Right Price Confectionery v Sengos [2003] Nswsc 117 - corrected 11 March 2003

[2003] NSWSC 117

CITATION:	Right Price Confectionery v Sengos [2003] NSWSC 117 - corrected 11 March 2003 [2003] NSWSC 143
HEARING DATE(S):	12/11/02, 13/11/02
JUDGMENT DATE:	4 March 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Barrett J
DECISION:	Claims in plaintiffs' amended statement of claim filed on 16 May 2000 dismissed with costs
CATCHWORDS:	CORPORATIONS - causes of action asserted by company and director/shareholder alleged to have exposed plaintiffs to loss from litigation - no causal connection shown between any such loss and alleged breaches of duty and statutory wrongs
CASES CITED:	Brunninghausen v Glavanics (1999) 46 NSWLR 538 Henville v Walker (2001) 206 CLR 459 Percival v Wright [1902] 1 Ch 421 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
PARTIES :	Right Price Confectionery Pty Limited - First Plaintiff David Gregory Radford - Second Plaintiff Paul Sheridan Sengos - Defendant
FILE NUMBER(S):	SC 3501/99
COUNSEL:	Second Plaintiff in person Mr J F Hassett, Solicitor - Defendant
SOLICITORS:	Second Plaintiff in person Hassett Dixon - Defendant

- 25 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

In proceedings 3501/99 pursuant to Part 20 rule 10 of the Supreme Court Rules, I correct accidental slips in reasons for judgment published on 4 March 2003 by substituting “FMC” for “RPC” wherever appearing (except in paragraph 47) and by substituting “second plaintiff” for “second defendant” wherever appearing and now re-publish those reasons in corrected form.

So ordered: 11 March 2003

BARRETT J

TUESDAY, 4 MARCH 2003

3501/99 – RIGHT PRICE CONFECTIONERY PTY LIMITED & ANOR v PAUL SHERIDAN SENGOS

JUDGMENT

1 By their amended statement of claim filed on 16 May 2000, the plaintiffs sue the defendant upon several causes of action. The first plaintiff, a company of which the second plaintiff is now the sole member and sole director, pleads certain duties owed to it by the defendant and breach of those duties. The duties are those that arose from a contract under which the defendant served as managing director of the first plaintiff and from the relationship that existed between the company and the defendant as one of its directors. The duties, as pleaded are said to be duties:

“a) to exercise a reasonable degree of care and diligence;

b) to act in good faith;

c) to act honestly;


d) to make full disclosure of all material information; and

e) to avoid conflict of interest between his personal interests and his duty.”

2 Alternatively, the first plaintiff says that the defendant engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in breach of s.52 of the Trade Practices Act 1974 (Cth) and s.42 of the Fair Trading Act 1987.

3 The second plaintiff who, at all material times, was a co-director of the first plaintiff with the defendant, pleads duties owed to him by the defendant and breach of those duties, the duties being duties:

“a) to exercise a reasonable degree of care and diligence;

b) to act in good faith;

c) to act honestly;

d) to make full disclosure of all material information; and

e) to avoid conflict of interest between his personal interests and his duty.”

4 Again, there is an alternative claim based on the Trade Practices Act and Fair Trading Act provisions.

5 The plaintiffs’ claims arise from events in relation to certain proceedings initiated in the then Commercial Division of this court in 1993. Those proceedings were settled in 1994. The plaintiff in those proceedings was Famous Makers Confectionery Pty Ltd (“FMC”). The defendants, as the proceedings were eventually constituted, included the present plaintiffs, the present defendant and one Joseph William Brown. The amended statement of claim in the present proceedings says the following in relation to the 1993 proceedings:

“39. On or about 2 November 1993, FMC commenced proceedings in the Commercial Division of the Supreme Court of New South Wales, No. 50388 of 1993 (“FMC proceedings”) against, insofar as is material, the Defendant and the First Plaintiff.
40. During the course of the FMC proceedings FMC alleged, in so far as is material, that:
a) the First Plaintiff was knowingly concerned in, for its own benefit and advantage, in the business activities engaged in by the Defendant in breach of the FMC non competition covenant;
b) the First Plaintiff wrongfully induced the Defendant to breach the FMC non competition covenant;
c) the First Plaintiff conspired with the Defendant o injure FMC by unlawful means;
d) the First Plaintiff was controlled by the Defendant and used by him as his instrument or ‘cloak’ for carrying out his business activities;
e) the First Plaintiff carried on business in reliance upon confidential information pertaining to FMC’s business wrongfully communicated to the First Plaintiff by the Defendant;
f) the business activities of the First Plaintiff were in the nature of the distribution or franchising confectionery by way of wholesale; and
g) in carrying out the activities referred to in paragraph 25 above, the Defendant was acting as an agent for the First Plaintiff.
41. On or about 6 April 1994, by yet still Further Amended Summons, FMC joined the Second Plaintiff and Brown as defendants to the FMC proceedings, alleging, in so far as is material that:
a) the Second Plaintiff and Brown conspired with the Defendant to injure FMC;
b) the Second Plaintiff and Brown wrongfully induced the Defendant to breach the FMC non-competition covenant; and
c) the Second Plaintiff used unlawful means to interfere with FMC’s business.
42. The Plaintiffs will at the hearing seek to rely on the pleadings in the FMC proceedings in full.
43. On or about 19 April 1994, FMC settled the FMC proceedings against the Defendant upon the Defendant consenting to a judgment against him of $500,000.00 with no order as to costs.
44. On or about 20 May 1994, FMC discontinued the proceedings against the First Plaintiff, the Second Plaintiff and Brown on the basis that each party pay its own costs.”

6 In his amended defence filed on 12 November 2002, the defendant deals with these aspects of the amended statement of claim (“ASOC”) as follows:

“25. The Defendant admits the content of paragraph 39 of the ASOC.
26. The defendant does not admit the content of paragraphs 40 and 41, and makes no concession in relation to paragraph 42 of the ASOC.
27. The Defendant admits the settlement and discontinuance alleged in paragraphs 43 and 44 of the ASOC but otherwise makes no admission.”

In addition, the defendant says that it did not owe any duties to the second plaintiff and that he has no standing to sue in the proceedings.

7 Despite paragraph 26 of the defence, there is no real dispute about the basic facts. The 1993 proceedings were a direct result of a transaction in which the defendant sold a confectionery distribution business to FMC. As part of that transaction, the defendant accepted a restraint of trade obligation in relation to his being engaged in “wholesale” confectionery distribution. During the period of the restraint, the defendant, the second plaintiff and Brown agreed to establish a company to conduct a confectionery distribution business. The defendant and the second plaintiff had been on friendly terms since about 1979. Brown was a friend of the second plaintiff.

8 The new business venture upon which the three decided to embark was to operate in a manner designed not to conflict with the restraint of trade that the defendant had accepted as against FMC. Operationally, their method of carrying on business was virtually identical with that of FMC in that sales operatives visited retail outlets and satisfied their needs for stock. The method of doing business was, however, designed in such a way that stock was to be placed with retailers on consignment so that, technically, that stock would be sold to consumers through the agency of the retailers. As a result, the argument ran, the new business operation would engage in retail selling, not wholesale selling. A barrister, Mr McKeand, gave certain advice about this revised method of operation. It will be necessary to look at that advice in due course. Certain confirmations as to the characterisation of the proposed method of distribution for the purposes of retail sales tax were obtained from the Australian Taxation Office.

9 The first plaintiff became, in August 1993, the vehicle through which the defendant, the second plaintiff and Brown were to conduct the new business. The first plaintiff had previously been a family company of the defendant. It had not operated and was dormant. It was agreed that the defendant, the second plaintiff and Brown would all be directors and that they would hold the shares in the proportions 34%, 33%, 33%.

10 While plans to establish this new business were in train, certain disputes arose between the defendant and FMC (and its principals) over matters unrelated to those which eventually became the subject of the 1993 proceedings. The disputes involved principally landlord and tenant issues about the premises occupied by the business the defendant had sold to FMC. These are said to have been the cause of certain threats and harassment of various kinds on the part of FMC and its principals, as well as retaliatory conduct of a like kind by both the defendant and the second plaintiff. The defendant admits that he engaged in certain episodes of harassing conduct against FMC.

11 The 1993 proceedings were commenced by FMC on 2 November 1993, that is, some three months after the defendant, the second plaintiff and Brown had started their joint venture operation through the first plaintiff. FMC sued the defendant and the first plaintiff for breach of the restraint of trade covenant. The first plaintiff was sued on the basis that it was “knowingly concerned” in the breach by the defendant and was liable to account as a constructive trustee. The defendant alone was also the subject of claims arising out of harassment episodes of the kind to which I have referred. Anton Piller orders were made and executed. FMC afterwards expanded the proceedings. The counts based on harassment were extended to the first plaintiff as well as the defendant. An allegation of the tort inducing breach of contract was made against the first plaintiff which was also said to have been a “cloak” for the defendant. Allegations of conspiracy, misuse of confidential information and accessorial liability under the Trade Practices Act were made against the first plaintiff. Counts covering these aspects were added to FMC’s originating process.

12 In its defence, the first plaintiff maintained that its method of selling did not involve conduct of the kind caught by the defendant’s restraint of trade covenant and denied any connection with or responsibility for the harassment alleged against the defendant.

13 With the onset of the 1993 proceedings and the central role played in them by the defendant, the three co-venturers (the defendant, the second plaintiff and Brown) came to the view that the first plaintiff’s future would be improved if the defendant withdrew. Steps to implement that arrangement were taken in late November 1993. The defendant sold his shares to the second plaintiff and Brown and resigned as a director. Late in 1993 or early in 1994, the second plaintiff and Brown took further action in an attempt to distance their business from the defendant. They obtained a new company having a name corresponding with its ACN and caused it to register the name “Right Price Confectionery” under the business names legislation. This new company started to conduct business in place of the first plaintiff. In March 1994, FMC further expanded its Commercial List proceedings by adding the new company, the second plaintiff and Brown as defendants. A further Anton Piller order was made and executed. FMC expanded the proceedings yet again on 6 April 1994 by adding claims for injunctive relief against the then recently added further defendants, including the present second plaintiff.

14 On 19 April 1994, the present defendant settled with FMC on terms that involved payment of a substantial sum by him to FMC. The action proceeded to trial against the remaining defendants on 26 April 1994 and was settled by all parties on the second day. The present plaintiffs incurred expenditure in connection with the proceedings.

15 The plaintiffs’ case in these proceedings is that the defendant owed one or other of them contractual and general law duties (and failed to adhere to statutory norms of behaviour) by:

(a) failing to inform the second plaintiff and Brown of the full effect of the advice of Mr McKeand regarding the restraint of trade covenant and the proposed new method of operation;

(b) allowing the first plaintiff to commence business on the basis of the new method of operation without following the barrister’s advice;

(c) failing to inform the second plaintiff before 10 August 1993 that he had engaged in importation and wholesaling of confectionery in breach of the FMC restraint of trade covenant;

(d) failing to lodge with the Australian Securities Commission notification of changes to directorships and shareholdings within the first plaintiff in a timely manner after 10 August 1993;

(e) failing to procure his brother Patrick Sengos to resign as a director of the first plaintiff;

(f) failing to inform the second plaintiff before 10 August 1993 or at any time thereafter that the first plaintiff was the trustee of the Sengos Family Trust;

(g) retaining confidential documents of FMC and keeping them at the first plaintiff’s premises where they were seized when the first Anton Piller order was executed; and

(h) engaging in misleading and deceptive conduct towards FMC, disseminating injurious falsehoods about FMC’s business, wrongfully detaining FMC’s goods and unlawful interference with FMC’s business.

16 Certain of these items need to be put in context. As to items (a) and (b), it is said by the plaintiffs that the barrister’s advice about the method of confectionery distribution designed to avoid the restraint of trade covenant was communicated to the defendant and that the barrister, as well as expressing an opinion that the consignment method of selling did not entail “wholesale” distribution, advised that some form of contact should be made with FMC before a business based on the assignment method was commenced. The plaintiffs also say that the defendant failed to communicate the latter aspect of the advice and in so doing committed a breach of the duties to which reference has been made, as well as engaging in conduct prohibited by the Trade Practices Act and Fair Trading Act.

17 Items (c), (g) and (h) in the list entail alleged conduct of the defendant which, as it were, was calculated to inflame FMC, thereby making it more inclined than it would otherwise have been to launch the 1993 proceedings in which the plaintiffs became embroiled to their detriment.

18 Items (d), (e) and (f) refer to alleged failures to act on the part of the defendant that allowed records maintained by the then Australian Securities Commission (and available to any member of the public wishing to search them) to reflect out of date information indicating a more substantial connection between the defendant and the first plaintiff than existed (or was meant to exist) after the first plaintiff had become, in August 1993, the vehicle for the joint enterprise of the defendant, the second plaintiff and Brown. Whereas the first plaintiff should have been presented in such records as a company owned 34%/33%/33% by the defendant, the second plaintiff and Brown and with the three of them as directors, it continued, the plaintiffs say, to be presented as a company of the defendant and his brother, with the result that anyone searching the Commission’s records would obtain the wrong message about the ownership and control. This, the plaintiffs say, was a result of breach of duty on the defendant’s part; and again the breach served to inflame FMC to the detriment of the plaintiffs.

19 Before examining the nature of such duties as were owed by the defendant to each plaintiff and the question whether any such duties were breached, it is appropriate to examine and assess in more detail the facts concerning each of the three areas of conduct in relation to which the plaintiffs make complaint. It is necessary to consider not only the conduct of the defendant towards the plaintiffs but also the extent of the knowing participation of the second plaintiff.

20 The first area to be explored involves the defendant’s alleged shortcomings in relation to implementation of the advice obtained from the barrister, Mr McKeand. The second plaintiff says in his affidavit that in or about July 1993, he had a conversation with the defendant about their going into business together and that the defendant said:

“As a part of the agreement with the new owners of FMC, I am not allowed to wholesale confectionery in Australia or New Zealand. However I have received an advice from a barrister – Ross McKeand that what I am proposing to do would not be in breach of the non competition covenant with FMC.”

21 The defendant, in his affidavit, describes his conference with the barrister on 18 January 1993 as follows:

“On 18 January 1993, I met with Mr McKeand. Dominic Mosca was unable to attend. In that meeting, we spoke in general terms about the scope of the non-competition covenant. Mr McKeand advised me along the following lines, he said -
‘The covenant here prevents you from taking part in any business to do with wholesaling confectionery. You can hold shares in a listed company which does so, but you cannot have a controlling shareholding. If you do, you could face an injunction and/or a suit for damages and an account for profits. You are, however, permitted to sell confectionery on a retail basis.’
I then asked -
‘Do you think that selling on a consignment basis would be OK?’
He said -
‘When you sell on consignment, you are effectively selling retail. Title to the goods never passes to the store owners, they are really just your agents, so that wouldn’t be classed as wholesale, and therefore is definitely permissible.’
I then said -
‘I think that they (meaning FMC) will try and stop anything that I do. Is there anything that I can do ahead of time to improve my position if they do try to stop me.’
Mr McKeand said -
‘’It’s probably advisable for you to send them some written notice of your intention, so that they can’t later claim that you were being deceptive in your conduct.’
Now exhibited to me and marked PS1 is a Statement made by Mr. McKeand in proceedings 50388 of 1993 in this Honourable Court (‘the FMC proceedings’) regarding the advice he gave me.”

22 It is clear from the defendant’s affidavit that he puts forward Mr McKeand’s statement as a reliable record of the advice given. In that statement, Mr McKeand refers to a conference with the defendant in January 1993 and to some subsequent occasions on which he gave oral advice and appeared for the defendant in proceedings involving entry into FMC premises, as well as a conference on 21 June 1993. The statement includes the following in relation to the conference in January 1993:

“The substance of the advice that I gave to Mr Sengos in the conference was as follows: First, I advised Mr Sengos that the restraint in the contract extended to all confectionery products regardless of whether they were actually sold by him or of the type sold by him prior to the sale agreement. Secondly, my advice was that he was not able to take any part in promoting or operating a business which engaged in wholesaling of confectionery. However, I told him that he could undoubtedly own shares in a listed public company carrying on that sort of business, but at the other end of the scale, he could not be a controlling shareholder in a small company carrying on the type of business which was restrained. I advised Mr Sengos that I could not say precisely where the line was to be drawn between those two extremes, but I told him that he could not take a participating role in any such business. Thirdly, I advised that if he was selling retail and not wholesale, there was no breach of the clause. Whether or not there was a fundraising component whereby some percentage of the proceeds of sale went off to charity, made no difference to the substance of the transaction. Fourthly, I advised Mr Sengos that he would probably be restrained by injunction from committing a breach of the covenant and that he would be liable in damages or possibly to account for any profits obtained or made as a result of a breach.”

23 Mr McKeand’s statement next refers to a request for advice he received from the defendant on 22 February 1993 regarding a new business involving the publishing of a magazine or trade journal enabling confectionery wholesalers to have an advertising medium as a means of contacting 10,000 retailers throughout New South Wales. The defendant also said that he “would do a bit of importing and wholesaling of products that are not being sold by Famous Makers Confectionery”. He asked Mr McKeand whether he should seek FMC’s permission for the venture, or tell them what he was planning to do (including “that I will be doing a bit of importing on products that do not compete with the products currently sold by FMC”), or “tell them nothing”.

24 Mr McKeand’s statement refers to the following advice given by him in response to the defendant’s request of 22 February 1993:

“The substance of the advice I gave to Mr Sengos in the telephone conversation was as follows: First, I advised him that he could not import and wholesale confectionery. Secondly, I advised Mr Sengos that as he thought what he intended to do was not within the ambit of the restraint clause, it was advisable to first inform Famous Makers Confectionery Pty Limited (‘FMC’) of what he intended This was because as he was sure that they would try and restrain him anyway, when the matter came to Court, the Judge would not have the impression that Mr Sengos was trying to do something secretly. Thirdly, I gave Mr Sengos some advice about the fliers which I believe I had at the time of the telephone conversation. However, I cannot recall what I said.”

25 Annexed to Mr McKeand’s statement was a fax he received from the defendant on 18 June 1993 as follows:

“TO:- ROSS McKEAND 235-2342
Ross,
I am contemplating starting a fundraising company whereby I would put products (bags of lollies) into a shop, social club, office etc on consignment. The outlet would sell the bags for $2 a pack, the outlet would get 50c a bag commission and the charity would get say 30c a bag commission.
Is this fundraising? Can I do this with out in the constraints of my agreement with Scott & Co?
Paul”

26 Mr McKeand attended the defendant and his solicitor in conference on 21 June 1993 and his record is as follows:

“The substance of the advice that I gave to Mr Sengos in conference was that he must avoid wholesaling any confectionery. I told him that I could not see that his idea of fundraising and giving a percentage of the proceeds of sale to a charity made any difference to the substance of the transaction. I advised him that he must avoid property in the goods passing to the retailer and that the retailer must not pay Mr Sengos for the goods out of his own money but must account to Mr Sengos for the money received from the customer after deduction of the retailer’s commission. To the best of my recollection, I advised that, ideally, the retailers should keep the proceeds of sale of the bags of sweets separate, but that in the light of the obvious practical difficulties in that course, it should not make any difference to the substance of the transaction if the moneys were not kept separate. However, I advised that it was essential that the retailers account for the proceeds of sale after deduction of their commission. I also advised Mr Sengos that I expected that, rightly or wrongly, FMC would take proceedings once they found out what he was doing and it was essential that Mr Sengos adhere strictly to the guidelines that I suggested. I also advised that I could not give Mr Sengos any assurance that this method of sale would not be interpreted as wholesaling, but if he wished to go ahead with this approach, it was essential that he stick to the guidelines. The substance of my advice as to the effect of what was being proposed was that it was my opinion that it was retailing but that I could not guarantee that a court would not find it to be wholesaling. To the best of my recollection, Mr Sengos said words to the effect:
‘I have drafted (or am drafting) an agreement with agents. Will you have a look at it?’
I replied in words to the effect:
‘Alright.’ “

27 The defendant deposes to the following conversation between himself and the second plaintiff at some time before commencement of the business venture:

Defendant: “Ross thinks we should tell FMC exactly what we are doing, but I’m against that idea. He says if we do this, no-one could accuse us of trying to operate behind their backs. But I think the reality is that we are either inside or outside the covenant. That’s it. If we are outside we are OK, and if we are inside we are in trouble. It doesn’t matter what we tell them, why should we tip them off – they’ll find out soon enough anyway.”
Second
Plaintiff: “I agree with you.”

28 The defendant also refers to an affidavit sworn by the second plaintiff in the 1993 proceedings in which he said that by 10 August 1993 he was satisfied that the proposed method of operation would not conflict with the restraint to which the defendant was subject. In cross-examination, the following exchange occurred:

“Q. We will come to this issue a little later. For present purposes, I am suggesting to you that you fought these proceedings primarily on the basis that you believed there was no breach and FMC was asserting as against you that there was. That was the main issue, correct?
A. At that point in time, yes.
Q. This was something that you had planned for ahead of time. You had taken your tax advice and spoken to Mr McKeand. The very thing you planned against happened, didn’t it?
A. Yes.
Q. Because they just took a different view to you?
A. They were provoked into taking action.”

29 In the present proceedings, the second plaintiff readily agreed in cross-examination that he had spoken with Mr McKeand about the development and drafting of the form of agreement with retailers on which the new business methodology was to be based. In the course of such conversations, Mr McKeand said words to the effect, “I want to be able to defend this document if necessary”. The second plaintiff accepted that he understood this as a reference to what he called “the difference between consignment and wholesale”, but maintained that, on his understanding, the persons against whom it might be necessary to “defend” were retailers to whom the venture supplied stock and the sales tax authorities. But he was also prepared to “assume” that Mr McKeand was referring to a possible need to defend against FMC in respect of the defendant’s restraint of trade covenant.

30 Mr Brown, the third co-venturer, gave evidence in these proceedings. He was called by the defendant and, in the course of his cross-examination by the second plaintiff, the following exchange occurred:

“Q. At that time [i.e., the time Brown had joined the second plaintiff in proceedings against the defendant] you obviously believed that he [i.e. the defendant] had something to do with the problems that we faced in the Supreme Court?
A. Well, it stemmed back before that, David, in my opinion, when we first took out the whole thing. You knew Paul. I didn’t know Paul. You told me that he was clear to operate this sort of business. You told me exactly that and what happened? It wasn’t the case. And that’s why the whole came apart.
Q. Would you relate what I told you in terms of wholesale and retail?
A. Yes. You said that he couldn’t wholesale but he could retail, but as it turned out, there was a very, very big question mark whether he could even retail; and you knew him better than I did. You said you checked it all out and you spoke to his solicitor. You did all of that and it wasn’t the case. As I see it – but then again, you tell me.”

31 I deduce from the whole of the evidence about Mr McKeand’s advice that the second plaintiff was fully aware of the technical basis on which the supposed distinction between “wholesale” activities and sales on consignment was constructed. He knew that in physical and operational terms there was no difference between the two. He also knew that the viability of the proposed business method, so far as lack of conflict with the restraint of trade covenant went, depended on a fine and technical legal distinction. As someone with commercial experience (he had been for 15 years or so an AMP agent), he must have known that FMC might well object to the defendant’s engaging in a business based on the proposed consignment methodology. He must have known that, when FMC saw a business of which the defendant was managing director supplying stock to the retailers from whom the covenant was meant to keep the defendant away, FMC would, in all probability, not sit back and simply say, “Well, isn’t that clever: they are selling on consignment and there is nothing we can do about it.” On the contrary, anyone with even rudimentary commercial experience or knowledge – or even common sense - would have thought that it was likely that FMC would take steps in an attempt to thwart the new competition, with the restraint of trade covenant being the main weapon in its armoury for any such battle.

32 There is a conflict in the evidence as to whether the defendant told the second plaintiff of Mr McKeand’s suggestion that an approach be made to FMC. According to Mr McKeand’s statement (adopted by the defendant), he made that suggestion to the defendant in February 1993 in relation to the project based on a trade journal enabling wholesalers to advertise to retailers, with “a bit of importing and wholesaling of products that are not being sold by Famous Makers Confectionery”. That suggestion by Mr McKeand in relation to that particular proposed project was a direct response to a direct question by the defendant whether he should say anything to FMC about the particular proposal. Faced with the stark reality that the proposal, as described to him, would entail “a bit of … wholesaling” – the very activity caught be the restraint of trade covenant – it was entirely to be expected that Mr McKeand would counsel against that aspect of it, as he did. The suggestion by him that there be prior notification to FMC related to the balance of the proposal based on the trade journal which, on the face of things, he probably did not regard as within the covenant but thought nevertheless might provoke FMC.

33 But the proposed course of action eventually decided upon was quite different from that in relation to which Mr McKeand had given the advice to which I have just referred. It did not involve a trade journal through which wholesalers could advertise to retailers. It involved, rather, the system of sales on consignment through retailers. The methodology was described in the defendant’s fax of 18 June 1993 to Mr McKeand set out in full above. Mr McKeand’s account of the advice he gave on that quite different proposal (which account, as I have said, is accepted by the defendant) is also set out in full above. Nowhere in that account is there any suggestion by Mr McKeand that FMC should be informed in advance of what was proposed.

34 The defendant deposes that he told the second plaintiff that Mr McKeand had said that they should “tell FMC exactly what we are doing”. It may well be that the defendant did say that, believing that the earlier suggestion to that effect in relation to the trade journal proposal had a continuing quality to it and applied to any new venture potentially impinging upon FMC.

35 In the end, it cannot matter whether Mr McKeand made the suggestion of communicating with FMC in relation to the particular proposal on which the parties eventually embarked. The possibility of such communication would logically have occurred to anyone in the second plaintiff’s position. He knew of the fine legal line. He spoke directly with Mr McKeand about the drafting of the form of agreement to be used. His input to that included suggestions about use of the word “consignment” in certain parts of the agreement. He checked with the Australian Tax Office about conformity with retail versus wholesale selling methodology. If the defendant had said to him, “Ross McKeand suggests we tell FMC in advance what we propose doing,” there can be no real doubt that he would have said that there was no point and that he had formed his own view that the business methodology did not involve selling by wholesale. The position is summed up in the evidence of Brown. The second plaintiff told him that he had “checked it all out”. The second plaintiff had, in fact satisfied himself on matters relevant to the wholesale/retail distinction and would not have been deflected by any information from the defendant about a suggestion that there be a preliminary approach to FMC to tell it in advance what was proposed.

36 I turn next to the second set of matters on which the plaintiffs’ claims are based, being those involving the defendant’s alleged failure to arrange filing of returns with the Australian Securities Commission and the resignation of his brother as a director of the first plaintiff, plus failure to cause the first plaintiff to relinquish trusteeship of the Sengos Family Trust. It is not, I think, disputed that the company was supplied by the defendant, having been formed to be the trustee of the family trust, and that it was dormant in August 1993, having never traded. The defendant’s accountants provided a certificate to the effect to the second plaintiff and Brown at about the time their venture began. The defendant and his brother were the directors.

37 The complaint of the plaintiffs here is that anyone searching the ASC records in relation to the first plaintiff would have formed the impression that it was wholly a Sengos company, even though, as of 10 August 1993, the defendant, the second plaintiff and Brown had entered into an arrangement for ownership by the three of them and for the three to be directors. This, it is said, would have caused FMC to believe that the first plaintiff was an alter ego of the defendant, whereas the true position was that he was one of three co-owners and co-directors.

38 This aspect may be dealt with shortly. Even if the defendant, in breach of some duty or other, allowed those records to show an outdated position after 10 August 1993, whatever views FMC had about the identity of the owners of the first plaintiff were set right in late November 1993 when the defendant withdrew, having been bought out by the second plaintiff and Brown. In the course of his cross-examination, the second plaintiff was taken to a copy of a circular signed by him as secretary of the first plaintiff headed “To Whom It May Concern” and stating that the defendant and his family were no longer associated with the first plaintiff, that they would take no further part in its management or control and that their shares had been bought by the second plaintiff and Brown. The cross-examination concerning that document was as follows:

“Q. … That’s you, writing to ‘Whom it may concern’ to tell everybody, or to whom it may concern at least, that Mr Sengos was out of the company and that you and Bill Brown were taking it over. Is that the effect of that?
A. Well, that’s what he wanted us to write, so we did that up.
Q. Wasn’t the purpose of creating this document to let everybody know that he was out, and that that might assist you with the problem that you have addressed earlier that FMC might be less hostile if he was gone?
A. That’s one of the purposes, yes.
Q. And they knew, as at early December, that he was gone?
A. Yes.
Q. But they pressed on against you because, I suggest to you, you were in fact a competitor of theirs and they wanted to stop you?
A. Well, I think they saw us still as the enemy. I’m sure they would have liked us to fold and be out of the business, and they had gone so far that it was hard for them to step back.
Q. Well, they hadn’t really gone that far, had they? The proceedings were only a month old.
A. Well, there were two Anton Piller orders, an injunction hearing, subpoenas to all our agents, a massive amount of our time being wasted. It felt to us that it had gone a long way in a very short distance.
Q. That was because they were trying to stop you from trading, wasn’t it?
A. Well, I think that was one of their objectives.”

39 Also in evidence is a letter dated 22 November 1993 from the solicitors acting for the present first plaintiff in the 1993 proceedings (being the third defendant in those proceedings) to the solicitors acting for FMC. That letter refers to an amended summons prepared on behalf of FMC and reads in part as follows:

“The first time the third defendant is mentioned in a substantive sense in particular (b) to paragraph 10 (top of page 10) of the points of contention.
That assertion may have an historical basis, but it has not been the case since 10 August, 1993. On that date Messrs David Radford and William Brown were appointed directors. The first defendant was and remains to this day the only other director. The second direction pre-10 August, resigned.
On that date, Messrs Radford and Brown also acquired 33% each of the shares in the third defendant. The first defendant held the remaining 34%. The first defendant stayed on with the third defendant after 10 August 1993 as a consultant.
On 18 November 1993 Messrs Radford and Brown learnt that the appropriate returns had not been filed at the ASC to record the changes of 10 August, 1993. They (Radford and Brown) had been informed by accountants retained by the third defendant that the returns had been lodged at the ASC on 9 September, 1993. The third defendant is following up the accountants as to whether the returns have been lost in the ASC, whether the returns were inadvertently not lodged, or otherwise.
In any event, the changes on 10 August 1993 were minuted and we expect the first defendant will not dispute the changes. Fresh returns are being lodged at the ASC by the third defendant’s new accountant.
Indeed, this litigation is precipitating a parting of the ways between the first and third defendants. We are instructed that during the week commencing 22 November 1993 the first defendant will resign as a director, he will dispose of his shares, and cease to have any role as a manager employee or agent of the third defendant.
We are informed by Blake Dawson Waldron that when the first defendant extricates himself from the third defendant, that should not be taken as any sort of admission to the plaintiff’s allegations against the first defendant, but rather as a desire to save the third defendant further entanglement in the litigation.
Outside court on 19 November last we told you about the parting of the ways, and you said that the third defendant would not get off the hook that easily, or words to that effect. The plaintiff might like to reconsider, particularly with regard to his claim for injunctive relief. The third defendant will tender a copy of this letter into evidence.
To return to the pleadings, the plaintiff has treated the third defendant as the alter ego of the first defendant. It is simply not true that the third defendant is ‘his’ (the first defendant’s) company. He is not the ‘organising principal thereof’. If the third defendant was a trustee of a family trust, the third defendant will be resigning that position forthwith.
We cannot distinguish claims against the third defendant. The next time the third defendant is mentioned in the points of contention is in paragraph 12, which on the face of it is an allegation against the third defendant as a principal under s52 of the Trade Practices Act. Yet paragraph 2 of the amended Summons appears to lift the words ‘knowingly concerned’ from s79(1)(d) TPA. Then in paragraph 4 of the amended Summons, there is the inference (and nothing more than that) that the third defendant engaged in conduct contrary to s52 as a principal.”

40 This evidence makes it clear that FMC was aware of the true position as to shareholders and directors by the end of November 1993, that is, within four weeks of the commencement of the 1993 proceedings. FMC could not then have been under an impression that the defendant was a director or shareholder: it had been told that the second plaintiff and Brown had bought him out. Notwithstanding this, FMC expended and intensified the proceedings, including by joining the second plaintiff, Brown and the new company they had formed (the company whose name corresponded with its ACN) as defendants some four months later in March 1994.

41 It is also relevant to note that, on 29 November 1993, transfers of shares in the first plaintiff by the defendant, his de facto wife and his brother were executed in favour of the second plaintiff and Brown and delivered to them. The defendant and his brother also signed resignations as directors on the same day. In a witness statement signed for the purposes of the 1993 proceedings and dated 2 December 1993, the second plaintiff referred to minutes of a meeting of directors at which these matters were dealt with (the date of the meeting being typed as 29 November but changed by hand to 30 November) and said:

“I have instructed the third defendant’s new accountant to lodge the appropriate returns at the ASC, forthwith.”

42 There was here a contemporary recognition by the second plaintiff that, as a result of the changes made on 29 November 1993, he or, more accurately, he and Brown had it entirely within their power to put matters straight by way of ASC filings. To the extent that any signature of the defendant as a former officer might have been required on any return for lodgment with the ASC, there is no reason why he would not have given it: he had already co-operated in the despatch of the “To Whom It May Concern” circular. In light of that circular and the letter of 22 November 1999 from the first plaintiff’s solicitors to the solicitors for FMC, FMC was fully aware of the facts as to ownership and control of the first plaintiff by the end of November. The second plaintiff could have arranged relevant ASC filings. In fact, his witness statement of 2 December 1993 said that he had already instructed accountants to do so.

43 The ASC’s database is not the equivalent of a Torrens system register. It reflects circumstances separately and independently arising and there can never be any certainty that the true facts are as shown there. While FMC may have been under a misapprehension between early August and late November in that it could have thought that the first plaintiff was wholly owned and controlled by the defendant and his brother, it was under no such misapprehension after the end of November. It had by then been told the true facts. It nevertheless intensified and expanded the proceedings. Perhaps it did not believe what it had been told about the defendant’s withdrawal. But if it was in that frame of mind, there is no reason why it should have placed any greater credence on the ASC database.

44 There is simply no cause and effect relationship between the existence of any out of date particulars on the ASC database and the initiation of the 1993 proceedings, the expansion of the proceedings by FMC to cover the second plaintiff and Brown or any intensification of those proceedings against the first plaintiff. The same can be said about any continuing role the first plaintiff may have had as trustee of a family trust. There is no evidence suggesting in any way that detriment was occasioned to either plaintiff by any such continuing role, even if it existed.

45 The third series of items in respect of which the plaintiff’s complain is what has generally been termed “harassment”. There is a great deal of evidence about childish behaviour as between FMC personnel on the one hand and the defendant on the other. When I describe it as “childish”, I do not mean to suggest that the conduct was not also serious. Some of it resulted in complaints to the police and an application for an apprehended violence order. The “childish” description is meant to suggest that the conduct, in many ways malicious and destructive, was not such as would have been engaged in by sensible adults. Nuisance phone calls were made. On one occasion, the defendant inserted a newspaper advertisement in the name of FMC seeking a secretary on ridiculously attractive terms so that the apparent advertiser was swamped with phone calls. FMC personnel used to sit in their cars outside the first defendant’s premises. These are merely a few examples. Another is the apparent retention by the defendant of a customer list (said by him to be out of date) that was located and taken by FMC under the first Anton Piller order.

46 Disputes that had arisen between the defendant and FMC personnel (over landlord and tenant and other matters) before the three party venture began on 10 August 1993 prompted this course of behaviour. It was in train before the second plaintiff came upon the scene. Both sides – the defendant and the FMC personnel – were actively involved. Having arrived, the second plaintiff became a participant in the campaign. I would go further and say that he participated with apparent alacrity. He admitted in cross-examination having been involved in the sending to one Scott, a principal of FMC, of a cartoon-type drawing intended to depict Scott. It shows a naked man urinating on to an upturned electric fan and apparently washing himself in the urine deflected on to him. There is a caption “Pommie Shower” and a speech balloon (which the second plaintiff admitted having added), “Peter! Get me the soap”, Peter being another FMC principal. The second plaintiff willingly joined the defendant in harassing conduct of this kind. The two of them viewed it, apparently, as fair pay-back for nuisance phone calls and other similar activities they believed were initiated by persons within FMC.

47 Brown gave evidence about these matters:

“Q. Can you recall when you first became aware that there was any commercial harassment of either FMC as against RPC or RPC as against FMC?
A. Yes. During that period there was, when I’d go into the office, there would be Paul and David, they would be sort of laughing and sniggering away there because they had contact with them and they explained to me they had phone calls with them and so forth.
HIS HONOUR: Q. When you say that period, what do you mean?
A. It was only three months that Paul was with the company. That was – when it first started to come out would have been a month after we started. Around September, September October they were – I’d come into the office and they’d be sniggering, you know, playing games. As I said, no point playing games. Anyhow, that’s what happened.
HASSETT: Q. At some stage you said there was no point playing games?
A. Yes.
Q. Do you recall who you said that to?
A. Both of them.
Q. Did you see either Julian Scott or Peter Costelloe at any time?
A. The only time I saw Peter Costelloe, he drove outside the factory in his car and he yelled out. I said to the guys: Forget about him. Just get on with it. Apparently he didn’t [scil. “did”] pass before, and quite often – the guys would tell me about it when I got in.”

48 The position here is essentially the same as in relation to the defendant’s alleged failure to warn the plaintiffs of a need perceived by Mr McKeand to inform FMC of the proposal to start up the new venture. The second plaintiff knew from the beginning that a form of warfare was in progress between the defendant and FMC. He became a willing participant in the harassment. It ill behoves him to say that he did not expect and became an unwitting victim of the new phase of the war that broke out when FMC decided to sue the defendant and the first plaintiff. If the defendant, through engaging in what I have termed harassment, contributed to the decision by FMC to initiate proceedings against the defendant and the first plaintiff, then so too did the second plaintiff.

49 Having completed a survey of the three areas of conduct on the part of the defendant that the plaintiffs allege to be deficient, I should mention what appears to me to be one other link in the causal chain by which the second plaintiff himself (along with Brown) became a defendant in the 1993 proceedings. The defendant left the scene on 29 November 1993. By the “To Whom It May Concern” circular issued shortly thereafter and by the solicitors’ letter of 22 November 1993, FMC became aware of the severing of the link with the defendant. Subsequent actions of the second plaintiff and Brown to remove the business from the first plaintiff and to place it with the new ACN company were followed by expansion of the 1993 proceedings to involve that new company, the second plaintiff and Brown. It must be inferred that those actions of the second plaintiff and Brown played a significant role in drawing them into the litigation net.

50 I proceed now to a brief examination of the nature of the duties on the part of the defendant asserted by the plaintiffs. The defendant’s duties towards the first plaintiff are said to arise in contract and by virtue of his being a director of the first plaintiff. The terms of the contract are not particularised but it may be accepted, I think, that a managing director (if that is what the defendant was) owes to his company contractual duties at least as extensive as those attaching to the office of director as such. It may therefore be accepted that the duties owed by the defendant to the first plaintiff included the duties pleaded, namely, duties to exercise a reasonable degree of care and diligence, to act in good faith, to act honestly, to make disclosure and to avoid conflict of interest and duty. In other words, it must be accepted that the defendant owed to the first plaintiff the several duties pleaded.

51 The second plaintiff maintains that equivalent duties were owed by the defendant to him. This cannot be so. One company director does not owe to another duties equivalent with those owed to the company itself; nor are fiduciary duties generally owed by a director to a shareholder, except in circumstances of particular reliance: Percival v Wright [1902] 2 Ch 421; Brunninghausen v Glavanics (1999) 46 NSWLR 538. In the present context, however, I accept that the defendant, the second plaintiff and Brown may be regarded as having become co-participants in a venture entailing some duties as among themselves, in addition to duties owed as directors to the company through which the venture was pursued. They may be regarded as having become fiduciaries of one another to such an extent as to place each under a duty to subordinate his own interests to the common good of the joint enterprise and to act honestly: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1. The particular content of any such duty will, however, be shaped by the particular circumstances, including the circumstance that each of the three was active in the business and none was under any form of disability or otherwise vulnerable.

52 Whatever may be the precise definition and limits of the duties owed by the defendant to the first plaintiff on the one hand and the second plaintiff on the other, the facts do not, in my judgment, warrant any finding that either of the plaintiffs suffered loss, damage or prejudice by reason of the conduct of the defendant that the plaintiffs say entailed breach of duty. Taken at its highest and putting upon all relevant matters the worst complexion for the defendant, the plaintiffs’ case fails to show that the conduct complained of occasioned loss or damage. There can, of course, be no doubt the each plaintiff suffered loss and damage because of involvement in the 1993 proceedings. Nor can there be doubt that the plaintiffs would not have been subjected to the 1993 proceedings but for the restraint of trade covenant the defendant had given to FMC. But there the chain of causation ends. The decision that the first plaintiff should engage in the business of selling on consignment was a decision in which the second plaintiff participated fully, as, it seems, did Brown. But the participation of the second plaintiff was more comprehensive than that of Brown. The second plaintiff went into the details of the wholesale/consignment distinction, including by participating in discussions with Mr McKeand about the drafting of the contract to be used and checking matters with the sales tax authorities. He cannot have helped but know that the method of doing business was against the spirit of the restraint of trade covenant and that a need to “defend” against FMC might arise. He knew that the parties were taking a calculated risk. Even had he been given the full details of all Mr McKeand’s advice as set out in Mr McKeand’s witness statement quoted extensively above, he would still have proceeded as he did. He was a willing participant in the harassment campaign waged by and against FMC and must have known what additional dangers that presented to himself and the first plaintiff. The absence from the ASC database of up to date information about ownership and control of the first defendant was not a cause of the 1993 litigation either at inception or at the later stage when it was expanded to make the second plaintiff, Brown and the ACN company additional defendants.

53 FMC acted aggressively in the 1993 litigation. It was intent upon stopping anyone it suspected of being backed by or associated with the defendant moving back into the sphere of commerce that it had paid to keep the defendant out of. In such circumstances, the desirable course for a party in FMC’s position might well be to cast the net widely and to draw in every entity which might eventually be shown to be liable under one head of liability or another. That is exactly what FMC did. It was in no mood to take much notice of fine distinctions between wholesale and consignment. It had paid for a commercial benefit and it was not about to sit by and see parties obviously and openly associated by the seller of that benefit to it attempting to deprive it of the benefit. No one will ever know whether FMC would have succeeded in the 1993 proceedings and whether the supposed wholesale/consignment distinction would have been found to have sustained the defence put forward by the defendants in that action. Perhaps it would. The real point is that the acts and omissions of the present defendant attacked by the present plaintiffs as breaches of duty were not in any sense causative of the 1993 proceedings or of the loss the plaintiffs suffered by reason of being subjected to those proceedings.

54 The same must be said of the part of the plaintiffs’ case based on the Trade Practices Act and the Fair Trading Act. It has not been shown that the plaintiffs or either of them were the recipients of representations made by the defendant that were misleading or deceptive. But even if they were, the kind of reliance that is essential to the operation of those provisions has not been established. The High Court emphasised in Henville v Walker (2001) 206 CLR 459 that, for contravention of s.52 to justify relief, the particular representation must have been operative as something upon which reliance was placed and therefore as a factor that materially contributed to the loss or damage suffered by the plaintiff. This is the requirement of s.82. For reasons already elaborated, such reliance on the part of the plaintiffs was absent so far as the representations ascribed to the defendant were concerned.

55 The result of these proceedings must therefore be that the claims in the plaintiffs’ amended statement of claim filed on 16 May 2000 are dismissed with costs.

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Last Modified: 03/12/2003