TD's Insurance Pty Ltd and Thomas James Doring and Matthew Charles Doring as Trustees for the Phil Doring Testamentary Trust in Their Capacity as Partners in and Trading as Phil Doring Insurance Brokers (Receivers...

[2022] WASC 15

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

CITATION:   TD's INSURANCE PTY LTD AND THOMAS JAMES DORING & MATTHEW CHARLES DORING AS TRUSTEES FOR THE PHIL DORING TESTAMENTARY TRUST IN THEIR CAPACITY AS PARTNERS IN AND TRADING AS PHIL DORING INSURANCE BROKERS (RECEIVERS & MANAGERS APPOINTED) and others according to Schedule 1 -v- RELIANCE ONLINE PTY LTD [2022] WASC 15

CORAM:   LE MIERE J

HEARD:   7-11 DECEMBER 2020, 14 DECEMBER 2020,

26-27 JULY 2021

DELIVERED          :   19 JANUARY 2022

FILE NO/S:   CIV 1911 of 2017

BETWEEN:   TD's INSURANCE PTY LTD AND THOMAS JAMES DORING & MATTHEW CHARLES DORING AS TRUSTEES FOR THE PHIL DORING TESTAMENTARY TRUST IN THEIR CAPACITY AS PARTNERS IN AND TRADING AS PHIL DORING INSURANCE BROKERS (RECEIVERS & MANAGERS APPOINTED) and others according to Schedule 1

Plaintiffs

AND

RELIANCE ONLINE PTY LTD

First Defendant

VANTAGE HOLDINGS GROUP PTY LTD

Second Defendant

ANDREW PAUL DONNELLY

First Third Party

KIMBERLEY JAMES HANSON

Second Third Party

Catchwords:

Corporations - Directors' duties - Duty of care and diligence - Whether directors should have entered into asset sale agreement and entered into guarantee - Turns on its own facts

Corporations - Directors' duties - Duty to act in good faith in the best interests of the company - Whether entering asset agreement was in the best interests of the company and entered into guarantee - Turns on its own facts

Legislation:

Corporations Act 2001 (Cth)

Result:

Defendants' claim against third parties substantially successful

Category:    B

Representation:

Counsel:

Plaintiffs	:	No appearance
First Defendant	:	Mr M L Bennett & Mr A J Tharby
Second Defendant	:	Mr M L Bennett & Mr A J Tharby
First Third Party	:	Mr S Shepherd
Second Third Party	:	In person

Solicitors:

Plaintiffs	:	No appearance
First Defendant	:	Bennett + Co
Second Defendant	:	Bennett + Co
First Third Party	:	Forbes Kirby
Second Third Party	:	In person

Cases referred to in decision:

Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1

Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; (2014) 48 WAR 1

Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373

Gray v Sirtex Medical Ltd [2011] FCAFC 40; (2011) 193 FCR 1

Henville v Walker [2001] HCA 52; (2001) 206 CLR 459

Lustre Hosiery Ltd v York [1935] HCA 71; (1935) 54 CLR 134

March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506

Sheahan v Verco [2002] SASC 68

Termite Resources NL (in liq) v Meadows [2019] FCA 354; (2019) 370 ALR 191

Vrisakis v Australian Securities Commission (1993) 9 WAR 395

Table of Contents

Summary

Events and circumstances leading to this proceeding

The Australian Reliance group

Advances to VCS by entities related to Mr Fogarty

Allrisk transaction

Convertible note deeds executed

VHG unable to repay convertible notes

VHG and group financial position in July 2015

Muller appointed director of VHG

VHG board meeting 4 August 2015

17 August VHG board meeting

18 August letter and circular resolution

24 August 2015 VHG board meeting

Coverforce heads of agreement

VHG solvency

Donnelly starts negotiations to acquire Doring business

22 October 2015 meeting

Adams demands payment of $250,000 by Reliance Online

Negotiations over Doring purchase continue

The Asset Sale Agreement

PDIB employees leave the business

Sale to RP Oakleigh

Coverforce agreement does not proceed

Donnelly informs Fogarty of Doring transaction

Sale to PSC

Pitcher Partners demand GST payment

Muller and Asquith replace Donnelly and Hanson on Reliance board

GST and instalments still not paid

Hanson employment terminated

Vendors allege breach of Asset Sale Agreement

Vendors commence Victorian Supreme Court proceedings

Sale of Reliance Online

Defendants' claims

Donnelly and Hanson were directors and officers

Defendants claim Donnelly and Hanson breached duty of care and diligence

Hanson was not an officer of VHG

Donnelly did not have authority to sign VHG guarantee

Duty of care and diligence

Responsibilities within the company

Circumstances of VHG and Reliance Online

Donnelly's view of Doring transaction

Mr Donnelly did not exercise due care and diligence

Mr Hanson did not exercise due care and diligence

Not acting in good faith and for a proper purpose

Duty to act for proper purposes

Relief

Defendants' claims

Heads of damages claimed by Defendants

Operating losses

Interest on money held pursuant to Court order

Settlement sum and the sale of business

Legal costs

Damages – conclusion

LE MIERE J:

Summary

1. On 6 November 2015, the vendors of an insurance brokerage business agreed to sell, and the first third party, Reliance Online, agreed to buy the assets of the insurance brokerage business carried on by the vendors, and the second third party, VHG, agreed to guarantee the obligations of Reliance Online under the agreement (the Asset Sale Agreement).  The purchase price was $1.1 million, of which $300,000 was payable on completion and the balance of $800,000 was to be paid in monthly instalments over the next three years from the income received as commissions on insurance policies sold to customers of the business acquired from the vendors with annual balloon payments to ensure the balance was paid within three years.

2. The vendors were TD's Insurance Pty Ltd in its own capacity and as trustee for the Tony Doring Family Trust, and Thomas Doring and Matthew Doring as trustees for the Phil Doring Testamentary Trust, who together traded as Phil Doring Insurance Brokers and Costalota Pty Ltd.  The Asset Sale Agreement was also executed by Giuseppe Rambaldi and Andrew Yeo of Pitcher Partners, the receivers and managers of the vendors (the Receivers).

3. The Asset Sale Agreement was executed by the third parties, Mr Donnelly and Mr Hanson, on behalf of Reliance Online and by Mr Donnelly on behalf of VHG.  Mr Hanson and Mr Donnelly were directors of Reliance Online.  Mr Donnelly was a director of VHG.

4. The $300,000 paid on completion was paid by the trustees of the Phil Doring Testamentary Trust (the Trustees).  Mr Donnelly and Alissa Pfitzner of Amicus Legal Pty Ltd, a lawyer instructed by Mr Donnelly to act on behalf of Reliance Online and VHG, had negotiated with the Trustees to form a joint venture under which a new company would be the joint venture vehicle and would carry on the business acquired by Reliance Online pursuant to the Asset Sale Agreement.

5. On 10 December 2015, the vendors demanded that Reliance Online pay $30,000, being the GST on the $300,000 of the purchase price paid on completion, which they asserted Reliance Online was liable to pay under the Asset Sale Agreement.

6. On 15 January 2016, VHG and its subsidiaries agreed to sell most of their insurance broking businesses, but excluding Reliance Online, to PSC Insurance Group Ltd.

7. In January and February 2016, the vendors demanded payment from Reliance Online of the $30,000 payable for GST and for the first two monthly instalments due under the Assets Sale Agreement and asserted that Reliance Online and VHG had breached the Asset Sale Agreement by entering the PSC sale agreement without prior notice to the vendors and without obtaining a replacement guarantor in place of VHG.  Reliance Online had not and did not make any of those payments.

8. On 17 February 2016, the vendors together with the liquidators of the corporate vendors, who are the plaintiffs in this proceeding, commenced proceedings in the Supreme Court of Victoria against Reliance Online and VHG.  The plaintiffs alleged that Reliance Online had breached the Asset Sale Agreement and that all amounts payable under the agreement had become due and payable and accordingly Reliance Online and VHG were indebted to the plaintiffs for $924,331.58.  The plaintiffs also claimed against VHG an injunction to restrain it from disposing of the proceeds of the PSC sale to the sum of $924,331.58.

9. On 22 February 2016, the Victorian Supreme Court issued an injunction restraining VHG from dealing with any assets derived from the PSC sale as to the amount of $1 million.  VHG paid that amount into court and subsequently into a solicitor's trust account.

10. By third party notice dated 8 April 2016, Reliance Online and VHG joined the third parties, Mr Donnelly and Mr Hanson, and Amicus Legal Pty Ltd as third parties to the proceeding.  The defendants claim, and the third parties deny, that in executing the Asset Sale Agreement the third parties breached their statutory and common law duties as directors or officers of Reliance Online and VHG.  By way of amended statement of claim, the plaintiffs joined Mr Donnelly and Mr Hanson as defendants to the proceeding.

11. The parties negotiated a settlement of the proceedings on the following terms.  VHG paid to the liquidators $225,000.  The plaintiffs gave to the defendants and the defendants gave to the plaintiffs mutual releases.  On 31 October 2016, VHG paid $225,000 to the plaintiffs' solicitors.  On 3 November 2016, the Victorian Supreme Court ordered that the proceeding between the plaintiffs and the defendants be struck out and there be no order as to costs and discharged the injunction restraining VHG from dealing with the proceeds of the PSC sale.

12. The proceedings were subsequently transferred to this court.  The proceeding between the defendants and Amicus Legal has been settled.  This judgement is the judgement following the trial of the issues between the defendants and the third parties, Mr Donnelly and Mr Hanson.

13. For the reasons which follow I find:

    1.Mr Donnelly and Mr Hanson, as directors of Reliance Online, breached their statutory and common law duty of care and diligence;

    2.Mr Donnelly and Mr Hanson breached their statutory and common law duty, as directors of Reliance Online, to act in good faith in the best interests of Reliance Online;

    3.Mr Donnelly, as a director of VHG, breached his statutory and common law duty of care and diligence;

    4.Mr Donnelly breached his statutory and common law duty, as a director of VHG, to act in good faith in the best interests of VHG;

    5.the third parties are liable to the defendants for $75,000, being the difference between the amount paid to the plaintiffs to settle the plaintiffs' claim in these proceedings and the amount received upon the eventual sale of the business;

    6.Mr Donnelly is liable to VHG for $90,654.24 for interest accruing on $1 million of the debt owed by VHG where those funds were ordered to be paid into the Victorian Supreme Court and ultimately a solicitor's trust account, together with interest on that amount; and

    7.the third parties are liable to the defendants for the legal costs and disbursements incurred by the defendants in defending the claim of the plaintiffs against the defendants in the proceeding between the plaintiffs and the defendants.

Events and circumstances leading to this proceeding

The Australian Reliance group

1. In about 1998, Mr Donnelly and Mr Hanson established an insurance broking business trading as West Coast Group.  In 2008, West Coast Group changed its name to Australian Reliance Pty Ltd and traded under the name Australian Reliance.

2. Insurance brokers earn revenue from a combination of commissions paid to them by insurers and fees charged to clients.  Insurers typically pay higher commissions based on the volume and profitability of the premium placed by the broker.  Volume bonuses are also paid once a broker places an agreed amount of insurance each year.

3. The Australian Reliance business grew by acquiring interests in insurance broking businesses across Australia.  In 2012, Australian Reliance held interests in several subsidiaries.

4. From 2012 until January 2016, Mr Donnelly and Mr Hanson were the chief executive officer and chief financial officer respectively of the Australian Reliance group.

5. In 2012, Mr Hanson and Mr Donnelly decided to create a broker network run through a company to be called Reliance Franchise Partners Pty Ltd.  The business model was that Reliance Franchise Partners would take a 50% equity interest in insurance businesses brought within the network as franchisees.

6. On 1 May 2012, Mr Hanson and Mr Donnelly caused a unit trust called the Vantage Investment Fund (VIF) to be established to provide a vehicle for investors to invest in the proposed national franchise business.

7. The trustee of the VIF unit trust was Vantage Corporate Services Pty Ltd (VCS).  The manager of the unit trust was Vantage Private Equity (Aust) Pty Ltd (VPE).  The trustee appointed the manager to invest and manage the trust assets.  The trustee established a wholly owned subsidiary of the trustee, to be the primary vehicle through which the trust was to operate.  The operating company was Vantage Holdings Group Pty Ltd (VHG).  VHG became the sole shareholder of Reliance Franchise Partners and held 20% of the shares in Australian Reliance.

8. From July 2012 to June 2015, Mr Donnelly identified and negotiated the acquisition of interests in insurance broking businesses as franchise partners for the Reliance franchise group.  The group grew to include interests in 38 insurance broking businesses across Australia.

9. Reliance Online Pty Ltd was incorporated on 11 July 2013.  The shares in Reliance Online were originally wholly owned by Reliance Franchise Partners.  In 2013, the shares were transferred to VHG and the shares in Reliance Online were then wholly owned by VHG.

Advances to VCS by entities related to Mr Fogarty

1. In about 1993, Mr Donnelly and Jonathon Fogarty became friends.  In December 2008, Mr Fogarty caused an entity related to Fopar Nominees Pty Ltd, a company related to Mr Fogarty, to acquire shares in Australian Reliance.

2. On 23 October 2012, Fopar advanced $1,250,000 to VCS.  On 22 May, 24 September, and 18 November 2013, Health Services International Pte Ltd (HSI), a company related to Mr Fogarty, advanced $3,750,000, $5 million and $5 million respectively to VCS.  There is a difference between Mr Fogarty and Mr Donnelly and Mr Hanson about the basis on which those sums were advanced.  It is unnecessary to resolve those differences.

3. By 2014, the Reliance group had raised capital and grown rapidly but its financial position was 'perilous'.  In an email to Mr Hanson on 22 October 2014, Mr Donnelly said that he had raised over $22 million into the fund and was at a loss as to where the monies had gone and added:

   And now I find out somewhere near $3m of trust funds monies have been used on top of the monies raised and then get informed by you that if we don't repay this ASAP we will both lose our houses.

4. Mr Hanson responded on 23 October stating, amongst other things:

   [L]ike you I am completely frustrated and gravely concerned at our perilous position.  I spend every day trying to manage & manipulate our cash position whilst trying to shield this from staff & other interested parties.

5. In 2014, VIF had not repaid the funds advanced to it by the companies associated with Mr Fogarty.  Mr Fogarty was pressing for repayment.  There were negotiations between Mr Fogarty and VCS and VPE concerning the basis on which the sums had been advanced and their repayment.

Allrisk transaction

1. In April 2015, Reliance Online acquired an interest in the business carried on by Allrisk Pty Ltd by purchasing from Marc Adams half of the shares in that company for $150,000, payable upon execution of the share sale agreement, and the balance of $250,000 payable upon completion.  Reliance Online financed the acquisition by borrowing $150,000 from Reliance Franchise Partners Pty Ltd, a wholly owned subsidiary of VHG.  On 17 August 2015, VHG assumed the loan assets of Reliance Franchise Partners Pty Ltd to reflect the intent of the Vantage Investment Fund Constitution and subsequently Reliance Online entered into a loan agreement with VHG under which the loan of $150,000 was repayable on demand and incurred interest from 17 August 2015 at 10%.

2. The balance sheet of Reliance Online as at 30 June 2015 disclosed cash at bank of $2.  Liabilities, in addition to the $150,000 owing to VHG, included $50,000 owing to VIF.  The 2015 financial statements include a note that $250,000 was payable upon the expiry of certain restraints and obligations of Allrisk under a corporate authorised representative agreement.

Convertible note deeds executed

1. On 20 April 2015, Fopar, HSI, VCS and VPE executed two convertible note deeds.  The first deed recited that Fopar had acquired from HSI ownership of previously advanced sums accumulating to a total of $13,750,000 (the Existing Advance) and the parties agree that $10 million of that advance (the Principal) shall become subject to the terms and conditions set out in the deed and shall supersede all previous terms and conditions in respect of that advance.  The deed provided for interest on the Principal.  The deed provided that VCS must repay the Principal and all accrued interest which has not yet been paid or converted into units by 30 April 2015.  The second deed related to the remaining $3,750,000 of the Existing Advance and was otherwise on the same terms and conditions as the first deed.

2. Each deed provided that if an event of default occurs, Fopar may give notice that all outstanding Principal and unpaid accrued interest is immediately due and payable.  The events of default included a failure to pay interest, an event of insolvency, and subject to cl 4.3, the Vantage Fund or the trustee incurring any financial liability without the prior written consent of Fopar.  Clause 4.3 provided relevantly that Vantage Fund must not incur any indebtedness other than trade debtors in the ordinary course unless, immediately following receipt of the funds raised, the trustee pays 100% of the funds received to Fopar in repayment of the principal; and that Vantage Fund and the trustee shall procure that neither VHG nor any subsidiary of VHG shall incur any indebtedness other than trade debtors in the ordinary course unless, immediately following receipt of the funds raised, the trustee pays 100% of the funds received in repayment of the principal or the trustee can demonstrate that the funds borrowed were used for the purpose of acquiring assets in the subsidiary with a value in excess of the amount borrowed.

3. At the same time as executing the convertible note deeds, and as a condition precedent to the performance by Fopar of its obligations under the convertible note deeds, Fopar entered into a deed of guarantee and indemnity with VHG, Reliance Franchise Partners and Australian Reliance Group by which each of those companies guaranteed to Fopar the satisfaction and payment in full of the liabilities and obligations of VCS as trustee for VIF under the convertible note deeds.

VHG unable to repay convertible notes

1. VCS and VHG did not have any means of paying the amounts due and payable under the convertible note deeds.  In June 2015, VCS defaulted in paying interest under the notes.  Fopar took steps to recover the amounts owing including nominating Mr Fogarty to be a director of VHG.

VHG and group financial position in July 2015

1. The trustee of the VIF defaulted on interest payments and the convertible note deeds fell due for payment but the Principal was not repaid.

2. Mr Donnelly and Mr Hanson sought alternative financing or means to repay the amounts owing to Fopar under the convertible note deeds.

3. During July there were many communications between Mr Fogarty on the one hand and Mr Donnelly and Mr Hanson on the other hand in which Mr Fogarty expressed his dissatisfaction with the way the group was being managed.

4. On 19 July, one of the directors of the trustee, Graham Anderson, died unexpectedly.  At the instigation of Mr Fogarty, Simon Owen resigned as a director of the trustee.  Mr Hanson became a director of VCS on 24 July and a director of VHG on 27 July.  At the instigation of Mr Fogarty, Keith Muller became a director of VCS on 24 July and a director of VHG on 27 July.  Mr Fogarty became a director of VHG on 4 August.  In his evidence‑in‑chief Mr Hanson said that at the end of July Mr Fogarty, with Mr Muller, took effective control of the group.

Muller appointed director of VHG

1. As I have said, at the instigation of Mr Fogarty, Mr Muller, a chartered accountant, was appointed a director of VHG on 27 July 2015.  Mr Muller's evidence is that, at the time of his appointment, the trust's financial position was precarious.  He said it had a lot of debt outstanding to a number of creditors and it hadn't raised any funds for some time.  Mr Fogarty had informed him that he had concerns, as a creditor, of the Fund's capacity.  Mr Muller formed the view that it was necessary to put some corporate governance in place and that the best way to generate a return for unit holders was to sell assets.

VHG board meeting 4 August 2015

1. On 4 August 2015, the directors of VHG were Mr Fogarty, Mr Donnelly, and Mr Muller.  Mr Hanson had resigned as a director of VHG on 27 July at Mr Fogarty's request.

2. There was a VHG board meeting on 4 August 2015 attended by Mr Fogarty, Mr Muller and Mr Donnelly as directors, Mr Hanson who was described as a substantial shareholder of VHG, and a number of unit holders.  The minutes are signed by Mr Fogarty, Mr Muller and Mr Donnelly.  I accept them as an accurate record of the meeting.  Mr Fogarty was appointed chairman.  The meeting resolved that all debt held by the trustee of the Vantage Investment Fund (ie VCS) would be transferred to VHG as a result of the issue of a controlling shareholding in VHG to Australian Reliance Group shareholders.  The minutes record that while other debts may exist, the main debts transferred to VHG were the $15 million Fopar debt, a debt of approximately $3.6 million to Macquarie Bank and $1 million to Cajay Investments Pty Ltd under a secured facility.  Mr Donnelly and Mr Hanson sought alternative financing or means to repay the amounts owing to Fopar under the convertible note deeds.

3. On 7 August 2015, Mr Donnelly and Mr Hanson received an email from Mr Fogarty.  Mr Fogarty noted that it is a breach of corporations law to take on any new debt, liability or similar commitment while the company is operating in a state of insolvency, meaning it cannot be confident it can repay its debts or fulfil its obligations on time when they are due.  Mr Fogarty gave what he called a 'directive':

   No new debts, liabilities, obligations to perform, or similar commitments will be entered into without the formal approval of the Board in writing.  Any decision to do so will be unauthorised and a possible breach of the law.

4. In his evidence, Mr Hanson, the group's chief financial officer, described the financial position of the group at that time as 'very precarious'.  He agreed that it was insolvent if the convertible deed holder, Fopar, had called it in because the company could not repay its debt.

5. On 9 August, Mr Hanson emailed Mr Donnelly proposing the acquisition of Goulburn Insurance Brokers, Coghlans Accountants and Advisors and Peninsular Insurance Services as Reliance Franchise partners, and proposed finance arrangements for the acquisitions.  Mr Hanson said:

   Given the structure of the Vantage board I thought we should obtain approval for all new deals we are proposing.

6. Mr Muller was appointed a director of Reliance Online on 10 August 2015.

7. The relationship between Mr Fogarty on the one hand and Mr Donnelly and Mr Hanson on the other hand continued to deteriorate.  In July, Mr Donnelly and Mr Hanson had applied to Macquarie Bank for a term debt of $7.5 million, working capital of $2 million and an acquisition facility of $10 million, for a total of $19.5 million.  On 11 August, Mr Fogarty messaged Mr Donnelly stating that the senior executive currently had no authority from the board to instruct Macquarie or any financial party regarding any corporate or financial matter and that his meeting with Macquarie was unauthorised and improper.  Mr Fogarty said that only non‑senior executive staff wage payments had board authority and executive staff operating without board approval would face the full effect of any unauthorised act.  Mr Fogarty added:

   The board now operates solely at the 'will and forbearance' of creditors … The business faces the prospect of an imminent call on debt, and any further act as those taken in the last 12 months will likely see a 'call' and the board legally required to appoint a former (sic) administrator.

8. The deterioration in the relationship between Mr Fogarty and Mr Donnelly is illustrated by Mr Donnelly identifying Mr Fogarty on his phone contacts as 'Fuckwit Fogarty'.

17 August VHG board meeting

1. On 17 August 2015, there was a meeting of the VHG Board of Directors attended by Mr Fogarty, Mr Muller and Mr Donnelly, who were directors of VHG, and Mr Hanson, who was recorded in the minutes as the CFO.  The minutes record that it was resolved that:

   [T]he Boards of all VHG controlled subsidiaries that the VHG Board will impose authority limits with the effect of allowing predetermined & agreed general operating activities (underwriting, wage payments etc) but no corporate activities (asset sales, acquisitions etc) which will require shareholder (VHG) approval.

2. Mr Donnelly's evidence is that the recorded level of authorities and delegations resolution is not exactly in accord with his recollection, which is that it was a resolution that after the meeting Mr Hanson would put to the board a draft for executives in the subsidiaries.  Mr Hanson said that the minute does not reflect accurately his recollection of the meeting but he did not further elaborate.

3. Mr Fogarty's evidence is that the resolution was passed without dissent.  Mr Fogarty subsequently signed the minutes as an accurate record of the meeting.

4. I find that the minutes are an accurate record of the resolution passed at the meeting.  I make that finding on the whole of the evidence.  I found the evidence of Mr Muller credible and reliable.  Mr Muller's recollection was consistent with the minutes.

5. The minutes were tabled at the board meeting of 24 August.  They recorded that Mr Fogarty had some amendments to the minutes of the 17 August meeting but record no amendments or dissent by Mr Donnelly or Mr Hanson.  Mr Muller noted that Mr Hanson was yet to circulate a level of authorities in accordance with item 3 of the minutes of the 17 August meeting and the above circular resolution was implemented in the interim and it was resolved that $10,000 is the new limit for non‑operating payments.  That Mr Muller noted that Mr Hanson was yet to circulate a level of authorities in accordance with the 17 August minutes is consistent with those minutes.

6. The minutes of both meetings were brought into existence close in time to the events they record.  Such documents will usually be reliable sources.  I do not overlook that statements can be wrong, as often they depend on the accuracy and purpose of the person who makes or generates the record.  The minutes are more likely to be reliable than the recollections of witnesses related orally in court six years later because the minutes were made contemporaneously with the events they record, were made when there was no relevant controversy and their maker had no apparent purpose for falsely stating what was said and resolved at the meetings.  In contrast, the witnesses' recollections are coloured by their interest in the proceeding.  Furthermore, the authorities resolution is consistent with the circumstances leading up to the meeting of 17 August.

7. The minutes of the 17 August meeting also record that it was noted and agreed that the corporate governance needs to be in order to prepare the business for a sale.  That is consistent with the evidence of Mr Donnelly and Mr Muller that the directors had agreed that the only way VHG could repay the amounts due and owing under the convertible note deeds was to sell the business or its assets.  The minutes further record that Mr Fogarty and Mr Muller sought assurance about the company's ability to meet its obligations in the near term and referred to estimated monthly operating costs and wages of $1.2 million excluding interest repayments. 

8. Mr Hanson is recorded as having summarised the total debt on the consolidated VHG balance sheet (excluding the Macquarie Cash backed amount) at $24.29 million, including a current liability of $15 million to Fopar.

9. The minutes record that Mr Donnelly said that management had an asset to purchase and Mr Fogarty expressed resistance to any additional purchases.

18 August letter and circular resolution

1. After the meeting Mr Muller sent an email to Mr Donnelly, copied to Mr Hanson, which attached a letter of 18 August from Mr Muller to Mr Donnelly.  The letter stated, amongst other things:

   As far as authorities to act, it was resolved that the Board meeting yesterday (17 August 2015) that the senior executives (Kim Hanson and yourself) are to be provided with limitations as to executive power and delegated limitations as to Director's powers while acting on VHG subsidiary companies; meaning all companies below VHG.

   The effect of this resolution is that either Kim Hanson or yourself acting as a Director or executive within any Company below VHG in the corporate structure (as tabled at the Board meeting) is acting under the direct approval and guidance of the VHG Board.  This resolution was agreed to by both Kim Hanson and yourself, and for clarity any act that is outside of those approvals will be deemed to be unapproved and possibly unlawful.

   For your records and until further notice, the delegated authority levels is for wages and day to day operating expenses and one‑off amounts of less than $50,000, with amounts over $10,000 to be reported to the VHG Board weekly.  No contracts, deeds, assignments, or any agreements of a material nature (meaning above a $50,000 materiality level) can be entered without prior written VHG Board authority.

2. Mr Muller stated his concern that, at the board meeting, it had been disclosed that a number of new contracts had been entered into with further debt commitments.  Mr Muller said that was contrary to cl 4.3 (a) ‑ (d) of the convertible note deeds and in any event:

   VHG is currently benefiting from Fopar's goodwill to continue trading as a going concern.  My fear is if VHG fails to display goodwill to Fopar that Fopar's goodwill toward VHG which are currently experiences will quickly evaporate.  Any intent to displace the position of a Lender may result in an immediate call of all debts and force the Board into the position of appointing an administrator.

   It has been clearly discussed as a concern at yesterday's Board meeting (17 August 2015), that non‑executive directors have significant concerns regarding the company's capacity to meet wages, general operating expenses and interest in the coming months.

3. Correspondence followed between Mr Muller and Mr Donnelly about the interpretation of cl 4.3 of the convertible note deeds.  On 19 August, Mr Donnelly emailed Mr Muller stating that he (Mr Donnelly) and Mr Hanson disagreed with the content of Mr Muller's letter.  It's not clear to which letter Mr Donnelly was referring but it is most likely the letter I have just referred to.

4. Later that day, Mr Muller attached a VHG directors' circular resolution dated 18 August 2015 to an email which he sent on 18 August to Mr Donnelly and copied to Mr Fogarty and Mr Hanson.  Mr Donnelly says he received the email but did not sign it.  The following appears on page 1 of the circular:

   In following up resolutions and required action from the Board meeting of 17 August 2015, the following two resolutions are put to the Directors of Vantage Holdings Group Pty Ltd (VHG).

   We the undersigned, being all directors of the above‑named company at the above date, hereby consent to the RESOLUTIONS set out below:

   RESOLUTION ONE

   The Directors (Jon Fogarty, Keith Muller & Andrew Donnelly) of Vantage Holdings Group Pty Ltd (VHG) RESOLVED at the Board Meeting dated Monday, 17 August 2015 to implement appropriate levels of authority to senior executives acting as executives or Directors of any company or subsidiary listed under the VHG Corporate Structure (as tabled at the above meeting).  This resolution applies the limits of that authority until further written notice from the Board

   it was agreed that Kim Hanson and Andrew Donnelly acting as executives or Directors of any of these companies on behalf of VHG would and do abide by this directive resolution.

   Description of Authority   $AUD's

   …

   Contracts, deeds, assignments or any agreements  $0

   RESOLUTION TWO

   …

5. On page 2, which is on the reverse side of page 1, there are places for the signatures of Mr Fogarty, Mr Muller and Mr Donnelly.

6. The circular attached to Mr Muller's email was signed by Mr Fogarty and Mr Muller but not Mr Donnelly.

7. A copy of the circular adduced in evidence bears the signature of Mr Donnelly as well as that of Mr Fogarty and Mr Muller.  Mr Donnelly says that the signature appearing on page 2 is his, but he says that he did not sign the circular because he did not agree with it.

8. On 19 August, Mr Donnelly sent an email to Mr Muller, copied to Mr Hanson and Mr Fogarty, stating:

   [T]his information is in conflict to my interpretation to the meeting.  Can you please advise if this resolution is designed to oppress Kim and I from earning an income?

9. Mr Fogarty concedes that he did not see Mr Donnelly sign the circular but says that he received it with Mr Donnelly's signature on it. 

10. I find on the balance of probabilities that Mr Donnelly did sign the circular resolution.  In any event, I am satisfied that at the 17 August 2015 board meeting the directors adopted the authorities resolution recorded in the minutes in the presence of, and with the knowledge of, Mr Donnelly and Mr Hanson.

11. Mr Fogarty and Mr Muller were concerned about the solvency of VHG.  On 18 August, Mr Muller emailed Mr Donnelly and Mr Hanson suggesting that accountants be retained at a cost around $30,000 to prepare up‑to‑date accounts.  On 19 August, Mr Donnelly responded that the business could not afford this at that time.  On the same day, Mr Muller emailed Mr Hanson, copied to Mr Donnelly and Mr Fogarty, asking for written justification of the company's ability to meet obligations as they fall due, including where the funds are coming from to meet wages and expenses over the next 30 days of approximately $1.2 million and confirmation that no abnormal payments would be made.

12. On 20 August, Mr Donnelly emailed Mr Muller referring to the appointment of an administrator and saying that he would be happy to comply with such request and seek expressions of interest.

24 August 2015 VHG board meeting

1. A VHG board meeting on 24 August was attended by Mr Fogarty, Mr Muller, and Mr Donnelly as directors.  Mr Hanson is recorded as having attended as CFO.  As I have said, the minutes record that Mr Muller noted that Mr Hanson was yet to circulate a level of authorities 'and the above circular resolution was implemented in the interim' and it was resolved that $10,000 was the new limit for non‑operating payments.

2. Mr Donnelly queried the Board's position on a $2.7 million acquisition from Sun Devil Investments Pty Ltd and other acquisitions.  Mr Fogarty stated that the Board's position was that it cannot approve these transactions.

3. On 26 August, Mr Fogarty emailed Mr Donnelly and Mr Hanson, copied to Mr Muller, stating that the group 'has limited or no immediate cash to meet its full liability of current (if called) and future debts.'  Mr Fogarty said that there was no board approval for any new discussions or executions regarding any new business acquisitions or debt funding and the board focus is on asset sales and potential equity raisings.  Mr Fogarty said:

   The VHG Board runs the entire group, and the VHG Board determines via the 2 key executive AD  and KH all very limited expenditure going forward.  No material decisions can be made in any subsidiary without this process … The company needs to now be operating in a State of self‑imposed 'soft administration'.  This is for the legal protection of all.

Coverforce heads of agreement

1. Mr Fogarty wanted the Reliance group to find a buyer for its business so that it could obtain funds to repay the amounts owing to Fopar under the convertible note deeds.

2. Coverforce Insurance Broking Pty Ltd (Coverforce), an insurance broker, and its parent company, Coverforce Pty Limited (Coverforce PL), headquartered in Sydney, entered into a heads of agreement dated 4 September 2015 with the major shareholders of VHG, (Coverforce heads of agreement) to acquire their shares in VHG, which is described in the heads of agreement as the Company.  The Buyer is Coverforce and the Sellers are Insubi Pty Ltd as trustee for the A Donnelly Trust, Britlaw (WA) Pty Ltd as trustee for the K & A Hanson Family Trust, and Vantage Representative Services Pty Ltd as trustee for the Vantage Investment Fund.

3. The heads of agreement states that its purpose was to set out the terms on which Coverforce would acquire from the Sellers (and the minority shareholders which are not party to the agreement) all of the outstanding shares of VHG (and its related bodies corporate, if applicable) or a newly‑incorporated entity holding VHG's business, in consideration for a mixture of cash and scrip in Coverforce such that, post‑completion, Coverforce's shares would be held approximately 60% ‑ 65% by Coverforce PL and 35% ‑ 40% by entities associated with Mr Donnelly and Mr Hanson.

4. The heads of agreement provided that the acquisition will include only the entities identified in Appendix 1 and the businesses conducted by those entities and not the excluded entities.  Appendix 1 identifies entities currently owned by the Company which will not be acquired by Coverforce, one of which is Reliance Online.

5. Mr Donnelly and Mr Hanson were to roll the shares their entities held in VHG into the new entity acquiring the shares in VHG.

6. The heads of agreement provides that the transactions contemplated by the heads of agreement are subject to completion of due diligence by Coverforce on VHG and its business to the reasonable satisfaction of Coverforce, including Coverforce determining that three key assumptions are met.  The second and third key assumptions, which are important, are:

   2.The Sellers' stated assumptions in respect of the Company's FY 16 growth and business plan are reasonable and supportable, and in particular that:

   ·Year to date trading supports the FY 16 forecast;

   ·there is a reasonable prospect of organic growth in the Company's broking business; and

   ·the expected growth in the Company's business will not result in abnormal concentration risks or have abnormal above average levels of expenses associated with it; and

   3.The acquisition pipeline for the Company's 'Reliance Franchise Partners' business supports its growth forecast.

7. Section 3 (Definitive documentation) provides that the parties agree to use reasonable endeavours to enter formal legally binding documentation reflecting the terms of the heads of agreement and any other reasonably necessary formal documentation.

8. The heads of agreement contains a 'Legal effect' clause which provides that subject to the key assumptions in section 2 being satisfied or waived by the Buyer, the terms set out in sections 1 ‑ 27 are intended to be binding on the parties.  It further provides that the parties acknowledge that the structure of the Acquisition 'is still under consideration and intend that the terms set out in sections 1 ‑ 27 will continue to be binding (subject only to section 2) notwithstanding any changes to or renegotiation of any individual section or sections to reflect structuring changes.  The section goes on to say that other sections including section 32 (Exclusivity) are intended to be unconditionally legally binding on the parties.

9. Section 32 is an exclusivity clause.  It provides that in the period of 12 weeks from the date of the heads of agreement, the parties will deal exclusively with each other and will not participate in any discussions relating to the transactions and arrangements contemplated by the heads of agreement with any other party.

1. The heads of agreement is not immediately binding in relation to the proposed acquisition but is binding in relation to specific matters including due diligence, confidentiality, and exclusivity.

2. Jim Angelis, a director, and CEO of Coverforce, together with another executive, executed the heads of agreement on behalf of Coverforce and Coverforce PL.  Mr Fogarty signed the heads of agreement on behalf of Fopar.  The heads of agreement provided that as part of the consideration for the acquisition, the Buyer would pay to Fopar the amount owing under the convertible note deeds at the time of completion of the acquisition.

3. On or about 16 October, Mr Angelis, Mr Donnelly and Mr Fogarty agreed to extend the exclusivity period under cl 32 of the Coverforce heads of agreement to 29 October 2015.

VHG solvency

1. On 7 September, Mr Fogarty emailed Mr Donnelly and Mr Muller.  Mr Fogarty said it was clear that if called VHG could not pay its debt bill.  Mr Fogarty said that there are now legal issues needing determination as to solvency.

Donnelly starts negotiations to acquire Doring business

1. On 7 October 2015, Mr Donnelly received an email from Ross Haywood of Premium Capital, a finance firm.  Mr Haywood was a shareholder of VHG and represented a unit holder in the VIF.  The email identified Phil Doring Insurance Brokers of Mackay, Queensland, as a potential acquisition.  Mr Donnelly had several conversations with members of the Doring family.  They told Mr Donnelly they wanted Reliance Finance Partners to purchase the business.

2. Mr Donnelly had met with Alissa Pfitzner, the principal of Amicus Legal, in Sydney on 30 September 2015 to discuss the Coverforce heads of agreement.  On 9 October, Mr Donnelly emailed Ms Pfitzner:

   I am also looking at a business in Mackay that I will need some assistance on.  The business has been put into receivership by Macquarie Bank so we have some complications to deal with but nonetheless I would like to pursue it as it is a 25 year old business in a regional centre that we would like to have representation.

3. Mr Donnelly sent a further email to Ms Pfitzner later on 9 October in which he informed her that the business he was looking at is Phil Doring Insurance Brokers, that Phil Doring had established the business some 25 years ago and since his death, his son, Tony, had 'driven the business into receivership'.  Mr Donnelly added a 'Spoiler alert' that there was a trust fund deficiency of around $850,000.

4. Ms Pfitzner responded later on 9 October stating risks arising from the trust account shortfall.

5. On 13 October, James Beaumont of Pitcher Partners, the receivers of the business (Receivers), sent to Mr Donnelly a confidentiality agreement in respect of the 'Phil Doring Insurance Brokerage opportunity'.  Later on 13 October, John O'Brien of Pitcher Partners sent to Mr Donnelly a 'high level summary of the opportunity and limited information on the sale process'; and 'detailed (de‑identified) data from the WinBeat in respect of the client book for the past 3½ years.'  WinBeat is a proprietary insurance broking software program.  Mr O'Brien said that their preference was to deal with potential acquirers that can move quickly.  Mr Donnelly forwarded the information to Ms Pfitzner and to Mr Angelis.

6. Later on 13 October, Mr Angelis emailed Mr Donnelly about Phil Doring Insurance Brokers saying that it was 'a perfect franchise partner opportunity' and:

   My thought is that the Mackay ladies offer 500K‑600k for 100% of the business.  We provide the cash and receive 50% equity via the reliance franchise model and they owe us 50% of the money for their equity.  In other words we provide them with a loan to buy 50% of the book at a low interest rate.

7. On 15 October, Mr Beaumont emailed to Mr Donnelly accounts of Costalota Pty Ltd and the estate of Phil Doring and the Tony Doring Family Trust for the FY14 and FY15.  Mr Beaumont said:

   As I said, I would take these with a grain of salt, particularly beyond FY14.

   For your background, Costalota is a service entity in which the employees are employed.  This entity then charged the partnership and service fee which prior to FY15 seemed to net nearly zero but subsequently, is a long way out.

8. Mr Donnelly's evidence is that he understood the reference to taking the accounts with a grain of salt to mean that they weren't accurate.

9. On 15 October, Paul Kelly of Kelly Legal sent to Mr Donnelly a memorandum of understanding setting out a preliminary approach to the potential joint venture/partnership between his client, Thomas and Matthew Doring as trustees of the Phil Doring Testamentary Trust, and Reliance Group Pty Ltd.  The memorandum of understanding stated that its objective was the acquisition of the insurance broker client portfolio of Phil Doring Insurance Brokers and to operate the business in partnership, joint venture or franchise arrangement between the parties.

10. On 17 October, Ms Pfitzner sent to Mr Donnelly for his consideration a draft letter to Pitcher Partners.  The letter stated that the Reliance Group and the trustees of the Phil Doring Testamentary Trust intend to establish a new joint venture company (Newco) to acquire the assets of Phil Doring Insurance Brokers (PDIB).  The proposed purchase price was $600,000 on completion of the transaction which reflects 'our initial assessment of the key risks'.  The letter identifies four risks.  First, PDIB has been operating without an AFS Licence since the death of Phil Doring which gives rise to the potential for ASIC enforcement action and penalties against not only the principal of the business but also the employees whom Newco intends to employ.  Secondly, the adverse publicity and the potential loss of clients because of the knock‑on effect of any ASIC investigation or action against PDIB, it's principal or employees.  Thirdly, they had been unable to ascertain whether PDIB currently holds any PI insurance and if, as they suspect, there is no current PI insurance policy, run‑off cover will be unavailable leaving any potential purchaser of the business exposed to historical PI claims.  Fourthly, there may be a shortfall in the trust account operated by PDIB.  The letter states that they wish to carry out further due diligence in relation to seven matters including to verify the level of client retention that PDIB has represented.

11. A lot happened on 20 October.  At 08.36, Mr Donnelly sent a copy of the draft offer letter to David Wyner and Tony Goldsmith, senior employees of the Reliance group, and Ms Pfitzner, together with the information previously sent to him by Pitcher Partners.  There were exchanges between Mr Donnelly and Ms Pfitzner to amend the offer letter.  There were discussions between Ms Pfitzner and Mr Kelly.

12. At 12.01, Mr Donnelly sent to Mr Beaumont of Pitcher Partners the amended indicative offer letter.  The purchase price was stated to be  $0.50 for every dollar of renewable revenue which Newco acquires and stated that for the purposes of the indicative offer, based on the limited financial information that has been provided, the purchase price would be $600,000.

13. Mr Beaumont responded asking:

    1.Whilst noting your estimate to be able to complete by 4 January, please confirm whether you have an ability to complete this transaction by 27 October.

    2.We note that your offer is based on 0.5 x renewable revenue.  Please confirm how you would propose to quantify renewable revenue and the expected timeframe required.

    3.Noting your multiple of 0.5, please confirm the maximum multiple you are [willing] to pay on renewable revenue.

14. At 18.28, Mr Donnelly asked Mr Beaumont if the receiver would be okay if the purchasers commit to completion by 27 October with a deferred settlement once they can jointly evaluate the renewable revenue.  The following series of emails followed in short succession.

15. Mr Beaumont said that that may be palatable but:

    [W]e would need to understand what (if any) non‑refundable deposit you would be willing to pay at completion and your estimated timeframe for the evaluation of the renewable revenue and confirmation that any balance (above the deposit already paid) would be payable once this evaluation is complete.

16. Mr Donnelly said he was happy to put up a $100k non‑refundable deposit and would need six weeks to complete the evaluation.

17. Mr Beaumont replied:

    Sorry Andrew, last clarification to line up bids:

    Maximum multiple willing to pay on renewable revenue (whilst noting your offer of 0.5, as indicated earlier we do have bids in play with a higher multiple).

18. There were more emails.  Mr Beaumont forwarded to Mr Donnelly an income report for PDIB for the 2013, 2014 and 2015 financial years generated by WinBeat.  Mr Donnelly forwarded the report to Ms Pfitzner.  Ms Pfitzner emailed Mr Donnelly the following observations on the income report:

    1.The financial periods that it refers to as FY 2013, FY 2014 and FY 2015 aren't in fact consistent …

    2.Leaving aside the time period inconsistencies, it does demonstrate a sharp drop off in transaction count and a decline in revenue from prior year.  What it looks like, based on my gut feel on those numbers is that the best you could hope for is a renewable book of circa $800k because you will get some bleed on this.

    So your offer of $600k based on a 0.5 multiple on a renewable book of $1.2m actually looks more like an offer of $0.75 in the dollar.  So you could tell him you'd pay 0.75 which looks like a better offer but may in fact result in you paying the same amount.  But it will impact the metrics of the deal for you in terms of your benchmark rate of return

    It's a commercial call for you as to how valuable this business is for Reliance but given what you've said about it being an opportunistic play rather than a key component of your growth strategy, you definitely don't want to overpay.  And a multiple that exceeds 1x's revenue or even 1x's revenue on this book, that you know is riddled with risk, is definitely overpaying.

    To be blunt, you have the whip hand here.  You could offer 0.75 as your best and final and if they politely decline then I suggest you act quickly to secure the employees, offer them a sign on deal (which I know gives you a bit of an accounting headache in terms of the P&L hit for pure or compensation expense) but they would be free and clear to just bring their clients with them and you'd get the revenue for free. (emphasis added)

19. Negotiations continued the following day, 21 October.  Ms Pfitzner sent Mr Donnelly a revised indicative offer which included a further cash payment at completion equal to 0.75 times the verified renewable revenue where that revenue exceeds $800k and 0.5 times when the renewable revenue is less than that.  At 12.54, Mr Donnelly said:

    Our offer multiple will be 0.75 times income received for the 12 months to 27^th October.

20. At 14.14, Mr Donnelly forwarded to Mr Beaumont a letter of offer signed by Mr Donnelly on behalf of Reliance Group and Tom Doring on behalf of the trustees of the Phil Doring Testamentary Trust.

21. Mr Beaumont emailed Mr Donnelly:

    We note in your signed offer that the renewable revenue is calculated with reference to the 12 months ended 27 October 2015.  We just need to flag that this date needs to be amended to a date prior to the appointment of Receivers given that PI insurance has not been in place since that date and therefore the managers have not been writing new business. (emphasis added)

22. On the evening of 21 October, Mr Beaumont asked Mr Donnelly to clarify some points to progress the bid including:

    Confirmation of the entity within the Reliance Group that will be guaranteeing the Purchaser's obligation under the Asset Sale Agreement.

23. Mr Donnelly emailed Ms Pfitzner asking her to enquire with Mr Kelly if the trust was prepared to put $250k bond into a Macquarie account.

22 October 2015 meeting

1. On 22 October, Mr Donnelly and others met with Mr Angelis at the William Street offices of the Reliance group.  Mr Donnelly's evidence is that he met with Mr Hanson, Mr Fogarty, Mr Angelis, and Mr Heugill and conversations to the following effect occurred.  They discussed the progress of the Coverforce deal.  Mr Donnelly raised the Doring transaction.  Mr Angelis acknowledged that it would be included in the heads of agreement.  Mr Fogarty said that the Doring transaction was a good deal.  After the meeting finished Mr Fogarty had a private meeting with Mr Angelis.

2. Mr Fogarty denies the meeting alleged by Mr Donnelly.  Mr Fogarty says that he came to the William Street offices that day looking for Mr Muller.  There was a meeting in the boardroom.  Mr Fogarty knocked on the boardroom door and opened the door to see if Mr Muller was there.  Mr Donnelly came to the door.  Mr Fogarty asked if Mr Muller was there.  Mr Donnelly said he was not.  Mr Fogarty left.

3. To support his evidence, Mr Donnelly produced a copy of an email dated 19 October 2015 addressed to 'Jon Fogarty1' which Mr Donnelly says he sent to Mr Fogarty.  The email says:

   I have Jim Angelis from Coverforce in Perth on Wednesday and Thursday.  Would you have any available time to meet with Jim on Thursday?

4. Mr Fogarty denies he received the email.  There is no evidence of any response to the email.

5. In cross‑examination, Mr Donnelly was taken to his substituted outline of evidence filed on 11 September 2020 in which Mr Donnelly said that at the meeting he said words describing the terms proposed for the asset acquisition from PDIB and said:

   In his description, Mr Donnelly said words explaining that the proposed terms included a contribution of $300,000 to be made by the Doring family to Vantage/ Reliance

   and

   The remaining payment of $800,000 for the acquisition was to be made from income received on the assets purchased.

6. Mr Donnelly was asked if he adhered to the statements in his witness outline that he explained at the meeting the proposed terms included a contribution of $300,000 to be made by the Doring family and that there would be a payment of $800,000 for the acquisition of the assets purchased.  He said that he did.

7. Those were not the terms of the transaction proposed at that time.  The offer submitted by Mr Donnelly the previous day was a non‑refundable deposit of $100,000 and at completion a further cash payment equal to 0.75 times the renewable revenue, less the deposit paid at signing.  The previous evening Mr Donnelly had emailed Ms Pfitzner asking her to enquire if the Doring trust was prepared to put up a $250,000 bond.  It was only in his revised offer of 4 November that Mr Donnelly proposed a $300,000 contribution from the Doring family and a purchase price of $800,000.

8. When confronted with these discrepancies Mr Donnelly doubled down on his evidence.  I reject Mr Donnelly's explanation for why he referred to the proposed terms he says he stated at the meeting.  I find that Mr Donnelly fabricated his evidence to the effect that he stated those proposed terms at the meeting.

9. Mr Hanson gave his evidence‑in‑chief by way of a witness statement.  Mr Hanson says that on 22 October he attended a meeting with Mr Donnelly, Mr Fogarty, Mr Huegill and Mr Angelis, and he recalls the PDIB opportunity being discussed as Mr Angelis confirmed that should it be agreed it would be included in the calculation of the proposed pricing structure outlined in the heads of agreement.

10. When cross‑examined by counsel for Mr Donnelly, Mr Shepherd, Mr Hanson said that Mr Angelis went through the acquisition pipeline and there was a discussion about the Mackay opportunity given that it had just recently appeared on the pipeline and Mr Angelis advised that he was aware and that it would be included in any future contracts.

11. I did not find the evidence of Mr Fogarty, Mr Donnelly or Mr Hanson compelling.  I am not satisfied any of them have a recollection of the meeting, as distinct from reconstructing events to suit their case.

12. I find that Mr Donnelly did not refer to the Doring acquisition and Mr Fogarty did not approve of the transaction at the 22 October meeting or at any time before the transaction was completed.  For the reasons I have stated, I reject Mr Donnelly's evidence about the meeting.

13. It is inconsistent with the surrounding circumstances that Mr Fogarty approved the Doring acquisition.  Mr Fogarty and Mr Muller had repeatedly stated to Mr Donnelly and Mr Hanson that they were not to undertake any new acquisitions.  There is not a single email or other document by which Mr Donnelly referred to the Doring acquisition in a communication to Mr Fogarty, despite numerous communications with others.  I find that Mr Donnelly did not disclose the Doring transaction to Mr Fogarty because he knew that Mr Fogarty and Mr Muller had directed that there be no new acquisitions.

14. On 9 December, Mr Fogarty emailed Mr Donnelly attaching a notice stating:

    The new unauthorised and until yesterday undisclosed acquisition of 'Makay' (sic), it's very clear that your obligations to Fopar are the least of your concerns.

    About two hours later Mr Donnelly responded:

    Thanks Jon.

15. I infer that Mr Donnelly's expression of thanks related to the notice attached to Mr Fogarty's email.  Mr Donnelly did not deny that the Mackay acquisition, that is the Doring transaction, was unauthorised and not disclosed to Mr Fogarty until the previous day.  I would expect Mr Donnelly to have denied that allegation if it was not true.  The failure to deny an allegation in circumstances where one would expect it to be denied if it were untrue is evidence of its truth.[1]

Adams demands payment of $250,000 by Reliance Online

[1] See Lustre Hosiery Ltd v York [1935] HCA 71; (1935) 54 CLR 134.

1. On 21 October 2015, Mr Adams had given Mr Hanson notice that the restraints had expired and the contract should be completed.  On 26 October 2015, Mr Adams gave notice to Mr Hanson and Mr Donnelly that the share transfer had been completed and requested payment of the $250,000 balance of the purchase price.

2. A letter to Reliance Online's auditor dated 28 October 2015 and signed by Mr Donnelly and Mr Hanson referred to the Allrisk transaction and stated that the balance of $250,000 'is due and payable but we are negotiating an extension'.

Negotiations over Doring purchase continue

1. Mr Donnelly and Mr Angelis had further discussions with Mr Beaumont.

2. On 4 November, Mr Donnelly presented a revised offer.  The offer provided that Newco would pay a non‑refundable deposit of $300,000 and at completion a further cash payment equal to 0.75 times the renewable revenue less the deposit paid at signing.  At 12 months post completion there was to be a further cash payment equal to 1 times (sic) the actual renewable revenue achieved in the 12 months post completion, less all previous payments.  Mr Beaumont said the revised offer was not compelling enough.

3. In an email of 5 November, Mr Donnelly summarised the revised offer and said that the total quantum based on the limited information presented will be $712,733.  Mr Donnelly put forward an alternative offer as follows:

   1.a non‑refundable deposit of $300,000 …; and

   2.A continuous monthly cash payment of 0.5 times the income received each month until an additional total amount of $800,000 is paid.

   Mr Donnelly added:

   [T]his is a strategic investment for the combined Reliance Coverforce group.

4. The solicitors for the receivers, Lander & Rogers, emailed Mr Donnelly on 5 November stating that any party wishing to purchase assets of the PDIB business must submit their final binding offer, in the form of an executed binding asset sale agreement, by no later than 2.00 pm AEST Friday 6 November and enclosing draft asset sale agreements.

5. Ms Pfitzner made some amendments to the asset sale agreement drafted by Lander & Rogers and sent the re‑drafted agreement to Mr Donnelly and Mr Kelly.  Mr Kelly responded with some observations about the redrafted agreement, including that it would have been preferable if they had formalised a heads of agreement between the Doring Trust and Reliance, but was willing to proceed.

1. Mr Donnelly and Mr Hanson executed the draft asset sale agreement as directors on behalf of Reliance Online.  Ms Pfitzner forwarded the asset sale agreement to Lander & Rogers.  On 6 November, Mr Donnelly emailed Ms Pfitzner:

   Ok, looks like we have got the deal if we can meet three conditions include GST in offer, add guarantee from Vantage and Coverforce, underfloor of $200k per year.  (emphasis added)

2. On 6 November, Ms Solakovski of Lander & Rogers emailed Ms Pfitzner requiring the following amendments to the draft Asset Sale Agreement:

   ·Inclusion of guarantee by Vantage Holdings Group Pty Ltd and condition subsequent for guarantee to be provided in the same form by Coverforce Pty Ltd by 5 pm Monday 9 November;

   ·Balloon payment of $200k on first anniversary and $400k on second anniversary; and

   ·GST clause to be reinserted as per our original draft.

3. Ms Solakovski said she understood the parties would be having a call to confirm all outstanding issues. 

4. At 17.25, Ms Solakovski emailed Ms Pfitzner an amended asset sale agreement which deleted the Coverforce condition subsequent and added covenants to deal with change of control and a replacement guarantee.  Ms Solakovski said:

   I understand that there are not two directors available to sign on behalf of the guarantor and that Andrew will be executing the ASA on behalf of the guarantor.  Accordingly, I have also added Andrew as a party to the ASA for the purpose of clause 9.4 only (in relation to the representations and warranties).

5. There is no direct evidence who instructed Ms Solakovski that there were not two directors available to sign on behalf of VHG.  When it was put to Mr Donnelly that he was not saying that Ms Solakovski was the one who suggested that he sign the loan, he answered:

   I can't talk for Alissa [Pfitzner] or Jackie [Solakovski].

6. When it was put to him that he was the person who told Ms Pfitzner, or alternatively Mr Beaumont who relayed to Ms Solakovski that there were not two directors available and he had authority and would sign it, Mr Donnelly answered:

   Well, that would make it an invalid guarantee.

7. I infer that Mr Donnelly told Ms Pfitzner or Mr Beaumont, who in turn told Ms Solakovski, that there were not two directors available and Mr Donnelly would sign on behalf of VHG.  The circumstances exclude any other reasonable hypothesis.  Mr Donnelly was the only person negotiating on behalf of Reliance Online or VHG.  There is no evidence that Mr Fogarty or Mr Muller were unavailable.  There is no reason why Mr Donnelly, or Ms Pfitzner if instructed by Mr Donnelly to do so, could not have attempted to contact Mr Fogarty or Mr Muller.  There is no documentary or testimonial evidence that Mr Donnelly communicated with Mr Fogarty or Mr Muller about the transaction on 6 November or the days leading up to it, except for the evidence of Mr Donnelly and Mr Hanson about the meeting with Mr Angelis on 22 October which I reject.  There is no documentary or testimonial evidence that Mr Donnelly, or anyone on his behalf or on his instructions, attempted to communicate with Mr Fogarty or Mr Muller on or in the days before 6 November.  I find that Mr Donnelly instructed Ms Pfitzner or Mr Beaumont that there were not two VHG directors available to sign the guarantee because he knew, or believed, that Mr Fogarty and Mr Muller would refuse to sign the guarantee.

8. At 17.58, Ms Pfitzner emailed Mr Hanson:

   Apologies for troubling you so late on a Friday night but we are ready to exchange signature pages on the purchase of the Phil Doring Book.  Andrew has signed the attached execution page but it needs you to countersign on behalf of Reliance Online Pty Ltd, the purchaser.  Without your signature I don't think the Vendors will accept that the Asset Sale Agreement has been properly executed.  The Vendors' solicitors are waiting to exchange signature pages this evening if at all possible.  If you could sign where indicated for Reliance and then PDF this page back to me that would be great.

9. At 18.11, Mr Hanson emailed the signed execution page to Ms Pfitzner.

10. At 18.36, Ms Pfitzner emailed the signature page signed by 'the Purchaser and Guarantor' to Ms Solakovski stating that her client had instructed her to append it to the execution version of the Asset Sale Agreement.

11. At 18.43, Ms Solakovski emailed to Ms Pfitzner the executed Asset Sale Agreement.

The Asset Sale Agreement

1. There are effectively five parties to the agreement.  The first of the parties is TD's Insurance Pty Ltd as trustee for the Tony Doring Family Trust, Thomas Doring and Matthew Doring as trustees for the Phil Doring Testamentary Trust and Costalota who are described as the Vendors of the business, that is the business of providing insurance brokerage services as Phil Doring Insurance Brokers.  The second party is the Receivers.  The third party is Reliance Online which is described as the Purchaser.  The fourth party is VHG which is described as the Guarantor.  The fifth party is Mr Donnelly.

2. The Purchaser agreed to buy the Assets, that is all customers and all lists and other data in possession of the Vendors, insurer contracts including any future rights to commission and the plant and equipment.  The purchase price is $1.1 million comprised of $300,000 payable on completion and $800,000 (the balance) paid in monthly instalments.

3. The monthly instalments were to commence in the month following the completion date (6 November 2015).  Each instalment was to be 0.5 times the income received from the Renewed Revenue, that is the amount invoiced as commissions in relation to insurance policies sold to customers in the preceding calendar month.  On the first anniversary of the completion date the Purchaser was to make a balloon payment to bring the total amount of the instalments paid as at that date to $200,000.  On the second anniversary the Purchaser is to make a balloon payment to bring the total amount of instalments paid as at that date to $400,000.  On the third anniversary the Purchaser is to make a balloon payment to bring the total amount of instalments paid as at that date to $800,000.

4. The default provisions provided that in the event that the Purchaser fails to pay any of the amounts payable on the due date then the Vendors may serve a notice on the Purchaser requiring immediate payment of any amount then due within seven days.

5. By cl 9.4, Mr Donnelly represented and warranted to the Vendors that he is authorised to enter into the agreement for the Guarantor and has obtained all necessary authorisations and consents and that the guarantee provided by the Guarantor is for the benefit of the Guarantor.

6. By cl 12, the Guarantor, that is VHG, guaranteed to the Vendors the due and punctual payment by the Purchaser to the Vendors of the Guaranteed Money, that is all amounts that are payable, owing or otherwise remain unpaid by the Purchaser to the Vendors.

7. By an additional covenant, Reliance Online and VHG agreed to advise the Vendors prior to any change of control in Reliance Online or VHG and in such an event agreed to procure a replacement guarantee from the Guarantor to the reasonable satisfaction of the Vendors.  If the Purchaser or Guarantor fails to comply with those covenants, the Purchaser and the Guarantor will be in default and the Vendors may then take steps to recover all monies payable under the agreement.

8. By cl 14, the parties acknowledged that the agreement gives rise to a taxable supply as defined in the GST Act and that in addition to providing the consideration, Reliance Online must pay to the Vendors an additional amount equal to any GST for which the Vendors are liable on that supply.

PDIB employees leave the business

1. On 10 November, Cheryl Boyd, a former employee of the PDIB business resigned.  Ms Pfitzner advised Mr Goldsmith and Mr Donnelly that Reliance Online did not acquire the benefit of the restraints of trade clauses in the employment contracts of the PDIB business and therefore Reliance Online could not enforce the restraint of trade clause against Ms Boyd. 

2. On 25 November, Mr Goldsmith advised Ms Pfitzner and Mr Donnelly that a former employee of PDIB, Ms Tombolato, was currently employed by Westcourt Broker and was approaching current clients of PDIB.  PDIB had not entered a written employment contract with Ms Tombolato and Reliance Online was unable to enforce any restraint of trade against her.

Sale to RP Oakleigh

1. After the completion of the Asset Sale Agreement, Mr Hanson and other Reliance administration staff held discussions with Pitcher Partners about the transfer of the business to RP Mackay Pty Ltd. 

2. In the beginning of December 2015, Mr Goldsmith and Mr Donnelly negotiated the sale of part of the RP Mackay insurance broking portfolio, which was domiciled in Victoria to James Wallace, an existing Reliance Franchise Partners franchise partner based in Victoria.  The terms of the purchase were agreed with Mr Wallace representing RP Oakleigh.  Former Doring clients were advised that they would be serviced by Mr Wallace thereafter.  The annual brokerage and fees of those clients was approximately $200,000.  Mr Hanson drafted a sale and acquisition agreement based upon the market value of two times annual brokerage and fees to be executed by the parties to be met equally by the shareholders of RP Oakleigh Pty Ltd.

Coverforce agreement does not proceed

1. In the first week of December, Mr Angelis called Mr Fogarty.  Mr Angelis said that he would not be able to complete the transaction within the exclusivity period and requested a further extension of the exclusivity period.  Mr Angelis said Coverforce was seeking an extension of the exclusivity period because it was now looking to purchase the VHG shares using bank finance and no equity and he would be starting discussions with bankers soon.  Mr Fogarty declined to extend the exclusivity period and said they will be talking to other parties but agreed that the discussions could continue.

2. Mr Fogarty wrote to Mr Angelis in his capacity as a director of Coverforce on 3 December 2015.  Mr Fogarty said that Fopar acknowledged and notified the end of the 12 week exclusivity period and performance had concluded on 26 November 2015 and that Coverforce had failed to provide any draft or completed final agreement under cl 3, and that Fopar had not been shown financing capacity or capacity to perform.  Mr Fogarty referred to Coverforce's proposal to finance the acquisition by debt.  Mr Fogarty stated that Fopar 'acknowledges your repudiation and accepts termination of the Agreement' and that Fopar would continue to look at all options going forward.

3. Mr Hanson says that on 9 December 2015, Coverforce sent drafts of a final share sale agreement and shareholders deed but Mr Fogarty rejected these stating that he did not believe that Coverforce could pay the purchase price.

4. Mr Hanson says that on 9 December 2015, Mr Fogarty issued a notice that he was taking control of Mr Donnelly's and Mr Hanson's shareholding in VHG.

Donnelly informs Fogarty of Doring transaction

1. On 9 December 2015, Mr Fogarty had emailed Mr Donnelly referring to the Doring transaction which had been disclosed to him for the first time the previous day.  On 11 December 2015, Mr Donnelly emailed Mr Fogarty and Mr Muller, copied to Mr Hanson and others, developments concerning VHG.  Mr Donnelly said, amongst other things:

   The Doring acquisition included a portfolio domiciled in Melbourne.  As a result of a review of the portfolio we have negotiated to sell $200,000 brokerage within the network at 2 times multiple.  As we will retain 50% ownership in the portfolio in the respective partners we have in essence recouped our investment on this portion on the book and RP‑Mackay have free carried equity on this portion as the cost price was 1 times.

Sale to PSC

1. A third party brought to Mr Fogarty's attention that PSC Insurance Group Ltd, a company newly listed on the ASX, was looking to acquire businesses.  Mr Fogarty met the PSC chairman.

2. Mr Fogarty and Mr Muller executed on behalf of VHG a term sheet dated 17 December 2015 between PSC and VHG.  Its stated purpose was to confirm that the parties wish to continue discussions and negotiations with the intent of entering into a transaction for the acquisition by PSC of the key business assets of VHG.  The term sheet included a term that VHG undertakes that it will negotiate exclusively with PSC for one month during which time PSC will conduct due diligence on the business and the parties will negotiate transaction documents.

3. PSC undertook due diligence on a purchase of VHG's assets.

Pitcher Partners demand GST payment

1. The first instalment of the balance of the purchase price was due on 10 December 2015.  On 10 December 2015, by email to Mr Goldsmith, a senior Reliance Online employee, the Receivers noted Mr Goldsmith's comments that it may be difficult for Reliance to meet the timeframe for the December 2015 instalment due to matters relating to preparing the customer database for invoicing.  The Receivers demanded payment of $30,000, being the amount of GST payable on the deposit of $300,000 paid on completion of the Asset Sale Agreement.  Mr Goldsmith replied by email of 11 December 2015.  Mr Goldsmith stated that Reliance Online was seeking taxation advice concerning the GST payable.  Mr Goldsmith asked to delay instalment payments by an additional 30 days to enable Reliance Online to better understand the portfolio and enable more matching of premiums and payments.  Mr Goldsmith said:

   The backlog of client invoicing and the lack of account reconciliation since 2012 had had a significant and unexpected increase on our workload as we attempt to work through what is genuine income and what is not.

2. On 14 December, the receivers replied agreeing to allow the due date for the first and second instalments to be 12 January 2016 and acknowledging that the history of the business, the state of its records and the trust account had caused difficulties since completion.  In relation to GST, the receivers said they expect the terms of the Asset Sale Agreement to be adhered to noting that:

   [B]oth the Vendors and the Purchaser have agreed that this is not the sale of the business as a going concern and that GST is payable.

Muller and Asquith replace Donnelly and Hanson on Reliance board

1. On 6 January 2016, Mr Donnelly and Mr Hanson ceased to be directors of Reliance Online and were replaced by Mr Muller and Mr Asquith.  By letter of 6 January 2016, Mr Fogarty, Mr Muller and Mr Asquith, as the directors of VHG, suspended Mr Donnelly from his role as CEO of VHG and all its subsidiary companies and restrained him from all executive duties within the group and acting on behalf of any company for any executive purpose.  The matters referred to by the directors included:

   Your unauthorised and unapproved behaviour by… as well as committing a subsidiary to a new $1m+ debt commitment again without Board approval or any voluntary disclosure.

GST and instalments still not paid

1. On about 7 January 2016, Mr Hanson told Mr Fogarty that Reliance was unable to pay wages due the following day and was not able to borrow any money.  Mr Fogarty arranged for Fopar to lend money to Reliance to pay the wages.

2. On 15 January 2016, the receivers emailed Mr Goldsmith stating that the two sale agreement instalments overdue as at 12 January 2016 and the GST portion of the deposit proceeds of $30,000 had still not been paid and requesting it be attended to by 18 January 2016.

Hanson employment terminated

1. Mr Hanson's employment was terminated on 19 January 2016. 

Vendors allege breach of Asset Sale Agreement

1. On 15 January 2016, PSC Insurance Group announced that it had entered into conditional agreements to acquire the Australian Reliance Corporate insurance broking business and Reliance Partners insurance adviser franchise network.  PSC said that it had agreed to pay an unadjusted purchase price of $31.57 million which includes a payment for the loan book and will pay up to 69% of this amount in cash on completion.

2. On 29 January 2016, Lander & Rogers, the solicitors for the receivers of PDIB, the vendors of the PDIB business, wrote to Reliance Online stating that Reliance Online was in default of payment of the first two instalments under the Asset Sale Agreement and the GST payable on the deposit and requiring payment within seven days.

3. On 11 February 2016, Lander & Rogers wrote separate letters to Reliance Online and VHG stating that Reliance Online had failed to provide details of monthly commissions received, failed to pay instalments of the purchase price, failed to pay $30,000 GST on the deposit, failed to inform the vendors of the transaction by which change of control of Vantage or that Vantage had ceased to hold the majority of the assets of the group before the transaction occurred.  The vendors gave notice to Reliance Online and VHG that, pursuant to cl 12(d) of the Asset Sale Agreement, each of them is in breach of cl 12(b) and accordingly the vendors demand from each of them payment of the monies payable pursuant to the agreement totalling $924,331.58.  The letter to VHG further stated that, unless by 12 February VHG's lawyers confirmed that the sum of $924,331.58 from the proceeds of the sale agreements with PSC will be retained in their trust account together with a written undertaking that they will be held in trust pending any order by the court or agreement between the parties, the vendors will seek urgent orders from the Supreme Court of Victoria restraining VHG from disposing of those proceeds.

Vendors commence Victorian Supreme Court proceedings

1. On 17 February 2016, the vendors of the PDIB business together with the liquidators of the corporate vendors (the plaintiffs) commenced proceedings in the Supreme Court of Victoria against Reliance Online and VHG.

2. The plaintiffs alleged that Reliance Online had breached the Asset Sale Agreement by failing to provide details of the commissions received from the PDIB assets since 6 November 2015 or pay the instalments due to the plaintiffs under the Asset Sale Agreement in December, January or February or at all.  The plaintiffs further alleged that on or about 15 January 2016 VHG had entered into agreements for the sale of the assets of the Reliance group to PSC, without informing the plaintiff's prior to entering into the agreement and that Reliance Online had, in breach of the Asset Sale Agreement, failed to procure a replacement guarantee.  The plaintiffs pleaded that on 11 February 2016 they had given notice to Reliance Online and VHG that they were in breach of the Asset Sale Agreement and that all amounts payable under the agreement had become due and payable and accordingly Reliance Online and VHG were indebted to the plaintiffs for $924,331.58 pursuant to the Asset Sale Agreement.

3. The plaintiffs claimed against Reliance Online and VHG $924,331.58 and against VHG an injunction to restrain it from disposing of the proceeds of the PSC sale to the sum of $924,331.58.

4. On 22 February 2016, the Victorian Supreme Court issued an injunction restraining VHG from dealing with any assets derived from the PSC sale as to the amount of $1 million.

5. By third party notice dated 8 April 2016, Reliance Online and VHG joined Mr Donnelly, Mr Hanson and Amicus Legal Pty Ltd as third parties to the proceeding.  By way of amended statement of claim, the plaintiffs joined Mr Donnelly and Mr Hanson as defendants to the proceeding.

6. The parties negotiated a settlement of the proceedings on the following terms.  VHG paid to the liquidators $225,000.  The plaintiffs gave to the defendants and the defendants gave to the plaintiffs mutual releases.  On 31 October 2016, VHG paid $225,000 to the plaintiff's solicitors.  On 3 November 2016, the Victorian Supreme Court ordered that the proceeding between the plaintiffs and the defendants be struck out and the be no order as to costs.  The proceedings were subsequently transferred to this court.

Sale of Reliance Online

1. Mr Hanson put to Mr Asquith that the general ledger for July to December 2016 showed brokerage commissions and fees and direct monthly instalments which were coded general or uncoded totalled $18,414.  Mr Asquith said that he didn't check whether those entries were correct but the staff would have made the decisions as to whether to put them to general income or to the specific companies based on their knowledge and he had no reason to check.

2. Mr Asquith was asked some questions about expenses shown on the P & L statement.  Mr Shepherd asked Mr Asquith about a $22,000 expense for computer on the January to June 2016 P&L.  The combined P&L shows an expense of $29,355.75 for computer.  Mr Asquith said he did not know what the computer expense was for and he probably would not be able to tell from looking at the general ledger.  In answer to questions from Mr Hanson, Mr Asquith agreed that the bulk of those expenses were charges made by Reliance management and Australian Reliance, and said he thought it was likely that Australian Reliance made the payment for an invoice which covered services rendered to a number of different sections within the group and the amount shown would be the portion attributable to the Mackay operation.  Mr Asquith says he could not be sure whether it was an internal charge but he thought it more likely that it was based on an external invoice.  Mr Hanson drew attention to an invoice of $11,284.59 which was allocated wholly to Mackay.

3. The January to June 2016 P & L shows legal fees of $45,699 and the combined P&L shows legal expenses of $48,499.  In answer to questions from Mr Shepherd, Mr Asquith said there might be more information about that on the general ledger but he didn't know whether it would be sufficient and otherwise offered no explanation for the expense.  In answer to questions from Mr Hanson, Mr Asquith said that it was likely that the fees were principally incurred in the present litigation when it was in the Supreme Court of Victoria.  They are extraordinary costs, and in any event, the defendants claim the costs incurred in defending the proceedings as a separate head of damages in this proceeding.

4. The next expense item on the P & L statement Mr Asquith was asked about was management fees of $63,453.22.  Mr Asquith's initial evidence was that:

   They were put in there on the basis of 30% of the revenue to recognise the processing and the other conventional management that was done by PSC.

5. Mr Asquith later agreed that the monies were paid to members of the Reliance group as an internal charge.

6. When asked about an entry to write off balances of $6,241 Mr Asquith said he could only speculate about it.

7. I am not satisfied that the defendants have produced any adequate evidence to support Reliance Online's claimed operating loss or indeed that Reliance Online suffered any trading loss.  The defendants did not produce any audited financial statements.  The invoices, receipts or other material on which the data inputted into the general ledger extracts was based were not produced in evidence, nor did any witness verify that the general ledger entries were based on proper records evidencing the data entered.

8. The cross‑examination of Mr Asquith showed that he had no knowledge of the entries in the P & L statements, merely that they had been produced by Reliance Online staff, apparently from data in the general ledger.  His cross‑examination cast serious doubt on whether many expense entries in the general ledger were properly allocated to the Mackay business and whether many unallocated income items, or some of them, should properly have been allocated to the Mackay business.

9. I am satisfied that the P & L statements produced are not correct because expense items do not properly reflect the expenses, or amount of expenses, incurred by the Mackay business as distinct from businesses in the group.  I am satisfied that income items do not properly reflect the income of the Mackay business because not all of the income properly attributable to the business acquired from the vendors under the Asset Sale Agreement has been allocated to the Mackay business.  It would be mere speculation what operating losses were suffered by Reliance Online or whether it suffered any operating losses after acquiring the business.

10. Mr Donnelly and Mr Hanson submitted that any losses suffered by Reliance Online were the result of mismanagement.  I find it unnecessary and impractical to address that question because the evidence does not establish that Reliance Online suffered any operating losses.

Interest on money held pursuant to Court order

1. Until 27 March 2015, VHG was a wholly owned subsidiary of the Vantage Investment Fund (VIF).  On 27 March 2015, VHG entered into a transaction that ceded the VIF's control of VHG.  Before that, the VIF had provided $13.75m in funds it had received from Fopar primarily to use to fund VHG's acquisition of new insurance broking businesses.  On 27 August 2015, the convertible note deeds between Fopar as lender and VCS in its capacity as trustee for the VIF for $13.75 million were novated to Vantage Representative Services Pty Ltd (VRS), the new trustee of VIF.  On 1 December 2015, VHG entered into a loan agreement with the VRS by which VRS loaned $13.75 million to VHG.  The loan agreement documented the terms upon which the VIF had lent the $13.75 million to VHG.  The loan agreement provided that interest would be charged at 15% per annum.

2. On 22 February 2016, the Supreme Court of Victoria made an order restraining VHG from, amongst other things, dealing with any assets as to the amount of $1 million (Freezing Order).  On or about 25 February 2016, VHG paid $1 million into the trust account of their lawyers, Bennett + Co, to give effect to the Freezing Order. 

3. Mr Asquith gave evidence that but for the Freezing Order, VHG would have used those funds to repay the loan it owed to VRS pursuant to the loan agreement of 1 December 2015.  The Freezing Order was vacated on 3 November 2016.  Between 25 February 2016 and 3 November 2016, VHG accumulated interest payable at 15% per annum under the loan agreement, being $103,278.69, and received interest on the $1 million the subject of the Freezing Order of $12,624.45.  Therefore, VHG claims it suffered loss and damage of $90,654.24.

4. VHG's loss arose from its alleged liability to the vendors under the Asset Sale Agreement.  The Supreme Court of Victoria made the Freezing Order on the basis that the alleged liability was sufficiently arguable to justify the grant of the order.  It is necessary then to consider whether VHG's alleged liability was caused by Mr Donnelly's breach of duty in executing the Guarantee.

5. VHG's alleged liability to pay all monies payable under the Asset Sale Agreement arose from cl 12.8 (d) of the Asset Sale Agreement which provided that if the Purchaser (Reliance Online) or the Guarantor (VHG) fails to comply with the obligations in cl 12.8 (b) or cl 12.8 (c), the Purchaser and the Guarantor will be in default of the agreement and the vendors may then take steps to recover all monies payable under the agreement.  Clause 12(b) provided relevantly that the Purchaser and the Guarantor agreed to advise the vendors prior to any change of control in the Purchaser or the Guarantor, or if the Guarantor is no longer the holding company of the Purchaser or the ultimate holder of all or substantially all of the assets in the group, which were defined as trigger events.  Clause 12(c) provided that if there is a trigger event which is materially detrimental to the vendors guarantee, the Purchaser and the Guarantor agree to procure a replacement guarantee from a guarantor to the reasonable satisfaction of the vendors.

6. The plaintiffs pleaded that, by entering into the agreement with PSC to sell most if not all of the assets of the Reliance group, VHG ceased to be the ultimate holder of substantially all of the assets of the Reliance group; VHG was deprived of substantially the whole of the value of its assets, and consequently the plaintiffs were deprived of the value of the Guarantee; and a Trigger Event occurred which was materially detrimental to the plaintiffs' Guarantee.  The plaintiffs pleaded that in breach of cl 12.8(b) of the Asset Sale Agreement, VHG did not advise the plaintiffs of the proposed sale prior to the PSC sale and in breach of cl 12.8(c) of the Asset Sale Agreement neither Reliance Online nor VHG procured a replacement guarantee from a guarantor to the reasonable satisfaction of the plaintiffs.

7. There was no difference between the parties as to the principles of causation to be applied.  The terms 'resulted from' and 'as a result of' used in Corporations Act s 1317H require that there be a causal connection between the alleged damage, on the one hand, and the identified contravening conduct, on the other. It is damage which, as a matter of fact, was caused by the contravention which may be the subject of an order for compensation under these provisions.[16]

   [16] Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 46 ACSR 504 [709]; Termite Resources NL (in liq) v Meadows [2019] FCA 354; (2019) 370 ALR 191 [727].

8. The words 'resulted from' in s 1317H should be given their ordinary meaning of requiring a causal connection between the damage and the contravening conduct, free from the strictures of analogy with equitable claims against fiduciaries.[17]  The parties agreed that the principles to be applied are the same as the common law principles of causation.

   [17] Adler v Australian Securities and Investments Commission [2003] NSWSC 131; (2003) 46 ACSR 504 [709]; Termite Resources NL (in liq) v Meadows [2019] FCA 354; (2019) 370 ALR 191 [727].

9. Common law causation involves applying 'common sense' to the circumstances of each case.[18]

   [18] March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506; Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 [95].

10. Loss or damage may be the result of contravening conduct even though other factors have contributed to its occurrence.[19]  It is sufficient if the contravening conduct contributed in a material way to the loss and damage.

    [19] Termite Resources NL (in liq) v Meadows [2019] FCA 354; (2019) 370 ALR 191 [307]; Henville v Walker [2001] HCA 512; (2001) 206 CLR 459 [97].

11. VHG's alleged liability was relevantly caused by Mr Donnelly's breach of duty in executing the Asset Sale Agreement including the Guarantee on behalf of VHG.  VHG's alleged liability would not have arisen but for Mr Donnelly executing the Asset Sale Agreement, including the Guarantee, on behalf of VHG.  I find, applying common sense, that Mr Donnelly executing the Asset Sale Agreement, including the Guarantee, on behalf of VHG caused or materially contributed to VHG's alleged liability to the plaintiffs.

12. Mr Donnelly submitted that no claim would have been made against the Guarantee had Mr Fogarty not acted to prevent the acquisition of the Reliance Group by Coverforce in 2015, in that Coverforce would have taken over the obligation upon completion of the transaction and Reliance Online would not have breached the terms of the Asset Sale Agreement.  Further, Mr Donnelly submitted that even without the refusal of Mr Fogarty to continue the Coverforce acquisition, liability arose under the Guarantee because of Reliance Online's breach of its obligation to pay and report under the Asset Sale Agreement and it was the breach by Reliance Online that triggered VHG's obligations under the guarantee.

13. Mr Donnelly's arguments reflect the approach rejected by the High Court in March v E & M H Stramare Pty Ltd,[20] that the defendant's negligence was not the real cause or true cause of the loss.  Arguments about the real cause or true cause of a loss are part of an analysis usually labelled a novus actus interveniens.[21]  It is established that the chain of causation is not necessarily broken by an act of a plaintiff which constitutes a more immediate cause of the loss or damage than the defendant's negligence.  The onus is on a defendant to prove that a voluntary act was a novus actus interveniens.[22]

    [20] March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506.

    [21] Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102; (2014) 48 WAR 1 [425] ‑ [427] (Edelman J).

    [22] Agricultural Land Management Ltd v Jackson [No 2] [2014] wasc 102; (2014) 48 WAR 1 [425] ‑ [427] (Edelman J).

14. As to Mr Donnelly's first argument, the onus is on Mr Donnelly to prove that the acquisition of the Reliance Group by Coverforce would have gone ahead in 2015 if it had not been prevented by the actions of Mr Fogarty and if it had gone ahead Coverforce would have taken over the obligations of Reliance Online under the Asset Sale Agreement and would have given a replacement guarantee to the vendors which would have been satisfactory to the vendors and Mr Fogarty's action to prevent the acquisition of the Reliance Group by Coverforce was the action of VHG and was unreasonable.

15. None of those matters are pleaded by Mr Donnelly.  Furthermore, even if it was open to Mr Donnelly to advance those arguments in the absence of a pleading, the evidence does not establish those matters.  There is no evidence that Coverforce could have completed the acquisition of the Reliance group in 2015.  I accept Mr Fogarty's evidence that Mr Angelus told him that Coverforce was commencing to approach banks to obtain finance to acquire the Reliance group wholly by debt.  It is speculation that Coverforce could have acquired the Reliance group.  There is no evidence that if it had acquired the Reliance group, Coverforce would have given to the plaintiffs a guarantee satisfactory to them.  Prior to Mr Donnelly agreeing to give the Guarantee on behalf of VHG, he had proposed that Coverforce give the guarantee.  Coverforce refused to do so.

16. The Coverforce Heads of Agreement was terminated on 3 December 2015 by Mr Fogarty on behalf of Fopar, not VHG.  Fopar was a party to the Coverforce Heads of Agreement.  It was a necessary party because cl 6 provided that Fopar's convertible note deeds would be repaid out of the proceeds of the sale and on completion Fopar would release any security over any of the assets of VHG or the shares in VHG and would not take any action in relation to any past or continuing breach of the convertible loan notes and disclaim any right to acquire shares in VHG. 

17. Furthermore, not only was Mr Fogarty's conduct in terminating the Coverforce Heads of Agreement an act done by Fopar not VHG, the evidence does not establish that it was unreasonable.  VHG remained solvent only so long as it maintained the support and forbearance of Fopar.  The only way that VHG could repay the amount owing under the convertible note deeds, and Fopar recover the amounts due and owing to it, was by sale of the assets of the Reliance group.  By December 2015, Coverforce had had three months to obtain the funds to complete the purchase.  Mr Angelis called Mr Fogarty and requested a further extension of the exclusivity period.  Mr Angelis said he was seeking an extension of the exclusivity period because he was now looking to fund the transaction by debt only and would be starting discussions with bankers soon.  It was not unreasonable for Mr Fogarty to conclude that Coverforce did not have the capacity to complete the acquisition and to look for an alternative purchaser.

18. Like his first argument, Mr Donnelly's second argument is neither pleaded nor established by evidence.  It was not Reliance Online's breach of its obligation to pay and report under the Asset Sale Agreement that triggered VHG's obligations under the guarantee.  The plaintiffs pleaded that it was the sale of the Reliance group's assets by VHG to PSC which triggered the liability of VHG to pay the whole of the amounts payable under the Asset Sale Agreement.  There is no evidence that a replacement guarantee could have been procured from PSC.  The evidence is to the contrary.  PSC declined to acquire Reliance Online.

19. In his closing submissions, Mr Donnelly submitted that no evidence was lead in support of the circumstances in which the Freezing Order was made, or the money paid into the solicitor's account and no accounts from VHG were produced.  He submitted that no identification of the uses to which funds paid by PSC to acquire Reliance businesses was put or explanation given as to why such funds were not used to pay down the Fopar debt.  Mr Donnelly submitted that it is insufficient for the defendants to merely say that they did not have sufficient funds to pay down the convertible notes and have not had funds to do so since 2016.

20. Again, none of this is pleaded.  There is ample evidence that VHG did not have $1 million prior to the PSC sale.  Mr Asquith's evidence is that if the $1 million had not been put on deposit, VHG would have used it to pay off part of its loan owing to Fopar.  Mr Asquith was not cross‑examined on that matter.  There is evidence that VHG had substantial debts prior to the PSC sale.  There is no evidence that, after the PSC sale, VHG could have paid off all amounts owing to VHG and paid the $1 million deposit from other funds.  If Mr Donnelly's counsel had cross‑examined Mr Asquith about that matter, he would have had an opportunity to elaborate upon his uncontradicted evidence that if VHG had not paid the $1 million deposit, it would have used the money to pay off the VHG debt.

21. I find that Mr Donnelly's breach of duty in executing the Guarantee on behalf of VHG caused or materially contributed to the loss of $90,654.24 in interest on the $1 million deposited pursuant to the order of the Supreme Court of Victoria.

Settlement sum and the sale of business

1. The defendants' settlement with the plaintiffs was negotiated by Mr Fogarty and his lawyers.  Having regard to the amount claimed by the plaintiffs and the merits of their claim, I find that the settlement was a reasonable settlement by the defendants.

2. I find that the amount paid by the defendants to settle the action was caused by the breaches of duty by Mr Donnelly and Mr Hanson.  The plaintiff's would not have brought the proceedings against the defendants if Mr Donnelly and Mr Hanson had not breached their duty to Reliance Online in executing the Asset Sale Agreement, and Mr Donnelly had not breached his duty to VHG in executing the Guarantee.

3. Mr Donnelly and Mr Hanson did not plead any novus actus interveniens, and the evidence does not establish any such intervening acts by Reliance Online or VHG.  Whether or not Reliance Online was mismanaged after the Asset Sale Agreement was completed, it could not pay the $30,000 GST.  Furthermore, as I have set out in considering VHG's claim for interest on the money deposited pursuant to the Freezing Order, the plaintiffs' claim for the whole of the amounts payable under the Asset Sale Agreement arose from the failure of Reliance Online and VHG to inform the plaintiffs of the PSC sale and to procure the replacement guarantor.  VHG sold its assets to pay its debts and there is no evidence that Reliance Online or VHG could have procured a replacement guarantor.

4. The loss from payment of the settlement sum would not have been incurred if the third parties had not breached their duties or contravened the provisions of the Corporations Act.  The loss is, in a real and practical sense, a result of those breaches of duty by the third parties. 

5. The defendants accept that the amount of $150,000 received on the sale of the business acquired from PDIB must be taken into account in reduction of their loss on the settlement sum paid to the plaintiffs.  So the defendant's loss is $75,000.

Legal costs

1. There is evidence that the defendants were represented by Bennett + Co in these proceedings between the plaintiffs and the defendants in the Supreme Court of Victoria which have been transferred to this court.  I infer that the defendants incurred legal fees to Bennett + Co for that representation.  The defendants seek as damages the costs incurred except to the extent that the costs incurred were unreasonably incurred or in an unreasonable amount.

1. The defendants have succeeded in their third‑party claim in these proceedings.  The costs incurred by the defendants in defending the claims by the plaintiffs against them in these proceedings resulted from the contraventions by the third parties of the civil penalty provisions of the Corporations Act imposing director's duties and from the third parties' breach of their common law directors' duties.  The costs would not have been incurred if the third parties had not breached their duties or contravened the provisions of the Corporations Act.  The costs are, in a real and practical sense, a result of those breaches of duty by the third parties. 

2. The third parties did not submit that costs incurred by the defendants in defending the claims against them by the plaintiffs in these proceedings are not as a matter of principle recoverable as damages, rather than as costs of the proceedings.  The third parties were right not to make that submission.[23]

Damages – conclusion

[23] See Gray v Sirtex Medical Ltd [2011] FCAFC 40; (2011) 193 FCR 1.

1. I make the following conclusions on damages. 

2. First, the defendants are not entitled to damages in respect of operating costs incurred by Reliance Online because the defendants have not proved that Reliance Online suffered any losses in operating the business acquired from PDIB. 

3. Secondly, the third parties are liable to the defendants for $75,000, being the difference between the amount paid to the plaintiffs in these proceedings to settle the plaintiffs' claim and the amount received upon the eventual sale of the business. 

4. Thirdly, Mr Donnelly is liable to VHG for $90,654.24 for interest accruing on $1 million of the debt owed by VHG where those funds were ordered to be paid into the Victorian Supreme Court, and ultimately a solicitor's trust account, together with interest on that amount.

5. Fourthly, the third parties are liable to the defendants for the legal costs and disbursements incurred by the defendants in defending the claim of the plaintiffs against the defendants in this proceeding.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CR
Associate to the Honourable Justice Le Miere

19 JANUARY 2022

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

CITATION: TD's INSURANCE PTY LTD AND THOMAS JAMES DORING & MATTHEW CHARLES DORING AS TRUSTEES FOR THE PHIL DORING TESTAMENTARY TRUST IN THEIR CAPACITY AS PARTNERS IN AND TRADING AS PHIL DORING INSURANCE BROKERS (RECEIVERS & MANAGERS APPOINTED) and others according to Schedule 1 -v- RELIANCE ONLINE PTY LTD [2022] WASC 15 (S)

CORAM:   LE MIERE J

HEARD:   ON THE PAPERS

DELIVERED          :   8 FEBRUARY 2022

FILE NO/S:   CIV 1911 of 2017

BETWEEN:   TD's INSURANCE PTY LTD AND THOMAS JAMES DORING & MATTHEW CHARLES DORING AS TRUSTEES FOR THE PHIL DORING TESTAMENTARY TRUST IN THEIR CAPACITY AS PARTNERS IN AND TRADING AS PHIL DORING INSURANCE BROKERS (RECEIVERS & MANAGERS APPOINTED) and others according to Schedule 1

Plaintiffs

AND

RELIANCE ONLINE PTY LTD

First Defendant

VANTAGE HOLDINGS GROUP PTY LTD

Second Defendant

ANDREW PAUL DONNELLY

First Third Party

KIMBERLEY JAMES HANSON

Second Third Party

Catchwords:

Costs - Whether first third party should pay defendants' costs on a party and party or indemnity basis - Whether Calderbank offer was unreasonably refused

Legislation:

Nil

Result:

Application for indemnity costs granted

Category:    B

Representation:

Counsel:

Plaintiffs	:	No appearance
First Defendant	:	No appearance
Second Defendant	:	No appearance
First Third Party	:	No appearance
Second Third Party	:	No appearance

Solicitors:

Plaintiffs	:	No appearance
First Defendant	:	Bennett + Co
Second Defendant	:	Bennett + Co
First Third Party	:	Forbes Kirby
Second Third Party	:	In person

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

Strzelecki Holdings Pty Ltd v Jorgensen [2019] WASCA 96; (2019) 54 WAR 388

LE MIERE J:

Summary

1. On 19 January 2022, I delivered judgment in this matter.  I found that the third parties should pay the defendants' damages, jointly totalling $219,404.07.

2. The defendants sought orders that the first third party, Mr Donnelly, should pay the defendants' costs on a party and party basis up to and including 25 March 2020; and on an indemnity basis after 25 March 2020.  The first third party opposed these orders.

3. For the reasons that follow, I find that Mr Donnelly did act unreasonably and should pay the defendants' costs on a party and party basis up to and including 25 March 2020; and on an indemnity basis after 25 March 2020.

Defendants' Calderbank offer

1. On 18 March 2020, the defendants made a Calderbank offer to the first third party.  The terms of the settlement offer were that:

   Judgment be entered for the Defendants in the sum of $150,000; and

   Mr Donnelly and Mr Hanson pay the Defendants' costs of:

   The primary proceedings on an indemnity basis (which were estimated to be around $90,000); and

   The third party proceedings, on a party and party basis,

   to be assessed if not agreed.

2. The offer expired seven days later, on 25 March 2020.

3. Mr Donnelly's evidence is that he did not ask for his solicitor's advice regarding the offer until after 7.00 pm on 25 March 2020.  Mr Donnelly ultimately did not respond to the defendants' Calderbank offer.

4. The defendants submit that Mr Donnelly's rejection of their Calderbank offer was unreasonable having regard to all the relevant facts and circumstances.  I must be satisfied that it was unreasonable on the balance of probabilities for Mr Donnelly to refuse the Calderbank offer.[24]

   [24] Strzelecki Holdings Pty Ltd v Jorgensen [2019] WASCA 96; (2019) 54 WAR 388 [82].

Donnelly unreasonably did not accept offer

1. The defendants identify seven reasons why their offer should have been accepted.

2. First, the offer was made about a month prior to the scheduled commencement date of the trial, and after the defendants had filed their written opening submissions.

3. Secondly, the offer provided seven days which was sufficient time to consider the offer.

4. Thirdly, the defendants offered a discount of about half of their quantified claim, and offered to forego their claim for pre‑judgment interest.

5. Fourthly, the case against Mr Donnelly was strong.

6. Fifthly, the defendants' case against Mr Donnelly did not change between the date of the offer and trial.

7. Sixthly, the offer was expressed with clarity.

8. Finally, the offer foreshadowed that a claim for indemnity costs would be made if it was not accepted.

9. Mr Donnelly makes several criticisms of the offer to support his argument that it was not unreasonable to reject the offer.

10. First, Mr Donnelly submits that the sum sought as damages for costs and disbursements was subject to further determination, and therefore did not propose a final settlement of the proceedings.

11. The defendants submit that this is standard practice, and that had the offer been accepted, the parties would have avoided the trial as to liability.  I agree.

12. Secondly, Mr Donnelly submits that he did not have sufficient time to consider the offer.  It is Mr Donnelly's evidence in his affidavit sworn on 12 January 2022 that he did not ask for his solicitor's advice on the offer until the evening that the offer expired.  Further, Mr Donnelly could have, and did not, ask for more time to consider the offer.

13. Thirdly, Mr Donnelly submits that at the time of the offer he was busy attending to a number of other tasks in preparation for trial.  For the same reason as above, I find that this is not a reasonable reason to not accept the offer.

14. Fourthly, Mr Donnelly submits that there was little evidence regarding the interest payment claim at the time of the offer.  The defendants submit that this claim was laid bare in their written opening submissions, which had been served prior to the offer, the exhibits referred to in those submissions, and in Mr Asquith's witness outline.  I agree.

15. Fifthly, Mr Donnelly submits that the offer being made jointly on behalf of the defendants caused 'practical issues' for him.  The defendants submit that the amounts being claimed by each defendant was particularised in their particulars of loss and damage dated 30 November 2016.  I agree with the defendants.  Further, Mr Donnelly could have replied to the offer for clarity, or with a counteroffer.  Instead, Mr Donnelly failed to respond at all.

16. Sixthly, Mr Donnelly submits that at the time of the offer he had not had a chance to consider the defendants' evidence regarding the Angelis Meeting, which he submits was a significant issue in the proceedings.  The defendants submit that their position was at all times plain, being that Mr Donnelly acted without reference to his fellow board members, including Mr Fogarty.  At trial, the defendants' position remained that the meeting did not occur.  I do not consider this to be a reasonable reason to not accept the defendants' offer.

17. Finally, Mr Donnelly submits that the offer was made in the context of a number of other matters.  The defendants submit that this is irrelevant to their offer.  Even if it is a relevant consideration, I consider that the defendants making an offer only regarding this matter is not enough for me to find that Mr Donnelly's decision to refuse the offer was not unreasonable.

Conclusion

1. Considering the whole of the facts and circumstances, I find that Mr Donnelly's refusal of the defendants' Calderbank offer by failing to respond was unreasonable.  The offer foreshadowed this application, and offered a significant discount to the claimed amount.  Further, Mr Donnelly was aware of the defendants' case, had time to consider the offer or at least ask for more time, and still failed to instruct his solicitor to consider the offer until it had expired.

2. For these reasons, Mr Donnelly should pay the defendants' costs on a party and party basis up to and including 25 March 2020; and on an indemnity basis after 25 March 2020.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

CR
Associate to the Honourable Justice Le Miere

8 FEBRUARY 2022