Suh v Cho
[2016] VSC 108
•21 MARCH 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2012 04980
| JUNG WHA SUH AND ANOTHER | Plaintiffs |
| v | |
| JEFF W CHO AND OTHERS | Defendants |
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JUDGE: | ELLIOTT J |
WHERE HELD: | MELBOURNE |
DATES OF HEARING: | 7-10, 15 MARCH 2016 |
DATE OF JUDGMENT: | 21 MARCH 2016 |
CASE MAY BE CITED AS: | SUH v CHO |
MEDIUM NEUTRAL CITATION: | [2016] VSC 108 |
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CONTRACT – Loan between directors – Loan from company to director – Unconscionable conduct – Economic duress – Defences not established – Demands for repayment – Construction of the contract – Repayment of both loans due – Competition and Consumer Act 2010 (Cth), schedule 2, the Australian Consumer Law, ss 20, 22.
DIRECTORS’ DUTIES – Alleged breaches of fiduciary and statutory duties – Alleged misappropriation of company assets – Establishing competitive business – Knowing involvement – Constructive trust – Breaches not established – Constructive trust not established.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | S S R Lee (Solicitor) | Spencer Reyner Law Office Pty Ltd |
| For the First Defendant | In Person | |
| For the Second Defendant | In Person | |
| For the Third Defendant | Second Defendant (by leave) |
TABLE OF CONTENTS
A.. Introduction................................................................................................................................... 1
B.. Background................................................................................................................................... 2
C.. Issues.............................................................................................................................................. 7
C.1... Repayment of the Company Loan.................................................................................... 7
C.2... Repayment of the Personal Loan.................................................................................... 12
C.3... Declaratory relief sought.................................................................................................. 16
D.. Conclusion................................................................................................................................... 24
HIS HONOUR:
A. Introduction
The first defendant, Jeff Cho (“Cho”), is a qualified plumber.
On 14 September 2005, the second plaintiff, Jeff the Plumber Pty Ltd (“Jeff the Plumber”) was incorporated. From 2005 until early 2009, Jeff the Plumber conducted a plumbing business, with Cho as its sole director.
In 2008, the first plaintiff, Jung Wha Suh (“Suh”) was renovating an investment property he had bought. As part of these renovations, Cho performed some plumbing works for Suh.
Suh had only arrived in Australia in July 2007. Suh’s English was poor and he was unable to secure employment for some time. Both Cho and Suh were former residents of the Republic of Korea. Partly a result of this connection, from around April 2008, Cho and Suh met approximately 2 times per month.
Suh observed Cho’s work, and engaged in discussions with Cho about the nature of Jeff the Plumber’s business. Over time, they also discussed the prospect of Suh becoming involved in the business. Suh had little or no plumbing skills, having been a banker in Korea for 22 years. However, Suh thought he and Cho could work together. To this end, the prospect of expanding Jeff the Plumber’s business, to include retailing of plumbing equipment, solar panels and various other items, was discussed.
The second defendant, Christi Ho (“Ho”) is Cho’s wife. Ho performed bookkeeping services for Jeff the Plumber. Ho was introduced to Suh, by Cho, in the second half of 2008.
Ho caused the third defendant, Jeff & Sons Plumbing Pty Ltd (“Jeff & Sons”) to be incorporated on 29 June 2009. Ho is the sole director and shareholder of Jeff & Sons.
B. Background
In March 2009, Cho and Suh agreed that Suh would invest in Jeff the Plumber, and become a co-director and 50 percent shareholder with Cho. Pursuant to this agreement, Suh consented to become a director and provided an initial $100,000, by way of 2 payments of $50,000. There is an issue as to whether the entirety of these funds, which were paid into 2 of Jeff the Plumber’s bank accounts,[1] were invested by Suh as equity, or whether $50,000 was so invested, with the remaining $50,000 being lent to Cho so that Cho could invest an equivalent amount as Suh.
[1]$50,000 was paid into an interest free account to be used immediately, and $50,000 was paid into an interest bearing account.
Upon this initial investment being made, Cho and Suh promptly sought premises for the conduct of the retail arm of Jeff the Plumber. Sometime in April 2009, suitable premises were located in Huntingdale, a suburb of Melbourne. Although the details were not before the court, it appears a lease was entered into by Jeff the Plumber.
Upon taking possession, Suh, Cho and Ho set up a shop to sell various items (“the Shop”). Once this was done, Suh worked at the Shop, while Jeff continued to perform plumbing services as he had done in the past.
Jeff the Plumber had 2 computers. From time to time, Ho attended at the Shop to do the bookkeeping. She did this at the direction of Cho. Suh was effectively excluded from the data stored in the computers, as he was not given access to the password until after the business ceased.[2]
[2]In fact, the password was not provided to Suh until, on 29 June 2009, Ho sent an email to Suh providing the details.
On 20 April 2009, Cho borrowed $5,000 from Jeff the Plumber. This was done with Suh’s knowledge.[3] There was no evidence of any requirement for Cho to pay interest on this loan.
[3]Arrangements had been put in place so that, for moneys to be withdrawn from Jeff the Plumber’s bank account, the joint authorisation of Cho and Suh was required.
Shortly after 30 April 2009, Suh advanced a further $100,000. It was agreed with Cho this amount was ultimately to be used as a further contribution to Jeff the Plumber. However, at Cho’s request, $100,000 was paid by Suh to a third party, so it could be put in that third party’s bank account for the third party to satisfy certain business lending requirements. Upon those lending requirements apparently being satisfied, the third party then paid the moneys to Jeff the Plumber by bank cheque on 5 May 2009. Again, there is an issue as to whether this $100,000 represented equity contributed solely by Suh, or whether half of it was lent to Cho for Cho to be able to make an equal contribution.
In mid May 2009, Cho asked Suh to make a further contribution. Cho claimed Jeff the Plumber needed to purchase a forklift and a boom lift. On 21 May 2009, Suh agreed to, and then did, advance another $100,000 to Jeff the Plumber. The same issues arise as to the nature of this payment.
In summary, Suh claims he has lent $150,000 in total to Cho (“the Personal Loan”). Cho denies he has borrowed any money from Suh.
On 22 May 2009, Cho repaid $2,000 of the $5,000 loan referred to in paragraph 12 above. However, a number of days later, Cho sought to borrow further funds. On 27 May 2009, Cho borrowed $27,000 from Jeff the Plumber with Suh’s knowledge. Suh said he agreed to this further payment because he feared Cho would leave Jeff the Plumber.
Thus, from 27 May 2009, Cho had borrowed $30,000 from Jeff the Plumber which has not been repaid (“the Company Loan”).
To this point in time, the agreements between Cho and Suh had been oral. Suh was concerned about this. He drafted a written agreement on his own, and then presented it to Cho.
In late May or early June 2009, when shown Suh’s draft written agreement, according to Suh, Cho asked whether it had been prepared by a lawyer and Suh assured Cho a lawyer had not been involved. Both Suh and Cho gave evidence that, upon reviewing the document, they negotiated some of the written terms. Suh said to Cho the purpose of the agreement he had drafted was to reflect the existing oral agreement, though he would agree with Cho to change some of the terms. Suh was very anxious to have something in writing.
When presented with the document drafted in Korean, Cho said that Ho could not read Korean and there needed to be an English version. Suh acceded to this request and an English version of the agreement was provided by Suh to Cho about 2 days later. However, when it came time to negotiate, Suh and Cho used the Korean version of the proposed agreement.
After some discussion, changes were made on Suh’s computer. Cho said amendments to the document were made and then, over 2 or 3 days, Suh kept asking for the document to be signed. Although there were different accounts as to when the draft agreement was finalised, both Cho and Suh executed the agreement on 2 June 2009 (“the Agreement”). Cho denies the Agreement is legally binding. In essence, he contends the Agreement is unenforceable because of the circumstances in which it was signed.
Although Cho had previously sworn he was denied an opportunity to get legal advice, and maintained this position at trial, under cross-examination, he acknowledged he could have obtained legal advice in the 2 to 3 days prior to execution. Cho also said he told Suh, “we need a lawyer”. No legal advice was obtained.
The final document recording the Agreement was predominantly in Korean. Again, by reason that Ho does not read or speak Korean, each of Suh and Cho later obtained separate translations into English of the Agreement.[4] Shortly before the commencement of the trial, it was agreed that Cho’s translation would be the agreed translation between the parties. The Agreement read as follows:[5]
[4]Cho’s translation was obtained on 3 July 2009, after the parties had had a falling out.
[5]The grammar and spelling is unchanged from the Agreement.
An Agreement between Jung What (sic) SUH and Jeff CHO
1. The Name of the Company: JEFF THE PLUMBER
2. Participants: Jung Wha SUH, Jeff CHO
3.Initial Capital: The initial capital is set for $300,000, to which each partner invests $150,000 respectively. The portion of Jeff [Cho]’s investment is to be borrowed from Jung Wha SUH.
4.The Equity to the company should be based on fifty to fifty: 50:50 between the partners.
5.Distribution of Profits: The profits after all expenditures deducted be divided into 50:50. The Priority of Payments for Expenditures: costs of materials, external payments payable, operating funds in store, repayment of initial capital. As for the repayment of initial capital invested, the interest against the principal should be calculated on the average bank mortgage interests for last five years.
6.The Scope of Business: Heating, Cooling Sale and Install, and all Plumber Jobs.
7.The Reversion of Interests: All profits and losses which accrue as a result of business operations during the business hours in the range of business prescribed above should belong to the company.
However, the working business days for Jeff [Cho] are 5 days from Monday through Friday and for Jung Wha [Suh] he works from Monday through Saturday at the [S]hop.
8.Decision Making: Important decisions should require 100% of agreement of the participants. Examples of important decisions are new types of business, borrowing money, purchase of property and so on.
9.Division of Duties: Jung Wha [Suh]: in charge of recruiting personnels, their management and sale.
Jeff [Cho]: in charge of management of workplace, management of staffs in workplace, management of vehicles and equipments. Both partners are in joint charge of the capital fund.
10.The participants should run the business in the spirit of trust for each other and do their best for the survival and prosperity of the company.
11.Liquidation of Company: The participants can leave the company if the one finds it difficult to agree with the other in the operation of business. The liquidation of company should be done on the basis of market value of the assets of the company after reimbursing firstly all external debts, then initial capital. The remainder after the repayments should be divided evenly between the two partners. Jeff [Cho] has the right to keep the company title, JEFF The PLUMBER.
Date: 2nd June 2009
Place: 56 Hargreaves St Huntingdale
Participants:
JEFF [Cho] JUNG WHA [Suh](signed) (signed)
Unfortunately, it became apparent that Cho and Suh had significantly different views as to how the business of Jeff the Plumber ought to be conducted. Without descending to too much detail, Cho was keen to invest moneys in equipment and to put on a full time employee in order to seek to expand the business. In contrast, Suh was concerned to ensure that Jeff the Plumber did not take on additional liabilities until he could be certain that there was sufficient work to justify the expenditure. There was also a dispute as to who should be responsible for the Workcover premiums of Cho.
On 25 June 2009, solicitors for Suh sent a letter to Cho which referred to Cho having previously expressed his intention “to terminate the partnership[6] and to cease the business”. The letter stated that Suh was inclined to agree to the proposed dissolution on the basis that a process was to be conducted “with and under the agreement of both parties”. In addition to seeking written confirmation from Cho, demands were made for Cho not to interfere with the assets of Jeff the Plumber without Suh’s consent, and for Cho to repay loans in the sum of $180,000 within 7 days.
[6]There was no suggestion at trial that any partnership was in existence.
On 27 June 2009, Cho resigned as an employee of Jeff the Plumber. Two days later, upon its incorporation, Cho became an employee of Jeff & Sons.
After Cho’s resignation, Suh arranged for the assets of Jeff the Plumber to be stored in a warehouse controlled by him. It appears the assets were assembled in late June or early July 2009, but were not relocated until around October 2009. These assets included 2 vehicles, kitchen equipment, a laptop, various items of equipment concerning heating and cooling, a forklift, a boom lift, and further miscellaneous items. Those items have remained in the possession of Suh ever since.
In addition, Jeff the Plumber still has approximately $68,160.69 in a bank account.[7]
[7]This was the balance as at 20 December 2010.
This proceeding was commenced by Suh on 11 June 2010 in the County Court of Victoria. On 11 October 2012, the proceeding was transferred to this court.[8] Although leave was not granted until 13 September 2013 for Suh to bring claims in this proceeding on behalf of Jeff the Plumber, the proceeding has always had both Suh and Jeff the Plumber named as plaintiffs.
[8]The proceeding was transferred because claims made by Suh and Jeff the Plumber included claims for compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) and for relief pursuant to s 1324 of the Corporations Act.
During the trial, the parties were asked what their intentions were with respect to Jeff the Plumber. All parties indicated that, regardless of the outcome, it was agreed that, after the determination of the issues in this proceeding, Jeff the Plumber would be placed into liquidation.
C. Issues
There are 3 substantive issues for determination. They are:
(1)Whether Cho is required to repay the Company Loan of $30,000 to Jeff the Plumber.
(2)Whether Cho is indebted to Suh in the sum of $150,000 by reason of the Personal Loan as alleged, and, if so, the basis upon which the Personal Loan is repayable.
(3)Whether declaratory relief ought to be granted to Jeff the Plumber to the effect that:
(a)Ho holds her shareholding in Jeff & Sons on trust for Jeff the Plumber;
(b)Jeff & Sons holds its plumbing business on trust for Jeff the Plumber.
C.1 Repayment of the Company Loan
Jeff the Plumber alleges the Company Loan is repayable on demand. A demand was made by Jeff the Plumber on 23 December 2013, after leave had been granted to Suh to bring the claim on behalf of Jeff the Plumber.[9] The demand required the amount of $30,000 to be paid by 30 December 2013. Cho acknowledged Ho received this demand and showed it to him.
[9]See par 29 above.
Various attempts were made by Cho to mount a defence to the claim for repayment of the Company Loan. Initially, Cho pleaded that the Company Loan was to be repaid within 5 years of being lent, with no requirement to pay interest. Having filed this defence, this allegation was withdrawn to be replaced by an allegation that the Company Loan was repayable from Cho’s share of the profit from Jeff the Plumber’s business. Cho also swore an affidavit to this effect.
However, under cross-examination, Cho accepted that the Company Loan was repayable on demand.[10] Further, and in any event, Cho gave no evidence at trial that would support the allegations set out in paragraph 33 above, as originally pleaded or as ultimately pleaded.
[10]See also par 56 below.
By his most recent pleading, Cho also sought to raise a further defence. Cho alleged he was under a special disability or disadvantage in his dealings with Suh by reason of the following:
(1)In May and June 2008, Cho was having problems repaying his credit cards, with debts totalling about $60,000.
(2)In or about June 2008, Suh told Cho that he had been a banker in Korea for 25 years, that he was a member of the American Institute of Certified Public Accountants, and that he was going to open a franchise of the Bank of Queensland with his friend Simon Kim (“Kim”).
(3)In about June 2008, Suh told Cho that he would help Cho consolidate his credit card debts and requested Cho to provide him with all Cho’s personal and financial information.
(4)In June 2008, Cho provided Suh with all his personal and financial information and a signed application form completed by Suh.
(5)In July 2008, Suh applied to the HSBC Bank to consolidate Cho’s credit card debts.
(6)Cho’s application to consolidate his credit card debts was rejected in July 2008.
It was further alleged that:
(1)By reason of the matters set out in paragraph 35(1) to (6) above, between March and May 2009, Suh took advantage of Cho’s special disability or disadvantage both in his own capacity and in his capacity as a director of Jeff the Plumber.
(2)At the time when the plaintiffs took advantage of this special disability or disadvantage, Cho was lent the sum of $32,000 when the plaintiffs knew or ought to have known of the facts set out in paragraph 35(1) to (6) above.
By reason of the matters set out above, it is alleged the plaintiffs were guilty of unconscionable conduct in contravention of ss 20 and 22[11] of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (“the Australian Consumer Law”) and that, by reason of that alleged unconscionable conduct, the Company Loan is unenforceable.
[11]I will proceed on the basis that the reference to s 22 of the Australian Consumer Law incorporates a reference to s 21.
Before referring to the evidence, it is not apparent why Cho’s alleged financial difficulties, and the refusal of a particular application for credit, together with Suh’s background, would give rise to a “special disadvantage” as that term is understood for the purposes of unconscionable conduct and ss 20 and 22 of the Australian Consumer Law. Generally speaking, a person will only be under a special disadvantage if that person suffers a disabling circumstance that seriously affects her or his ability to make a decision as to her or his own best interests.[12] In short, mere differences in background or bargaining power do not, of themselves, give rise to a special disadvantage.[13]
[12]Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, 62 [5] (Gleeson CJ), referring to an equivalent provision to s 20 of the Australian Consumer Law in the Australian Trade Practices Act 1974 (Cth), s 51AA. See also Mackintosh v Johnson (2013) 37 VR 301, 303 [7] (Buchanan and Whelan JJA and Hargrave AJA), citing Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 462.7 (Mason J).
[13]Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, 64 [11].
Turning to the evidence, although there were differences in the extent of Suh’s involvement, Suh did in fact seek to assist Cho in Cho finding a means by which he could refinance his credit card debt. It also appears that Suh introduced Cho to Kim. This occurred at a restaurant, in what could be only be described as an informal occasion. About 2 months later, the 3 of them met again. Suh said “nothing in particular” was discussed on this occasion. This evidence was not challenged.
Further, Suh’s involvement in the application included providing some documents to Kim. However, contrary to the allegation that the application form was filled out by Suh,[14] the evidence showed that it was Ho that filled out the form before either she or Cho gave the form back to Suh, who in turn provided it to Kim.
[14]See par 35(4) above.
During the cross-examination of Suh, Cho put to Suh that Suh had a business relationship with Kim. In support of this proposition, reference was made to an invoice, dated 2 July 2008, which was issued by Kim’s company, YSK Group Pty Ltd (“YSK Group”), for the sum of $220. The details of the invoice indicated a fee was being charged for “a credit card consultation”. On the face of the invoice, Suh was referred to as “lending manager” of YSK Group. The invoice provided Suh’s mobile telephone number. In addition, in a letter, dated 4 July 2008, from YSK Group to Cho, these same details were recorded with respect to Suh.
As I understood it, it was being suggested that Suh was seeking some financial gain from his involvement in the credit card application and that this was a relevant circumstance concerning Suh’s alleged unconscionable conduct. However, Suh gave evidence that he was not employed by YSK Group, was not paid by YSK Group and was simply assisting Kim because, at the time, he was unemployed. Further, he stated that he was not a lending manager of YSK Group, and had not seen the invoice or the letter referred to above until after this proceeding commenced. He also said he had no responsibility for making the application. Beyond the 2 documents in question, there was no evidence contrary to Suh’s account of his relationship with YSK Group. I accept Suh’s evidence in this regard.
Based on all the evidence, I infer that Suh was simply trying to help Cho with his financial predicament. On no view of the evidence could Suh’s attempts to seek to help a companion for no personal gain be properly characterised as Suh acting unconscionably. Further, the Company Loan was of considerable advantage to Cho. It allowed him to pay some of his credit card debt, which was presumably attracting significant interest charges, with proceeds of an interest free loan. In these circumstances, to the extent Suh facilitated the advance, it is difficult to comprehend how such conduct might have been unconscionable.
By reason of the absence of any causal link between the facts as alleged and the allegation of a special disability or disadvantage,[15] and the facts as found,[16] the defendants’ allegations concerning unconscionable conduct on the part of the plaintiffs must fail.
[15]See pars 38 above.
[16]See pars 39-43 above.
One further matter needs to be addressed on this topic. In February 2013, Cho decided to oppose an application by Suh that the court grant leave for Suh to bring a proceeding on behalf of Jeff the Plumber.[17] Cho swore an affidavit in opposition to the application. That affidavit referred to a letter from Cho dated 24 May 2012, addressed to a judge of the County Court. That letter, the contents of which were reproduced in the body of the affidavit, stated that Cho admitted he had borrowed $30,000 from Jeff the Plumber. The affidavit positively stated that Cho would repay the Company Loan “by instalments which will be negotiated with [Suh]”. Later in the same affidavit, in asserting that it was not in the best interests of Jeff the Plumber for leave to be granted to Suh, Cho again swore he would repay the Company Loan by instalments.
[17]The application by Suh was made pursuant to various statutory provisions, including the Corporations Act, ss 236 and 237.
It is difficult to reconcile the position adopted by Cho, in May 2012 and again in February 2013, both in his assurances to the County Court and in his sworn affidavit, with the defences he sought to maintain at trial in this proceeding.
In summary, there is no defence to the claim by Jeff the Plumber for a repayment of the Company Loan. The Company Loan is immediately due and payable by Cho to Jeff the Plumber.
C.2 Repayment of the Personal Loan
As the evidence set out above shows,[18] Suh and Cho had discussions pursuant to which terms were negotiated, which terms were recorded in writing in a document that was then signed by each of them on 2 June 2009. By reason of these facts, at least on a prima facie basis, each of Suh and Cho represented that they were bound by the Agreement, or were willing to take the chance of being bound by the terms of the Agreement.[19] The only defence that Cho raises, to allege that he is not bound by the document he signed, is a defence of economic duress. Further to this defence, the defendant alleged that there was a substantially different agreement.
[18]See pars 19-23 above.
[19]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 180-181 [45] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
Economic duress, as distinct from duress to the person or to goods, has been recognised as sufficient to ground a claim for duress in Australia for a significant period of time.[20] To succeed in a claim for economic duress, it must be established that illegitimate pressure was applied which induced the victim to enter into the contract.[21] That pressure need not be the sole reason for the victim entering into the contract, but it must be a reason.[22] The pressure is prima facie illegitimate if the threatened conduct is illegal, and may be illegitimate, even if it is lawful, if there is no reasonable connection between the pressure being applied and the demand to which that pressure relates.[23]
[20]See Smith v William Charlick Ltd (1924) 34 CLR 38, 56.7 (Isaacs J).
[21]Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46.1 (McHugh JA); applied in Doggett v Commonwealth Bank of Australia [2015] VSCA 351, [73] (Whelan JA, with whom Garde AJA agreed).
[22]Ibid, at 46.6.
[23]Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366, 401.2 (Lord Scarman); applied in Doggett v Commonwealth Bank of Australia [2015] VSCA 351, [73] (Whelan JA, with whom Garde AJA agreed).
The case Cho sought to put to establish economic duress was far from clear. In an affidavit filed for the purposes of an interlocutory application, Cho swore that he was both verbally abused and physically threatened by Suh. Cho asserted it was because of this conduct that he agreed to sign the Agreement. However, in his evidence in chief at trial, Cho stated that the reason he signed the document was because of pressure put on him by Suh of a different kind. Cho said that Suh was very angry, was grinding his teeth and told Cho that if Cho did not sign the Agreement, Suh’s wife would kill him (that is, Suh).
Under cross-examination, Cho was referred to his earlier affidavit (the relevant part of which, at that stage, had not been referred to at trial). After acknowledging the inconsistency in the accounts given, Cho then gave evidence that he was not verbally abused.
In short, Cho gave no reliable evidence upon which the court could find that he was the subject of economic duress at the time he signed the Agreement. Moreover, Suh gave a very different account. Suh suggested it was Cho who was angry. Suh said Cho shouted and also slammed the door on 1 occasion when he walked in. Given the unsatisfactory nature of Cho’s evidence and Suh’s competing evidence, Cho has failed to discharge the onus[24] of establishing the defence pleaded. Therefore, the Agreement ought to be enforced according to its terms.
[24]EFM Pty Ltd v New Zealand Steel (Australia) Pty Ltd [1998] VSC 194, [26] (Chernov J); cf Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46.6 (McHugh J). See also J W Carter, Contract Law in Australia (LexisNexis Butterworths, 6th ed, 2013), 490 [22-06].
For present purposes, the Agreement is significant for 2 reasons. First, contrary to Cho’s case, the Agreement specifically required each of Suh and Cho to contribute the initial capital in equal amounts. Given this clear language, the suggestion by Cho that Suh was to contribute all the capital, without any corresponding obligation upon Cho, must be rejected. Whether this was ever contemplated is subject to competing versions of events. However, from 2 June 2009, both clause 3 and clause 4 made it plain that all equity contributed was on a 50/50 basis.
Secondly, the Agreement specifically recorded that Cho had borrowed $150,000 from Suh in order to be able to make his capital contribution.
The only remaining question on this issue is the basis upon which the Personal Loan is repayable.
As may be seen from the Agreement, there was no provision for when the Personal Loan was repayable. It is well established that when there is no express provision for the time at which a loan must be repaid, then the loan is repayable immediately upon the loan being made.[25] However, as Nettle J pointed out in VL Finance Pty Ltd v Legudi,[26] a term that a loan is repayable immediately upon demand is imposed as a matter of contract, and is implied based on the relationship between the parties and the surrounding circumstances of the loan. In other words, the relationship and surrounding circumstances may or may not give rise to such an implied term.
[25]Ogilvie v Adams [1981] VR 1041, 1043.5 (Fullagar J), referred to with approval in Termine v Witches in Britches Pty Ltd [2015] VSC 66, [13] (Ferguson JA); Ottavio v Hayvio Pty Ltd [2011] NSWSC 1125, [10]-[11] (Ward J).
[26][2003] VSC 57, [39]-[42].
In my view, the circumstances in which the Personal Loan was provided raise serious doubts about whether, on a proper construction, the Personal Loan was repayable immediately.[27] Further, those circumstances militate against a construction that there was an implied term that the Personal Loan was repayable upon demand, regardless of when that demand was made. The Personal Loan was provided to Cho so that he could meet his equity obligations equally with Suh. It was agreed that the equal contribution of equity between Cho and Suh would be ongoing. In circumstances where Suh knew that Cho had no alternative means of finance, it is highly unlikely the parties would have contemplated that the Personal Loan could be called up at any time.
[27]This submission was not put by the plaintiffs.
No submissions were made by any party as to what the implied term might have been beyond whether or not it was repayable on demand. In these circumstances, it is not appropriate to determine precisely what the implied term for repayment might have been.[28] Suffice to say, any implied term for repayment (and there must have been such a term) would necessarily include that the Personal Loan was to be repayable upon the parties deciding to take steps to wind up Jeff the Plumber.
[28]As to the requirements that need to be met before a term may be implied, see BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283.1 (Lord Simon, Viscount Dilhorne and Lord Keith).
As it happens, nothing of substance turns on the difference between the Personal Loan being repayable on demand or being repayable upon the parties deciding to dissolve their joint business venture through Jeff the Plumber. At the time the demand was made by Suh on 25 June 2009,[29] the parties had already resolved to go their separate ways. Accordingly, the Personal Loan was repayable upon the demand being made.
[29]See par 25 above.
In summary, by reason of the demand made for repayment of the Personal Loan, an amount of $150,000 is immediately due and payable by Cho to Suh.
For completeness, I refer to a contention put on behalf of the defendants in seeking to establish that no loan had been entered into by Cho with Suh for the sum of $150,000. Although the issue was not raised on the pleadings, the defendants relied upon a spreadsheet prepared by Suh, together with the receipt of 2 payments by Suh from Jeff the Plumber in the amounts of $566.14 and $5,382.45. In essence, it was submitted that these were payments referable to Suh’s capital contributions of $200,000 and $300,000 respectively, and the acceptance of these moneys by Suh demonstrated that the entire contribution by Suh was capital.
There are at least 2 responses to this submission. First, insofar as the second payment was made on 4 June 2009, evidence of subsequent conduct cannot affect the proper construction of the Agreement.[30] There is no question that a contract was entered into. Accordingly, subsequent conduct is not relevant to establishing the existence of the agreement between the parties.
[30]Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, 164 [26] (Heydon JA) and the cases there cited.
Secondly, and in any event, Suh gave evidence that the payments were made after discussion with Cho, to save the inconvenience of there being 2 transactions for each payment. In other words, Suh said the parties agreed that, rather than have the moneys paid to Cho for him to simply hand over the moneys to Suh, Cho’s share of the payments was paid directly to Suh. I accept this evidence. It is a perfectly plausible explanation as to why these payments were handled in the manner in which they were.
C.3 Declaratory relief sought
The plaintiffs sought to establish that Cho had breached various duties alleged to be owed to Jeff the Plumber and, by a number of means, that, broadly speaking, Cho, Ho and Jeff & Sons were knowingly involved in misappropriating Jeff the Plumber’s business. By reason of this, the plaintiffs alleged that the legal owner of Jeff & Sons’ business, either being Ho as shareholder of Jeff & Sons or Jeff & Sons as owner of the business, was in knowing receipt of Jeff the Plumber’s business. As a result, it was alleged Jeff & Sons’ business was held on constructive trust for Jeff the Plumber.
The claims made against Cho were that he breached equitable and fiduciary duties and obligations allegedly owed to Jeff the Plumber. It was alleged this occurred by Cho: failing to act with due care and diligence; failing to act in good faith and in the best interests of Jeff the Plumber; using his position to his advantage or to the detriment of Jeff the Plumber; favouring his own personal interests or those of others rather than those of Jeff the Plumber; and taking benefits without the prior fully informed consent of Jeff the Plumber. The particulars of these allegations were confined to the following:
On 27 June 2009 Cho resigned as an employee of Jeff the Plumber and established [Jeff & Sons] in direct competition to Jeff the Plumber.
Cho took certain of the assets of, or substantially all of the assets of, Jeff the Plumber to establish [Jeff & Sons].
Whilst a director and employee of Jeff the Plumber, and immediately prior to the establishment of [Jeff & Sons], Cho and Ho determined to establish a plumbing business in direct competition with Jeff the Plumber utilising certain assets of, or substantially all of the assets of, Jeff the Plumber.
On 29 June 2009 Cho and Ho took certain assets of Jeff the Plumber to establish [Jeff & Sons], which assets included:
(a) customer lists;
(b) books of account and financial records;
(c) business phone numbers;
(d) plumbing licences;
(e) fittings.
(Emphasis added.)
In substance, there are 2 broad allegations made: first, wrongfully being in competition with Jeff the Plumber; and, secondly, the misappropriation of assets.
As to the former of these, there is a general difficulty with the underlying complaint being made as to Cho’s conduct in conjunction with Jeff & Sons. The conduct about which complaint is made concerns Jeff & Sons being “in direct competition” with Jeff the Plumber. However, such an allegation is misconceived. By 27 June 2009, it had already been decided that Jeff the Plumber would no longer be in business.[31] Accordingly, no business of Jeff & Sons could ever result in Jeff & Sons being a competitor of Jeff the Plumber.
[31]See pars 25 and 26 above.
And as to the latter allegations, by way of general observation, there was simply no evidence that Cho took substantially all of the assets of Jeff the Plumber. On the contrary, it was Suh who took possession of the assets upon the decision being made to cease to operate the business of Jeff the Plumber.[32]
[32]See par 27 above. In closing submissions, the plaintiffs’ solicitor accepted this allegation could not be maintained.
Furthermore, there was nothing to suggest that Cho and Ho determined to establish a plumbing business in competition with Jeff the Plumber whilst Cho was still an employee of Jeff the Plumber. It was plain that Cho indicated prior to 25 June 2009 that he intended “to terminate” the relationship and “to cease the business”.[33] It was not until 29 June 2009 that Ho established Jeff & Sons. The timing of these events are entirely consistent with Cho deciding, in co-operation with Suh, that the business of Jeff the Plumber could no longer continue and that, this decision having been made, new arrangements needed to be put in place.
[33]See par 25 above.
As to the specific items referred to in paragraph 65 above, a number of observations may be made. First, there was no evidence that any customer lists existed. It was asserted that such a customer list must have been in Cho’s phone, but there was no evidence of this. Further, Suh himself gave evidence that there were no customer lists. Despite this, at 1 point Suh stated that the customer lists were the “numbers that were stored in [Cho]’s mobile phone”. However, there was no evidence that phone numbers were in fact stored.
Secondly, Suh said he took everything that was at the premises. There was no evidence of Cho taking any “books of account” or “financial records”.
Thirdly, it was conceded that there was only 1 business phone number relevant to the allegation that Cho and Ho had taken certain assets, namely the mobile number of Cho. There is no question that Cho’s telephone number was used as part of the business of Jeff the Plumber. However, as Suh acknowledged in his own evidence, it was Cho’s telephone number. In addition to this acknowledgement, an invoice was tendered with respect to the mobile phone in question. That invoice was in Cho’s name.[34] Further, when all the assets were collected together for the purpose of dissolving Jeff the Plumber’s business, there was no evidence of any demand by Suh that Cho hand over his mobile phone. Given the demand made on 25 June 2009 for Cho not to interfere with any of the assets of Jeff the Plumber,[35] and the tense relationship that existed from at least late June 2009 onwards, it may be inferred that if Jeff the Plumber had any rights to the mobile phone, Suh would have insisted upon those rights being exercised. In short, the plaintiffs have failed to establish that the use of Cho’s telephone number after June 2009 was the use of anything other than Cho’s own property.
[34]The bill was addressed to “Jeff Cho T/a Jeff the Plumber Pty Ltd”.
[35]See par 25 above.
Fourthly, there was no evidence that Jeff the Plumber had any plumbing licences. It was unclear on the evidence whether any plumbing licence was held by Jeff the Plumber or by Cho personally.
Fifthly, there was no evidence that Cho took any fittings of Jeff the Plumber.[36]
[36]In closing submissions the plaintiffs’ solicitor conceded that Cho took no assets of Jeff & Sons except an alleged customer list.
In summary, much of the conduct particularised as being conduct of Cho in breach of the duties alleged simply was not established.
As to the relevant legal principles, there can be no doubt that, in certain circumstances, a constructive trust may be imposed where a director of a company, with the knowing involvement of another, misappropriates property of that company to another.[37] However, whether a constructive trust arises must always depend on the particular facts and circumstances of each case. In particular, contractual provisions may directly affect the nature and extent of the obligations and duties imposed.
[37]See, for example, Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, 417 [562]-[563], 424-427 [591]-[600] (Finn, Stone and Perram JJ).
In Hospital Products Ltd v United States Surgical Corporation,[38] Mason J identified the possible interrelationship between contractual and fiduciary obligations. His Honour stated:[39]
That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
(Emphasis added.)
[38](1984) 156 CLR 41.
[39]At 97.5.
Similarly, in Chan v Zacharia,[40] Deane J, in the context of a partnership, stated:[41]
As between partners, the rights and duties of the members of a partnership are primarily contractual, flowing from the express or implied terms of the particular partnership agreement. Questions of illegality aside, the implication, by statute or the general law, of general or particular obligations or standards is, as between the partners, ordinarily subject to any contrary provision in the agreement between them. It is conceivable that the effect of the provisions of a particular partnership agreement, in the context of the nature of the particular partnership, could be that any fiduciary relationship between the partners was excluded.
(Emphasis added.)
[40](1984) 154 CLR 178.
[41]At 196.1.
Also in the context of a director, a breach of a fiduciary duty can be authorised by the articles of association or by the fully informed approval or acquiescence of all shareholders.[42]
[42]Furs Ltd v Tomkies (1936) 54 CLR 583, 592.3 (Rich, Dixon and Evatt JJ). See also Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507, 523 [32] (Gleeson CJ and Heydon J).
Whatever particulars might have been relied on to establish a breach of duty, the fundamental difficulty for the plaintiffs in seeking to establish that Jeff the Plumber is entitled to the declarations sought concerning competition is that the Agreement plainly contemplated Cho being able to continue as a plumber if Jeff the Plumber was to be placed into liquidation. Indeed, Cho had “the right” to take with him the name “Jeff the Plumber”, which necessarily must have included any goodwill that attached to that name.[43]
[43]See cl 11, par 23 above.
Further, clause 11 expressly provided that either of Suh or Cho could leave Jeff the Plumber if he found it difficult to agree with the other in the operation of the business. There was simply no contractual obligation for either of them to continue working for Jeff the Plumber in the event that a difficulty arose. On the facts, there were numerous significant disagreements between Suh and Cho as to how the business should be operated.
On the authorities referred to in paragraphs 77 and 78 above, the effect of clause 11 of the Agreement is such that such fiduciary duties of Cho, which might have otherwise been owed, were attenuated after the parties fell out, so that his conduct, in leaving Jeff the Plumber and starting Jeff & Sons, was not in breach of those duties.
In closing submissions, the plaintiffs submitted that, despite clause 11 of the Agreement, as Cho remained a director of Jeff the Plumber, his acting for “a competitor“ was in breach of his fiduciary duties.
Further, given Cho’s continuation as a director, it is convenient to consider whether the alleged conduct was in breach of Cho’s statutory duties as these cannot be authorised by agreement.[44]
[44]Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507, 523 [32] (Gleeson CJ and Heydon J). I refer to the issue of statutory duties for completeness: see pars 91-92 below.
In Links Golf Tasmania Pty Ltd v Sattler,[45] Jessup J summarised the law in relation to directors’ fiduciary duties in circumstances where the director acts for a company and its competitor.[46] By reference to a number of authorities,[47] Jessup J concluded that a director is not in breach of her or his fiduciary duties merely by conducting a business on her or his own account in competition with the company of which he was a director.[48] The question is, rather, whether, in light of the circumstances of the case, the situation involves a “real or substantial possibility of a conflict between [the director’s] personal interests and those of the persons whom [she or] he is bound to protect”.[49]
[45](2012) 213 FCR 1.
[46]At 190-191 [562].
[47]Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291, 303 [69] (McLure P, with whom Buss JA agreed); SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, 556 (Cooper J); Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779, 782.8-783 (Young J); On the Street Pty Ltd v Cott (1990) 101 FLR 234, 242.2 (Powell J); Bell v Lever Brothers Ltd [1932] AC 161, 195.5 (Lord Blanesburgh).
[48]Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1, 190 [562].
[49]At 191 [563], citing Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 103.8 (Mason J).
While it is easy to imagine a case in which this situation would give rise to such a real or substantial possibility of conflict, it does not in this case. The point has already been made. By the time that Cho began conducting the business through Jeff & Sons, it was agreed that Jeff the Plumber was to be liquidated, pursuant to clause 11 of the Agreement. In late June or early July 2009, Suh suggested to Cho that they sell off all the assets of the company and share the revenue equally. It was common ground between the parties that the defendants similarly sought to liquidate Jeff the Plumber from before June 2009. Although this did not occur, this was because of a disagreement as to the terms of the liquidation, not as to whether or not it should happen.
In circumstances where Jeff & Sons commenced operating on 29 June 2009, after it had already been agreed between the parties that Jeff the Plumber would be liquidated, it is entirely unclear how it is asserted that Cho was in breach of his directors’ duties by allegedly competing with Jeff the Plumber. In short, there was no possibility of any conflict. On the basis of this finding, any claim that Cho has breached his fiduciary or statutory duties by virtue of the establishing of Jeff & Sons cannot succeed.
Further, such a finding is consistent with the fact that, from the time that it was decided by the parties that Jeff the Plumber would be liquidated, the nature of the fiduciary duties owed by Cho to Jeff the Plumber changed. As in Chan v Zacharia (adapting the language to refer to directors and a company rather than partners and a partnership):[50]
The relationship between the [directors] was curtailed and altered by the dissolution of the [company]. It did not however cease. … [Each] … remained under fiduciary obligations in respect of the [company] property which was to be realized and applied in paying or discharging [company] debts and liabilities and the expenses of and incidental to the winding up of the [company] affairs … [E]ach [director] remained under a fiduciary obligation to co-operate in and act consistently with the agreed procedure for the realization, application and distribution of [company] property.
[50](1984) 154 CLR 178, 197.3 (Deane J).
Furthermore, Cho made it clear that Jeff the Plumber should be placed into liquidation, and that he was going to move on, before Jeff & Sons was established. Not only did Cho clearly state his intentions, but 4 days before Jeff & Sons was incorporated Suh indicated his acceptance of Cho’s position.[51] In these circumstances, Cho continuing on as a director is entirely consistent with the stated intentions of the parties to proceed to liquidation.
[51]See par 25 above.
Moreover, although the defendants acknowledged that the business being conducted by Jeff & Sons was “the same” as the business that had been previously conducted by Jeff the Plumber, there is no evidence to suggest that Jeff & Sons has been dealing with customers that were customers of Jeff the Plumber. No case was put on behalf of the plaintiffs that there were specific customers that had an ongoing relationship with Jeff the Plumber.
There were further matters raised by the plaintiffs (at least initially) in seeking to establish the existence of a constructive trust. At a directions hearing on 2 March 2016, the plaintiffs submitted that they relied on allegations of:
(1) Misleading and deceptive conduct against Cho;
(2) Conversion and detinue against all defendants;
(3)Breach by Cho of his equitable and fiduciary duties (and knowing assistance in such breaches by Ho and Jeff & Sons); and
(4)Breaches by Cho of ss 181, 182 and 183 of the Corporations Act 2001 (Cth) (and involvement in such breaches by Ho and Jeff & Sons),
in order to establish that the business and shares of Jeff & Sons are held on trust for Jeff the Plumber.
It was unclear how subparagraphs (1), (2) and (4) above give rise to a claim that Ho and Jeff & Sons hold the business and shares of Jeff & Sons on trust for Jeff the Plumber. The plaintiffs made no submissions in closing that such allegations gave rise to any constructive trust. The matters raised in subparagraph (3) above have already been addressed.[52]
[52]See pars 76-90 above.
Finally, I refer to some of the cross-examination of Cho with respect to Jeff & Sons’ advertising. In substance, the cross-examination appeared to be directed to seeking to establish that Jeff & Sons was passing off itself as the business of Jeff the Plumber. No such case was pleaded by the plaintiffs. In any event, given the terms of clause 11 of the Agreement and the unequivocal decision to cease the business of Jeff the Plumber in late June 2009, it is difficult to understand how such matters were relevant.
It must follow that, as the plaintiffs have been unsuccessful in establishing any breach by Cho as alleged, the derivative claims against Ho and Jeff & Sons cannot be made out.
D. Conclusion
For the reasons stated above, there will be judgment in favour of Suh in the sum of $150,000 and judgment in favour of Jeff the Plumber in the sum of $30,000. Otherwise, the plaintiffs’ claims will be dismissed.
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