mathews. Given the potential significance of the comments which Murdaca said that Pereza-Mathews made to him, there was considerable incentive for Repose to locate Pereza-Mathews and have him give evidence. In the circumstances, I am not satisfied that Pereza-Mathews would be expected to be called by one party rather than another. Especially when the court does not know the circumstances in which he ceased his employment with PCL, I do not consider that I should find that Pereza-Mathews is properly regarded as being in the camp of one party rather than the other such that it was unrealistic for the other party to call him.
136 While a defendant is entitled within certain limits to put a plaintiff to its proof, it normally cannot challenge a person’s evidence with conflicting or contradictory facts unless the defendant’s lawyers holds specific instructions to that effect.
137 I note that Repose did not argue a claim for monies had and received arising from an obligation on PCL to reimburse Repose. Such a claim would have been simpler and in circumstances where PCL did not challenge the veracity of Murdaca’s evidence or lead contrary evidence from Pereza-Mathews (or anyone else), Repose might possibly have succeeded.[91] However, Repose made no reference to the concept of money had and received or restitution in its written or oral closing submissions. Nor did it seek leave to amend this part of its claim when it amended at the conclusion of the evidence. While I accept that the further amended statement of claim said that PCL had mistakenly charged fees it was not entitled to, Repose ran the claim as one for breach of a specific contract. I reach no final view on the matter as it was not fully argued at the hearing and it was not part of the case which PCL had to meet at trial.
[91]But the issue about Pereza-Matthew’s ability to bind 2Up would remain.
Conclusion
138 For the reasons set out, I dismiss Repose’s claim against PCL.
139 I will hear the parties on the form of final order and costs. I direct the parties to confer on these matters in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4:00pm on 16 November 2021, each party is to file with my chambers and serve a written submission setting out the orders sought and the reasons therefor. The submissions are not to exceed five A4 pages, a minimum 12 point typeface, and 40mm margins on either side of the page.
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