Schlegel v Gourmania Holdings Pty Ltd
[2019] WASC 277
•7 AUGUST 2019
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SCHLEGEL -v- GOURMANIA HOLDINGS PTY LTD [2019] WASC 277
CORAM: ALLANSON J
HEARD: 1 & 2, 5 & 6 NOVEMBER 2018
DELIVERED : 7 AUGUST 2019
FILE NO/S: CIV 2692 of 2016
BETWEEN: BEAT SCHLEGEL
Plaintiff
AND
GOURMANIA HOLDINGS PTY LTD
Defendant
Catchwords:
Contract - Share sale agreement - Where plaintiff selling one of two shares in company - Where agreement provided for price adjustment by reference to cash on hand and net tangible assets at completion - Where parties dispute construction and application of price adjustment formula
Contract - Share sale agreement - Where the plaintiff breached warranty - Whether the breach by wilful non-disclosure - Whether purchaser suffered loss alleged
Fiduciary duty - Duties of director - Where plaintiff/director substantially increased own salary - Whether the plaintiff acted in accordance with company constitution - Where the plaintiff acted with informed consent of other director or shareholder
Fiduciary duty - Where plaintiff invoiced company for consultancy services - Where the plaintiff procured payment of invoices
Assignment of actions - Whether action under the Corporations Act s 1317H assignable - Whether action for breach of director's fiduciary duties assignable by company to shareholder
Legislation:
Corporations Act 2001 (Cth), s 181, s 182, s 183, s 1317H
Property Law Act 1969 (WA), s 20, s 191
Result:
Claim allowed in part
Counterclaim allowed in part
Category: B
Representation:
Counsel:
| Plaintiff | : | E Hensler |
| Defendant | : | CPK Russell |
Solicitors:
| Plaintiff | : | O'Donnell Salzano Lawyers Pty Ltd |
| Defendant | : | Zafra Legal |
Case(s) referred to in decision(s):
Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570
Angas Law Services (in liq) Pty Ltd v Carabelas [2005] HCA 23; (2005) 226 CLR 507
Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052
Brimstone Resources Ltd v Empire Resources Ltd [2018] WASCA 107
Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1
Commonwealth Bank of Australia v Shannon [2013] NSWSC 1076
Commonwealth of Australia v Verwayen [1990] HCA 39; (1990) 170 CLR 394
Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500
Dover v Lewkovitz [2013] NSWCA 452
E C Dawson Investment Pty Ltd v Crystal Finance [No 3] [2013] WASC 183
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 37; (2014) 251 CLR 640
Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498
George 218 Pty Ltd v Bank of Queensland Ltd [2015] WASC 434; (2015) 303 FLR 231
Herrman v Simon (1990) 4 ACSR 81
Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
In re Duomatic [1969] 2 Ch 365
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
MYT Engineering Pty Limited v Malcon Pty Limited [1999] HCA 24; (1999) 195 CLR 636
Oswal v Commonwealth Bank of Australia [2013] WASCA 58
Palaniappan v Westpac Banking Corporation [2016] WASCA 72
Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633
Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165
Re Compaction Systems Pty Ltd and the Companies Act [1976] 2 NSWLR 477
Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156
Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 82 ACSR 1
Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544
Table of Contents
Introduction
The witnesses
Factual background and findings
The Share Sale Agreement and Mr Schlegel's salary increase
Cuisinex Asia
The issues - the claim
The purchase price and completion adjustments
The cash actual amount
The net tangible assets
The issues - the counterclaim
Breach of warranty
The terms of the Share Sale Agreement
The allegations of breach
The defences to the warranty claim
The salary increase
The Articles of Association
Findings
Cuisinex consultancy fees
The agreed facts
Assignment
Set‑off
Conclusion
ALLANSON J:
Introduction
The plaintiff, Beat Schlegel, formerly held one ordinary share in Gourmet Chef Foods Pty Ltd. In December 2012, he entered a Share Sale Agreement to sell his share to the defendant, Gourmania Holdings Pty Ltd. Mr Schlegel accepted deferred payment of $1 million of the purchase price, with Gourmania Holdings to pay it in three instalments pursuant to a Seller Finance Agreement.
Following the sale, Mr Schlegel stayed as a director of Gourmet Chef Foods until May 2015.
Gourmania Holdings did not pay the third instalment of the purchase price.
In 2016, Mr Schlegel brought this action seeking payment of the balance of the purchase price, including an adjustment in accordance with the Seller Finance Agreement.
Gourmania Holdings responded to Mr Schlegel's claim for payment with a substantial counterclaim for damages under several causes of action, including for misleading or deceptive conduct.
By the time of the trial, Gourmania Holdings had abandoned the misleading or deceptive conduct claim. The dispute had considerably narrowed. The court was required to determine:
(1)on the proper construction of the Share Sale Agreement, was the purchase price of Mr Schlegel's share subject to adjustment;
(2)did Mr Schlegel breach his statutory and fiduciary duties as a director of Gourmet Chef Foods in procuring a salary increase for himself, including back pay, in December 2012;
(3)did Mr Schlegel breach his statutory and fiduciary duties as a director of Gourmet Chef Foods in procuring payment by Gourmet Chef Foods for services he provided to another business venture in Thailand;
(4)did Mr Schlegel breach a warranty in the Share Sale Agreement by not disclosing the salary increase;
(5)did Gourmania Holdings suffer any loss or damage from the breach of warranty (if proved);
(6)did Mr Schlegel wilfully conceal the breach of warranty;
(7)did Gourmet Chef Foods effectively assign to Gourmania Holdings its rights to claim damages or compensation for breaches of duty by Mr Schlegel.
At least for the purposes of determining costs, it will also be necessary to decide whether, pursuant to the Seller Finance Agreement, Mr Schlegel was entitled to payment of the third instalment on the due date without any deduction or set‑off.
Gourmet Chef Foods traded under the name Gourmania, but I will use the company name to avoid confusion with the name of the defendant.
The witnesses
Mr Schlegel, gave evidence and called two other witnesses: Naresh Parbat Patel and Barry Leonard Newton.
Sivan Jeyarajah, the director and Chief Executive Officer of Gourmania Holdings, gave evidence. Gourmania Holdings called one other witness, Mr Saul Keith Owens.
The evidence of Mr Patel and Mr Owens was brief and unchallenged.
Mr Schlegel was cross‑examined extensively. He was confident in his testimony. He was inclined to be argumentative in his answers in cross‑examination, but his manner of testifying did not lead me to form any adverse view of his credibility.
I have, in discussing the facts, referred to aspects of Mr Schlegel's conduct that made me doubt aspects of his evidence. To some extent the same comments can be made regarding Mr Jeyarajah. Both men failed to maintain the distinction between the interests of Gourmet Chef Foods, in which each was only a director or shareholder, and their private interests. This was manifest in the Cuisinex Asia venture and, in Mr Schlegel's case, in his conduct in substantially increasing his salary as a director of Gourmet Chef Foods immediately before the sale of his share in that company.
Factual background and findings
Mr Schlegel joined Gourmet Chef Foods in 1997, as chief executive officer. He became a director and shareholder in 1999.[1] He ceased as a director on 25 May 2016.[2]
[1] Exhibit 3.1 [3].
[2] Exhibit 1, 2455.
Gourmet Chef Foods targeted catering to Western Australian metropolitan hospitals, and by 2007 was the preferred supplier under a contract with the Metropolitan Western Australian Public Health Care Units (the Health Corporate Network Contract).[3]
[3] Exhibit 3.1 [4].
In about 2006, Naresh Patel and his family bought into the business of Gourmet Chef Foods, with the Patel Family Trust acquiring a 50% interest. Naresh Patel became a director and remained a director until February 2011 when his son Mihir Patel was appointed.[4] Mihir Patel was a director from February 2011 until May 2016.[5]
[4] Exhibit 1, 2455; exhibit 7.1 [5].
[5] Exhibit 1, 2455.
Naresh Patel remained as an employee of Gourmet Chef Foods.
In 2011, the shareholders in Gourmet Chef Foods were Mr Schlegel and the MSN Trust, a trust related to Patel family. Each shareholder held one share.
The Share Sale Agreement and Mr Schlegel's salary increase
In 2011, both shareholders in Gourmet Chef Foods offered their shares for sale. Negotiations were conducted between Mr Schlegel and Narash Patel on behalf of the sellers, and Mr Jeyarajah and Mr Daniel Romano on behalf of the proposed buyer, Gourmania Holdings.[6] Gourmania Holdings had been incorporated by Mr Jeyarajah and Mr Romano for the purpose of the acquisition of Gourmet Chef Foods.[7]
[6] Exhibit 3.1 [7].
[7] Exhibit 8.1 [48].
The negotiations resulted in an agreement in May 2012, by which Gourmania Holdings would acquire both shares in Gourmet Chef Foods. The agreement came to an end on the failure of a condition precedent concerning extension or renewal of the Health Corporate Network Contract.[8]
[8] Exhibit 8.1 [49].
In December 2012, Mr Schlegel and Gourmania Holdings entered a second agreement, the Share Sale Agreement, by which Mr Schlegel was to sell his share to Gourmania Holdings. Mr Schlegel signed the agreement on 10 December 2012.[9]
[9] Exhibit 3.1 [24], [26].
In early December 2012, Mr Schlegel advised Mihir Patel that he was making an adjustment to his salary.[10] Naresh Patel had earlier mentioned to Mihir Patel, in or around November 2012, that they 'would need to have a review and make sure that there was some kind of adjustment to [Mr Schlegel's] salary later on'.[11]
[10] Exhibit 3.1 [29].
[11] Exhibit 7.1 [47].
Mr Schlegel had also told Mihir Patel that Mr Jeyarajah had decided that he (Mr Schlegel) would only be employed for a further nine months after Mr Jeyarajah started at Gourmet Chef Foods; and that Mr Schlegel expected that his working hours would probably increase 50% during that period. Mr Schlegel's evidence was that Mihir Patel said that he was 'fine with that'.[12]
[12] Exhibit 3.1 [29].
While I accept that Mihir Patel did not object to the increase, I am satisfied that Mr Schlegel did not tell him by how much he was going to increase the salary, or that he was backdating the pay rise.[13] Mr Schlegel said that he told Mihir Patel that the rise would be enough to recover the two years of no increase. Mr Schlegel appeared to regard that as disclosing the extent of the pay rise, including back pay. In my opinion, it did not.[14]
[13] ts 107.
[14] ts 83 - 84, 90.
The increase was outside the normal salary review for Gourmet Chef Foods, which occurred in February of each year (a review later occurred in February 2013).[15]
[15] Exhibit 5 [16], [21].
The increase was from $7,980.77 to $13,750 a fortnight (approximately $200,000 a year to $350,000), with a lump sum backdating to July 2012. The evidence does not establish precisely when Mr Schlegel gave the instructions, but the increase came into effect days before Mr Schlegel signed the Share Sale Agreement. At the same time, Mr Schlegel increased the salary of Mr Newton, Gourmet Chef Foods' accountant.[16] Mr Newton was the only other employee of Gourmet Chef Foods who knew the extent to which Mr Schlegel's salary had increased.
[16] Exhibit 5 [17]; exhibit 3.2 [18].
Mr Schlegel was adamant in his evidence that the pay rise was 'done by the book'.[17] That may reflect the informal way in which Gourmet Chef Foods had been managed. Mr Schlegel said, and I accept, that he simply fixed remuneration himself, and a resolution to fix the directors' remuneration had never happened in the history of Gourmet Chef Foods.[18]
[17] ts 98.
[18] ts 107.
On 7 December 2012, Mr Romano forwarded a final version of the Share Sale Agreement to Naresh Patel. Mr Romano wrote:
I will await the green light from Beat and Raj.
One point is that I believe the employee schedule will need to be updated for the sake of completeness. The current version that we have is at 8 May 2012 (see attached).
Once the green light is given, and the employee information is updated, then I will finalise the document and send a copy of the execution page to Naresh for Beat to sign, at the same time Raj and I will execute an execution page so that we can exchange counterparts.[19]
[19] Exhibit 1, 1283 - 1284.
Mr Schlegel did not disclose the recently implemented increases in his salary (or Mr Newton's), but replied:
With regard to the employee schedule, the current one is 'much of a muchness' really i.e. payroll adjustments are made only in very early February each year --- coinciding with Gourmania adjusting the Tender Contract Prices with Health Corporate Network (HCN WA). Hence, we might just as well wait until about 11th February 2013 when new payroll details have been confirmed. On present indications, we would expect to raise current payroll by the applicable CPI Perth + 'about 0.5%' on top of that. Plus, there may be about 3 - 4 exceptional cases where this could end up higher as a direct reward for truly outstanding services provided at all times!
The reply was copied to Naresh Patel and Mr Jeyarajah. On 7 December 2012, Mr Jeyarajah replied, 'All appears in order from my perspective'.[20]
[20] Exhibit 1, 1283.
Mr Schlegel said in evidence that he did not disclose his salary increase because he did not regard himself as an employee of Gourmet Chef Foods but as the employer.[21]
[21] ts 80, 82.
A director holds office, and is not necessarily an employee. The Constitution of Gourmet Chef Foods does not clearly provide for whether directors are also employees of the company.
There is, however, considerable evidence that Mr Schlegel was a director and an employee. In his first witness statement, he described starting to work for the company as chief executive officer in 1997, and in 1999 becoming a director and shareholder.[22] He said that he resigned as an employee on 16 November 2013 when he left Perth.[23] Before his resignation, Mr Schlegel was paid fortnightly.
[22] Exhibit 3.1 [3].
[23] Exhibit 3.1 [56].
In December 2012, when Mr Schlegel spoke to Mihir Patel about making an adjustment to his salary, he told Mr Patel that Mr Jeyarajah had decided that he (Mr Schlegel) should only be employed for a further nine months after Mr Jeyarajah started at Gourmet Chef Foods. Mr Schlegel expected his working hours to increase during that period. Mr Schlegel referred to his remuneration as salary and described the increase in December 2012 as a pay rise.[24]
[24] Exhibit 3.1 [29].
Extracts of MYOB details for Gourmet Chef Foods listed Mr Schlegel as an employee, CEO/director.[25]
[25] Exhibit 1, 104 – 107.
I am satisfied that Mr Schlegel was an employee, as well as a director. Perhaps more importantly, I am satisfied that Mr Schlegel believed he was an employee, and that what he had done was to give himself a salary increase. He also knew that he was selling his share in Gourmet Chef Foods, and would continue to receive the increased salary as an employee after the sale. I am satisfied that his failure to disclose the increase to Mr Romano in Gourmania Holdings was deliberate.
The Share Sale Agreement was completed in February 2013, with a Completion Date of 4 February. Neither Mr Schlegel nor Gourmet Chef Foods advised Gourmania Holdings of the change in remuneration for Mr Schlegel or Mr Newton before the Completion Date.
Following completion of the Share Sales Agreement, Mr Schlegel remained a director of Gourmet Chef Foods until 29 May 2015. An agreement appointing Mr Schlegel as a consultant to the company was prepared, but not executed.
Mr Jeyarajah was appointed as a director of Gourmet Chef Foods on 4 February 2013, and continued in that office at the time of trial. Two further directors (including Mr Romano) were appointed in May 2016.
Although he remained a director until 2015, Mr Schlegel did not receive remuneration as a director after 13 November 2013.[26] He was paid as a consultant.
[26] Defence and counterclaim [48]; reply and defence to counterclaim [21].
Mr Schlegel left Australia on 16 November 2013 for Thailand, returning to Perth on 13 April 2014.[27]
Cuisinex Asia
[27] Exhibit 3.1 [56].
In early 2014, Mr Jeyarajah and Mr Schlegel discussed business opportunities in the Asia Pacific region. Initially they discussed a business to be owned or co-owned by Gourmet Chef Foods.[28] Eventually they created a new business, separate from Gourmet Chef Foods, to pursue those opportunities. Mr Schlegel said that he anticipated the Thai operation would be owned or co‑owned by Gourmet Chef Foods until about April 2014.[29]
[28] Exhibit 3.2 [23] - [24].
[29] Exhibit 3.2 [24].
In the period 1 March 2014 to 20 June 2015, Mr Schlegel sent documents, which were headed 'overseas charges', to Mr Newton as the financial officer of Gourmet Chef Foods.
The first set of overseas charges was submitted by an email dated 1 March 2014, addressed to Mr Newton. At 1 March 2014, it had not been decided that the Thai business was to be separate from Gourmet Chef Foods.
The email of 1 March 2014 was marked confidential. In it, Mr Schlegel said:
When Raj comes back from overseas, can you please sit down with him and provide him with my first set of OVERSEAS CHARGES - incurred in the past 15 weeks ...[30]
The Thai Work Charges are following the Consultancy Agreement between Raj and me…I have diarised daily my working time spent - as said, for every single day there is a diary entry that I can provide for viewing upon return, if necessary.
…
Barry: once you and Raj have had the opportunity of a review, I look forward to hearing from you next week.[31]
[30] That is, commencing in November 2013.
[31] Exhibit 1, 1735.
Mr Schlegel sent further emails with invoices for his consultancy work nearly every month between March 2014 and June 2015.[32] The overseas charges documents set out hours of work in each week (numbered as weeks of the year).
[32] Exhibit 3.2 [31].
Mr Schlegel did not copy anyone else into his emails to Mr Newton.
Mr Newton agreed that the overseas charges were to be confidential, but that he 'would have told Raj'[33] (as the email asked him to).
[33] ts 137.
Mr Newton did not forward the emails from Mr Schlegel to Mr Jeyarajah or anyone else in Gourmet Chef Foods. Mr Newton said that Mr Jeyarajah was in the same office and he took the invoices to him.[34] That is not implausible, although Mr Jeyarajah denies it happened. It is necessary to briefly digress from the chronology to address the factual issue of authorisation of the payments.
[34] ts 132 - 133.
In his witness statement Mr Newton said that he took all invoices to Mr Jeyarajah for authorisation up to about December 2014. Mr Jeyarajah then told him not to bother and, in effect, gave him a general authorisation to pay the invoices from Gourmet Chef Foods.[35] His oral evidence was that he took the invoices to Mr Jeyarajah until about October 2014.[36] I do not believe the difference in date is significant.
[35] Exhibit 5 [23] - [26].
[36] ts 136.
Mr Newton also said that, in the period after he stopped taking the invoices to Mr Jeyarajah, he still required a second authorisation before he could make the payment. The weight of evidence, including objective evidence of a letter from Gourmet Chef Foods's bank,[37] is that the requirement for a second authorisation for electronic banking payments was not brought in until May 2015. This was shortly before Mr Newton left Gourmet Chef Foods. Despite his apparent confidence in giving evidence, I believe that Mr Newton was wrong on this point.
[37] Exhibit 6.
Mr Jeyarajah denied the expense claims were brought to him. Although he appeared more confident that he had not seen the email, he expressed less certainty about whether he had seen an invoice.[38] Mr Jeyarajah denied authorising any invoices rendered by Mr Schlegel to be paid by Gourmania Holdings for work done for Cuisinex.[39]
[38] ts 176. Although sometimes referred to in evidence as invoices, the documents are more accurately described as a statement of expenses with a request for payment. It was only in mid‑2015 that the claims were resubmitted in the form of tax invoices.
[39] Exhibit 8.1 [90]; exhibit 8.3 [53].
Mr Newton's evidence is the only direct evidence that the expense claims were taken to and authorised by Mr Jeyarajah. I accept his evidence for several reasons. First, it is what Mr Schlegel asked him to do. Second, there was no reason for either Mr Schlegel or Mr Newton to conceal invoices from Mr Jeyarajah. Third, Mr Newton did not believe that Gourmet Chef Foods should be paying invoices for the Cuisinex business.[40] It is unlikely that Mr Newton would not seek authorisation for the payments and leave himself exposed. Fourth, Mr Newton's evidence is indirectly supported by later emails between Mr Jeyarajah and Mr Newton. In August 2014, Mr Jeyarajah and Mr Schlegel exchanged emails referring to Mr Newton's concerns. On 21 August 2014, Mr Jeyarajah wrote to Mr Schlegel of 'Barry's attitude and treatment of the whole matter, which creates unnecessary roadblocks for the group when there should be none …'[41] Fifth, there was no suggestion that the charges from Mr Schlegel and the payments to him were in any way concealed in the records of Gourmet Chef Foods. Although I find that Mr Newton was wrong in his evidence about when the requirement for a second authorisation was introduced, I generally accept what he said.
[40] Exhibit 5 [24] ‑ [25].
[41] Exhibit 1, 1965.
On all of the evidence, I am satisfied that Mr Jeyarajah knew that Gourmet Chef Foods was being used to pay the expenses of the Thai business. I am also satisfied that Mr Jeyarajah authorised payment. He was also invoicing Gourmet Chef Foods for expenses in Thailand, including those contracted in forming Cuisinex (although I accept his evidence that he later reimbursed those amounts). Mr Jeyarajah did not, himself, keep the two businesses separate. At least at an early stage, he appears to have regarded the business in Thailand as part of the Gourmet Chef Foods business or a Gourmania 'group'.
The second set of overseas charges were sent on 13 April 2014, and were for weeks 10 to 15 of 2014 (that is, 3 March to 13 April).[42] Payment was made by bank transfer on 6 May 2014.[43]
[42] Exhibit 1, 1780.
[43] Exhibit 1, 1782.
Mr Schlegel sent a further invoice for the period to 11 May 2014 (week 19) on 11 May.[44] Payment was made on 16 May 2014.[45]
[44] Exhibit 1, 1814.
[45] Exhibit 1, 1816.
Around this time, the decision was made to incorporate a new entity in Thailand. Mr Jeyarajah engaged a Bangkok based law firm to assist with registration of the company, Cuisinex Asia Co Ltd.[46] The company was registered on or around 12 June 2014.[47] Mr Jeyarajah was the sole director. Mr Jeyarajah, Mr Schlegel and Mr Bruce Cunningham were the shareholders.
[46] Exhibit 1, 1817 - 1820.
[47] Exhibit 8.1 [86] - [88].
On 28 July 2014, in an email to Gourmet Chef Foods staff (copied to Mr Schlegel) Mr Jeyarajah wrote:
As you are aware as part of the new Joint Venture we are starting up in Thailand, I will now be based between Perth and Asia. This necessitates a slight change in some of the roles/responsibilities and functionalities of the way we currently conduct operations and general business in Gourmania. Fortunately, none of these changes are too fundamental - if at all, … hence, I would expect that the transition into the new mode will progress smoothly without any hiccups …[48]
[48] Exhibit 1, 1910.
In an attached document, Mr Jeyarajah included a note, 'A new strategy for existing and new markets will be developed post successful product development and trials in Thailand and manufacturing/sales capability has been established'.[49]
[49] Exhibit 1, 1911.
Mr Schlegel sent his next overseas charges on 30 June 2014, for weeks 20 to 26.[50] These are the first charges after the incorporation of Cuisinex Asia. Even after the incorporation, Mr Jeyarajah was referring to a joint venture with Gourmet Chef Foods, and to markets for the company in Asia.
[50] Exhibit 1, 1906.
On 10 August 2014, Mr Schlegel sent an invoice for weeks 27 to 32.[51] Gourmet Chef Foods transferred payment on 12 August 2014.[52]
[51] Exhibit 1, 1951.
[52] Exhibit 1, 1952.
In his email exchange with Mr Schlegel, between 20 and 22 August 2014, Mr Jeyarajah wrote of concerns expressed by Mr Newton and continued:
As I explained to him, there was an advance (eventually coming out of my dividends), that will be applied to all the Equipment/Capex and W.C. for Cuisinex - hence no nexus/connection with Gourmania.
There will be ongoing expenses (travel/incidentals), etc that will be expensed to Gourmania for the foreseeable future - again this is also part of my costs that I will equalise against Naresh's cost to the company…
In my view, I think this is justifiable in that the work done still continues to benefit Gourmania and eventually the shareholders of the company.[53]
[53] Exhibit 1, 1966.
In response to concerns expressed by Mr Schlegel about the treatment of capital expenses, Mr Jeyarajah wrote that it was 'something that can easily be justified in the books of Gourmania'.[54]
[54] Exhibit 1, 1965. Gourmet Chef Foods traded using the name Gourmania. The references to Gourmania are to Gourmet Chef Foods and not to the shareholder Gourmania Holdings Pty Ltd.
In September 2014, Mr Jeyarajah circulated an email headed 'Revisit ‑ Strategic Directions' to the 'team' at Gourmet Chef Foods, copied to Mr Schlegel.[55] The Patels were not included. The email identified 'key customers' including international customers, with the note:
A new strategy for existing and new markets will be developed post successful product development and trials in Thailand and manufacturing/sales capability has been established.[56]
[55] Exhibit 1, 1985 - 1987.
[56] Exhibit 1, 1986.
Mr Schlegel was identified as the contact for HCN and Japan, but was not otherwise assigned any role or responsibility.
Mr Schlegel sent an invoice dated as issued on 5 October 2014, for weeks 33 to 40.[57] It was paid on 3 October 2014.[58] A further invoice was issued on 13 November 2014, for weeks 41 to 46,[59] and paid on 19 November 2014.[60]
[57] Exhibit 1, 1991 - 1992.
[58] Exhibit 1, 1993.
[59] Exhibit 1, 2009 (the invoice was misdated 13 October 2011).
[60] Exhibit 1, 2008.
Mr Schlegel submitted overseas charges on 28 December 2014,[61] which were paid the following day.[62] Charges for the first six weeks of 2015 were submitted on 9 February and paid on 13 February 2015.[63] Further overseas charges up to 23 March 2015 were submitted on 23 March and paid on 24 March.[64]
[61] Exhibit 1, 2032.
[62] Exhibit 1, 2031.
[63] Exhibit 1, 2062 - 2063.
[64] Exhibit 1, 2086 - 2087.
On 25 March 2015, Mr Newton gave notice that he would resign, effective on 24 April 2015.[65]
[65] Exhibit 1, 2091.
Mr Schlegel submitted further overseas charges on 26 April 2015, paid on 30 April 2015.[66] The replacement of Mr Newton does not appear to have affected the process of invoice and payment.
[66] Exhibit 1, 2178 - 2179.
On 31 March 2015, Mr Schlegel sent a formal letter resigning as a director of Gourmet Chef Foods.[67] The parties agreed that he ceased to be a director on 29 May 2015.
[67] Exhibit 1, 2152 - 2153.
Mr Schlegel and Mr Jeyarajah continued to correspond by email regarding 'Gourmania'. Mr Jeyarajah described himself as 'the primary driver and decision maker both operationally and strategically' for Cuisinas.[68] On 21 May 2015, Mr Schlegel referred to the relationship between Gourmania and Cuisinex, and said, 'On the one hand, you have no hesitation spending mostly Gourmania money furthering the Cuisinas biz in Asia … with costs that should be borne entirely by Cuisinas and not Gourmania'.[69] Within the same email chain, Mr Schlegel warned, 'We cannot go on and on and raid the Gourmania accounts for Cuisinas biz or biz development'.[70]
[68] Exhibit 1, 2197. 'Cuisinas' appears to have been used as a contraction of Cuisinex Asia.
[69] Exhibit 1, 2194.
[70] Exhibit 1, 2198.
On 21 May 2015, Mr Schlegel purported (ineffectively as things turned out) to rescind his resignation.[71]
[71] Exhibit 1, 2201.
The continuation of Mr Schlegel's directorship was addressed by Mr Jeyarajah in an email to Naresh and Mihir Patel on 29 May 2015. Cuisinex Asia was treated as important to Gourmania's growth prospects and a move away from Asia as 'a disaster for Gourmania'.[72]
[72] Exhibit 1, 2206 ‑ 2210.
The last of Mr Schlegel's overseas charges were for the period 27 April to 29 June 2015.[73] This included the period after Mr Schlegel had ceased to be a director of Gourmet Chef Foods.
[73] Exhibit 1, 2322 ‑ 2325.
On 24 June 2015, Mr Schlegel provided a summary of work carried out from April 2015, commenting that a 'very different system' was now being applied.[74]
[74] Exhibit 1, 2258 ‑ 2268.
On 26 June 2015, Mr Schlegel wrote asking for approval of his final overseas charges and for advice as to when they would be paid. Mr Jeyarajah replied and informed Mr Schlegel that there had been some discussion between the directors and senior management and there was a concern as to the validity of some of his consultancy charges.[75]
[75] Exhibit 1, 2273.
In July 2015, Mr Schlegel provided a break-down, from his contemporaneous records, of what part of the fees he had previously been paid was incurred for the benefit of Gourmet Chef Foods, and what part was incurred for Cuisinex. It was only in July 2015 that Mr Schlegel's requests for payment of overseas charges were submitted as tax invoices.
On 23 July 2015, Mr Mihir Patel informed Mr Schlegel that payment would be made to Mr Schlegel on his invoices.[76] A final payment was processed within days.
[76] Exhibit 1, 2321.
Mr Schlegel separately recorded the fees charged for consultancy for Gourmet Chef Foods, and those for Cuisinex. The charges are for the period from 29 April 2014 (week 18 of 2014) to 24 June 2015, although the claim for consultancy to Cuisinex Asia was only up to week 24 (ending14 June 2015). The defence at trial accepted that the division of amounts across the two businesses was as pleaded by Mr Schlegel, and the counterclaim was limited to the sum of $32,761.72 only.[77]
[77] ts 153.
The issues - the claim
The purchase price and completion adjustments
The resolution of this part of Mr Schlegel's claim depends on the proper construction of the Share Sale Agreement.
There is no dispute about the principles to be applied in the construction of the Share Sale Agreement as a commercial agreement:[78]
(1)It should be given an objective construction by determining what a reasonable business person would have understood its terms to mean.
(2)The text, context (the entire context), and purpose of the Share Sale Agreement are to be considered in objectively construing it.
(3)The agreement should be construed to avoid it 'making commercial nonsense or working commercial inconvenience'. A reasonable commercial construction is to be preferred to a 'strict legal meaning' or a 'literal interpretation'.
(4)The agreement has to be considered as a whole and any apparent inconsistency should be avoided.
(5)If the language of the agreement is 'ambiguous' because it is 'susceptible of more than one meaning' or because there is a 'constructional choice', objective surrounding circumstances ('events, circumstances and things external to the contract which are known to the parties') may be considered in construing it.
[78] See Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 37; (2014) 251 CLR 640 [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] ‑ [51].
Neither party suggested that the language of the Share Sale Agreement was ambiguous. But Gourmania Holdings submitted that the text left open constructional choices and that, when regard was had to the whole of the agreement, its construction should be preferred.
The clauses of the agreement under consideration contained several defined terms. In construing the agreement, the task is to read the words of the definition into the operative provisions, and then construe the operative provisions incorporating the defined terms.[79]
[79] See Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 [158]; Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156 [88].
Mr Schlegel claimed payment from Gourmania Holdings of:
(a)$333,333.00, being the final instalment payable for the sale of his share in Gourmet Chef Foods; and
(b)an adjustment to the purchase price under the Share Sale Agreement.
Gourmania Holdings admitted that it was liable to pay the $333,333, subject to any set‑off available to it.
The Share Sale Agreement provided that the Completion Purchase Price was subject to adjustment by reference to two factors:
(1)the Cash Actual Amount defined as the actual amount of Cash held by Gourmet Chef Foods as at the close of business on the Completion Date; and
(2)the Net Tangible Assets, defined as the value of the total assets of the Company, minus any intangible assets, less the liabilities of the Company.[80]
[80] Cash Actual Amount and Net Tangible Assets are defined in cl 1.1.
'Cash' was defined to mean all cash and cash equivalents including cash in bank, cash at site (including petty cash), outstanding deposits, and unpresented cheques.[81]
[81] Exhibit 1, 1500 ‑ 1608, cl 1.1.
If the amount of Cash held by Gourmet Chef Foods as at the close of business on Completion Date exceeded the Cash Estimate ($100,000), the Completion Purchase Price was increased by the amount by which the Cash held exceeded $100,000.[82] If the Cash held was less than $100,000 the Completion Purchase Price was correspondingly decreased.[83]
[82] Exhibit 1, 1500 ‑ 1608, cl 5.2(a).
[83] Exhibit 1, 1500 ‑ 1608, cl 5.2(b).
The contracting parties also agreed a Benchmark Net Tangible Asset Position ($999,964.73).[84]
[84] Exhibit 1, 1500 - 1608, cl 1.1, definition of Benchmark Net Tangible Asset Position.
If the net tangible assets of Gourmet Chef Foods immediately prior to Completion of the sale and purchase of the share exceeded $999,964.73, the Completion Purchase Price was increased by half the amount by which the Completion Net Tangible Assets Amount exceeded $999,964.73.[85] There was a corresponding decrease in the price payable if the Net Tangible Assets Amount was less than the benchmark.
[85] Exhibit 1, 1500 ‑ 1608, cl 5.2(c).
The Completion Net Tangible Assets Amount was defined as an amount agreed between the parties or determined in accordance with cl 5.3. Clause 5.3 required the parties to follow a dispute procedure ‑ in effect, determination by an expert. The parties did not follow the agreed procedure. At trial, they accepted the accuracy of a balance sheet showing the cash and asset position of Gourmet Chef Foods at 4 February 2013, the Completion Date of the Share Sale Agreement. The trial was conducted on the basis that the court was to determine the proper construction of cl 5.2 and apply that construction to the agreed balance sheet.
Clause 6 provided for matters in the period before Completion, including access by Gourmania Holdings to Gourmet Chef Foods' assets, properties and records. Gourmania Holdings was able to attend the Gourmet Chef Foods premises to allow its accountant to make an assessment of the likely Completion Net Tangible Assets Amount and to verify the Cash Actual Amount.
Mr Schlegel was required to ensure that Gourmet Chef Foods conducted its business in the ordinary and usual course, and paid all amounts owing to trade or other creditors 'in accordance with applicable payment terms'.[86] Mr Schlegel was also required to ensure that Gourmet Chef Foods did not incur any indebtedness other than in the usual course of business, or, except as required by law or by the existing terms of employment, to 'increase or make any representation about an increase in the annual remuneration of any employee'.[87]
[86] Exhibit 1, 1500 ‑ 1608, cl 6.2.
[87] Exhibit 1, 1500 ‑ 1608, cl 6.3.
By cl 6.8, Mr Schlegel was to procure that, on or before Completion, all indebtedness owed to him by Gourmet Chef Foods was discharged and extinguished in full.
At Completion, Mr Schlegel was required to deliver documents evidencing the repayment of all debts owing from Gourmet Chef Foods to him or any person connected or associated with him; and documents evidencing the repayment of debts to third parties, not being debts to trade creditors in the ordinary course of business and not outside applicable trading terms.[88]
[88] Exhibit 1, 1500 ‑ 1608, cl 7.3.
Clause 14 made specific provision for tax. By cl 14.1, Mr Schlegel was required to pay to Gourmania Holdings:
the amount of any Tax that the Company is liable to pay in respect of or by reference to any matter or event occurring or which is taken to have occurred on or before the Completion Date.
By cl 14.2, Mr Schlegel was not liable for any Tax Claim[89] to the extent that, 'in the case of a Tax Claim in respect of a liability to pay Tax, a provision for that Tax has been disclosed to the Buyer prior to Completion'.[90]
[89] Defined as a claim against Gourmet Chef Foods under cl 14.1: see exhibit 1, 1500 ‑ 1608, cl 1.1.
[90] Exhibit 1, 1500 ‑ 1608, cl 14.2(a).
The following matters of construction were in issue:
(1)In calculating the adjustment to the purchase price for cash held at the Completion Date, was the amount of $262,380, which Gourmet Chef Foods held for a taxation liability that was not yet due, included as cash held as at that date?
(2)In calculating the adjustment to the purchase price for the Completion Net Tangible Assets Amount, did the Tangible Assets include the cash held by Gourmet Chef Foods on that date?'
(3)In calculating the adjustment to the purchase price for the Completion Net Tangible Assets amount, what was the proper treatment of an amount recorded in the balance sheet on Completion Date as a provision for tax?
The cash actual amount
The amount of cash held at the close of business on Completion was $496,632.67. In his final pleaded position, Mr Schlegel accepted that the actual amount should be $341,979.77, following the deduction of an amount owing to him by Gourmet Chef Foods and which should have been paid prior to settlement.
Gourmania Holdings was liable to the ATO for $262,380, which was due to be paid shortly after Completion. The amount outstanding to the ATO was paid in full between 18 February and 27 February 2013. Gourmania Holdings contended that this amount should not be included in the Cash Actual Amount and, in truth, the only cash that 'remained' in the business was $78,398.83.
Gourmania Holdings submitted that the clear intention of the parties was that the actual value of the business was $2.9 million and that the purchase price would then be adjusted based on how much cash was to remain in the business.[91] It submitted that the object of cl 5.2(a) was to increase the purchase price where cash was actually going to be retained in the business, not to enable a windfall to Mr Schlegel because of the timing of the payment of the debts.[92]
[91] Defendant's opening submissions [18].
[92] Defendant's opening submissions [24].
In this submission, Gourmania Holdings excluded cash held for the payment of creditors in the ordinary course of trade. I agree there is a distinction between amounts held for the payment of tax liabilities, and trade creditors. But the claimed exclusion points to the extent to which the defendant seeks to modify the words of the agreement ‑ that is, the Cash Actual Amount, on its construction, is limited to cash to remain in the business other than cash held for the purpose of paying creditors in the ordinary course of trade.
I agree that the Share Sale Agreement attributed a value of $2.9 million to the underlying business as a going concern. It then adjusted the price by reference to factors which have an element of chance: the cash held and the Net Tangible Assets position on Completion Date. Choosing close of business on a particular day as the date for adjustment was going to leave some things to chance. A different formula could have been used, such as an average over a period. But that is not what the parties agreed. The fact that the tax debt was not immediately due, so the cash was held by Gourmet Chef Foods, was fortuitous. The actual amount of cash held could, similarly, have been affected by Gourmet Chef Foods making an early payment (ie before the due date), or by a delay in the Completion Date so that the tax was due.
Further, the reference to the actual amount of cash held as at the close of business on a specified day is inconsistent with the construction advanced by Gourmania Holdings that the parties intended to refer to cash that was to remain in the business.
Gourmania Holdings relied on three clauses as supporting their preferred construction:
(1)cl 7.3(2)(j) required Mr Schlegel at completion to deliver to Gourmania Holdings 'documentation evidencing to the reasonable satisfaction of the Buyer the repayment of all financial debts owing from the Company to third parties not being debts owing to trade creditors in the ordinary course of business and which are not outside applicable trading terms';
(2)cl 14.1(a) required Mr Schlegel to pay to Gourmania Holdings 'the amount of any Tax the Company is liable to pay in respect of or by reference to any matter or event occurring or which is taken to have occurred on or before the Completion Date'; and
(3)the Seller Warranty in sch 7, cl 14.2 that 'All Tax that has become lawfully due and payable by the Company has been paid on or before the due date for that payment'.
I do not accept that these clauses lead to the result for which Gourmania Holdings contends.
First, none of these clauses was obviously related to the calculation of the Cash Actual Amount at the Completion Date.
Second, the obligation in cl 7.3(2)(j) was to deliver documentation. The compliance with that obligation is not in issue.
Third, cl 14.1 was directed to a different issue. It imposed an obligation on Mr Schlegel to pay to Gourmania Holdings the amount of tax for which Gourmet Chef Foods was liable. That personal obligation would not affect the cash held by Gourmet Chef Foods.
Fourth, Gourmania Holdings did not assert that the tax was then due. The warranty that tax lawfully due has been paid on or before the due date is a different matter.
More generally, the submission on behalf of Gourmania Holdings strained the meaning of the words of the agreement to an unacceptable degree. The question is not 'what in truth remained in the business'. The 'Cash Actual Amount' was the actual amount of any cash held by Gourmet Chef Foods 'as at the close of business on the Completion Date', not the amount that 'remained' in the business after the later payment of debts not then due.
The cash actual amount, for the purposes of adjustment to the completion purchase price is, accordingly, $341,979.77.[93]
The net tangible assets
[93] The amount of cash on hand $496,632.67 less a loan to Mr Schlegel of $154,652.90 which the parties agreed should be deducted.
The balance sheet of Gourmet Chef Foods at 4 February 2013, on which the parties relied, listed Assets (including Current Assets and Non-Current Assets), Liabilities, and Equity.
The Current Assets included cash on hand, receivables, inventory, and 'Other Current Assets' (prepayments and bond on hired equipment). It included a 'black hole' of $ 8,355.57. None of the listed assets was an intangible asset.
All listed liabilities were current liabilities: creditors and borrowings; wage expenses (superannuation, annual leave, long service leave, child support); credit cards; the outstanding loan from Mr Schlegel;[94] GST liabilities; and a provision for income tax. The provision for income tax and the amount of GST paid on purchases reduced the total current liabilities to $484,027.57.
[94] Allowance for which was made in calculating the Cash Actual Amount.
Mr Schlegel pleaded and submitted that the adjustments to the Completion Purchase Price by reference to net tangible assets were as follows.
Cash Actual Amount $341,979.77
Receivables, inventory, other current assets, and property plant and equipment $1,320,081.64
Less liabilities (adjusted to assume the repayment of the loan to Mr Schlegel) $329,374.67
Completion NTA Amount $1,332,686.74
The Benchmark Net Tangible Assets Position was $999,964.73.[95] On Mr Schlegel's case, the amount by which the Completion Net Tangible Assets Amount exceeded the Benchmark Net Tangible Assets Position was $332,722.01, resulting in an adjustment increasing the Completion Purchase Price by $166,361.00.
[95] Exhibit 1, 1500 ‑ 1608, cl 1.1.
Gourmania Holdings pleaded and submitted an alternative Net Tangible Assets calculation which it said should be preferred:
Net Assets: $1,341,042.31
Less Black Hole: $ 8,355.57
Less Cash on Hand: $ 496,632.67 [96]
Less Income Tax Provision $ 283,022.00
Add Loan Schlegel B $ 154,652.90
Add ATO Liability $ 262,380.00
Completion NTA Amount $ 970,064.97[97]
[96] The amount allowed for Cash on Hand requires the deduction of the 'Loan Schlegel B', which is then not taken as a liability. The net result does not change.
[97] See further amended rejoinder to reply and defence to counterclaim, [3A].
The treatment of the loan from Mr Schlegel, and the exclusion of the amount for the 'black hole' from assets, were not disputed. My conclusion that the amount of $262,380 held for payment of tax should not be deducted from Cash on Hand results in there being a liability for that amount to be deducted when determining the Net Tangible Assets.
The balance sheet included a provision for income tax, which appeared in liabilities as ($252,839). The areas of controversy were the deduction of Cash on Hand, which I have already considered, and whether the liabilities should be reduced by the provision for income tax.
I do not accept Gourmania Holdings' argument for excluding the Cash on Hand held at the Completion Date from the Net Tangible Assets of Gourmet Chef Foods. 'Net Tangible Assets' was defined to mean the value of the total assets of Gourmet Chef Foods minus any intangible assets less the liabilities of Gourmet Chef Foods. 'Asset' was defined to mean each asset owned or held by Gourmet Chef Foods or used in its business, including any assets held under any financing or operating lease, and including recipes and trade-marks. The text of the agreement is consistent with Mr Schlegel's case.
It is true that if cash is included in tangible assets it can be counted twice under the two limbs of the adjustment formula in the Share Sale Agreement, with an adjustment of $1.50 for each dollar (assuming that the cash is more than the estimate of $100,000 and the net asset balance exceeds the benchmark). But that consequence is not a sufficient reason to regard the adjustment provision as, in some way, commercial nonsense or as working a commercial inconvenience so that the court should depart from the text and give 'asset' a restricted meaning.
The balance sheet was not compiled at the end of the financial year and appeared to be a MYOB printout at the relevant date (in February). The balance sheet records a provision for income tax, in liabilities, of ($252,839). Provisions generally record a liability where there is uncertainty about when or in what amount the liability will be settled. Counsel for Gourmania Holdings submitted that the recording of the provision in this way showed that the company had paid $252,839 to the Tax Office but was yet to receive an assessment for that amount.[98] On the evidence, I cannot say whether that is correct; or whether the amount recorded as a provision had been (notionally) set aside for income tax, not yet payable; or what the entry means.
[98] ts 235.
Gourmania Holdings also submitted that $283,000.22 for income tax, calculated at 30% (the company tax rate) of the current year earnings at Completion, should be deducted from the net assets at the Date of Completion. I do not accept the amount for which Gourmania Holdings contends. Simply assessing 30% of earnings to the Date of Completion assumes that earnings to date equalled taxable income to date, and also assumes, for example, that Gourmet Chef Foods had no carryover losses.
Neither party led any evidence to enable the court to make any finding about the correct reading of the provision for tax in the balance sheet.
The result is that I am unable to make any finding about how the provision for income tax affects the figure for Net Tangible Assets. I am not prepared to speculate. Unfortunately, the dispute procedure set out in the agreement, which could have resolved the question, was not used.
On the way the parties proceeded, Mr Schlegel had the onus of proving the adjustment to be made. I am not satisfied that he has proved that the provision should be taken into account in reducing the liabilities at the Completion Date.
The result is to reduce the Completion Net Tangible Assets Amount to $1,074,734.62. That is $74,769.89 over the Benchmark, and gives an adjustment of $37,384.94 in favour of Mr Schlegel.
The issues - the counterclaim
There are five distinct parts to the counterclaim.
First, there are claims relating to the proper construction of the Share Sale Agreement regarding the adjustment of the purchase price.[99]
[99] Defence and counterclaim [26] ‑ [37].
Second, Gourmania Holdings pleaded that Mr Schlegel's failure to discharge and extinguish in full on or before Completion the amount owed to him of $154,652.90 for unpaid director's dividend constituted a breach of Clause 6.8 of the Share Sale Agreement. The issue fell away at trial and Mr Schlegel accepted the loan amount should be deducted from the Cash Actual Amount.
Third, Gourmania Holdings pleaded the breach of warranties in Clauses 11.1 (b), 11.1(c), 15.1, 15.2 and 15.3 of Schedule 7 to the Share Sale Agreement. The amount claimed related to Mr Schlegel's salary increase (including the lump sum for back salary).[100]
[100] Defence and counterclaim [60] ‑ [82].
Fourth, Gourmania Holdings alleged breaches of Mr Schlegel's duties as a director of Gourmet Chef Foods in relation to the salary increase, resulting in a total additional payment of $141,345.89 during the period 3 December 2012 to 13 November 2013; and the lump sum payment of $57,692.30.[101] Mr Schlegel admitted the salary increase but pleaded it was determined in accordance with Gourmet Chef Foods' constitution and with the informed consent of its directors and members.
[101] Defence and counterclaim [48], [53].
Fifth, Gourmania Holdings alleged breaches of Mr Schlegel's duties as a director in relation to consultancy payments invoiced to Gourmet Chef Foods but incurred for the Thai business.[102]
Breach of warranty
The terms of the Share Sale Agreement
[102] Defence and counterclaim [83] ‑ [90].
Pursuant to cl 11.1 of the Share Sale Agreement, Mr Schlegel (as Seller) warranted to Gourmania Holdings that each Warranty contained in sch 7 of the Share Sale Agreement was correct and not misleading or deceptive as at:
(a)the date of execution of the Share Sale Agreement; and
(b)the time immediately prior to Completion, unless specifically expressed to be given only at a particular time, in which case it was given as at that time.
Neither copy of the executed Share Sale Agreement is dated. Mr Schlegel pleaded it was entered into in or about December 2012 or January 2013;[103] Gourmania Holdings admitted that it was entered into in about January 2013.[104] On the evidence, the Agreement was executed after the exchange of emails on 7 December 2012.
[103] Statement of claim [3].
[104] Defence and counterclaim [3]. In [75], Gourmania Holdings pleads execution 'in or around 18 December 2012'.
The parties acknowledged that Gourmania Holdings had entered into each Transaction Document in reliance on the Warranties.[105]
[105] Exhibit 1, 1500 ‑ 1608, cl 11.4.
In construing the Warranties, it is necessary to consider the definition of Due Diligence Materials, which were defined in cl 1.1 to mean 'the written information and documents provided to the Buyer by the Seller and its Representatives, an index of which is attached as Attachment 2'. The documents included in the index of Due Diligence Materials were dated between 2009 and February 2012. If it was relying on the Due Diligence Materials, Gourmania Holdings could have had no information more recent than 14 February 2012.
Relevantly, the Due Diligence Materials included a report, dated July 2011, which disclosed Mr Schlegel's pre-tax income as $3,846 a week.[106]
[106] Exhibit 1, 57 - 97.
By cl 11.5, no Warranty was excluded or limited by any enquiry or investigation made by or on behalf of Gourmania Holdings, or any constructive knowledge of Gourmania Holdings that any warranty is or may be incorrect, 'but the Seller shall have no liability for Warranty breach to the extent that the Buyer had actual knowledge of the circumstances that give rise to the breach'.
Schedule 7 of the Share Sale Agreement contained the Seller's Warranties.
Schedule 7, cl 11, set out Warranties regarding employees. Relevantly, Mr Schlegel warranted that:
(1)complete and accurate details of each employee had been disclosed in sch 6; and
(2)complete and accurate details of the terms of employment of each employee of Gourmet Chef Foods, including all remuneration and other benefits payable during that employment or engagement, had been disclosed in the Due Diligence Materials or, in the case of any changes to those details after the date of the agreement and before Completion, by notice to Gourmania given no later than four Business Days before Completion.
Schedule 7, cl 15 set out Warranties regarding Disclosure, including:
15.1All information relating to Gourmet Chef Foods and its assets contained in Schedule 1 to Schedule 6 of the Share Sale Agreement is complete, accurate and not misleading;[107]
15.2All information contained in the Due Diligence Materials is accurate and not misleading or deceptive;[108]
15.3The Due Diligence Materials include all information relating to the Company:
(a)which the Seller knows or should reasonably be expected to know is material to the Buyer in entering into and completing the transactions contemplated by this agreement; or
(b)the disclosure of which might reasonably be expected to affect the willingness of the Buyer to buy any Shares or the price or other terms or conditions on which the Buyer would be willing to buy any Shares.[109]
[107] Exhibit 1, 1500 ‑ 1608, sch 7, cl 15.1.
[108] Exhibit 1, 1500 ‑ 1608, sch 7, cl 15.2.
[109] Exhibit 1, 1500 ‑ 1608, sch 7, cl 15.3.
Clause 12 of the Share Sale Agreement limited liability in respect of a warranty claim. Relevantly, by cl 12.1, the Seller was not liable in respect of a Warranty Claim if the fact, matter or circumstance giving rise to the Warranty Claim was fairly disclosed in any Transaction Document, or in the Due Diligence Material. A fact, matter or circumstance was fairly disclosed 'if sufficient information has been disclosed that the fact, matter or circumstance which might constitute a breach of Warranty, and the nature and extent of the breach of Warranty, would be immediately obvious to a purchaser who is advised by professional advisors reasonable experienced in transactions of the of the nature of the sale of the Shares'.[110]
The allegations of breach
[110] Exhibit 1, 1500 ‑ 1608, cl 12.2.
Gourmania Holdings claimed Mr Schlegel's failure to provide an updated employee Schedule to Mr Romano and Gourmania Holdings in December 2012, and the representations he made in his email of 7 December 2012, constituted breaches of the Warranties in cl 11.1(b), cl 11.1(c), cl 15.1, cl 15.2 and cl 15.3 of sch 7 to the Share Sale Agreement. Gourmania Holdings pleaded as separate breaches:
(1)the failure to provide an updated employee Schedule;
(2)the representation that a current employee schedule was 'much of a muchness', as payroll adjustments were made only in early February each year, coinciding with Gourmet Chef Foods adjusting the tender contract prices with the Health Corporate Network;
(3)the representation that the parties should wait until about the 11th of February 2013 when new payrolls had been confirmed;
(4)the representation that on present indications, the Plaintiff would expect to raise current payroll by the applicable CPI Perth + about 0.5% on top of that.[111]
[111] Defence and counterclaim [60] - [82].
Gourmania Holdings further claimed that the failure to provide an updated schedule and the representations made constituted wilful concealment on the part of Mr Schlegel in relation to the nondisclosure of his increased director's salary and the lump sum payment.[112]
[112] Defence and counterclaim [70].
The allegation of wilful concealment by Mr Schlegel is critical to Gourmania Holdings' claim, because otherwise the limitation period for warranty claims of 18 months after completion (that is, by 4 February 2013) would apply to the claim.
I am satisfied that Mr Schlegel breached the warranties in sch 7, cl 11.1 and cl 15.3. Complete and accurate details in relation to his employment, including his remuneration and his receipt in the 12 months before the agreement of the lump sum payment, were not disclosed in the Due Diligence Materials. The promise that they were, in cl 11.1, was false. Further, because of his salary increase, the Due Diligence Materials did not include all information relating to Gourmet Chef Foods which Mr Schlegel knew, or should have known, was material to Gourmania Holdings completing the Share Sale Agreement, and which might reasonably be expected to affect Gourmania Holdings' willingness to accept the price or other terms and conditions. The promise in cl 15.3 was false.
I do not otherwise uphold the claim of breach of Warranty.
First, the way in which the breaches were pleaded did not, in my opinion, correspond to the terms of the Share Sale Agreement or their breach.
Gourmania Holdings alleged that Mr Schlegel breached the various warranties by his conduct, including the representations he made on 7 December 2012.[113] The breaches are alleged to have been committed before the agreement had been made and the warranties given.
[113] Defence and counterclaim [71] - [74].
There was one alleged breach not based on a representation.[114] Gourmania Holdings pleaded that Mr Schlegel's failure to provide an updated employee schedule constituted a breach. That, however, is not the nature of the breach. The breach lies in the false promise, at the date of the execution of the agreement, that each Warranty is correct and not misleading or deceptive.
[114] Defence and counterclaim [70].
Second, the Warranties that were given must also be construed taking into account that sch 6 in the Share Sale Agreement was in these terms:
See attached (details current as at 8 May 2012) [THIS SHOULD BE UPDATED]
Read objectively, the parties acknowledged that the details current at 8 May 2012 (which, it appears, were not attached) should be updated.
Third, the claim for damages is for the sums of $141,345.89 and $57,692.30 (the amount of the salary increase and lump sum back pay respectively).
The principles to be applied in assessing damages were recently affirmed in in Clark v Macourt.[115] A promisee is to be awarded as damages that sum of money which will put the promisee in the same position as they would have been in if they had not sustained the wrong for which they now getting compensation. When a contract has been breached, the position in which the promisee is to be put, by an award of damages, is the position in which they would have been if the contract had been performed. The promisee bears the onus of proof of the loss or damage suffered.
[115] Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1 [7], [26] - [27].
Even if Gourmania Holdings suffered some loss as a result of the alleged breach, the damages claimed are not the proper measure of damages for a party who, pursuant to the agreement, became one of two shareholders in Gourmet Chef Foods. Gourmania Holdings did not prove that the value of its share was less. It did not prove that it suffered any other loss as a result of the breach it claimed.
Clause 11.6 of the Share Sale Agreement extends the indemnity for breach of warranty to Indemnified Losses suffered or incurred by the Company (Gourmet Chef Foods) arising out of or in connection with the breach of any Warranty. Clause 1.1 gives an expansive definition of Indemnified Losses, including legal and other professional expenses.
Gourmania Holdings did not, however, prove that Gourmet Chef Foods suffered loss as a result of the breach of Warranty. If Gourmet Chef Foods suffered loss as a result of Mr Schlegel's failure to disclose his salary increase to Gourmania Holdings, that loss is not the same as the salary increase.
Finally, Gourmania Holdings did not plead or prove any expanded category of loss (such as legal or other professional expenses) arising out of the alleged breach.
Even if the breach of Warranty were to be upheld, notwithstanding the way in which Gourmania Holdings pleaded its case, it has not proved that it suffered the loss claimed.
In written submissions, Gourmania Holdings submitted that it had a right to be indemnified by Mr Schlegel pursuant to cl 11.6(a) of the Share Sale Agreement. Gourmania Holdings relied on the definition of Indemnified Loss in cl 1.1, which included 'other liabilities arising out of or in connection with that fact, matter or circumstance'. Gourmania Holdings contended that the liability on the part of Gourmet Chef Foods to pay Mr Schlegel the increased salary and back pay was an indemnified loss as it arose 'out of or in connection with' the breach of warranty.[116]
[116] Post trial submissions, filed 19 November 2018, [17] ‑ [20].
The obligation to indemnify under cl 11.6 was to pay the amount of any Indemnified Loss suffered or incurred by the Buyer or the Company 'arising out of or in connection with the breach of any Warranty'. Gourmania Holdings has not shown that, as the purchaser of one share in Gourmet Chef Foods, it suffered any loss arising from the breach of Warranty. Nor has it shown that Gourmet Chef Foods suffered any loss from the breach - that is, from the failure to disclose. Any loss suffered by the company as a result of the salary increase was independent of Mr Schlegel's failure to disclose the increase in his salary. Clause 11.6 cannot, in my opinion, be construed as extending to the company's liability to pay Mr Schlegel his salary.
Finally, with regard to this submission, it does not in my opinion come within Gourmania Holding's pleaded case. Gourmania Holdings pleaded that Mr Schlegel's breaches of the Share Sale Agreement caused it to suffer loss and damage, and the 'loss and damage suffered by [Gourmania Holdings]' is an Indemnified Loss within the meaning of cl 11.6. Gourmania Holdings did not plead any loss suffered by Gourmet Chef Foods and arising out of or in connection with the breach of Warranty.
The defences to the warranty claim
Mr Schlegel pleaded several defences based on the terms of the Share Sale Agreement. Should I be wrong on my finding that there was no loss suffered, I will consider them in turn.
First, he pleaded that under cl 11.5(b) of the Share Sale Agreement, he had no liability for any Warranty breach to the extent that Gourmania Holdings had actual knowledge of the circumstances that gave rise to the breach.[117] The knowledge required, for the purposes of sch 7, cl 11.1, would include knowledge of the terms of employment of each employee, including all remuneration. I am not satisfied that he has proved that Gourmania Holdings had actual knowledge at the times prescribed in cl 11.1 (that is, the date of execution and the time immediately prior to Completion). By cl 11.5, constructive knowledge of the Buyer does not exclude or limit liability.
[117] Reply and defence to counterclaim [25C i].
Second, Mr Schlegel pleaded that under cl 11.6 of the Share Sale Agreement, Gourmania Holdings must take reasonable measures to mitigate any liability Mr Schlegel had under the clause.[118] Given my findings on the loss claimed by Gourmania Holdings, the question of mitigation does not arise. But if, contrary to my views, Gourmania Holdings did suffer loss, Mr Schlegel did not show what Gourmania Holdings, as the holder of one share in Gourmet Chef Foods, could have done to mitigate loss.
[118] Reply and defence to counterclaim [25C ii].
Third, Mr Schlegel relied on cl 12.1 and cl 12.2 of the Share Sale Agreement, by which he was not liable in respect of a Warranty Claim 'if sufficient information had been disclosed that the fact, matter or circumstance which might constitute a breach of Warranty, and the nature and extent of the breach of Warranty, would be immediately obvious to a purchaser advised by professional advisors reasonably experienced in transactions of the nature of the sale of the Shares'.[119] The plea, however, did not take into account that cl 12.2 is confined to matters fairly disclosed in the Due Diligence Material. As I have noted above, the Due Diligence Material listed in Attachment 2 was confined to material up to 14 February 2012. There was nothing in any of that material relevant to Mr Schlegel's salary increase, or which could have alerted the most astute adviser.
[119] Reply and defence to counterclaim [25C iii].
Fourth, Mr Schlegel relied on the time limits for Warranty Claims in cl 12.3. Relevantly, Gourmania Holdings was required to bring a claim within 18 months after Completion, that is, no later than 4 August 2014.[120] Clause 12.3 was subject to cl 12.9, by which
None of the limitations in this clause 12 apply to any Claim to the extent that it arises out of, or is increased as a result of …
(b)any fraud, wilful default or wilful concealment by the Seller or any of their representatives.
[120] Reply and defence to counterclaim [25C iv].
The meaning of cl 12.3 and cl 12.9 are to be determined by construing the clauses according to their natural and ordinary meaning, read in light of the contract as a whole.[121] The question is whether the Warranty Claim arose out of or was increased as a result of wilful concealment by Mr Schlegel.
[121] Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500, 510.
The Warranty Claim arose out of the failure of sch 6 or the Due Diligence Materials to disclose complete and accurate details of each employee. Schedule 6 was, in effect, not used. Gourmania Holdings did not allege any concealment by Mr Schlegel (or anyone else) in the Due Diligence Materials, or of any changes 'after the date of this agreement and before Completion'.[122] Gourmania Holdings relied on the conduct of Mr Schlegel in his response to the email of 7 December 2012.
[122] See exhibit 1, 1500 ‑ 1608, sch 7, cl 11.1.
To conceal does not only mean to cover or hide, but also 'to forbear to disclose or divulge'.[123] The Oxford English Dictionary gives the primary meaning:
To keep (information, intentions, feelings, etc.) from the knowledge of others; to keep secret from … to refrain from disclosing or divulging.
[123] Macquarie Online Dictionary.
I am satisfied that, within the ordinary meaning of cl 12.9, Mr Schlegel concealed by not revealing that the Due Diligence Materials did not disclose complete and accurate information about his employee details. I have earlier referred to my dissatisfaction with Mr Schlegel's explanation for why he did not tell Mr Romano and Mr Jeyarajah about the increase in his salary. I am satisfied that the concealment of that information was wilful, and the limitation, including the time limitation, in cl 12.3 of the Share Sale Agreement does not apply.
Mr Schlegel further pleaded that, by the email dated 7 December 2012 from Mr Jeyarajah on behalf of Gourmania Holdings to Mr Schlegel, Gourmania Holdings waived its rights, remedies and powers in relation to the provision of information.[124]
[124] Reply and defence to counterclaim [25H d].
In Commonwealth of Australia v Verwayen, Mason CJ described 'waiver' as 'an imprecise term capable of describing different legal concepts, notably election and estoppel'.[125] In other cases, the term has apparently been used to include forbearance and abandonment or renunciation.[126]
[125] Commonwealth of Australia v Verwayen [1990] HCA 39; (1990) 170 CLR 394, 406.
[126] Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 [55].
It is not alleged that, with knowledge, Gourmania Holdings acted in a manner that could be said to be inconsistent with it relying on the warranties. There is no question in this case of Gourmania Holdings electing between inconsistent rights. Mr Schlegel has not pleaded or established any facts on which the court could find estoppel.
There may have been a mutual variation by which the parties did not include any content in sch 6. But there was nothing in what Mr Jeyarajah said or did which could be construed as a waiver of Gourmania Holdings' rights under the contractual warranties.
Mr Schlegel further pleaded that his response on 7 December 2012 fairly disclosed information about employees and terms of employment 'in such a way that it would be immediately obvious to a purchaser advised by professional advisors reasonably experienced in transactions of the nature of the sale of shares that a fact matter or circumstance had arisen which might constitute changes, including significant changes, to [the employee] information'.[127] If the plea was intended to invoke cl 12.2 it would fail for two reasons. First, the clause refers to fair disclosure in the Due Diligence Material. Second, by cl 12.9, none of the limitations in cl 12 apply by reason of the wilful concealment by Mr Schlegel.
The salary increase
[127] Reply and defence to counterclaim [25H e].
As a director of Gourmet Chef Foods, Mr Schlegel owed it fiduciary duties. The questions in this case are about the scope of the duties owed by Mr Schlegel, and whether he acted with the informed consent of those to whom the duty was owed when he caused his salary to be increased in December 2012.
At the most general level, the rules can be expressed as the conflict rule and the profit rule:
(1)a fiduciary must not, without informed consent, promote their personal interest by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the personal interest of the fiduciary and those whom they are bound to protect.[128]
(2)a fiduciary must account for a profit or benefit if it was obtained either when there was a conflict or possible conflict between their fiduciary duty and their personal interest, or by reason of the fiduciary position or by reason of taking advantage of opportunity or knowledge derived from their fiduciary position.[129]
[128] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 103; Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 [78].
[129] Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544, 557.
Ordinarily a director cannot have personal interests that conflict with the interests of the company. But, as McLure P said in Streeter v Western Areas Exploration Pty Ltd (No 2):
… the content of fiduciary duties are moulded to the character of the particular relationship so that even within an established fiduciary relationship, the content of the duties will not be uniform for all cases: United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1, 11. Further, the subject matter over which fiduciary obligations extend can be ascertained from the course of dealing between the parties or the circumstances of the appointment of the fiduciary: Chan v Zacharia (1984) 154 CLR 178, 196 and 204. In my view, these authorities provide the principled basis for any narrowing of the fiduciary rules applying to directors.[130]
[130] Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17; (2011) 82 ACSR 1 [70].
In the circumstances of this case, it is important not to overlook, as an aspect of Mr Schlegel's obligation to act in the interests of the company, the duty of a director to act in accordance with the company's constitution.
Gourmania Holdings pleaded the duties of Mr Schlegel as duties to:
(a)act in good faith;
(b)act in the best interest of Gourmet Chef Foods;
(c)avoid conflicts between the interests of Gourmet Chef Foods and his own interests;
(d)act honestly;
(e)refrain from using his position as a director of Gourmet Chef Foods to gain an advantage for himself;
(f)act for the proper purposes of Gourmet Chef Foods in relation to its affairs.[131]
[131] Defence and counterclaim [46].
It was not disputed that on 3 December 2012, Mr Schlegel increased his remuneration as director of Gourmet Chef Foods from $7,980.77 to $13,750.00 a fortnight and received $57,692.30, being the amount of the increase in his remuneration back paid to 1 July 2012. Between 3 December 2012 and 13 November 2013, Mr Schlegel received $141,345.89 as a result of the increase in his remuneration. It is not in dispute that from 13 November 2013, Mr Schlegel no longer received salary as a director but was paid as a consultant.
Gourmania Holdings claimed that Mr Schlegel procured the salary increase in breach of his duties as a director of Gourmet Chef Foods and claimed damages or compensation for the amounts paid under the salary increase. It pleaded that the increase was not determined or approved by a directors' resolution; nor was it authorised by the shareholders of Gourmet Chef Foods in a general meeting as required by Article 63(1) of its Articles of Association; nor was it disclosed to Gourmania Holdings or its officers or agents at any time.[132]
[132] Defence and counterclaim [49].
Gourmania Holdings pleaded breaches of s 181, s 182 and s 183 of the Corporations Act 2001 (Cth); alternatively, breach of fiduciary duties.
Gourmania Holdings claimed damages, or alternatively compensation pursuant to s 1317H of the Corporations Act.
Mr Schlegel pleaded that his duties to Gourmet Chef Foods did not prevent him from procuring the increase in his salary where he had the informed consent of Gourmet Chef Foods's directors and members, and the remuneration was determined in accordance with Gourmet Chef Foods's constitution.
He further pleaded that Mr Jeyarajah was a director of Gourmet Chef Foods from 4 February 2013, and information about the amounts paid to him was available to Gourmania Holdings both before and after it entered the Share Sale Agreement.
The Articles of Association
The Articles of Association of Gourmet Chef Foods, as amended, provided that directors shall be paid 'such remuneration as is from time to time determined by the Company in general meeting'.[133]
[133] Exhibit 1, 1 ‑ 21, cl 63.
The Articles also provided for the appointment of a managing director who shall, 'subject to the terms of any agreement entered into in a particular case, receive such remuneration [whether by way of salary, commission or participation in profits, or partly in one way and partly in another] as the directors determine'.[134]
[134] Exhibit 1, 1 ‑ 21, cl 80.
Mr Schlegel pleaded that he was the managing director of Gourmet Chef Foods[135] and gave unchallenged evidence that he was the chief executive office, secretary and managing director.[136]
[135] Reply and defence to counterclaim [18].
[136] Exhibit 3.3, [3] ‑ [5], ts 33 ‑ 34.
Clause 71 of the Articles provided:
No director shall be disqualified by his office from holding any office or place of profit under the Company or under any company in which this Company shall be a shareholder or otherwise interested or from contacting [sic] with the Company either as vendor purchaser or otherwise nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested by avoided nor shall any director be liable to account to the Company for any profit arising from any such office or place of profit or realised by any such contract or arrangement by reason only of such director holding that office or of the fiduciary relations thereby established but it is declared that the nature of his interest must be disclosed by him in the manner required by the Corporations Law. A director may vote in respect of any contract or arrangement in which he is interested. A director may be appointed as the director in whose presence the seal of the company is to be affixed to any instrument notwithstanding that he is interested in the contract or arrangement to which the instrument relates.
The reference to the Corporations Law appears to be a reference to pt 2D.1, div 2, headed Disclosure of, and voting on matters involving, material personal interests. Section 191 (1) requires a director who has a material personal interest in a matter that relates to the affairs of the company to give other directors notice of the interest unless subs (2) applies. The notice requirements are set out in subs (3). The notice must give details of the nature and extent of the interest and the relation of the interest to the affairs of the company, and must be given at a directors meeting as soon as practicable after the director becomes aware of their interest in the matter. Relevantly, s 191(2)(iii) provides that a director does not need to give notice of an interest under subs (1) if it arises in relation to the director's remuneration as a director of the company.
Findings
I accept that Mr Schlegel advised Mihir Patel in early December 2012 that he had not had a pay rise for at least two years and was making an adjustment to his salary. Mr Schlegel told Mihir Patel that the rise would be enough to recover the two years of no increase. While Mihir Patel was aware that Mr Schlegel was adjusting his salary, Mr Schlegel did not tell him the extent of the increase or about the lump sum back pay.
Mr Schlegel said that he believed his salary increase was shown in documents at a payroll review meeting in February 2013, attended by Mr Jeyarajah.[137] If so, that meeting was after the Date of Completion of the Share Sale Agreement. Mr Patel was not present.
[137] Exhibit 3.1, [31] - [32].
In any event, the question of breach of duty relates to Mr Schlegel's conduct in or around December 2012, when the increase was put into effect. At the time of the increase, Gourmania Holdings was merely a prospective purchaser of Mr Schlegel's share in Gourmet Chef Foods. Mr Schlegel owed no duty, as a director of Gourmet Chef Foods, to Gourmania Holdings or Mr Jeyarajah and subsequent disclosure to them was not relevant to whether he breached his duties to Gourmet Chef Foods.
At a fundamental level, Mr Schlegel procured the increase in his salary otherwise than in accordance with the constitution of Gourmet Chef Foods. It was not in dispute that his salary was not fixed by the company in general meeting, nor was it determined by the directors.
Mr Schlegel pleaded that his remuneration was determined in accordance with Gourmet Chef's constitution and with the informed consent of its directors and members.[138]
[138] Reply and defence to counterclaim [22], [24].
Mr Schlegel relied upon his discussions with Mihir Patel, the knowledge of Mr Jeyarajah, and Gourmet Chef Foods' adoption of the financial statements for the year ended 30 June 2013. He cited In re Duomatic in submitting that the increase in salary breached no duty.[139] The authorities support the contention that, where there is a potential defect in a purported exercise of corporate power, the unanimous consent of the shareholders, even if there has been no formal resolution of a general meeting, may be as binding as a resolution in general meeting would have been. But it is necessary, for the Duomatic principle to apply, that the authorisation be with the full knowledge and consent of the members.[140] Mr Schlegel has not proved the full knowledge and consent of all members and directors to what he did. I am satisfied that he did not disclose the extent to which he was increasing his director's salary.
[139] In re Duomatic [1969] 2 Ch 365, cited with apparent approval in MYT Engineering Pty Limited v Malcon Pty Limited [1999] HCA 24; (1999) 195 CLR 636. See also Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507.
[140] Re Compaction Systems Pty Ltd and the Companies Act [1976] 2 NSWLR 477, 484; Herrman v Simon (1990) 4 ACSR 81, 83.
Mr Schlegel also referred to Australian Securities & Investments Commission v Maxwell, where Brereton J said:
Where there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control ‑ which is fundamental purpose and rationale of these duties - is much less acute. That is a circumstance which can impact considerably on the content of the duties. The significance of a correspondence between the identity of the directors and the shareholders is illustrated by the circumstance that, at general law, a fully informed general meeting can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors' powers for an improper purpose … Where the directors and the shareholders are one and the same, ratification is implicit. Although the shareholders of a company cannot release the directors from their statutory duties imposed by s 180, 181 and 182 … their acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position.[141]
[141] Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052 [103] (citations omitted).
There is, on the facts, no fully informed ratification of what occurred. Nor did Mr Schlegel plead that his conduct had been ratified. His plea was that he had the informed consent of Gourmet Chef Foods' directors and members.
I am satisfied, on the findings of fact that I have made, that the conduct of Mr Schlegel in procuring the increase in his salary was in breach of his duties to Gourmet Chef Foods as pleaded. Further, he has not shown that he acted in accordance with the Company's constitution, or that he had the informed consent of the other directors or the members.
Cuisinex consultancy fees
Gourmania Holdings pleaded that, in or around early 2014, Mr Schlegel and Mr Jeyarajah agreed to pursue business opportunities in Thailand in a joint venture.[142] Gourmania Holdings pleaded a joint venture agreement under which:
(a)Mr Jeyarajah and Mr Schlegel would establish a company in Thailand to act as vehicle for their joint venture interests;
(b)Mr Schlegel would provide consultancy services to the company, and would provide invoices to the company for payment of those services; and
(c) the company would reimburse Mr Schlegel for consultancy services upon receipt of his invoices.[143]
[142] Defence and counterclaim [83].
[143] Defence and counterclaim [84].
To give effect to the joint venture agreement, Mr Schlegel and Mr Jeyarajah caused Cuisinex Asia Company Ltd to be created.[144]
[144] Defence and counterclaim [85].
Gourmania Holdings alleged that Mr Schlegel invoiced Gourmet Chef Foods for services he performed for Cuisinex and procured the payment of those invoices 'as a director of Gourmet Chef Foods',[145] and that Mr Schlegel's conduct 'in procuring payment' of the fees was a breach of his duties as an officeholder in Gourmet Chef Foods.[146]
[145] Defence and counterclaim [86].
[146] Defence and counterclaim [87].
Gourmania Holdings claims damages or compensation for the amount of fees paid for breach of Mr Schlegel's duties as a director of Gourmet Chef Foods.
Mr Schlegel pleaded that there was a Thai Venture, but denied that he and Mr Jeyarajah agreed a joint venture.[147]
[147] Reply to defence and counterclaim [26] ‑ [27].
Mr Schlegel pleaded that between May 2014 and June 2015 he invoiced Gourmet Chef Foods for, and was later paid:
i.$32,761.72 for consultancy services provided by him at the request of Mr Jeyarajah in connection with the Thai Venture; and
ii.$32,238.28 for consultancy services provided by him to Gourmet Chef Foods but not in connection with the Thai Venture.[148]
[148] Reply to defence and counterclaim [28].
It was not in dispute that the division of amounts across the two businesses was as pleaded by Mr Schlegel, and the counterclaim was limited to the sum of $32,761.72 only.
Mr Schlegel pleaded that Mr Jeyarajah directed him to address invoices for consultancy services provided by him to Gourmet Chef Foods trading as Gourmania Holdings, and also invoices for services provided by him, at the request of Mr Jeyarajah, in connection with the Thai Venture.[149]
[149] Reply to defence and counterclaim [26].
Mr Schlegel pleaded that the payment of the amount for consultancy services to the Thai Venture was authorised by the directors and shareholders of Gourmet Chef Foods with informed consent.[150]
The agreed facts
[150] Reply to defence and counterclaim [29e].
Some of the relevant facts were included in an agreed chronology.[151]
[151] From the agreed chronology.
On 16 November 2013, Mr Schlegel ceased to be an employee of Gourmet Chef Foods and left Perth. He ceased as a director on 29 May 2015.
Between 1 March 2014 (first invoice) and 20 June 2015 (last invoice) Mr Schlegel submitted invoices to Gourmet Chef Foods for consultancy fees. During this period, on 12 June 2014, Cuisinex Asia Co Ltd was incorporated. Mr Jeyarajah was sole director. Mr Jeyarajah, Mr Schlegel and Mr Bruce Cunningham were the shareholders.
On 26 June 2015, Mr Jeyarajah informed Mr Schlegel that there had been some discussion between the directors and senior management and there was a concern as to the validity of some of his consultancy charges.
On 23 July 2015, Mr Mihir Patel informed Mr Schlegel that payment would be made to Mr Schlegel on his invoices. A final payment was processed within days.
I am satisfied that the last invoice was paid by Gourmet Chef Foods after the invoiced amounts had been reviewed by Gourmet Chef Foods and the directors determined that it should be paid.
The earlier invoices were not the subject of any direction by the directors of Gourmet Chef Foods, other than Mr Jeyarajah.
It was not in dispute that after 13 November 2013 (which includes the whole of the relevant period) Mr Schlegel did not receive a salary but was paid as a consultant. A written consultancy agreement was prepared but not executed. But it was not in issue that Mr Schlegel was entitled to be paid as a consultant to Gourmet Chef Foods, and Gourmania Holdings did not challenge those amounts that were identified as payment for work done on behalf of Gourmet Chef Foods.
I also accept the evidence of Mr Schlegel that Mr Jeyarajah told him that he (Mr Jeyarajah) would 'bear all costs and charges of Cuisinex going forward'.[152]
[152] Exhibit 3.1 [64].
Mr Jeyarajah was the decision maker for Gourmet Chef Foods. I am satisfied that Mr Jeyarajah authorised the payments to be made by Gourmet Chef Foods, as part of his overall approach that ongoing expenses in Asia would be paid by the Company, and 'equalised' against the costs to the company of Naresh Patel. This continued until the Patels raised concerns in the middle of 2015.[153] Even then, those concerns appear to have been primarily directed to expenses incurred by Mr Jeyarajah. There is no evidence that Mr Schlegel was party to any decision by Gourmet Chef Foods about how, or from where, his consultancy charges would be paid.
[153] Exhibit 7.1 [33] ‑ [37].
Gourmania Holdings pleaded an alternative case that 'by procuring an unauthorised additional payment above and beyond his salary entitlements, [Mr Schlegel] put himself in conflict with the interests of Gourmet Chef Foods and his own personal interests'.[154]
[154] Defence and counterclaim [88].
The cases as pleaded by Gourmania Holdings have not been made out. The evidence does not support the allegation that Mr Schlegel 'procured' the payment of the invoices by Gourmet Chef Foods - that he used his office as director to persuade or cause Gourmet Chef Foods to make the payments. Gourmania Holdings has not proved the case it pleaded in relation to the Cuisinex payments.
Assignment
The claims against Mr Schlegel for breach of his duties as a director require consideration of whether Gourmania Holdings can maintain that claim, the duties being owed to Gourmet Chef Foods. Gourmania Holdings holds two of the four issued shares in Gourmet Chef Foods.[155]
[155] Exhibit 1, 2457.
By a Deed of Assignment executed on 23 June 2016, for the sum of $1, Gourmet Chef Foods assigned to Gourmania Holdings absolutely all of its:
(a)rights to the Claim, being a chose in action;
(b)rights, remedies and obligations of the Claim;
(c)legal and other remedies for the Claim; and
(d) power to give god discharge of the Claim
as at [23 June 2016], including but not limited to all rights, powers entitlements and liens which [Gourmet Chef Foods] has or may have pursuant to the Deed.[156]
[156] Exhibit 1, 2364D.
The claim was defined to mean the whole of its chose in action against Mr Schlegel arising from Mr Schlegel's directorship and employment with Gourmet Chef Foods arising from conduct during the period of:
(a)1 July 2012 to 15 November 2013; and
(b)16 November 2013 to 26 May 2015.[157]
[157] Defence and counterclaim [58].
The Deed of Assignment followed a resolution of the directors of Gourmet Chef Foods on 23 June 2016. Notice of the assignment was given to Gourmania Holdings.
Mr Schlegel put in issue whether the assignment was void for being contrary to public policy.[158]
[158] Reply and defence to counterclaim [25].
The choses in action during the relevant period include Gourmet Chef Foods's claims for compensation pursuant to the Corporations Act and its claims for breach of fiduciary duty.
The Corporations Act claims rely on s 1317H, which provides:
(1)A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if:
(a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and
(b)the damage resulted from the contravention.
The assignment raises two questions: on the proper construction of s 1317H, is the statutory action pursuant to that section assignable; and is the claim for breach of fiduciary duties assignable, or is it inherently unassignable as a bare right of action.
These questions have arisen in earlier cases, primarily in the context of assignment by a liquidator. But the underlying question is not dependent on that legal context.
As a matter of construction, the compensation under s 1317H is available to the specified corporation, scheme or fund for damage suffered by the corporation, scheme or fund. The terms of the section confer a right which is personal to the specified persons who suffers damage that results from a contravention of a civil penalty provision in relation to the corporation. It is not a cause of action which is assignable.[159]
[159] See Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd [2018] VSC 633 [60] - [68], [116].
The claims assigned to Gourmania Holdings, however, include claims for breach of non‑statutory fiduciary duty. As a shareholder in Gourmet Chef Foods at the time of the assignment, even though Gourmania Holdings did not then have a pre-existing enforceable right against Gourmet Chef Foods, it had a genuine commercial interest in taking the assignment and in enforcing it for its own benefit.[160] In those circumstances the claim was assignable.[161]
[160] Dover v Lewkovitz [2013] NSWCA 452 [25].
[161] Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498 [53], [79], [159]; E C Dawson Investment Pty Ltd v CrystalFinance [No 3] [2013] WASC 183 [889] - [890].
It was not in issue that the assignment complied with s 20 of the Property Law Act 1969 (WA).
I find that the claim against Mr Schlegel for breach of fiduciary duty in procuring the adjustment of his salary in December 2013 was effectively assigned to Gourmania Holdings, and Gourmania Holdings is entitled to enforce that claim.
Set‑off
Finally, it is necessary to consider whether Gourmania Holdings could set‑off the amount it claims, following assignment by Gourmet Chef Foods, from the amount due to Mr Schlegel.
By cl 19.3 of the Share Sale Agreement, any payment to be made 'must be made free and clear of any set-off, deduction or withholding' except as required or compelled by law. Clauses excluding set‑off are common in agreements between banks and borrowers, and have been held to be enforceable.[162] Clause 19.3 does not prevent Gourmania Holdings' counterclaim, but does affect when amounts were due.
[162] See Brimstone Resources Ltd v Empire Resources Ltd [2018] WASCA 107; Palaniappan v Westpac Banking Corporation [2016] WASCA 72 [73], [85], [130] ‑ [141], [151] ‑ [160]; George 218 Pty Ltd v Bank of Queensland Ltd [2015] WASC 434; (2015) 303 FLR 231 [288]; Oswal v Commonwealth Bank of Australia [2013] WASCA 58 [45], [54] ‑ [55]; Commonwealth Bank of Australia v Shannon [2013] NSWSC 1076.
Conclusion
The claim by Mr Schlegel is upheld to the following extent:
(1)Gourmania Holdings is to pay the sum of $333,333 plus interest pursuant to cl 4.1 of the Seller Finance Agreement at the Commonwealth Bank variable base rate (calculated daily and compounding monthly) on $333,333 from 4 February 2016 until payment.
(2)The purchase price under the Share Sale Agreement is adjusted in accordance with the findings at [110] and [126] of these reasons, and Gourmania Holdings is liable to pay the adjusted purchase price accordingly.
The claim by Gourmania Holdings is upheld to the extent of the claim for breach of fiduciary duty by Mr Schlegel in procuring the adjustment of his salary in December 2012.
I will hear the parties on the question of interest on the adjusted purchase price, and interest on the claim against Mr Schlegel, to the extent it was upheld, and costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CG
Associate to the Honourable Justice Allanson5 AUGUST 2019
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