Riley v The Buzz Corp Pty Ltd [No 2] - [2012] WADC 146

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: RILEY -v- THE BUZZ CORP PTY LTD [No 2] [2012] WADC 146

CORAM: EATON DCJ

HEARD: 21-25 & 28 MAY 2012

DELIVERED : 19 OCTOBER 2012

FILE NO/S: CIV 2469 of 2007

BETWEEN: MICHAEL MARK RILEY
First Plaintiff
RILAND PTY LTD
Second Plaintiff
AND
THE BUZZ CORP PTY LTD
First Defendant
KEVIN ALSTON FYNN
Second Defendant
ANTONIO CANTONI
Third Defendant

Catchwords:

Contract - Alleged agreement, partly oral and partly written not proven - Estoppel

Trade practices - Misleading and deceptive conduct - Accessorial liability - Damages

Legislation:

Trade Practices Act 1974, s 51A, s 52, s 75B, s 82

Result:

Judgment for the first plaintiff in the sum of $53,000
Second plaintiff's claims dismissed

Representation:

Counsel:

First Plaintiff                :     Mr G D Cobby
Second Plaintiff            :     Mr G D Cobby
First Defendant             :     Mr W A S Keane
Second Defendant         :     Mr W A S Keane
Third Defendant           :     Mr W A S Keane

Solicitors:

First Plaintiff                :     Gadens Lawyers
Second Plaintiff            :     Gadens Lawyers
First Defendant             :     Vincent Partners
Second Defendant         :     Vincent Partners
Third Defendant           :     Vincent Partners

Case(s) referred to in judgment(s):

Azzi v Volvo Car Australia Pty Ltd [2007] NSWSC 319
Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389
Bowler v Hilda Pty Ltd (1998) 153 ALR 95
Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594
Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171
Martin v Tasmania Development & Resources (1999) 163 ALR 79
Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353
Ratcliffe v Evans [1892] 2QB 524
Stoelwinder v Southern Health Care Network [2000] FCA 444
Village Building Co Ltd v Canberra International Airport Pty Ltd [2004] FCAFC 240
Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387
Yorke v Lucas (1985) 158 CLR 661

EATON DCJ: This action is between a management consultant, the first plaintiff, and his service company, the second plaintiff on the one hand and a company formerly known as Ispire Networks Pty Ltd, the first defendant, and two of its former directors, the second and third defendants, on the other. The first plaintiff claims against the first defendant damages for breach of contract and, further, and in the alternative, against all defendants, damages for misleading and deceptive conduct with interest and costs. The second plaintiff claims damages for misleading and deceptive conduct as against all defendants with interest and costs. All three defendants deny that the plaintiffs are entitled to any relief at all.
The first plaintiff, Mr Riley, is a management consultant who has, by way of academic qualifications, a master's degree in science from the University of Western Australia and a master's degree in business administration from the London Business School. Having completed the latter, he returned to Australia to work for a firm called Anderson Consulting in Sydney, New South Wales. He is married with two children. Following a period of employment with Anderson Consulting in London he returned to Australia with his family in 2003. At about that time he acquired or incorporated the second plaintiff, Riland Pty Ltd, and thereafter, through that corporate vehicle, provided management consultancy services on a contract basis. In that capacity he was successful, garnering a number of significant clients including Lend Lease, a company with an international business.
In August 2006 Mr Riley was almost entirely engaged in consulting to Lend Lease earning, for his services, $2,500 per day excluding GST.
Albion Capital Partners had been a client. The chairman of that firm happened to be an old friend of Mr Riley from university days. He suggested to Mr Riley that he might employ his management skills and experience in the management of a venture in which he had a personal interest rather than market those skills and experience on a purely consulting basis. Mr Riley thought that good advice and, pursuant to it, spoke with another old friend about opportunities in Perth, Western Australia with 'start‑up companies'. When asked, in evidence, to define that phrase he said:
Start‑up companies are companies very early in their corporate life who emerge generally from a good business idea or a good piece of technology – sometimes patented, sometimes not – but with good potential to earn income from a new market.
Making further enquiry, Mr Riley contacted a Professor Conrad Crisafulli, then in charge of intellectual property commercialisation at Curtin University in Western Australia. They spoke in March 2006. Mr Riley enquired as to the prospect of becoming the chief executive officer (CEO) of a start-up company.
It appears that one of the professor's roles at Curtin University was to identify emerging technology with commercial potential and to link the intellectual property involved with that technology to a corporate vehicle under the control of a suitably qualified CEO.
The initial contact with Professor Crisafulli proved fruitful and in May 2006 they met. They discussed, in general terms, emerging technologies, intellectual property and its protection, the use of corporations and the process of raising capital. In that regard they spoken of an Australian Government initiative for commercialising emerging technologies known by the acronym COMET.
Following their meeting Professor Crisafulli introduced Mr Riley to people involved with an innovation in the field of medical technology that appeared potentially lucrative. He made an unsuccessful presentation to them. Nothing came of it.
A few months later Mr Riley was again contacted by Professor Crisafulli who spoke of the possibility of a CEO position in the field of telecommunications, in particular, in the area then known as 'voice-over internet protocol' or VOIP. Mr Riley had some relevant knowledge from previous work. He expressed an interest. In consequence, Professor Crisafulli forwarded to him, by email, a document entitled Ispire Networks Pty Ltd. The document announced the company as a provider of 'reliable low-cost telecommunication services' enabling a phone user to benefit from low-cost VOIP infrastructure without the need for direct internet access from the user's home or business.
Having read the material forwarded to him, Mr Riley indicated to Professor Crisafulli that he was interested in meeting those associated with Ispire and the technology referred to. A meeting was arranged at the offices of the Western Australian Telecommunication Research Institute (WATRI). Mr Riley was introduced to the second defendant, Professor Kevin Fynn. Among the papers before the meeting was Mr Riley's Curriculum Vitae. He outlined to those in attendance the reasons why he would make a good CEO of Ispire adding that he wanted, before becoming engaged, to make further enquiry about the technology. There was general discussion about the possibility of its commercialisation and the need to apply for a COMET grant for some initial funding.
Three days later, Mr Riley and Professor Fynn met over dinner at the University Club on the campus of the University of Western Australia. By then Mr Riley had made enquiries as to the potential for Ispire's technology. The advice he received was favourable. He told Professor Fynn over dinner. They got on well. Following an exchange of emails they met again in early October 2006.
Professor Fynn was, at the time of trial, the head of the School of Electrical Engineering and Computing at Curtin University. In August 2006 he was the director of WATRI, a joint venture between the University of Western Australia and Curtin University. He was also a founding director of Ispire. In that capacity he was in search of a CEO.
It became clear to both men that Ispire's need for expertise in the area of corporate management and Mr Riley's desire to become involved in the management of the corporate commercialisation of emerging technology were likely to coalesce. In mid-September 2006 there was an exchange of emails between them. Professor Fynn said:
It is my understand that your engagement with Ispire in moving forward is on the basis that you will be the CEO post‑funding, subject to broader board endorsement. It is perhaps appropriate for us to have some preliminary discussions on what your expectations are in terms of the total ESOP and your equity expectations. Finally, I am able to offer you an office at WATRI to use as a base during the next few months. So shall we set a date/time for Oct 2.
It is the case that in October 2006 Mr Riley moved into an office at WATRI which was just across the corridor from the office occupied by Professor Fynn. Mr Riley was still consulting to Lend Lease. He was rarely at the WATRI office. He had begun work on Ispire's application for a COMET grant, a questionnaire to be submitted to participants in a pilot program of 50 residential customers and an information memorandum for the purpose of fundraising. In his evidence‑in‑chief Mr Riley said that he was happy to work for 'sweat equity' until Christmas 2006. He explained that term as being work undertaken, not for monetary remuneration, but rather in the expectation of being later allocated equity in the form of shares in a company. There was the possibility that the COMET grant would not be successful and that no funds would be available from that source. That proved not to be the case.
On 6 October 2006 Ispire entered into a deed with the Commonwealth of Australia for a grant under the COMET program. It recorded the Commonwealth's need to ensure accountability for all monies provided by way of financial assistance and specifically provided that COMET funding would be used for management team development, strategic business planning, market research and finalisation of a work in prototype and proven technology. The total grant was not to exceed $64,000. Funding would be by instalments. Payment depended upon the achievement of certain milestones by specified times.
The deed further provided that Ispire might enter into an agreement with a service provider only with the approval of the Commonwealth and could not enter into such an agreement if the service provider was, at the relevant time, an employee of the company or a person with a direct or indirect pecuniary interest in the company including a shareholder or director of it.
The understanding of both Mr Riley and Professor Fynn was that any agreement with a service provider had to be at 'arms length' from the company. Mr Riley's understanding was that he could not be appointed CEO of Ispire until after the completion of the information memorandum and associated matters because the work involved was being funded by the COMET grant. There was, however, an expectation both on the part of Mr Riley and Professor Fynn in November 2006 that Mr Riley would, in due course, be appointed CEO of Ispire.
There was to be a board meeting on 27 November at which Mr Riley would make a presentation. Some five days before, there was an email exchange between he and Professor Fynn in which he enquired as to whether the board would be discussing a CEO package. Professor Fynn replied that the topic was an agenda item and that he would be nominating Mr Riley for the position of CEO. He said in that regard:
I believe that the issues to discussed will be primarily at what % equity and the caveats surrounding this arrangement. Secondly, what level of remuneration is expected when funding becomes available.
He went on to explain that he was supportive of Mr Riley becoming a shareholder. Mr Riley agreed to provide Professor Fynn with a draft of his presentation to the board over the weekend preceding the meeting.
The board of Ispire met as planned on 27 November 2006 at 2.00 pm at the WATRI offices in Nedlands, Western Australia. The third defendant, Professor Cantoni, chaired the meeting. Others in attendance were Professor Fynn, Professor John Siliquini, Professor Conrad Crisafulli and Mr Andrew Sierakowski, all directors of Ispire. The minutes of the meeting record, firstly, a discussion about the governance structure of Ispire, secondly, a presentation to the board by Professor Fynn as to the status of the COMET grant, including a schedule of activities and financial aspects, thirdly, with Mr Riley in attendance, a presentation by Professor Siliquini on the development of Ispire technology and trial results, fourthly, a presentation by Mr Riley on a proposed strategy to commercialise the technology entitled 'Commercialising Ispire: early thoughts' and, fifthly, in the absence of Mr Riley, a discussion, following his nomination to the position of CEO by Professor Fynn, about Mr Riley's expectations as to salary and equity. The minutes record:
The board agreed that Michael was a good candidate for the job and would offer him the position subject to successful capital raising. KF pointed out that Michael Riley could not be formally appointed as CEO since he was engaged as a consultant to Ispire funded from COMET, and therefore could not be appointed until after the assignment.
On the final point the minutes note that Professor Crisafulli was to send Professor Fynn a consultancy contract.
Mr Riley had prepared a visual presentation as to his proposal for the commercialisation of the company's technology (1/48). At the meeting he utilised the visual presentation, moving from page to page (presumably projected onto a screen), speaking to his various 'bullet points'. The presentation, he said, took about 45 minutes and at the end he was thanked and asked to leave.
Following the departure of Mr Riley from the meeting, Professor Fynn put forward his nomination which he had prepared, in advance, in writing. The document proposed that Mr Riley be appointed CEO of Ispire subject to a set of conditions and caveats. There followed three bullet points, the first noting that Mr Riley had expressed an interest in the position of CEO subject to agreeable conditions and caveats, the second noting that he did not wish to be engaged solely as a business development consultant and the third noting that he was prepared to accept an equity stake on par with the founding inventors, as per allocations thereafter set out in the document.
The shareholders of the company at inception were:
•Curtin University   25%
•University of Western Australia                    25%
•Professor Fynn   12.5%
•Professor Siliquini   12.5%
•Professor Cantoni   12.5%
•Dr G Mercankosk   12.5%
To accommodate a newly appointed CEO with an equity equal to the other directors, it was proposed that the shareholdings be varied as follows:
•Curtin University   22.22%
•University of Western Australia                    22.22%
•Professor Fynn  11.11%
•Professor Siliquini   11.11%
•Professor Cantoni   11.11%
•Dr G Mercankosk  11.11%
•Mr M Riley   11.11%
Following his presentation Mr Riley returned to his office and resumed work. About 5 or 10 minutes later, he said, Professor Fynn came to his office, held out his hand and said to him, as they shook hands, 'Congratulations, the job is yours.' Mr Riley was pleased. They had a short conversation during which Professor Fynn told him that the board was unanimous and that he had been appointed by the board to finalise an employment agreement with Mr Riley which could not take place until after the COMET work was complete. Mr Riley said that Professor Fynn told him that there was agreement as to his proposal for equity in Ispire but that there was no agreement as to salary. That conversation, he said, took 2 or 3 minutes. At the time, or shortly after Professor Fynn's departure, Mr Riley made some notes. He then resumed work on a pilot questionnaire to be sent out during his absence overseas.
In the early evening of Tuesday 28 November 2006, Professor Fynn sent Mr Riley a draft consulting agreement for review. The document described as a 'contract for provision of consultancy services' envisaged that Ispire would appoint Mr Riley to provide consultancy services as described in the schedule to the agreement and would pay him fees as set out in the schedule to the agreement. The schedule provided that the consultant would undertake a market assessment, prepare a business plan and an information memorandum and raise capital as stipulated in the business plan.
As to the question of fees, the schedule provided:
In addition, on settlement of a first round capital raising of an amount consistent with the business plan and subject to finalisation of an employment contract engaging the consultant as CEO of Ispire, the consultant will be granted shares or options in Ispire equivalent to an equity prior to the injection of the new capital (pre-cash equity) of 2.1%. The employment contract will also provide for the grant of options to the consultant, with a peppercorn strike price, equivalent to a pre-cash equity of a further 9% vesting against the achievement of milestones to be identified in the revised business plan.
The consultant will meet his own out of pocket expenses other than major expenses (e.g. for travel) which must have Ispire's prior written approval.
The draft agreement was for the provision of work by a consultant to Ispire to be funded from the COMET grant.
The plaintiff's plead in their further re-amended statement of claim that by an agreement made partly in writing and partly orally between Mr Riley and Ispire the latter agreed to employ him as its CEO after he had provided consulting services to Ispire at the completion of the contract for provision of consultancy services. Particularising the pleaded agreement, the plaintiffs plead that the writing comprised slide 19 of Mr Riley's visual presentation to Ispire's board of directors on 27 November 2006 and, insofar as it was oral, the oral component of his presentation to the board on that day regarding proposed remuneration and the conversation between Mr Riley and Professor Fynn following the board meeting, during which Professor Fynn told Mr Riley that the 'board of directors had unanimously approved the plaintiff's appointment as CEO of the first defendant on the terms set out by the plaintiff.'
The plaintiff's further plead that the agreement reached contained certain express terms as follows:
(a)Mr Riley would undertake the COMET consulting agreement;
(b)Mr Riley would be appointed CEO of Ispire upon completion of the COMET consulting agreement;
(c)Mr Riley's remuneration package as CEO of the first defendant would comprise:
(i)a salary of between $150,000 to $250,000 per annum;
(ii)to the extent that Mr Riley's salary was set below $250,000 per annum, he would be permitted to undertake independent consulting work whilst employed as CEO of Ispire, to supplement his income;
(iii)shares to be issued by Ispire to Mr Riley equivalent to 11.1% of the issued shares in Ispire, to be calculated before Ispire's first round of equity capital raising.
The pleaded agreement is said to comprise, in part, the oral component of Mr Riley's presentation to the board of directors on 27 November 2006. In evidence‑in‑chief Mr Riley was asked by his counsel what he said to the board in the course of his oral presentation about his proposed appointment as CEO. He said:
I recall going over the requirements of the stakeholders to appoint a CEO. Those stakeholders were the board themselves, were me and were COMET. So I acknowledged that we couldn't finalise the appointment of a CEO until the COMET grant was concluded – till the COMET work was concluded.
The page of his pre-prepared visual presentation dealing with 'CEO appointment' referred to the issue 'rewards' which were 'to be discussed.' In that regard he said:
Yeah, I – you know, it was important that we – that we defined how I was to be rewarded as a CEO, what my remuneration package would be if we were to proceed together.

Referring to the next slide in his visual presentation entitled 'remuneration' Mr Riley said, in his evidence-in-chief, that the page represented his remuneration requirements to become the CEO of Ispire. When asked what he said to the board he referred to three components being a salary, a long‑term incentive and a short-term incentive. His salary expectations were between $150,000 and $250,000. He recalled saying that $200,000 per annum would be acceptable to him provided that he retained a right to top up his income by doing consulting work outside the job of being full‑time CEO.
In evidence Professor Fynn confirmed that Mr Riley's presentation to the board on 27 November 2006 took about 40 to 45 minutes. He recalled Mr Riley talking to the bullet points on his visual presentation. There were some questions from board members but he could not remember the detail. Mr Riley left the meeting and shortly after he tabled his nomination in writing. All board members, he said, were impressed with Mr Riley's representation. The consensus of the board, he said, was that Mr Riley would be a good candidate for the position of CEO, that he should be offered a consultancy agreement to be finalised by Professor Fynn. Professor Crisafulli provided Professor Fynn with a draft of the proposed agreement.
Following the meeting, said Professor Fynn, he went to speak to Mr Riley. He said that he shook Mr Riley's hand, congratulated him on his presentation, told him that the board were impressed and that he had been asked to finalise the consultancy agreement. The discussion took a couple of minutes.
In cross-examination counsel for the plaintiffs put to Professor Fynn that the purpose of the board meeting on 27 November 2006 was to either approve or disapprove of Mr Riley's appointment as CEO of Ispire. Professor Fynn disagreed, saying it was to look at considering Mr Riley as, first, a consultant, and, secondly, to consider Professor Fynn's nomination of Mr Riley as CEO. He confirmed that Mr Riley's objective was clearly the latter position and that he would not have been interested in the consultancy work if he were not to be offered that position. Professor Fynn said that he made that clear to the board. The ultimate appointment to the position of CEO would depend, he said, on certain conditions being met. Professor Fynn said that prior to and at the board meeting he knew about the range of salary proposed by Mr Riley and the proposal for an ability to do external work. Counsel for the plaintiffs put to Professor Fynn that if it had not been for the agreement with the Commonwealth for the COMET grant, Mr Riley would have been appointed CEO of Ispire at the board meeting. Professor Fynn replied that in those circumstances the board and Mr Riley would have engaged in contract negotiation. At the time of the board meeting the position of the consultancy so far as the COMET agreement was concerned was settled subject to completion of the relevant written agreement. Professor Fynn said to counsel for the plaintiffs 'The only obstacle to starting the negotiations for the CEO was the COMET grant, correct.'
Professor Fynn agreed, in cross-examination, that immediately following the meeting he visited Mr Riley. They shook hands. Professor Fynn said that he proffered his congratulations but denied that he then referred to Mr Riley being the CEO. It was, he said, a very brief conversation of about 2 minutes duration. He could not recall precisely what he did say to Mr Riley. He agreed that he informed him that he had been appointed to finalise the contract. Professor Fynn confirmed that whatever he did say to Mr Riley reflected his instructions from the board.
It is the case that Mr Riley made a brief contemporaneous note of that conversation. The note, dated 27 November 2006 reads as follows:
KF
BOARD:
CEO üü
Shares = founders ü
Salary      $200k     X
9    top up ü
9    KF approved to finalise contract ü
need to finish COMET / 'arms length'
Those notes represent, apart from the recollections of the two people involved in the conversation, the only written record. I find that Professor Fynn informed Mr Riley that the board had endorsed his appointment, in due course, as CEO of Ispire. I find that he informed Mr Riley of the board's approval of him taking a shareholding in Ispire equal to that held by the individual shareholders except for the two universities. He was informed that the board did not agree to a salary of $200,000 per annum but that it did, in principle, agree to him being able to top‑up his income as CEO with external consulting work and that Professor Fynn had been appointed to finalise his contract. Finally, he was informed, as he already knew, of the need to complete the work encompassed within the agreement made with the Commonwealth for the grant of COMET funds and that, if he was to complete that work, which was contemplated, he was to do so at 'arms length'. In other words there was a general acknowledgement by all concerned that there could be no immediate appointment to the position of CEO until the completion of the work contemplated in the agreement with the Commonwealth.
It is evident from the foregoing that there were, as at 27 November 2006, following the board meeting and the discussion as between Professor Fynn and Mr Riley, two matters still to be resolved. They were, firstly, the precise amount of his salary as CEO and, secondly, the definition in contractual terms, of the principle of 'top‑up.' There was, in addition, a third factor, of lesser importance, in the form of the timing of the issue of shares or options to the CEO.
In Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 the court said 360 – 361:
Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common ...
Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own …
The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document … or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed.
The parties had not, on 27 November 2006 reached finality in all of the terms to be agreed. They did not intend to be immediately bound. They were, clearly, intent on negotiating the three outstanding matters mentioned above.
It could not be said that the parties had completely agreed upon all the terms of their bargain. The questions of salary and top‑up were both vital and interrelated. The intent of Mr Riley was to maintain his level of income or wealth. He explained it as follows:
From a personal perspective, one of the decision making criteria I would use to be involved or accept a CEO position in a start-up company was whether I could create wealth – not income – but wealth in excess of $500,000 per year. And that benchmark was established from my consulting activities at the time. As we have discussed, I was working for Lend Lease for $2,500 a day. If I worked for them 9 days out of 10, in normal working days, that is close to 200 days a year. And 200 days a year at $2,500 is $500,000. Now, I never had the expectation that I would be paid that amount of money to work as a start-up but what I would do is say, if I took the salary component and then added on what the equity would be worth as we commercialised the company, if collectively those two items lead to a figure greater than $500,000 then I would consider it a pretty attractive opportunity.
Clearly, Mr Riley was contemplating that Ispire would be successful and that the value of its shares would rise to the point where he might achieve his ambition, as between salary and equity, of maintaining wealth at a level in excess of $500,000 per annum. What concerned him was the prospect of being employed full-time as a CEO at a salary far below that which he had previously commanded as a consultant to Lend Lease for a number of years prior to the anticipated ultimate success of Ispire and rise in the value of its shares. He proposed, for that period, to continue to consult to Lend Lease while working as the full‑time CEO of Ispire.
In evidence-in-chief Mr Riley explained how he proposed to resolve that particular potential problem. Of the 365 days in a calendar year 104 were weekend days. There are, in addition, he said, 10 or 11 public holidays in the year. The standard arrangement for annual leave is a period of 4 weeks. There were, in consequence, he said, about 226 working days in a year for the typical full-time employee in a 9 to 5 job. The remaining 139, he said, are weekends, public holidays and four weeks of annual leave excluding the weekends. Mr Riley explained:
What I wanted to do was have the ability to top‑up that income from full-time employment by working the other days of the year that I was not required to work at Ispire. So it didn't affect my full-time employment. It was – the common term is moon‑lighting, I guess, you working outside of regular business hours.
It follows from the foregoing that if, as CEO of Ispire, Mr Riley was paid an annual salary of $175,000 and in the absence of any appreciation in the value of the shares to be allocated to him, he would need to generate additional income at a level of about $325,000 in order to maintain an annual income in the area of $500,000, being a level of income that he was, as a consultant, accustomed to. If he were to work as a consultant on the 139 days contemplated as being available to him outside his job as CEO he would have to generate an average of about $2,340 a day on every one of those days in order to maintain an income at that level.
Mr Riley's slide presentation to the Board on 27 November 2006 provided that the management of Ispire would be headed by a 'CEO full‑time'. Slide number 18 listed three stakeholders, being COMET, the Ispire Board and Mr Riley. As to the first, the noted requirement was to the effect that 'Protocol requires IM service provider to be at arms length from entity'. Under the subheading 'status' there was a note to the effect that the information memorandum was for completion in January 2007 and that it would restrict appointment, being a reference to the appointment of the CEO.
The following slide, numbered 19, is particularised as being the written part of the pleaded agreement for Mr Riley's employment as CEO of Ispire. Under the heading 'Salary' are the following:
•       150-250 previous
•        External top‑up
•        Ratchet with Ispire performance
Those references, along with Mr Riley's brief note of his conversation immediately after the board meeting with Professor Fynn suggest agreement in principle to top‑up but not agreement in terms. The latter, in my view, was fundamental. What Mr Riley had in mind as to the meaning of top‑up and what it meant to Professors Fynn and Cantoni were not the same. A company, when employing a CEO, might have particular expectations as to the level of the employee's commitment to the role. Those expectations might not coincide with what is expected of an employee working Monday to Friday from 9 am to 5 pm.
On Tuesday 28 November 2006 at 6.54 pm, Professor Fynn wrote to Mr Riley by email, attaching a draft consulting agreement. The operative part of the proposed agreement would appoint the consultant from the date of the agreement to provide consultancy services as described in the schedule for the term and consideration specified in the schedule. The schedule included a paragraph under the heading 'Fees' in the following terms:
In addition, on settlement of a first round capital raising of an amount consistent with the business plan and subject to finalisation of an employment contract engaging the consultant as CEO of Ispire, the consultant will be granted shares or options in Ispire equivalent to an equity prior to the injection of the new capital (pre‑cash equity) of 2.1 %.
It is clear from the foregoing that the granting of shares or options in Ispire were subject to finalisation of an employment contract engaging Mr Riley as CEO.
The evidence suggests that the consultancy agreement was executed by Professor Fynn and Mr Riley on 29 May 2007. As executed, it was an agreement between Ispire and the second plaintiff rather than Mr Riley. The passage quoted above was amended only to the extent that, subject to the finalisation of an employment contract engaging the consultant as CEO of Ispire, the consultant or entity related to the consultant would be granted 213,750 B class shares in Ispire, equivalent to pre‑cash equity of 2.11 %. It provided further that B class shares would include a right to receive $0.01 per share in the event that Ispire is wound up, but no voting or dividend rights.
The changes to the draft consultancy agreement leading to the execution of it in its final form were not so much about the work to be performed pursuant to that agreement and the remuneration for it, but rather about the basis on which Mr Riley would be appointed CEO of Ispire and, in particular, the means by which he, or the second plaintiff, would take up expected equity entitlements. Quite sensibly, cognisant of tax implications, Mr Riley took professional advice from Price Waterhouse Coopers, culminating in an advisory letter dated 23 May 2007 from a partner in that firm to Mr Riley in that regard.
In the interim, Mr Riley continued to provide consulting services, through the medium of the second plaintiff, to lend lease. By letter of 1 February 2007 he, as a director of the second plaintiff, wrote to the chief executive officer and others at Lend Lease about the arrangements for continuing the consultancy during 2007. In that letter Mr Riley noted that the second plaintiff had responsibility for delivering specified outcomes in two areas of Lend Lease's then current activity. The first was entitled 'Asia retail expansion strategy' and the second was entitled 'Intelligent engineering – strategic investment analysis and due diligence'. In that regard, Mr Riley said:
I have recommenced work on the Asia retail expansion strategy this week and have commenced work on the IE opportunity following your instruction. Professional fees will continue to be based upon the delivery of specified results and outcomes agreed with you at the start of each activity.
He further advised:
Given the outcome–based nature of the work, I understand the requirement to work flexibly, including extended hours and weekend work where required. I also understand that travel to other Lend Lease locations overseas is likely, and that these travels will be determined with your guidance and approval. Please note that my availability might be restricted at various periods during 2007 and will be discussed with you at the start of any new activities. Following out discussion at the end of 2006, my professional fees will be at the new rate of $3,000 per day in 2007, excluding GST, until agreed otherwise. Payments will be contingent upon your evaluation of the successful delivery of the agreed results and outcomes.
The reference to Mr Riley's availability being restricted at various periods during 2007, is, I presume, a reference to his commitments and obligations to Ispire in the capacity of CEO of that company in the expectation of his ultimate appointment.
On 19 March 2007, pursuant to the new consultancy fee arrangement, the second plaintiff invoiced Lend Lease for consultancy work done on 32 days at $3,000 per day, an amount of $96,000, for the period 29 January to 17 March 2006, a period of 46 days if one regards those dates as being exclusive rather than inclusive.
Contemporaneously, Mr Riley was holding himself out as the CEO of Ispire, as evidenced by his email of 2 March 2007 to a Mr Dewhurst of Tesco Telecom of the United Kingdom. His doing so reflected an assumption on his part or an expectation that, in due course, he would be formally appointed CEO of Ispire. Professor Fynn appeared to be of the same expectation.
At about the end of March 2007, Mr Riley made a presentation to the Curtin University Pre‑Seed Commercialisation Fund Investment Committee. That led to an exchange of correspondence between the chair of that committee and a Ms Crosthwaite of that committee with copies to other board members of Ispire. One of them, Professor Crisafulli, became annoyed and vented that annoyance in further correspondence. The spat that erupted led Mr Riley to contact Professor Cantoni and advise, by email of 29 March 2007:
I write to you in your role as chairman of Ispire, given developments over the last 48 hours. It is difficult for me to resign as Chief Executive of Ispire when I have not yet achieved the honour of that role, but I feel I have been left with little option other than to withdraw my candidacy for that position. There are four underlying drivers to this decision….
One of those four factors was, said Mr Riley, the attitude of Professor Crisafulli. He explained:
It would be fair to assume, based upon the degree of vitriol and personal abuse directed towards me in Conrad's email, that Conrad has lost confidence in my management ability. It appears that poor commercial judgement and poor communication skills are at the top of Conrad's list of my failings. Any (future) CEO can only operate with the full confidence of his Board. If that confidence is lost, then it is the Board's responsibility to replace that CEO. I could not operate as the CEO of Ispire if the views in the email below are the true beliefs of Conrad.
Mr Riley concluded by indicating that he would complete his existing commitments under the contract funded by the COMET grant over the coming days.
Professor Cantoni responded to that email on the same day indicating that there remained an opportunity to talk about the matter and resolve the problem. They did meet and discuss matters. Professor Cantoni, it seems, indicated that he would quell Professor Crisafulli's wrath and persuaded Mr Riley not to take the threatened course of action. In consequence, Mr Riley continued his work pursuant to the consultancy agreement and was, in due course, invited to present a report to the Board at a meeting on 5 April 2007. The agenda for that meeting included, of course, business arriving from the previous meeting, and, at item 4, company positions. Under that heading, the minutes of the meeting provide the following (2/79):
The Board accepted that the IM and business plan. An action point was raised for KF to execute the consultancy agreement. A discussion took place on MR suitability as CEO for Ispire. A recent investment committee (CIC) meeting raised some concerns on the performance on MR and on his suitability as the CEO for Ispire. KF commented that he has seen MR perform well in other investor presentations and meetings and did not share the concerns of the CIC. AC commented that the Board needs to offer more support to MR in terms of the strategic direction of Ispire. All members of the Board agreed to offer MR the position of CEO of Ispire.
A discussion then took place on the remuneration package to be offered. The Board agreed to the equity offering of 11.11%, being equal to the founders. The shares would be vested at 2.11% on successful capital raising with the remainder being vested pro‑rata over a two year period. The salary level to be offered was to be in the range of $165k ‑ $175k (inc superannuation). The chair would follow up on the contract negotiations. CC stated he would forward to KF a baseline executive employment contract used by Curtin in other start‑up ventures.

By way of action to be undertaken immediately, Professor Fynn was to execute the consultancy agreement with Mr Riley and Professor Crisafulli was to forward an executive employment contract template to Professor Fynn.
By letter of 13 April 2007, Mr Riley, in his capacity as a director of Riland Pty Ltd, wrote to Professor Fynn, described in that letter as 'Acting Chief Executive Officer' of Ispire Network Pty Ltd. Attached was an invoice for the consultancy work in the sum of $33,000, being the contract amount of $30,000 plus GST.
In cross‑examination Mr Riley was questioned about the work that was done leading to the rendering of that invoice. Counsel for the defendants put to him that the work carried out by him from 28 November 2006 to 21 June 2007 was done pursuant to the consultancy agreement and not pursuant to anything that had been said by Professor Fynn to him. Mr Riley responded:
Yes. Part of the work I did was reliant upon the COMET funded work. There was a substantial amount of other work I did which was reliant upon my understanding of the agreement we had reached on 27 November that I would be CEO.
The foregoing reflects a continued understanding, or expectation, on the part of Mr Riley that he would be, in due course, formally appointed CEO of Ispire. Putting aside the spat with Professor Crisafulli, it is fair to say, on the evidence, that in general terms the Board had the same expectation. The twin uncertainties of salary and a definition of what was meant by top‑up were still to be resolved.
Mr Riley said in evidence-in-chief that at about the beginning of June 2007, Professor Fynn visited him in his office and informed him that responsibility for finalising the employment contract had been transferred to Professor Cantoni. Certainly, it is the case that on Friday 8 June 2007, Professor Fynn sent an email to Mr Riley advising that, from that point onwards, further negotiations as to his employment contract would be between Mr Riley and Professor Cantoni. It was at about this time that the latter forwarded to Mr Riley a document entitled 'Executive Employment Agreement' with a covering letter apparently dated 13 June 2007. In a cover page the role was defined as chief executive officer and salary was said to be $175,000 per annum including superannuation. The role was stipulated as being full‑time.
Crucially, that document (3/138) provided the following:
The executive undertakes that subject to clause 6.3, 6.6 and 6.8 he will not at any time during the period of employment without the consent in writing of the company be:
A)engaged, employed, concerned or interested directly or indirectly (otherwise than as a share or debenture or note holder in a public company) in any proposal, project, assignment or development which is in or related to the industry in which the company is concerned;
or
B)engage directly or interested directly or indirectly in any other employment, business or occupation.
Not surprisingly, Mr Riley sought to have a discussion with Professor Cantoni. They met. Mr Riley began to outline his proposed changes to the contract. In evidence-in-chief he said that Professor Cantoni asked him to put his proposed changes in writing so that he might distribute them to other board members.
By email of 14 June 2007 (3/144) Mr Riley wrote to Professor Cantoni, with a copy to Professor Fynn, attaching his suggested modifications to the document forwarded to him. As to the passage just quoted he said:
As discussed above, this term contradicts the board's position at the November 2006 meeting that I should retain the opportunity to supplement income through the corporative advisory Activities of my existing company Riland Pty Ltd. I have therefore modified the term to provide comfort that I will not work for an interent telephony competitor and also to provide comfort of an upper time limit on Riland work. Please note that, after removing annual and holiday leave, there are 226 company work days in a year. That leaves 139 other days in the year, of which I propose to earn supplementary income from up to half these days. The Riland work will therefore not diminish my performance with the company.
By email of 19 June 2007 Professor Cantoni wrote to Mr Riley (3/146) in the following terms:
I have put your requested variations to the board of Ispire and after a few iterations the board has converged to a unanimously agreed that is contained in the two attached documents. The board has moved from its original position towards some of the variations you requested but remained firm on others. From my meeting with you, I suspect that the most important issue for you on which the board did not change its position at all is that the salary is for full-time employment and hence did not accept the allowance of 70hr/yr for other work. I believe that the board did move in a reasonable way towards your requested variations related to termination and death and covered under 3(k) and 3(l) in the offer of employment letter.
I hope you will give favourable consideration to the revised offer and join the Ispire team and help make the venture a success.
Professor Cantoni wrote again on 20 June 2007 with an offer of employment as chief executive officer. He proposed a salary of $175,000 per annum inclusive of superannuation and no change to the board's attitude to top‑up. Mr Riley responded on the following day complaining that the current offer was for an annual salary of $160,550, excluding superannuation, and that the board had changed its attitude to the principle of top-up as expressed at the time of the board meeting in November 2006.
Correctly, Professor Cantoni informed the other board members that there was a wide gap between the offer then currently made to Mr Riley and his expectations. He proposed, given the wide gap, that the offer be withdrawn immediately and that Professor Fynn fill the role of CEO for the time being. It seems that there was ready agreement on the part of other board members to the course proposed and in consequence Professor Cantoni wrote by email to Mr Riley on 21 June 2007 advising that the offer of his employment was withdrawn and that in consideration of the work already done by him the board proposed to grant 263,750 class B shares to be converted into ordinary shares at Mr Riley's election.
Mr Riley did not regard the position as entirely lost and responded on the following day to Professor Cantoni indicating his bewilderment and pointing out that he had been working in good faith during the 'contract negotiation period'. He requested a further meeting and, in the interim, accepted the offer of 263,750 class B shares to be converted into ordinary shares at a time of his choosing.
Mr Riley said that three or four weeks after the email of 21 June he met with Professor Cantoni. He had, by then, been into his office over a weekend to collect his personal belongings. At the meeting, he said, Professor Cantoni told him that the decision of the board was unanimous and final and that it was the result of the gap in expectations as between Mr Riley and the board. That gap was, very clearly, about the business of top-up.
Following his meeting with Professor Cantoni, or at about the time of the meeting, Mr Riley contacted Lend Lease to inform that he was again available to consult to the company on a full‑time basis. He was, he said, welcomed back to Lend Lease as a consultant on that basis.
By their further re-amended statement of claim the plaintiffs plead that Ispire represented to Mr Riley on 27 November 2006 that he would be appointed CEO of Ispire after the completion of the COMET consulting arrangement, that his remuneration package in that capacity would consist of shares and a salary in the range of $150,000 to $250,000 and, to the extent that his salary might be less than $250,000, he would be permitted to undertake independent consulting work whilst employed as CEO of the first defendant to supplement his income. By way of particulars the plaintiffs plead that the representations were partly in writing and partly oral comprising, so far as the writing was concerned, slide 19 of Mr Riley's audio‑visual presentation to the board of directors on 27 November 2006 and an email from Professor Fynn to him dated 28 November 2006 containing a written contract for the COMET consulting arrangement. The oral component was Mr Riley's presentation to the board in terms of what he said to them and the brief conversation between he and Professor Fynn following the board meeting.
The plaintiffs plead that the representations were made in trade and commerce, were unqualified and were misleading and deceptive contrary to s 52 of the Trade Practices Act 1974. That section provided, at the relevant time: 'A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.'
By their pleadings each of the defendants denies par 12 of the plaintiff's further re-amended statement of claim which asserts that the pleaded representations and each of them were made in trade and commerce. The context before me is that of negotiation as between a prospective employer and employee. Neither plaintiff could be characterised as a consumer or customer. In Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594, Mason CJ, Deane, Dawson and Gaudron JJ drew a distinction between conduct in the course of an activity that was not itself of a trading character, but was undertaken in the course of or as an instant to trade, and conduct which was an aspect or element of an activity that bore a trading character. They held that a cause of action under s 52 could only arise if the alleged false and misleading conduct related to the latter type of activity. The court was concerned with an appeal on a preliminary question of whether a direction by the defendant's foreman to the plaintiff, also an employee of the defendant, regarding the removal of certain equipment was conduct in trade or commerce. The majority held that the foreman's direction was not inherently of a trading or commercial character and was 'divorced from any relevant actual or potential trading or commercial relationship or dealing' of his employer. It was, rather, in the nature of an internal communication by one employee to another in the course of their ordinary activities in and about the construction of a building.
The context before me is different to that considered by the High Court in that case. Since then in Barto v GPR Management Services Pty Ltd (1991) 33 FCR 389, Wilcox J said of information provided to an employee in the course of negotiation of a variation of his contract of employment (393-4):
The information was 'internal', in the sense that the recipient was a person already employed by the informer. And, although the context was 'commercial' in nature, the relevant conduct was not the sale of goods or services by virtue of which the corporation endeavoured to make profits, but something related to its capacity to affect such sales.
Wilcox J, however, held that the negotiations for the variation of the contract of employment were made 'in trade or commerce' because those negotiations were 'commercial in nature' and undertaken for the purpose of the company's overall trading activities.
Heerey J in Martin v Tasmania Development & Resources (1999) 163 ALR 79 took the view that contracts of employment and associated incidental negotiations, however necessary, were not in themselves of a trading or commercial nature.
Reflecting on the foregoing cases, Finkelstein J, in Stoelwinder v Southern Health Care Network [2000] FCA 444, did not regard negotiations for a contract of employment as an internal matter in the sense discussed in the High Court in Concrete Constructions. He said at [6]:
Before a contract of employment is made the prospective employee is not a part of the corporate enterprise and communications between the corporation and the prospective employee are not an aspect of the internal affairs of the corporation. Nor would I regard in any different way discussions concerning the variation of a contract of employment. Negotiations for the variation of a contract are not properly characterised as communications with an employee in the course of his or her employment. I would regard all such communications, that is communications relating to the making or variation of a contract of employment to be prima facie 'in trade or commerce' because in most cases a contract of employment 'is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character', to adopt the language of the High Court.
In Village Building Co Ltd v Canberra International Airport Pty Ltd [2004] FCAFC 240 French, Sackville and Conti JJ, dealing with the problem of interpretation said [49]:
The difficulty that can arise in applying the principles in Concrete Constructions is illustrated by the different views expressed in this Court as to whether representations made by a corporation to an employee in connection with the employee’s terms of employment constitute conduct in trade or commerce. In Barto v GPR Management, in the context of a strike out application, Wilcox J held (at 395) negotiations with a prospective or present employee in respect of that person's employment contact is conduct capable of falling within s 52 of the TP Act. In Martin v Tasmania Development & Resources [1999] FCA 593; (1999) 163 ALR 79, 96 – 98 [70] - [77], Heerey J disagreed, holding that a communication to an employee asserting that termination of his employment was required on operational grounds was not a dealing of a trading or commercial nature. (This issue was not addressed on appeal: Tasmania Development & Resources v Martin [2000] FCA 414). In Stoelwinder v Southern Health Care Network (2000) FCA 444; (2000) 177 ALR 501, Finkelstein J preferred Barto to Martin. In Hearn v O'Rourke [2002] FCA 1179; (2002) 193 ALR 264, a case involving a different fact situation, Kiefel J at first instance expressed a preference for the reasoning in Martin. The Full Court allowed an appeal (Finn and Jacobson JJ; Dowsett J dissenting), but did not find it necessary to resolve the conflict: Hearn v O'Rourke [2003] FCAFC 78; (2003) 129 FCR 64.
The context before me is not confined to the internal dealings of a corporation as between one employee and another. It involves, rather, negotiations between a corporation and a prospective employee. Undoubtedly, the business of the corporation was in trade or commerce in that it was proposing to develop and commercialise its intellectual property by marketing its product to consumers. The corporation needed management for that purpose and, more particularly, needed management with skills and experience associated with the marketing of its product. The prospective employee was keen to fulfil that role. The two became engaged in negotiations to that end. In doing so, in my view, the corporation engaged in trade or commerce. Its conduct in that regard was in trade or commerce.
Section 52 of the Act proscribes conduct in trade or commerce that is misleading or deceptive or likely to mislead or deceive. The plaintiffs plead representations by the first defendant to the first plaintiff. If the representations, as pleaded, were made they would amount to conduct on the part of Ispire in trade or commerce. The plaintiffs further plead that the representations were in respect of a future matter and that Ispire did not have reasonable grounds for making them, invoking s 51A of the Act. That section, at the relevant time, provided that for the purposes of div 1 pt V of the Act, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading. The section further provides that the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
It is trite to say that, as a general principle, intent need not be proved in order to establish a contravention of s 52.
I have already found, as a matter of fact, that Professor Fynn, following the board meeting on 27 November 2006, informed Mr Riley, on behalf of the board, inter alia, that the board agreed, in principle to Mr Riley being able to top‑up his income as CEO by external consulting work. The circumstances were that such that the representation relied upon was not just a statement of the board's attitude to that principle at that particular time but that it would be the attitude of the board when the time came to finally negotiate the terms of Mr Riley's appointment as CEO of Ispire, negotiations that could not be finalised until the completion of the COMET work. As such, what Professor Fynn said to Mr Riley in the brief discussion on 27 November 2006 was a representation as to a future matter.
Professor Fynn knew well before the board meeting in November 2006 that Mr Riley was accustomed to earning in excess of $500,000 per annum in his role as a management consultant. Professor Fynn was also aware that Mr Riley was continuing with his consulting work both before and after the office at the WATRI building was made available to him. I have no doubt that Professor Fynn and the other board members, with the possible exception of Dr Mercankosk, who was very ill, were well aware of the level of income being generated by Mr Riley as a management consultant and of his continuing work in that capacity. I am also satisfied that the defendants were aware that Mr Riley would not have undertaken the work encompassed within the COMET agreement without a firm expectation of his eventual appoint as CEO of Ispire.
In informing Mr Riley as he did in the brief conversation following the board meeting in November 2006, Professor Fynn had reasonable grounds for making the representation to the effect that Ispire was agreeable to Mr Riley undertaking independent consultancy work whilst employed as CEO of Ispire. Having regard to the provisions of s 51A of the Act I find that the corporation did have reasonable grounds for making the representation. To the extent that the section casts an evidentiary burden upon the corporation it has, I find, satisfied that burden.
As Brereton J said in Azzi v Volvo Car Australia Pty Ltd [2007] NSWSC 319 [87], evidence of reasonable grounds need not come from the persons who made the representation and need not be testimonial. The existence of factors which would establish reasonable grounds may more often more reliably be ascertained from the overall probabilities to which the circumstances of the case give rise, the background and the conduct of the parties prior to the relevant communications. I conclude that when the representation was made by Professor Fynn to the effect that the board's attitude to the principle of top‑up was a positive one, the board had, at that stage, had the intention of ultimately appointing Mr Riley as CEO of Ispire on that basis and had the capacity to do so.
The question remains as to whether the representation made was, in its context, misleading or deceptive, whether it was likely to mislead or deceive and whether it did in fact mislead or deceive.
It is the case that when Professor Cantoni came to the final negotiations with Mr Riley as to the terms of his employment as CEO, the position of Ispire had changed. Rather than being accepting of the principle that the CEO would, as of right, be able to engage in other income‑earning activities, the written contract presented to Mr Riley provided that the CEO would undertake that he would not at any time engage, directly or indirectly, in any other employment, business or occupation without Ispire's consent in writing. In such circumstances, if such consent was not forthcoming, the CEO would be precluded from engaging in other income‑earning activities by way of top‑up. In an attempt to negotiate a settlement of what appeared to be an impasse Mr Riley suggested to Ispire that his undertaking would be that he would not at any time during the period of employment undertake more than 70 days of paid work with Riland Pty Ltd in any year. That proposal was flatly rejected by the board which remained intransigent. The picture for Mr Riley had changed dramatically in that, rather than taking on the position of CEO of Ispire with the readily ability to maintain his income, if he could, at a level commensurate with his earnings as a management consultant, he was faced with the prospect of working as Ispire's CEO for $175,000 per year (inclusive of superannuation) with no ability for top‑up in the event of Ispire's refusal to consent in writing. For Mr Riley that meant a potential reduction in annual income in excess of $325,000, a position that he was not prepared to countenance. The negotiations broke down and he returned to his former work with Lend Lease.

Given that I am approaching Mr Riley's damages claim on the basis that it was he who suffered loss or damage by reason of conduct in contravention of s 52, I should also take into account any remuneration or compensation that he may have received but for his direction to Ispire that the remuneration or compensation ought to be directed to Riland Pty Ltd. That being the case, the amount of $30,000 ought to be deducted from the amount that Mr Riley would have earned by reason of his consulting to Lend Lease but for his work for Ispire.
In that vein, I must consider the value, if any, of the 263,750 B class shares. As mentioned, a share certificate was issued by Ispire in respect of them. In cross‑examination, Mr Riley said that, having received the certificate, he returned it to Professor Fynn, requesting that it be amended to make reference not just to Riland Pty Ltd but to Riland Pty Ltd as trustee for the Riley Family Trust. He explained that the reason for making the request was that it was 'just a more tax effective vehicle'. Mr Riley said that he did not receive any further correspondence or share certificate subsequent to the request.
More recently, prior to the trial, he had made enquiry as to the shareholders of The Buzz Corp Pty Ltd (formerly Ispire) and discovered that Riland Pty Ltd is listed as the holder of B class shares. He had made no attempt to convert those shares to ordinary shares. To the best of his knowledge, Riland Pty Ltd had not received any correspondence from the company. He regarded the shares, as issued, as effectively valueless, having an entitlement to 1 cent per share in the event of a winding up or liquidation.
During the trial, Brenton Scott Siviour gave evidence of an expert nature. He was called by the plaintiffs. He was, by profession, a chartered accountant who produced an expert report dated 26 October 2011 entitled 'Valuation of Riley's interest in The Buzz Corp'. That report is found at volume IV of the trial bundles.
In an executive summary to the report, Mr Siviour calculated the value of Mr Riley's interest in Ispire as at 1 May 2007 and 21 June 2007 on the basis of he then having a shareholding 11.1% of shares on issue. Under the heading 'Calculation as at the date of this report', he said that he was unable to complete an updated valuation due to a lack of relevant and accurate information. When asked by counsel for the plaintiffs what was missing, he replied:
The information which is needed to be able to perform a valuation as of today's date would be relevant financial information. The information that I received was bookkeeping information and – in the documents and relevant financial information would need proper profit, loss and a balance sheet and accounts from the period of inception through to the date; of today's date. Well the last balance sheet date anyway.
Counsel for the plaintiffs then asked Mr Siviour as to the present value of class B shares in The Buzz Corp Pty Ltd based on the assumption that they were, from the outset, invalidly issued. He replied:
If shares were invalidly issued, I would presume that they would have no rights to any economic benefit, or legal rights. Legal rights would flow to an economic benefit. See, if there's no economic benefit from that, then there would be no value attributed to it; to those shares.
The matter of the validity of the B class shares emerged during the trial. In the belated amended reply to the defence of the first defendant, the plaintiff's, at par 2A, plead that the purported issue of class B shares by the first defendant was invalid in that, at all material times, the first defendant did not have a constitution and prior to 21 June 2007, had one class of shares capable of issue. In the absence of a special resolution passed by the board of Ispire, varying the rights attached to shares, no B class shares could be issued.
In final submissions, counsel for the plaintiffs asserted that, in the absence of a special resolution authorising the issue of class B shares in Ispire, the issue of the B class shares to Riland Pty Ltd was invalid.
In closing written submissions, counsel for the defendants asserted that Ispire had not adopted a constitution and was governed by the replaceable rules under the provisions of the Corporations Law. Counsel submitted that the issue of purported class B shares in Ispire to Riland Pty Ltd was defective in that the rights attaching to those shares were not defined but that the issue of the shares was not beyond power and the shares are not invalid.
As mentioned, the question of the validity of the issue of the class B shares to Riland Pty Ltd arose during the course of the trial. What I do know, and do accept, is that a share certificate did issue. It was returned by Mr Riley with a request for an amendment as to the identity of the shareholder. There was no further share certificate issued nor any correspondence on that subject matter. Mr Riley has, to all intents and purposes, ignored those shares and regards them as effectively valueless. If the shares were invalidly issued, then they may have, as Mr Siviour suggested, no value at the present time. If he were wrong, there is, in any event, no evidence before me as to the present value of those shares. The point is, however, a somewhat arid one. The question for me is whether I should attribute some value to those shares and take them into account in an assessment of damages on the basis that they represent some form of remuneration or compensation flowing from Ispire to Mr Riley for the work done by him during his association with Ispire. I am not prepared to attribute any value to those shares in that exercise.
In my view, Mr Riley is entitled to an award of damages pursuant to s 82 of the Trade Practices Act in the sum of $53,000 being, in effect, the loss of income that he might have derived by consulting to Lend Lease during the period of his association with Ispire less the $30,000 paid to him pursuant to the work carried out by him under the COMET agreement. It follows that there should be judgment for the first plaintiff against the defendants in the sum of $53,000. The second plaintiff's claims are dismissed. I will hear counsel for the parties as to appropriate orders.