Thomas v SMP International (No 4)
[2010] NSWSC 984
•22 September 2010
CITATION: Thomas v SMP International (No 4) [2010] NSWSC 984
This decision has been amended. Please see the end of the judgment for a list of the amendments.HEARING DATE(S): 20 July 2010
26 - 30 July 2010
2 - 6 August 2010
9 - 13 August 2010
16 - 19 August 2010
23 - 27 August 2010
JUDGMENT DATE :
22 September 2010JURISDICTION: Equity JUDGMENT OF: Pembroke J CATCHWORDS: FIDUCIARY DUTY: loyalty - fair and open dealing - honesty - FIDUCIARY DUTY: accountant - non-traditional category - particular circumstances - EQUITABLE COMPENSATION: causation and principles - Brickenden's case - EVIDENCE: complex fact findings - practical limits in explaining all considerations and impressions - CREDIBILITY: reconstruction - uncorroborated assertions - principle in Watson v Foxman - COSTS: Sanderson order CATEGORY: Principal judgment CASES CITED: Abalos v Postal Commission (1990) 171 CLR 167
Aneve Pty Limited & Ors v Bank of Western Australia Limited [2005] NSWCA 441
Beach Petroleum v Abbott Tout (1999) 48 NSWLR 1
Biggs v London Loan & Savings Co [1933] 3 DLR 161
Biogen Inc v Medeva PLC [1997] RPC 1
Breen v Williams (1996) 186 CLR 71
Brickenden v London Loan & Savings Co [1934] 3 DLR 465
Bristol & West Building Society v Mothew [1998] Ch 1
Re Coomber; Coomber v Coomber [1911] 1 Ch 723
Re Dawson (dec'd) [1966] 2 NSWR 211; (1966) 84 WM (Pt 1) (NSW) 399
For the Good Times Pty Ltd v Coltern Pty Ltd [2007] NSWSC 807
Hungerfords v Walker (1989) 171 CLR 125
John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd & Ors [2010] HCA 19
McKenzie v McDonald [1927] VLR 134
McMurtrie v Commonwealth of Australia [2006] NSWCA 148
Meinhard v Salmon (1928) 249 NY 458
Nocton v Lord Ashburton [1914] AC 932
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Pavan v Ratman (1996) 23 ACSR 214
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Societe d'Avances Commerciales v Merchant's Marine Insurance Co (1924) 20 Ll.L Rep 140
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588
Swindle v Harrison (1997) 4 All ER 705
United Dominions Corporation Ltd v Brian (1985) 157 CLR 1
Warman International Limited v Dwyer (1995) 182 CLR 544
Watson v Foxman (1995) 49 NSWLR 315TEXTS CITED: Conaglen M, Remedial Ramifications of Conflicts Between a Fiduciary's Duties (2010) 126 LQR 72
Devlin P, The Judge, OUP 1979
Edelman J, When Do Fiduciary Duties Arise? (2010) 126 LQR 302
Gummow WMC, Compensation for Breach of Fiduciary Duty in T G Youdan (ed), Equity, Fiduciaries and Trusts, Law Book Co, Toronto, 1989PARTIES: Eric Clyde Thomas - first plaintiff
John Leslie Sullivan - second plaintiff
Softsand Design Investments Pty Limited - third plaintiff
SMP (International) Pty Limited - first defendant
Eugene King - second defendant
David Joseph King - third defendant
Gregory Paul Willett - fourth defendant
Debra Willett - fifth defendantFILE NUMBER(S): SC 2003/85446 COUNSEL: P E King - for plaintiffs
W Carney - for third defendant
R J Weber SC with I R Pike - for fourth defendant
F Kalyk - for fifth defendantSOLICITORS: Hayes Partners - for plaintiffs
Husseini Lawyers - for third defendant
Moray & Agnew - for fourth defendant
Bartier Perry - for fifth defendant
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
PEMBROKE J
WEDNESDAY, 22 SEPTEMBER 2010
2003/85446 - THOMAS v SMP (INTERNATIONAL) PTY LTD
(No 4)
JUDGMENT
INDEX
Subject Paragraph
1 Introduction 1-2
2 Complex Facts 3-10
3 Mr Sullivan 11-15
4 Mr Thomas 16-19
5 Mr Willett 20-21
6 SSDI - Establishment 22-26
7 SSDI - Property Acquisitions 27-31
8 SSDI – Purpose 32-38
9 SMP 39
- Representations 40-44
- Willett in Control 45-47
- Payments by Thomas 48-49
- Events between 24 July & 4 September 50
- Willett & Sullivan in SMP’s Business 51-52
- Subsequent Events 53-58
- Further Payments by Thomas & Sullivan 59
Subject Paragraph
10 Fiduciary Analysis – Factual 60-66
11 Fiduciary Obligations – Principle 67-71
12 Causation 72-76
13 Loss & Compensation 77-81
14 Credibility Issues 82
- Mr Willett 83-84
- Mr Thomas 85
- Mr Sullivan 86
- Mrs Liddlelow 87-88
15 Misrepresentation & Misleading Conduct 89-91
- Mr Willett 92-95
- Mrs Willett 96-99
16 Claim against David King 100
17 4 September 2000 Agreement 101-103
18 February 2002 Agreement 104-106
19 Conclusion 107
20 Costs 108
21 Interest 109
22 Orders 110
Introduction
1 From July to October 2000, the plaintiffs, Mr Thomas and Mr Sullivan, outlaid approximately $2 million for the benefit of a business they did not own. The business manufactured surf, ski and skate board clothing. The brand name of the clothing was SMP and the business was conducted by Surf Snow and Skate Pty Ltd ( SSS ). Its parent was SMP (International ) Pty Ltd. The investment was recommended and encouraged by Mr Greg Willett. He was an accountant as well as a manager of sportsmen. His clients included well known rugby league players some of whom were provided with sponsored clothing by SMP. At the time, Mr Willett described himself as the Chairman of SMP.
2 Mr Thomas and Mr Sullivan were neither financially astute nor well educated and have now lost their monies. They contend that they were in a fiduciary relationship with Mr Willett and that he owed them certain duties arising from that relationship. They also make claims based on misrepresentation and misleading conduct. Mr Willett, on the other hand, contends that Mr Thomas and Mr Sullivan were arms length commercial investors who were prepared to take greater risks in return for the prospect of higher rewards.
Complex Facts
3 Before setting out my findings of fact, I should make the following preliminary observations. The hearing was lengthy and fact-intensive. There were four weeks of evidence and one week of addresses. It has been frequently said of cases involving an alleged fiduciary relationship that there is “no class of case in which one ought more carefully to bear in mind the facts of the case”: Re Coomber; Coomber v Coomber [1911] 1 Ch 723 at 729 (Fletcher Moulton LJ). I have borne in mind that observation.
4 The three protagonists were Mr Thomas, Mr Sullivan and Mr Willett. Other witnesses also played roles, but they were less important. Two of these were Mrs Willett and Mrs Liddlelow, Mr Willett’s former secretary. I have had the considerable advantage of seeing and hearing the evidence unfold over almost a month. During that period I have been able to observe, at close range, each of the protagonists, as well as all of the other witnesses. Mr Thomas was cross-examined over seven days, Mr Sullivan over four days and Mr Willett over four days.
5 Numerous questions of competing credibility arose. It is tempting to base my factual findings on those questions by reference to “the subtle influence of demeanour”: Abalos v Postal Commission (1990) 171 CLR 167 at 179 (McHugh J). But there were insufficient indicators of demeanour one way or another, and except in an obvious case, I doubt the ability of a judge to discern the truth from a witness’ demeanour: Patrick Devlin, The Judge, Oxford, Oxford University Press, 1979 at 63 (cited in State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (1999) 160 ALR 588 at 617-8). I prefer the approach of Atkin LJ in Société d’Avances Commerciales v Merchants’ Marine Insurance Co (1924) 20 Ll.L Rep 140 at 152 (also cited in SRA v Earthline (supra) at 617):
An ounce of intrinsic merit or demerit in the evidence, that is to say, the value of the comparison of the evidence with known facts, is worth a pound of demeanour.
6 In any event, the resolution of the competing questions of credibility did not, by itself, enable me to determine the true facts on all of the many issues that have arisen. Credibility was important, but it was not always the only relevant factor. In general, I have endeavoured to reach my conclusions on the issues of fact by reference to the probabilities, after comparing the evidence of the witnesses with the proved facts and the competing accounts. The assessment of the credibility of the witnesses was a part of that process and I deal with it separately later in this judgment at paragraphs [82] – [87].
7 However, because the trial was lengthy, the exhibits numerous, the factual issues multiple and the submissions detailed, there are practical limits to the extent to which it is possible to explain all of the considerations and impressions that have led me to the conclusions of fact that I have reached. This feature of complex factual cases was explained in SRA v Earthline (supra) at 619 (per Kirby J). Lord Hoffmann had used similar language a few years earlier in Biogen Inc v Medeva PLC [1997] RPC 1 at 45:
- … specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance … of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation.
8 In this case, the primary events took place 10 to 12 years ago. The evidence of all witnesses was fallible. Sometimes it was even fanciful. This was partly because of the passage of time and the absence of corroborative documents, and partly because the witnesses’ processes of memory and reconstruction were overlaid by perceptions of self interest: Watson v Foxman (1995) 49 NSWLR 315 at 319 (McLelland CJ in Eq). The degree to which perceptions of self interest affected the evidence, and whether that effect was subconscious or deliberate, varied between the witnesses.
9 At a general level only, I thought that Mr Thomas and Mr Sullivan overstated and exaggerated their case. On the other hand, the evidence of Mr & Mrs Willett was somewhat unpersuasive. Each was present in court and followed intently the evidence of Mr Thomas and Mr Sullivan. When their time to give evidence eventually arrived, each was defensive, and sought to deflect any possible criticism by a considered process of denial and non-recollection. Only when they perceived that a question was not threatening, did they occasionally open up. Sometimes these answers were revealing. I have explained in detail, later in this judgment, why I have taken an adverse view of Mr Willett’s evidence.
10 Ultimately, after putting aside evidence that was irrelevant, inconsistent, exaggerated or plainly false, I thought there was an irreducible core on which I was able to act, because it was consistent with the probabilities, the contemporaneous documents, the undisputed facts and the evidence of other witnesses on relevant issues. This has led me to conclude that Mr Thomas and Mr Sullivan should succeed, but not on all issues, and not against all defendants. It is necessary at the outset to explain the relationship between Mr Thomas, Mr Sullivan and Mr Willett.
Mr Sullivan
11 Mr Sullivan is a man of limited education. Apart from his experience as a commercial diver, he has had little in the way of a regular job or a regular income. During the period with which this case is primarily concerned, he was frequently occupied providing assistance to Mr Willett – delivering documents, assisting in Mr Willett’s office, signing papers, conducting the banking, liaising with Mr Willett’s clients including sportsmen, and helping with the computers in Mr Willett’s office. His only direct recompense for these services was the provision of a petrol card. No doubt Mr Sullivan saw benefits and opportunities in being able to associate and socialise with Mr Willett and the rugby league footballers that he managed. No doubt Mr Willett saw advantages in having at his disposal someone who was so willing to assist. Mr Sullivan agreed with the description of himself as a “gofer” for Mr Willett, no doubt because it was in his interest to do so. But I do not think that it was too far from the truth. He added, quite fairly, that he was always willing to learn. And he showed a keen interest in doing so.
12 Mr Sullivan and Mr Willett had first met at Cronulla High School. Mr Sullivan left the school in 1967, aged 15, and undertook a plumbing apprenticeship. Throughout the 1970s he had some social and business association with Mr Willett, who was training to be an accountant and was also known as a rugby league player in the Cronulla district. Mr Willett or his office prepared Mr Sullivan’s tax returns for many years through the 1970s to the 1990s. I am satisfied that he gave some advice and assistance to Mr Sullivan in connection with the purchase of a small business known as the “Juice & Jaffle Bar” in Cronulla in 1977. This business was short lived. In 1978 Mr Sullivan commenced a commercial diving course with Mr Thomas. Later, in 1984, Mr Sullivan was a guest at Mr Willett’s wedding.
13 The relevant events in this case commence in 1998, but during the preceding years, a series of transactions took place which help explain the nature of the relationship that developed between Mr Sullivan and Mr Willett. They also reveal a pattern of behaviour on Mr Willett’s part which, I have concluded, continued during the period 1998 to 2002. The essence of that behaviour was an ability to persuade other persons to part with their money for investment in transactions in which Mr Willett was interested – directly or indirectly.
14 These earlier transactions involving Mr Sullivan and Mr Willett were as follows:
(a) In March 1984, Mr Sullivan received approximately $28,000 from his brother in connection with the sale of a unit. The monies were invested with the firm of T H Waters Halpin & Co. By January 1985, the proceeds of the investment had become $30,427. Mr Willett recommended to Mr Sullivan that he lend those monies to Mr Willett’s father-in-law. Mr Willett said that he would guarantee the loan and it would be as if it were a loan to him. Mr Sullivan lent the monies;
(b) In March 1987, Mr Sullivan had available $65,000 following the sale of some flats and the purchase of a cheaper house for his mother in Port Macquarie. Mr Willett recommended to Mr Sullivan that he place those monies in his firm’s trust account. Mr Sullivan did so;
(c) In December 1994, Mr Sullivan received $317,000 as the first instalment of a lump sum payout consequent upon a diving injury. Mr Sullivan informed Mr Willett about those monies. In January 1995 Mr Willett asked Mr Sullivan if he could lend $50,000 as a favour. The borrowers were Kelly Willett, Debra Willett, Barbara Hekking and Pauline Young. Mr Sullivan lent the monies;
(d) In December 1995, Mr Sullivan received a second payment of $450,000 consequent upon his diving injury. He informed Mr Willett about the payment. The following month, Mr Willett put a proposal to Mr Sullivan in relation to a loan of $100,000 to a company owned by a client of his. The company was North Shore Furniture Rentals and the client was Chris Rylands. Mr Willett said that he would personally guarantee the loan. Mr Sullivan lent the monies;
(e) Two months later, in March 1996, Mr Willett requested Mr Sullivan to lend a further $50,000 to North Shore Furniture Rentals and that he would personally guarantee the loan. Mr Sullivan lent these monies as well;
(f) Later in March 1996, Mr Willett asked Mr Sullivan to make another loan to a client of his in the sum of $15,000. Mr Sullivan did so;
(g) In March 1997, Mr Willett proposed to Mr Sullivan that he become involved in a business importing furniture from Indonesia which Mr Willett, Mrs Willett and Chris Rylands were going to start. Mr Sullivan was unwilling to be involved. Mr Willett then asked if Mr Sullivan would lend $20,000 for a container load of furniture in connection with the business. Mr Sullivan did so;
(i) Also in 1997, Mr Willett obtained Mr Sullivan’s agreement to contribute to the purchase and redevelopment of a property known as 40 Kirkwood Road, Cronulla. Mr Sullivan contributed 50% of the purchase price. In a pattern that was often later repeated, Mr Willett’s contribution came not directly from his own resources, but from funds said to have been lent by a client, Mr Hopwood, and obtained from his mother-in-law, Gloria Campbell.(h) In July 1997 Mr Willett discussed with Mr Sullivan a loan of $50,000 to assist Eugene King. He told Mr Sullivan that he would personally guarantee the loan. Mr Sullivan lent the monies.
15 Mr Sullivan’s credit was attacked and I will return to it. I formed the view that he was not only foolish and commercially naïve, but also simple, and easily led. In connection with the business of SMP, he did not always behave with complete honesty. But nor did Mr Willett. I concluded that Mr Sullivan placed considerable trust and confidence in Mr Willett and was prepared to do what Mr Willett requested him to do. Mr Willett, on the other hand, privately regarded Mr Sullivan with disdain. Mrs Liddlelow, who was Mr Willett’s personal secretary from 1996 to 2002, recalls Mr Willett describing Mr Sullivan in words to the following effect: “Sul is nothing but a dumb-arse diver. He’s got brain damage from diving.” Mrs Liddlelow’s credit was also attacked and I will return to it.
Mr Thomas
16 Mr Thomas’ history before 1998 was as follows. When he left school at the age of 15 years, he obtained an apprenticeship as a fitter, machinist and welder. After completing a commercial diving course, he worked as a hyperbaric welder and diver in the oil industry until 1988. He then became a commercial fisherman. He leased an abalone fishing licence and carried on business from Eden on the far south coast of New South Wales. In 1989 he was involved in a serious motor vehicle accident and spent the next 11 months in the Spinal Ward at Prince Henry Hospital. He became a quadriplegic. He eventually received compensation in excess of $5 million. While he was in hospital, he exercised an option to purchase the abalone licence. He was only able to do so because of the generous assistance of Mr Sullivan who provided security over his own home to Mr Thomas’ lender. Although physically incapacitated, Mr Thomas was able to conduct the business by leasing a fishing boat and employing a diver and deckhand. Like other abalone fishermen on the far south coast, Mr Thomas belonged to the Mallacoota Abalone Fishermen’s Co-operative.
17 From approximately 1980, Mr Thomas and his wife utilised the services of a local Bega accountant, Mr Kellow. He prepared their tax returns and incorporated a number of private companies for them as Mr Thomas endeavoured to make a living from various aquatic and agricultural ventures. Mr Kellow’s main area of work was taxation and the companies appear to have been established to minimise the incidence of taxation. The businesses themselves were simple and uncomplicated with few overheads and only an occasional contractor. Mrs Thomas was trained as bookkeeper but had limited ability to understand complex financial statements. Mr Thomas had even less ability to do so. He was an outdoors man who had neither the temperament, the talent, nor the interest, to master financial statements or the complexities of the retail clothing trade. He was no fool however and has demonstrated an aptitude for the successful conduct of his abalone fishing business.
18 The companies incorporated by Mr Kellow included Extraband Pty Ltd which was the trustee of a trust known as the Abalone Fishing Trust. E C & J M Thomas Pty Ltd which was the trustee of the Thomas Family Superannuation Fund of which Mr Thomas became a director in 1998; Aquaden Pty Ltd which was established to pursue, somewhat optimistically, the business of farming eels; and Tupelo Hill Pty Ltd which was a corporate beneficiary of the Abalone Fishing Trust. Cattle, sheep and deer, in insignificant numbers, generating only modest income, if at all, were farmed in partnership between Mr & Mrs Thomas. Mr & Mrs Thomas did not have a clear or complete understanding of the corporate structure. Nor does the corporate picture indicate any real commercial sophistication on their part. Given the valuable abalone fishing licence, and the size of his personal injury verdict, any prudent accountant could have been expected to advise and recommend similar structures.
19 By 1998, it is clear that Mr Thomas had several things in common with Mr Sullivan. They both had an acquaintance with Mr Willett during schooldays in Cronulla. Both left school at the age of 15 years and undertook trade apprenticeships. Both subsequently became commercial divers. Both suffered an injury which resulted in the payment to each of them of a substantial lump sum. Mr Sullivan’s total payments, as I have mentioned, were almost $800,000. Mr Thomas’ payment was in excess of $5 million. In summary, both were men of limited education with substantial monies at their disposal, who regarded Mr Willett as financially astute, materially successful and well positioned to assist them by advancing their financial interests.
Mr Willett
20 Mr Willett was at all material times a licensed tax agent. In 1978, he obtained a Certificate of Commerce (Accounting Practices) from TAFE. In 1986, he obtained a Bachelor of Business degree from UTS. Throughout the 1980s and 1990s and until 2007, Mr Willett carried on a tax and accounting business in Cronulla in partnership under the firm name of Willett & Associates. He was a long time Cronulla resident and was well known in the district. He grew up in Cronulla; went to school there; played rugby league football there; carried on business there; and married and resided there. His practice as an accountant and tax agent had many clients and appeared to be prosperous. In addition to his taxation and accountancy practice, he operated a seemingly successful sports management business, managing some of the most well known rugby league players in the NRL, as well as surfers and other sportsmen.
21 To persons like Mr Thomas and Mr Sullivan, Mr Willett would have exhibited all of the superficial trappings of material success. His counsel sought to downplay his commercial prowess, describing him as “just a suburban accountant who was no financial genius”. But these things are relative and a matter of perception. In any event, he was not just an accountant. I am quite satisfied that Mr Thomas and Mr Sullivan regarded Mr Willett as having skills, expertise, financial training and contacts that were beyond their own capacity or experience. I am also satisfied that Mr Willett knew that, in relation to the events and transactions that I will recount, Mr Thomas and Mr Sullivan trusted and depended on him. The starting point is the establishment of a company known as Softsand Design Investments Pty Ltd (SSDI) in 1998. The end point is the investment by Mr Thomas and Mr Sullivan in SMP in 2000.
SSDI - Establishment
22 Mr Willett caused SSDI to be incorporated on 24 September 1998. From that date, its registered office became “c/- Willett & Associates”. Mr Sullivan’s address, around the corner from the office, was given as the principal place of business. The company register contains a resolution made on 24 September 1998 by the shelf company director and shareholder. That resolution records the issue of one ordinary share to each of Mr Willett, Mr Thomas, Mr Sullivan and Mr Hankinson and the appointment of each of them as directors. Mr Hankinson was a builder. The formal notifications to ASIC relating to the issue of shares and the appointment of directors and office holders were signed as to some by Mr Willett, and as to others by Mr Sullivan. As at 24 September 1998, ASIC was notified of the issue of four ordinary $1 shares and of the appointment of the four directors. Mr Willett was the secretary as well as the firstnamed director. Mr Thomas and Mr Sullivan each signed an application for one share and a consent to act as a director. After 24 September 1998, with one possible exception, Mr Willett did not cause any meetings of the company, or its directors, to take place. The exception relates to a meeting of directors recorded in minutes dated 24 July 2000 and signed by Mr Willett as “Chairman”. I will return to it.
23 On 1 October 1998, Mr Willett lodged further documents with ASIC which included notice that Mr Hankinson ceased to hold office as a director and that the issued shares were then allocated as to Mr Willett (2 shares), Mr Thomas (1 share) and Mr Sullivan (1 share). The reason for the establishment of the company, at least initially, was the investment of Mr Thomas’ personal injury monies. That was the only money realistically available to SSDI from the shareholders at that stage. Somewhat surprisingly, shortly after its incorporation, Mr Willett owned 50% of SSDI’s issued capital.
24 Mr Willett says that this situation came about because, within a few days of the company’s incorporation on 24 September, it was decided that Mr Hankinson should not be a director or shareholder. He says that he discussed with Mr Thomas and Mr Sullivan what was to happen to Mr Hankinson’s share and that either Mr Thomas or Mr Sullivan said words to the effect: “Leave the two shares with you. We can sort it out later.” I reject this evidence. It is inconsistent with the explanation given by Mr Willett in proceedings in the District Court in 2008. I have grave doubts about the honesty of Mr Willett’s evidence on this issue. In the District Court proceedings, his explanation was that SSDI was initially established as a joint venture between him and Mr Sullivan. In these proceedings, he has said that from the outset, it was established as a joint venture of which Mr Thomas was a part.
25 Mr Willett’s evidence in the District Court was as follows:
Q. You made yourself a shareholder in this company without telling either Mr Sullivan or Mr Thomas didn’t you?
A. No Mr Thomas wasn’t coming into it at that time. The person who found the land was a man called Kas James and he told us after we’d done the development of Kirkwood Road, there was three blocks of land up in Bando Road that we should buy for a development. So I formed a company and there was going to be two shares Sullivan and two shares me. Then what happened was Sullivan said, “Mr Thomas wants to come in”, and so we went up there and we bought the land in the – but we’d already – because there was going to be four shares issued and that’s how come the four share part came about, and I had two and they had one each. Because he told me all Mr Thomas was going to be was we were going to do the deal with the St George Bank and he told me that Mr Thomas would come in and he’d finance the development. So they got a share each for their half and I got my two shares.
26 It is not possible to reconcile the explanation given by Mr Willett in the District Court proceedings with the evidence which he has given in these proceedings. Mr Willett also confirmed in his District Court evidence that at the time, he had no money to contribute to SSDI; that Mr Thomas was primarily putting the money in; and that he (Mr Willett) knew what a fiduciary was. For reasons which will become clear, I regard Mr Willett’s conduct in connection with his acquisition of a second share in SSDI as amounting to double-dealing.
SSDI’s Property Acquisitions
27 On 26 September 1998, two days after its incorporation, SSDI purchased three properties at auction. The properties had been identified by Mr Willett, with the assistance of a real estate agent, and were known as 5, 7 and 9 Bando Road, Cronulla. Mr Thomas was kept informed by telephone during the bidding. He supplied the total purchase price of $1.96 million and took three mortgages from the company to secure repayment, without interest, of the monies outlaid by him. On 23 April 1999, SSDI purchased another property known as 11 Marlo Road, Cronulla. The purchase price was $580,000. Mr Thomas also supplied the purchase price for this property.
28 The submission, on Mr Willett’s behalf, that the Marlo Road property was purchased “with a lot of Greg Willett’s money” did not have a proper foundation. Despite some tired and confusing oral evidence by Mr Thomas, the submission never accorded with Mr Willett’s own contentions, the competing affidavit evidence or the contemporaneous documents. In his affidavit, Mr Willett said no more than that he “may have supplied the deposit for Marlo Road” using funds borrowed from his mother-in-law, Gloria Campbell. He added that Mr Thomas supplied the balance of the purchase price of approximately $550,000. Mr Thomas’ affidavit evidence was to the same effect. He said that Mr Willett asked him to deposit $547,000 into the SSDI account for the purchase of the Marlo Road property. This tallies with the amount of $546,829 stipulated in the letter from Cassidy Gibson & Howlin dated 2 June 1999. That firm acted for SSDI on the purchase and was also Mr Willett’s solicitors.
29 On 20 August 1999, SSDI agreed to purchase another property. This property was known as 3 Bando Road, Cronulla. The evidence as to the payment of the purchase price for this property is less clear. Mr Willett stated in his affidavit that he recalled paying stamp duty of $40,494. Mr Thomas says in his affidavit that on 30 September, he transferred $370,000 to SSDI towards the purchase of this property.
30 Whatever the precise funding arrangements in relation to 3 Bando Road, Mr Willett was able to state in his affidavit that by mid-2000, SSDI was in a strong financial position. He said that it owned assets consisting of the properties known as 3, 5, 7 and 9 Bando Road and 11 Marlo Road, Cronulla having a total purchase price of $3.54 million. Mr Thomas contributed the vast majority of these purchase monies. In describing SSDI’s financial position, Mr Willett did not mention that he had become the holder of 50% of its issued share capital, or that, for a minimal outlay, he had secured a very advantageous position for himself, particularly at the expense of Mr Thomas. Neither Mr Thomas nor Mr Sullivan knew, or had any reason to suspect, that Mr Willett had acquired two shares in SSDI.
31 In 2002, the dispute which led to these proceedings emerged between Mr Thomas and Mr Sullivan on the one hand, and Mr Willett on the other hand. On 23 July 2002, Mr Willett resigned as a director and secretary of SSDI. The Bando Road properties were then sold. They had not been re-developed. Understandably, attempts were made by Mr Thomas and Mr Sullivan to ensure that Mr Willett did not become aware of the sale of those properties. When Mr Willett did become aware, he made no claim for 50%, or any other share, of the proceeds of sale received by SSDI. He brings no cross claim in these proceedings for any such share.
SSDI – Purpose
32 In these proceedings, Mr Willett characterised SSDI as a corporate vehicle that was established at the outset for the shared commercial exploitation of mutual investment opportunities – in which Mr Willett, Mr Thomas and Mr Sullivan were co-venturers, on an equal footing, who were prepared to take higher risks in return for higher correlative rewards.
33 On the other hand, in 1998 Mr Thomas was the recipient of very substantial monies from his personal injury verdict. Since 1997, those monies had been placed on deposit with Mr Thomas’ bank. In contrast, Mr Willett had no available monies. And Mr Sullivan had no immediate intention of investing monies in SSDI. It is understandable that Mr Thomas was open to suggestions and recommendations from Mr Willett about more effective investment. As Mr Thomas subsequently provided almost all of the funds for the properties purchased by SSDI, it is also understandable that he may have convinced himself that SSDI was his company – especially in the process of reconstruction by him since 1998, overlaid as it no doubt was, by his sense of injustice and perceptions of self interest, conscious or sub-conscious. He says he knew that the three of them were directors, but that he did not know they were all shareholders. Mr Sullivan’s evidence was to the same effect.
34 The truth, I think, was somewhere in between Mr Willet’s characterisation and the reconstruction of Mr Thomas and Mr Sullivan. In reaching my conclusion, I have had regard to the documentary evidence and the probabilities, the evidence of other witnesses that I accept, and my assessment of Mr Thomas, Mr Sullivan and Mr Willett. It necessarily requires me to reject Mr Willett’s explanation and much of the reconstruction of Mr Thomas and Mr Sullivan. The principal relevant factors are as follows:
(a) First, Mrs Liddlelow recalls, at the time of the establishment of SSDI, that Mr Willett said to her words to the effect: “Clydie needs his own company”. Notwithstanding his statement that Mr Thomas needed his own company, he then told her that there would be four shareholders and directors, Mr Thomas, Mr Sullivan, Mr Willett and Mr Hankinson;
(c) But third, I do not think that Mr Thomas and Mr Sullivan understood the implications. They assumed, I am satisfied, that their respective interests in the company were equivalent, at least initially, to the investment (if any) which each of them made. Hence in 1998, Mr Thomas rationalised that the company was for his benefit. And Mr Sullivan believed that he was assisting his friend, Mr Thomas, in a vehicle primarily designed for his benefit, but with some expectation of profit for himself. In my view, neither Mr Thomas nor Mr Sullivan, or for that matter Mrs Thomas, had an adequate understanding of the significance of ownership through a corporate vehicle. They started off thinking that the Bando Road properties might be redeveloped but did not know, or understand, how any redevelopment would be funded or how any profits on resale would be shared through SSDI.(b) Second, Mr Thomas and Mr Sullivan each received numbered share certificates. And in November 1998, after several requests of Mr Willett, Mr Thomas and his wife received a draft balance sheet of SSDI showing that the issued capital of the company was $4 constituted by four $1 shares. Mr Thomas and Mr Sullivan must have understood at the time that they and Mr Willett were not only directors, but also shareholders, of SSDI;
35 But whatever view is taken of the matter, Mr Willett’s conduct in bringing about a situation, within a short time after incorporation, where he held 50% of the issued shares of SSDI, was not honest. It was contrary to the natural expectations of Mr Thomas and Mr Sullivan and occurred without any meetings of the company or its directors being held. Mr Willett did not inform Mr Thomas and Mr Sullivan or obtain their consent. Nor did he contribute any significant monies to the purchase of the properties which SSDI acquired. He was, in my view, engineering an opportunity for himself. He perceived that it was not in his interest to be full and frank or to deal openly and directly with Mr Thomas and Mr Sullivan. He saw advantage to himself in opacity, obscurity and non-disclosure.
36 Over time, Mr Willett began to treat SSDI as if it were his own company, available for his private purposes. He already had another company, with a similar name, which fulfilled that purpose – Softsand Design Pty Ltd (SSD). Mr Thomas had no interest in SSD. For many years SSD had been the corporate vehicle through which Mr Willett had conducted the business of managing footballers and surfers, making investments and conducting transactions outside his tax and accountancy practice. He had been a director, and its major shareholder, since 1985. His mother-in-law, Gloria Campbell, had held the offices of director and secretary since 1989. In 1997, in connection with the joint purchase and development of 40 Kirkwood Road, Cronulla with Mr Sullivan, the latter was made a director of SSD and issued with 15 out of 198 A class ordinary shares. This represented 7.5% of its issued capital.
37 With increasing frequency, Mr Willett began to make deposits and payments into and from SSDI’s bank account relating to his personal affairs. These deposits and payments included amounts related to footballers (Phil Blake and Craig Gower), his mother-in-law, Gloria Campbell, clients of his taxation and accountancy practice (Chris Rylands and Michael Atkins) and other individuals with whom he was associated in some way (John Murray and Bob Norris). Even part of the proceeds of sale of a Willett family ski lodge was at one stage paid into the SSDI account. The evidence did not permit a thorough or reliable investigation of the source and origin of each deposit and payment. Among other things, Mr Willett contended that a great deal of his paperwork relating to SSDI was stolen. When I asked him whether he could think of any reason why someone might want to take his financial records relating to SSDI, or who any such person might be, he could provide no reason or identify any person.
38 On the other hand, the plaintiffs sought to put much evidence before me, of varying quality and admissibility, designed to show how, over time, many personal expenses of Mr & Mrs Willett were paid out of SSDI’s bank accounts. I accept that there were such payments, but it does not matter what the precise amounts were. Mr Willett freely admitted that historically, SSD was his family company into which he had put money from sports management and football earnings, as well as other activities outside his tax and accountancy practice. He explained that he changed his practice and started using SSDI for his private purposes because “Softsand Design did not have money, but SSDI did – because of the contributions initially made by Mr Thomas.” I have no doubt that, by July 2000, Mr Willett regarded SSDI as if it were his own. He believed that SSDI was a vehicle available for use in any further investments that he thought appropriate and that he could probably obtain further substantial financial contributions to any such investment from Mr Thomas and possibly from Mr Sullivan. This is what happened in connection with the SMP group commencing in July 2000.
SMP
39 In July 2000, Mr Willett was familiar with the SMP group of companies. As I have mentioned, the group manufactured and sold sporting, surfing, ski, skate and snowboarding clothing. The business was effectively owned and managed by Eugene King, a one time snowboarder who was not, I am prepared to infer, particularly commercially experienced or financially sophisticated. Mr Willett had known Eugene King since at least 1997 both socially and in a business sense. Before his involvement in SMP, Eugene King and someone called Bart Joseph had been in a business together importing snowboards. Mr Willett was Bart Joseph’s tax accountant and had meetings with both King and Joseph when he was instructed in relation to the separation and split up of that business. Mr Willett and Eugene King then had a continuing association through which Mr Willett gradually learned more about the business. Mr Willett’s footballer clients were taken to SMP’s premises in Surry Hills, frequently by Mr Sullivan, for the supply and fitting of sponsored clothing.
Representations
40 There is no doubt that by mid-2000, Mr Willett regarded SMP as an investment opportunity. He knew that it was under pressure from its banker, HSBC. He believed that it was not well managed under Eugene King. He considered whether the group should be allowed sink and the business bought back from the bank. He had formed the view that the brand was exciting and the cash flow substantial. He not only thought, but also told Mr Sullivan, and probably also Mr Thomas, that:
… everyone reckons SMP is a terrific brand and maybe this is a chance to invest at a good time and get in there early before it gets really big.
41 At around this time, Mr Willett was provided with turnover figures for the SMP business. It is more probable than not that he looked at other books and records of SMP. He asked for a list of debtors and creditors. As with some other areas of his evidence, and given the allegations of misrepresentation against him, he was predictably circumspect about what he saw, saying that he could no longer recall the figures with which he was provided. However, he acknowledged that the figures demonstrated to him that the business ought to have been generating a gross profit of about $5.5 million for the next 12 months. It is obvious that Mr Willett analysed the figures and reached a considered conclusion. He regarded the turnover as “huge”. He formed the view that the business had short term cash flow problems but was otherwise sound; that it had significant prospects; and that it was a potentially attractive investment opportunity. As usual however, Mr Willett himself had no available funds for investment.
42 Mr Willett had a number of discussions about investing in the SMP brand, first with Mr Sullivan and then with Mr Thomas. I have no doubt that he encouraged and enthused them. In a sense, he had nothing to lose as he had already made clear, at least to Eugene King, that all his funds were tied up, that he did not have a “cracker” and that he was not personally able to help. I do not think however that Mr Willett made a number of the specific representations that Mr Thomas and Mr Sullivan allege against him. There is no contemporaneous written corroboration of what Mr Willett is alleged to have said but Mr Thomas’ and Mr Sullivan’s account of Mr Willett’s representations tended towards hyperbole. The evidence of each of them on this issue was not, I think, knowingly false. But it was affected by their sense of grievance and the process of constant reconstruction and reaffirmation which they had undertaken since 2002.
43 For the reasons that I will make clear however, it is just as much what Mr Willett did not say, as what he did say, that justifies the claims against him. As to what he did say, I am quite satisfied that in July 2000, Mr Willett said to Mr Thomas and Mr Sullivan words to the effect that SMP was still in its global infancy and rocketing in the right direction; that it just needs our financial guidance; that Willett & Associates will now be involved as accountants; that SMP will perform a lot better with our management and accountancy skills; I have reviewed the figures and the turnover is huge; that the potential growth looks fantastic; and we are now in full financial control of SMP. I am also satisfied that he said that the SMP brand would be as big as Billabong. Nor do I have any doubt that after 24 July 2000, Mr Willett was in the habit of saying words to the effect that – we saved SMP; I am in control; SMP is my company; and without me SMP would no longer exist.
44 I am satisfied that Mr Willett conveyed to Mr Thomas and Mr Sullivan that he was offering them a special opportunity. He said that he could do the SMP investment with his footballers and clients, but that he wanted to do it with Mr Thomas and Mr Sullivan. In fact, he also obtained monies for investment in SMP from some of his clients. Mr Willett also made clear that the vehicle for the investment in SMP would be SSDI. Mr Thomas and Mr Sullivan remained unaware that Mr Willett held 50% of SSDI’s issues shares. Mr Willett said that whatever each of them put in would be “recorded in our loan accounts with SSDI and reconciled at the end.”
Mr Willett in Control
45 The contemporaneous evidence supports the inference that Mr Willett took charge of SMP, at least from 24 July 2000. On that day, Mr Willett signed the minutes of a meeting of directors of SMP. That company owned the shares in SSS which was the company that generated the sales turnover. Mr Willett described himself in the minutes as “Chairman” of SMP International. Eugene King is also recorded as being present at the meeting. He had previously been in effective practical control of the SMP group’s day to day affairs. It is obvious that Eugene King relinquished control in favour of Mr Willett. The subject of the meeting was the cancellation of the payment of royalties by SSS to SMP International in order to improve the cash flow of the former.
46 Also on 24 July 2000, Mr Willett signed minutes of a meeting of directors of SSDI, describing himself as “Chairman” of that company as well. The minutes record that SSDI will receive “50% of all the companies and the international companies” in the SMP group. They also record that SSDI’s aim was to reduce SMP’s loans to HSBC by $500,000, by injecting approximately $600,000 cash flow and that Eugene King was to get a share of the profits (in an amount that was not yet decided), if the Bando Road properties were redeveloped. This agreement was further recorded in a letter dated 25 July 2000, on the letterhead of Willett & Associates, from Mr Willett to the directors of SSDI, being Mr Thomas, Mr Sullivan and himself.
47 Thus, in less than two years since the establishment of SSDI on 24 September 1998, Mr Willett had brought about the following series of events. Having started with the $1.96 million which he had recommended that Mr Thomas outlay for the acquisition of the Bando Road properties by SSDI, he was now SSDI’s self appointed “Chairman” and the holder of 50% of its issued capital. He had ceased to use his family company (SSD) and had commenced to use SSDI as if it were his own company, available for his private affairs and transactions. He had an agreement in principle for SSDI to acquire 50% of the issued share capital in the SMP group, namely SMP International, SSS and a third company known as SMP Clothing Pty Ltd. He was also now the “Chairman” of SMP International and, for the time being, appeared to be in day to day control of the group’s affairs. He managed to achieve all of this without contributing in any significant way to the purchase of the Bando Road and Marlo Road properties in 1998 and 1999. And he had made clear in July 2000, that he personally had no available funds to invest in SMP.
Payments by Mr Thomas
48 In this context, and from the advantage of his position as “Chairman” of the SMP group and “Chairman” of SSDI, Mr Willett asked Mr Thomas in July 2000 to provide $1.5 million to enable the SMP group to overcome its short term cash flow problems. Over the next two months, from 28 July to 29 September 2000, Mr Thomas made the following payments totalling $1.4 million for the benefit of SMP at Mr Willett’s request and direction - $200,000 (28 July), $300,000 (4 August), $200,000 (9 August), $100,000 (22 August), $100,000 (23 August), $100,000 (23 August) and $400,000 (29 September). On 12 October 2000, Mr Thomas made a further payment of $75,000 for SMP’s benefit at Mr Willett’s request and direction.
49 Mr Willett said he had no recollection of having any discussions with Mr Thomas about these monies. But this is sophistry. I reject this evidence. Among other things, there are instances of emails to Mr Thomas from Mr Willett’s secretary conveying requests from Mr Willett for monies. For example, on 22 August 2000, in relation to one of the amounts that Mr Willett requested, his secretary, Mrs Liddlelow sent an email to Mr Thomas commencing with the words: “Greg asked for $100,000 to be deposited into Capital Textiles Pty Ltd bank account …” and ending: “Greg said he would ring you tonight”.
Events between 24 July and 4 September 2000
50 On 4 September 2000, a more formal agreement relating to SSDI’s acquisition of 50% of the SMP group, was signed by Eugene King. Between 24 July and 4 September, a number of events occurred relating to Mr Willett’s fundraising from Mr Thomas and Mr Sullivan in connection with SMP. Those events reinforced the course on which he had embarked with them:
(a) In late July, Mr Manauzzi, the external accountant for SMP and Eugene King, attended a meeting with Mr Willett at the offices of Willett & Associates. Eugene King was present and said to Mr Manauzzi in Mr Willett’s presence: “Willett & Associates will be taking over doing the books for the SMP group and they will be running everything to get me into line”;
(b) On 28 July, Mr Willett attended a meeting on behalf of SMP with HSBC. Others present were Mr Manauzzi, Donna King, a footballer by the name of Phil Blake and Mr Sullivan;
(c) Between 31 July and 4 August, Mr Willett attended the premises of SMP or had meetings in connection with SMP almost every day;
(d) On 8 August, Mr Willett attended another meeting on behalf of SMP with HSBC (Mr Ian Watson). Mr Sullivan accompanied him. Mr Willett mapped out a plan to reduce SMP’s indebtedness;
(e) On 11 August, HSBC wrote to Mr Willett, at Willett & Associates, noting that he had been appointed by Eugene King to negotiate with the bank on SMP’s behalf. The letter put forward a proposal for the restructure of the debt facilities of SSS;
(f) On 14 August, Mr Willett signed a personal guarantee of a loan of $500,000 to Mr Sullivan from Perpetual Trustees Victoria. The guarantee was necessary because Mr Sullivan had no employment or income. The loan was secured over Mr Sullivan’s property at 40 Kirkwood Road, Cronulla and the proceeds were intended for investment in SMP. Mr Sullivan, to Mr Willett’s knowledge, had no independent means of meeting the loan repayments;
(g) On 15 August, Mrs Willett and Mr Sullivan travelled together to review SMP’s operations in the United States. I think that it is fair to say that Mr Willett “sent” them. Mrs Willett said she only went for shopping but I regard this as disingenuous. Their purpose was to review the business operations and finalise and document the agreement for SSDI’s acquisition of 50% of the SMP group;
(h) On about 19 August Mrs Willett returned to Australia. Mr Sullivan remained in California to finalise SSDI’s agreement with the SMP group;
(i) On 25 August, Mr Willett wrote to Mr Markovitch from K2 Inc regarding a payment schedule in respect of the amounts outstanding to K2 Inc for the SMP trademark;
(j) Later on 25 August, Mr Sullivan, at SMP’s offices in California, sent a fax back to Mr Willett and Mr Thomas stating that K2 needed a more substantive letter;
(k) On 28 August, a more substantial letter to K2 was composed and faxed from Mr Willett’s office. It was on the letterhead of SSD, Mr Willett’s own company. Mr Willett denied signing it but I am satisfied that he composed and was responsible for it. The letter contained a number of extravagant and false representations in support of a proposal for the payment of the monies outstanding to K2 Inc;
(l) On 31 August, Mr Thomas’ solicitors (Beston, Macken McManis), who had acted for him in his personal injury litigation, became involved. They did so with Mr Willett’s knowledge and approval. They sent to Mr Sullivan in California, a letter agreement relating to the transfer to SSDI of the 50% interest in the SMP group for signature by Eugene King;
(m) On 1 September, Beston, Macken McManis sent a revised form of letter agreement to Mr Sullivan for Eugene King’s signature;
(o) Also on 4 September, Mr Willett’s solicitors, Cassidy Gibson Howlin wrote to Mr Sullivan confirming that his mortgage advance of $500,000 had been paid to SMP’s bank, HSBC.(n) On 4 September, Eugene King on behalf of SMP, and Mr Sullivan on behalf of SSDI, signed the letter agreement together with a handwritten annexure;
Mr Willett & Mr Sullivan in SMP’s Business
51 After the 4 September 2000 agreement had been secured, both Mr Willett and Mr Sullivan threw themselves into the SMP business. For the next few months, Mr Willett attended SMP’s premises at least several times each week. Mr Sullivan, who had no gainful employment, was there almost every day. Business cards were printed describing Mr Willett, Mr & Mrs Thomas and Mr Sullivan as directors of SMP Clothing. Mr Willett signed SMP cheques. Mr Sullivan busied himself in daily operations including liaising with retailers and suppliers and co-ordinating the transport of stock. Mr Willett reviewed SMP’s trading account including the income tax returns that had been lodged for SSS. He prepared a general ledger based on bank account statements. He also arranged for the SMP group to transfer its banking from HSBC to the National Australia Bank. Mr Willett had a subsisting relationship with Neil Gard at the NAB.
52 After 12 October 2000, with one later exception, Mr Thomas refrained from making any further payments to, or for the benefit of, SMP. He began to feel uneasy about the amount of money that he had been persuaded to invest. I have no doubt that, at least initially, Mr Thomas had been encouraged by Mr Sullivan. But the more powerful and influential force was always Mr Willett. Mr Sullivan, because of his trust and confidence in Mr Willett, his simplicity, and his propensity to be easily impressed, was blinded by him.
Subsequent Events
53 By January 2002 it had all begun to unravel and the truth emerged. But there were a number of other events that I must mention to complete the intervening picture:
(a) In November 2000, to assist with SMP’s funding, Mr Willett organised an $800,000 overdraft facility for SSDI and a documentary line of credit and debtor finance facility for SSS, with the NAB, SMP’s new bankers. He sought and obtained the agreement of Mr Thomas and Mr Sullivan to guarantee the facilities, where required. Mr Thomas also reluctantly agreed to the provision of a mortgage debenture over SSDI’s assets, namely the Bando Road and Marlo Road properties. Mr Willett and Mr Sullivan executed the mortgage debenture on behalf of SSDI.
(b) Also in November 2000, Mr Willett caused the employment of Mr O’Toole, SMP’s manager in its premises at Surry Hills, to be terminated;
(c) In December 2000, Mr Willett arranged meetings at SMP’s premises at which he introduced Mr Ian Frykberg to Mr Thomas and Mr Sullivan as a potential new investor in the SMP group;
(d) In January 2001, as debts mounted, Mr Willett told Mr Thomas that SSDI’s Marlo Road property would have to be sold. The sale occurred in February and the proceeds were disbursed partly to, or for the benefit of, SSS and partly in reduction of SSDI’s existing indebtedness;
(e) In April 2001, Mr Frykberg became involved and commenced to make a number of substantial payments for the benefit of the SMP group. Mr Frykberg believed that he would receive one share representing a 25% interest in SSDI. This later became the subject of dispute when his accountant ascertained that Mr Willett already held two shares, so that Mr Frykberg’s share represented only 20% of SSDI;
(f) In May 2001, as debts continued to mount, Mr Willett caused SSDI’s overdraft facility with the NAB to be increased from $800,000 to $1.2 million;
(h) In July 2001, Mr Frykberg gave notice that he was resigning as a director of SSDI;(g) In June 2001, Mr Thomas and his wife, became more and more concerned with what they perceived was Mr Willett’s inability or unwillingness to furnish adequate documentation and make adequate disclosure to them about SSDI and SMP and their financial commitment to those companies;
54 During the second half of 2001, more money was paid to SMP or its creditors. Mr Willett continued to draw cheques on the SSDI bank accounts, especially the NAB overdraft account which he had established. He maintained the cheque book for that account and since late 2000 many personal expenses of Mr Willett had been paid, and continued to be paid, from it. Cheques were also paid from that account for SMP’s purposes.
55 During this period, Mr Thomas in particular, and Mr Sullivan more slowly, gradually became suspicious and distrustful of Mr Willett. They received reports direct from the accounting staff at SMP and learned that things were not going as well as had been hoped. By 12 November 2001, Mr Willett became concerned himself. He wrote to Eugene King informing him that he wanted to resign as a director of SMP International.
56 In January 2002, Mr Thomas and Mr Sullivan became aware from Mr Cronin, who was Mr Frykberg’s accountant, that Mr Willett held two shares in SSDI. Then, in early February, Mr Cronin recorded in his notes that, in order to keep trading, SSS required an immediate injection of $3 million. On 12 February 2002, an agreement was entered into for the transfer to Mr Frykberg, Mr. Willett, Mr Thomas and Mr Sullivan of 85% of the remaining 50% of the SMP group still held by the King Family Trust. The agreement was predicated on SSDI having already acquired the other 50% of the SMP group in September 2001- although no documentation relating to the transfer of shares to SSDI had ever been lodged with ASIC. The February 2002 agreement was never implemented and nothing eventuated.
57 By April 2002, Mr Thomas had ceased to speak to Mr Willett. Mr Thomas’ solicitor, Mr Macken, attended meetings on his behalf and became engaged in discussions for the sale of the SMP group. One proposal was for the sale of SMP to the Bart group. Nothing came of it. On 17 May 2002, Eugene King caused SMP International to terminate the licence of SSS to use the SMP brand and trademark. On 27 May, voluntary administrators were appointed to SSS. On 29 May, the NAB appointed receivers of its assets.
58 The final blow occurred when on 27 May 2002, unknown to either Mr Thomas, Mr Sullivan, Mr Frykberg or Mr Willett, Eugene King caused SMP International and the King Family Trust to enter into an agreement with Garment Corporation Pty Ltd. The agreement provided for Garment Corporation Pty Ltd to subscribe for shares in SMP International to a maximum amount of $2 million. The intended result was that Garment Corporation and the King Family Trust would each hold 50% of the issued capital in SMP International. SSDI’s supposed 50% interest in the SMP group arising from the 4 September 2000 agreement, in relation to which no share transfer documents had ever been lodged, was ignored.
Further Payments by Thomas & Sullivan
59 During the whole of this period, and in addition to their initial investments of $1.475 million and $500,000 that I described in paragraphs [48] and [50(o)], there were more payments by Mr Thomas and Mr Sullivan which they claim to recoup:
(b) On 9 October 2000, Mr Willett drew a cheque for $100,000 for the benefit of SMP. This resulted in SSDI’s bank account again being overdrawn. The overdrawn amount was approximately $73,000. Mr Willett spoke to Mr Thomas, saying that he personally had no money to cover it. He requested Mr Thomas to deposit $73,000 into SSDI’s account. Mr Thomas did so on 12 October;(a) On 27 September 2000, Mr Willett drew a cheque on SSDI’s bank account for $50,000 for the benefit of SMP payable to Capital Textiles. This resulted in the SSDI account being overdrawn by approximately $32,000. This was covered by a deposit of $50,000 into the SSDI account on 28 September which Mr Willett is said to have procured from Bart Joseph. Mr Sullivan claims this money because he contends that Bart Joseph’s $50,000 was in fact owed to him and that he has not been repaid that sum by either Mr Willett or Bart Joseph. The evidence in relation to this transaction is not sufficient to enable me to conclude that Mr Sullivan is entitled to recover the $50,000 from Mr Willett. Nor, as a matter of legal analysis, does it appear necessarily correct that those monies are owing by Mr Willett to Mr Sullivan;
(c) On 23 November 2000, Mr Sullivan received a cheque for $30,313 from the Public Trustee in respect of his father’s estate. Mr Willett urged him to put the money into SMP. Mr Sullivan, as he had done on numerous other occasions, did as Mr Willett suggested;
(d) On about 18 September 2001, Mr Willett asked Mr Sullivan if he could use his Mastercard to pay obligations of SMP. I accept that, on this occasion, it is probable that Mr Willett said not only that SMP will make your repayments but also that “If there is a shortfall, I will pay you back personally”. Mr Sullivan incurred indebtedness of $14,060 on his Mastercard which neither SMP nor Mr Willett repaid;
(f) Finally, on 12 February 2002, on the day on which the agreement for the transfer of 85% of the remaining 50% of the shares in SMP International and SSS was entered into, and after Mr Thomas had become aware that Mr Willett had concealed his ownership of two shares in SSDI, Mr Thomas paid another $92,000 for SMP’s benefit. These monies are not recoverable from Mr Willett. Mr Thomas paid them in response to a request from Mr Frykberg at a time when he was already aware that Mr Willett had failed to behave honestly towards him. Mr Frykberg is not a defendant.(e) On about 18 December 2001, Mr Sullivan obtained a bank cheque for $170,000 which he caused to be paid into the account of SSS. I accept that having already borrowed $500,000 to contribute to SMP, Mr Sullivan was reluctant to make available any further monies. He did so because Mr Willett requested and encouraged him to do so;
105 The transfer of shares was never effected. But I do not think that there is a proper basis for recovering damages from David King as a result of the non-transfer. Nor is there any admissible or persuasive evidence from which I could infer the value of the lost entitlement, even if David King were otherwise liable. It is quite apparent that many different commercial considerations were in play over the next few months after the agreement was entered into. There was a fundamental change in approach. Discussions took place with the Bart group over a possible sale. Mr Macken, Mr Thomas’ solicitor, wrote letters concerning the possible sale. Mr Sullivan was involved. There was a real likelihood that the NAB would foreclose. The parties appeared no longer to wish to support and fund SMP, but to sell it.
106 Thus, the 12 February 2002 agreement appears to have been overtaken by events. From a commercial perspective, it appears to have been ignored. This explains why, although it was open to him to do so, Mr Sullivan did not execute the share transfer documents on behalf of the vendor. The agreement provided that he could do so, as the attorney for David King, if King had not done so within seven days of delivery of the documents to him. There no longer seemed to be any commercial will to carry out and perform the agreement. The claim for damages for breach of the 12 February 2002 agreement is at odds with the commercial realities. It must therefore fail.
Conclusion
107 The evidence in this case ranged widely but much of it, on all sides, was difficult to accept and inherently fallible for the reasons that I have explained. The clearest verity to emerge was Mr Willett’s duplicitous conduct in taking advantage of Mr Thomas and Mr Sullivan to advance his own financial interests. There should be an award of equitable compensation to make good the losses which they suffered which were occasioned by his breach of fiduciary duty.
Costs
108 In my view, this is an appropriate case for a Sanderson order. I therefore propose to order the unsuccessful defendant (Mr Willett) to pay the costs of the successful defendants (Mrs Willett and Mr King) as well as the plaintiffs’ costs. A Sanderson order will avoid circuity and is reasonable in the circumstances. It is also fair because the wrongful conduct of Mr Willett was the root cause of the litigation and the joinder of Mrs Willett and David King was a reasonable response by Mr Thomas and Mr Sullivan to the predicament which they faced. An additional factor of which I have taken account is that the evidence indicated the possibility that Mr Willett may not himself own substantial assets and that it was his general practice to ensure that his wife was the owner of real estate which they both enjoyed. In those circumstances, and having regard to Mr Willett’s primary responsibility for the losses suffered by Mr Thomas and Mr Sullivan, it would be an unfair result if Mr Thomas and Mr Sullivan were required to pay the costs of the third and fifth defendants. However, if the parties wish me to do so, I will hear submissions on costs.
Interest
109 In accordance with well established principles applicable to defaulting trustees and fiduciaries, where the breach of duty was deliberate and wilful, interest should be compounded: Hungerfords v Walker (1989) 171 CLR 125 at 148. If the parties wish me to do so, I will hear submissions on interest.
Orders
110 Subject to those matters, I propose to make orders that the fourth defendant pay equitable compensation to Mr Thomas and Mr Sullivan in the amounts specified in paragraph [76]. Interest at the rates prescribed under the Uniform Civil Procedure Act (NSW), 2005, compounding, should be calculated from the date of each payment. The claims against Mrs Willett and Mr David King should be dismissed. The fourth defendant should pay the costs of the plaintiffs and of the third and fifth defendants. The plaintiffs should bring in short minutes of order to reflect these reasons. Attention should be given to the position of the defendants `who did not appear. The exhibits may be returned.
28/09/2010 - Amendment to list of authorities - Paragraph(s) Cover sheet 05/10/2010 - Hearing dates corrected - Paragraph(s) Cover sheet
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