Underwood v CGP (Aust) Pty Ltd
[2010] VCC 1150
•5 November 2010
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL – EXPEDITED DIVISION
Case No. CI-09-04391
| DARREN UNDERWOOD | Plaintiff |
| v | |
| CGP (AUST) PTY LTD | Defendant |
| and | |
| CGP (AUST) PTY LTD | Plaintiff by Counterclaim |
| and | |
| COLIN JAMES PARKES | Second Plaintiff by Counterclaim |
| v | |
| DARREN UNDERWOOD | Defendant by Counterclaim |
| and | |
| BUSINESS FINANCE SOLUTIONS PTY LTD | Third Party by Counterclaim |
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JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 1-5 March; 2 September and 14 October 2010 | |
DATE OF JUDGMENT: | 5 November 2010 | |
CASE MAY BE CITED AS: | Underwood v CGP (Aust) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2019] VCC 1150 | |
REASONS FOR JUDGMENT
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Catchwords: CONTRACT – accountant – whether engaged in accountancy practice pursuant to terms contained in written document – whether an employee – proposed change in position – whether repudiation of contract or resignation by employee – employer’s counterclaim – alleged payment for duties not performed – claim for retransfer of shares to be purchased by plaintiff but not paid for – whether an agreement had been reached for employer to purchase a share in employee’s business – claim for share of profits.
PRACTICE AND PROCEDURE – application to amend statement of claim after judgment reserved – issue raised by Court – County Court Rules of Civil Procedure, Rule 36.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A J McDonald and Mr A Downie on 14 October 2010 | McDonald Murholme |
| For the Defendant | Mr D G Guidolin | Baker Jones |
HIS HONOUR:
1 Mr D Underwood, an accountant, sues CGP (Aust) Pty Ltd, which conducts an accountancy practice, claiming that he was employed under a written contract dated 25 May 2005, which was wrongly terminated on 22 January 2009. He ceased work with CGP on that day.
2 After judgment was reserved and following the relisting of the proceeding in the circumstances described below, Mr Underwood applied to amend his statement of claim to rely on a contract of employment created by implication. This application was argued on 14 October 2010. I informed the parties that I would reserve my judgment on the amendment application and if I allowed the amendment would give reasons for that decision and give directions for the further conduct of the proceeding and if I did not allow it, I would deliver my reasons for judgment in the proceeding and include my reasons for not allowing the amendment. I have decided not to allow the amendment for the reasons set out below.
3 Mr Underwood makes two claims against CGP. First, for the sum of $204,753.00, being the difference between the amount paid to him and the amount that he would have received had he been paid at the rate set out in the written agreement of 25 May 2005. Second, he claims damages for repudiation of contract consisting of twelve months’ pay in lieu of notice in the sum of $120,000.
4 CGP counterclaims alleging that Mr Underwood was paid for 305 days when he did not perform work and claiming the repayment of the money paid to him for work on those days. The counterclaim also alleges that Mr Underwood and his company Business Finance Solutions Pty Ltd, which was joined as a defendant to the Counterclaim, breached an agreement to transfer to CGP fifty per cent of the shares in Business Finance Solutions. A share of profits is claimed.
5 Mr C Parkes, a director of CGP, also counterclaims against Mr Underwood seeking the return of twenty shares in MEBC Pty Ltd, that Mr Parkes transferred to Mr Underwood, because he failed to pay the agreed purchase price of $200,000 for them. MEBC provides office accommodation and conference facilities in CGP’s office.
6 The issues for determination are:
Issues arising from Mr Underwood’s Claim
· Issue 1: was Mr Underwood engaged by CGP on the terms contained in a letter by Mr Parkes to the Bank of Melbourne dated 25 May 2005?
· Issue 2: if no, should Mr Underwood be permitted to amend his statement of claim to allege that he was employed by CGP under an implied contract of employment?
· Issue 3: was Mr Underwood an employee of CGP?
· Issue 4: did Mr Underwood resign his employment on 22 January 2009 or did CGP terminate his contract?
· Issue 5: if CGP terminated Mr Underwood’s contract of employment, what remedies does he have?
Issues arising from the Counterclaim
· Issue 6: was Mr Underwood paid by CGP for days on which he did not work?
· Issue 7: did Mr Underwood agree to retransfer to Mr Parkes twenty shares in MEBC?
· Issue 8: did Mr Underwood agree to transfer fifty percent of the shares in Business Finance Solutions to CGP?
Issue 1: Was Mr Underwood engaged by CGP on the terms contained in a letter by Mr Parkes to the Bank of Melbourne dated 25 May 2005?
7 Mr Underwood first met Mr Parkes in 2003 or 2004. In early 2005 Mr Parkes discussed with Mr Underwood the possibility of him becoming a partner in Burton & Parkes Pty Ltd, the predecessor of CGP. In 2005 the assets of Burton & Parkes were rolled over into CGP, which was created in part with a view to taking in new partners, whilst not affecting the capital gains tax free status of the assets of Burton & Parkes.
8 The other director and shareholder of Burton & Parkes was Mr J Moleta.
9 On 27 May 2005, Mr Parkes sent a letter dated 25 May 2005 on the letterhead of Burton & Parkes to the Bank of Melbourne headed “New Practice Partner Remuneration”:
“I refer to our past and recent discussions regarding the change of our practice name from Burton & Parkes to Capital Growth Partners.
You are aware that from 1 July 2005, Mr Darren Underwood will commence as a partner of the practice and will be entitled to remuneration as agreed between the existing partners.
Darren will be remunerated (sic) a salary package of $125,000 per annum inclusive of appropriate salary packaging options.
Please contact me if you need to discuss this any further.”
10 Mr Underwood’s case is based on that letter. No point was taken by CGP about the email being sent on the letterhead of Burton & Parkes.
11 The context of the letter of 25 May 2005 was as follows. As stated, from about January 2005 Mr Underwood discussed with Mr Parkes becoming a partner in Burton & Parkes.[1] Various business plans were prepared to consider Mr Underwood’s involvement as a partner. Various structures were discussed, but not completed.[2]
[1]see email of 19 January 2005 – Exhibit 5
[2]Transcript (“T”)T 104, T 115
12 On 19 January 2005, Mr Underwood sent an email to Mr Parkes entitled “Business Investment” that described two options for him to purchase a percentage of CGP and sell his stake in Business Finance Solutions. In respect of his financial capacity to purchase part of CGP, he stated:
“Based on the above, the cash to service my commitments would need to take account of the debt service of borrowings to purchase the stake along with servicing my other existing commitments. I have looked at my own income (refer Xcell Spreadsheet) and based on practice salary of $58K and drawings of $2,000/mth to my Trust, things will no doubt be a little tight. Admittedly this does not allow for distributions from BFS, Somersault and MEBC but I think we have a medium term plan and expect some reinvestment to ensure the life of these activities.”[3]
[3]Exhibit 5
13 According to Mr Parkes, he met Mr Underwood on 18 February 2005 and discussed his involvement in the practice. Profits would be split between the partners equally and he could expect at least a minimum of around $60,000 per annum.[4] He told Mr Underwood that if things went well he could expect further draw downs as cash flow allowed. Mr Moleta’s evidence supported Mr Parkes’ account of this conversation.
[4]T 315, T 319
14 Mr Parkes denied that he had told Mr Underwood that he would be paid $125,000 per annum. His evidence was that the practice would have been unable to support that level of remuneration.
15 Mr Underwood enquired from CGP’s bank, the Bank of Melbourne, about borrowing funds to raise finance for a potential investment in CGP. He drafted the letter of 25 May 2005, which he requested Mr Parkes to sign. Mr Parkes signed it on 27 May 2005 and it was sent to the Bank of Melbourne.
16 On 25 May 2005, Mr Underwood sent an email to an insurance agent about the total permanent disablement and death insurance policies available to him, Mr Parkes and Mr Moleta. He stated in the email that his:
“… imputed salary with CGP (Aust ) Pty Ltd to be $125K per annum with potential other income sources from Business Financial Solutions Pty Ltd, Somersault Network Pty Ltd and M.E.B.C. Pty Ltd.”[5]
[5]Somersault Network Pty Ltd was a loose network of associated businesses - T 31.
17 When Mr Underwood sent the letter to the Bank of Melbourne, he and Mr Parkes expected that he would become a shareholder in CGP.
18 Mr Parkes stated that the figure of $125,000 contained in the letter of 25 May 2005 was not true. He stated that he was being pressured by Mr Underwood to sign the letter and he had not given it much thought. He knew that the purpose of the letter was connected with Mr Underwood obtaining finance to purchase equity in the practice. When asked to agree in cross- examination that he did not tell Mr Underwood that the letter was untrue he answered “No, because we knew it wasn’t true”.[6] This evidence did no credit to Mr Parkes.
[6]T 451
Mr Underwood commences work with CGP
19 Mr Underwood commenced work for CGP on 1 July 2005. On that day he became a director of CGP and signed a guarantee of its debts. He never became a shareholder. He performed IT administration and work in connection with the acquisition of a new accountancy practice and for clients.
20 On about 1 July 2005 Mr Underwood, Mr Moleta and Mr Parkes and their respective family trust companies executed a document, which was referred to as a “Shareholders’ Agreement”. It recited that Mr Parkes’ family trust company owned 60 percent of the issued capital of CGP, and Mr Moleta’s and Mr Underwood’s 20 percent each. Despite that recital, the only share issued in CGP was issued to Mr Parkes,[7] although Mr Moleta considered that he had a twenty per cent equity in the practice. According to Mr Underwood, the document contained the basis of the arrangement that was envisaged at that time.[8]
[7]T 54
[8]T 57
21 Mr Underwood’s family trust company, Woodunder Pty Ltd, was formed to hold shares in the practice, should he acquire them, but that did not occur.
22 Counsel for CGP accepted in final submissions that on a “strict interpretation” as from 1 July 2005, Mr Underwood was an employee of CGP, as were Mr Parkes and Mr Moleta.[9] They were appointed directors of, and were entitled to, remuneration under clause 9.1 of the Shareholders’ Agreement, which contained, so it was said, the terms of the contract of employment. The Shareholders’ Agreement provided that each of the trust companies of Mr Parkes, Mr Moleta and Mr Underwood had the right to appoint directors, but any director was automatically deemed to be removed if their shareholding fell below twenty percent. The Shareholders’ Agreement did not create or evidence a partnership, a joint venture or a fiduciary relationship, or the relationship of principal and agent between the parties.
[9]T 544, L14-25
23 Mr Underwood stated that the salary component of his total remuneration package was $87,000 or $7,250 gross per month. He expected to receive a payment at the end of each month. His counsel argued that in addition, he was entitled to 9 percent superannuation contribution and fringe benefits. CGP’s payroll advices recorded his annual salary as $87,000, but Mr Parkes stated that this figure was inserted as a notional figure and was required in order for the computer program that prepared the advices to operate.
24 During his first three months at CGP, Mr Underwood was paid $6,250 per month. He was not paid between November 2005 and February 2006, or in April 2006 or August 2006.[10] In other months he was paid amounts less than $7,250 gross.
[10]T 48-55
25 According to Mr Underwood, he raised the non-payment with CGP’s bookkeeper, who referred him to Mr Parkes, who in turn told him that there were cash flow problems and that payment would be restored once cash flow improved. Mr Underwood and Mr Parkes occupied adjoining offices. Mr Parkes denied Mr Underwood’s account and stated that from time to time, Mr Underwood asked him how the cash flow was going and that he replied that CGP should be getting money in.
26 Mr Underwood’s tax returns state that he received the following gross payments from CGP: in the year ending 30 June 2006 $53,750; in the year ending 30 June 2007 $62,600; and in the year ending 30 June 2008 $67,335. In the period 1 July 2008 until 22 January 2009 he received $25,312 gross.
The Parties’ Submissions concerning the letter of 25 May 2005
27 Mr Underwood relied on the plain terms of the letter of 25 May 2005 as a statement of his total remuneration package of $125,000. He also pointed to his email to the insurer. His counsel drew attention to the amount that Mr Underwood agreed to pay to enter the business and suggested that this reflected a belief, encouraged by Mr Parkes, that he was going to make a lot of money. He argued that Mr Parkes’ evidence about the letter of 25 May 2005 was untrue. He submitted that rather than complaining about non-payment, Mr Underwood had kept his head down and tried to make money for the practice.
28 CGP disputed that the letter contained evidence of a contract of employment and argued that its purpose was to assist Mr Underwood in obtaining finance. It had no contractual intent.[11]
[11]See Air Great Lakes Pty Ltd v KS (Easter) Holdings Pty Ltd [1985] 2 NSWLR 309, 316; Nicolazzo v Harb [2009] VSCA 79 at [88]-[89] and Equuscorp Pty Ltd v HGT Investments Pty Ltd [2002] QCA 380
29 In final submissions, counsel for CGP agreed with the proposition that the letter was a sham, designed to tell the bank one thing when something else was the case.[12]
[12]T 520
30 CGP submitted that the only contract that was made with Mr Underwood was the Shareholders’ Agreement of 1 July 2005.
Conclusion on Issue 1
31 I do not consider that the letter of 25 May 2005 contained the terms of a contract between Mr Underwood and CGP. I reach this conclusion for the following reasons.
32 First, the letter was sent as a letter of comfort to the Bank. Viewing the matter objectively, it was not intended to have contractual force between Mr Underwood and CGP.[13]
[13]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
33 Second, on 25 May 2005, the parties anticipated that Mr Underwood would become a partner in the practice and be paid by reference to a partner’s draw of profit, with a minimum payment. I accept Mr Parkes’ account of the meeting of 18 February 2005 where these matters were discussed. The basis on which the letter was based did not eventuate.
34 The letter of 25 May 2005 stands in isolation from the discussions between Mr Underwood and Mr Parkes about Mr Underwood’s admission to the partnership. At no point did Mr Underwood ever receive, or claim, a salary or package based on the amount of $125,000. His counsel put it that he did not wish to rock the boat, as to do so would have been unwise when the business was operating in difficult circumstances. However, there is no evidence that at any point, whilst he was working for CGP, that Mr Underwood asserted a right to payments based on a yearly package of $125,000. Subsequent conduct can be relevant as to whether an agreement was reached in the first instance see Brambles Holdings Ltd v Bathurst City Council[14] per Heydon JA.
[14](2001) 53 NSWLR 153, at 163-164.
35 The letter of 25 May 2005, at best, reflected Mr Underwood’s hope that at some point, as a result of profit distributions, he would receive an annual remuneration package of $125,000.
36 I am not persuaded that the letter evidenced a contract.
37 However, I do not consider that Mr Underwood sought the letter to participate in a sham. Rather, he hoped that his earnings would soon be at that level. But that does not alter the conclusion that the letter did not have contractual force.
Issue 2: If no to issue 1, should Mr Underwood be permitted to amend his statement of claim to allege that he was employed by CGP under an implied contract of employment?
38 On the first day of the trial, after hearing Mr Underwood’s opening and a summary of CGP’s case, I advised the parties that I understood that the issue for decision was whether Mr Underwood had proved the contract pleaded, which was based on the letter of 25 May 2005.[15] Both counsel agreed that that was the issue to be decided. Counsel for CGP stressed that he had come to Court to argue that issue. The parties’ submissions focused on whether the letter of 25 May 2005 was a binding contract.[16]
[15]See discussion at T 17, T 23-26 and T 581
[16]See T 15 L3-18; T 17 L4-13; T 23 L13-26; T 579; T 581; T 582; T 583 L21-23; T 585 L11-12; 18-19, 24-26; T 613 L27-29; T 614 L1-20
39 After reserving my judgment, I relisted the matter on 2 September 2010 and made the following statement:
“In this matter I had the parties informed last week that I would deliver judgment today. Subsequently, I decided that I should draw the parties’ attention to one matter before giving judgment. I have determined that the plaintiff’s case as pleaded, that there was a written contract of employment dated 25 May 2005, has not been established.
While I have formed no final view about the matter, the evidence that was led in the trial may provide a basis [for a conclusion] that Mr Underwood was employed but on a different contract; perhaps one that was oral or to be implied. The issue arises as to what I should do about that evidence, and whether I should consider any entitlement Mr Underwood may have based on any other contract.
The ambit of the pleadings was discussed at trial, particularly by counsel for CGP, and there were various submissions put about it.
However, in light of the view I have formed about the fact that the plaintiff’s case does not succeed based on the way it is pleaded, the question arises [whether], or I consider I should raise the issue again.
On the present state of the pleadings, only one contract has been pleaded, and I have not accepted that. I could not consider any other case unless it was pleaded. That would require an application to amend the pleadings, which may or may not be granted. If it were granted, it may require the right [to be given to] the parties to call further evidence and make further submissions. Those steps, if they occur, may have costs consequences, particularly for the plaintiff.
I invite any submissions from the parties, and if it is likely there may be any further application in respect of the pleadings or further argument I would fix a time by which that application had to be made and would then determine it. I do not propose to deliver my reasons for judgment in respect of the claim or counterclaim until I have heard what the parties wish to say in response to the statement I have just read.”
40 I made this statement because I considered that once I had reached my conclusion about the effect of the letter of 25 May 2005, the consequences for much of evidence that was led at trial required reconsideration.
41 Following that statement, Mr Underwood sought time in which to consider whether or not to make an application and was granted fourteen days. A similar period was granted to CGP to respond to any such application.
42 Mr Underwood applied to amend his statement of claim and filed a supporting affidavit and submissions. CGP filed a submission and an affidavit by its solicitor in opposition to the application. The proposed amendment sought to rely on an implied contract of employment. The particulars of this implied contract were that: Mr Parkes asked Mr Underwood to work for CGP, the letter of 25 May 2005 signed by Mr Parkes and sent to the Bank of Melbourne, the fact that Mr Underwood commenced working for CGP on 1 July 2005 and thereafter was treated by CGP as an employee including having income tax deducted from his salary and the fact that superannuation had been paid on his behalf as required for an employee. The particulars also included the fact that he was described as an employee in time sheets and pay slips, that his tax return for 2006, which had been prepared and signed by Mr J Moleta, described his income as salary or wages and that in November 2006 Mr Parkes as principal and director of CGP asked him to withdraw his resignation as an employee. The proposed amended pleading alleged that it was a term of the employment agreement that Mr Underwood he would be paid $125,000 per annum as a total employment package comprising $ 87,000 per annum salary, plus superannuation and allowances.
43 Mr Underwood’s affidavit stated that he would be prejudiced if not given leave to amend and that he had done whatever had been asked of him to ensure that his case was properly prepared. He stated that the suggestion that the letter of 25 May 2005 was a sham had only arisen in final submissions.
44 The solicitor for CGP filed an affidavit in which he stated that at no time until Mr Underwood served his application to amend his statement of claim did he ever indicate that he sought leave to amend his statement of claim.
45 The matter was relisted for 5 October 2010. At the request of CGP, that hearing date was adjourned to 14 October 2010, when I heard the parties’ submissions about the amendment application.
46 The power of the Court to raise the question of whether pleadings should be amended, even if that matter has not been adverted to by the parties, and to require the pleadings to be amended is established by authority. In Etna v Arif,[17] Batt JA, whose judgment was agreed in by Charles and Callaway JJA, stated:
“The final factor for consideration is that the possibility of there being the implied term and the possible need to amend were raised by the trial judge himself in his memorandum and orally with both counsel. I do not accept the submission for the appellant that thereby the appearance of the impartial administration of justice was eroded or that it was unfair or unjust to invite or allow the amendment. The judge had clearly been giving consideration to the proper construction of the contracts and was, as he said, troubled and concerned on that score. In my view, it was perfectly proper for his Honour to raise with the parties a possible construction which did not depend upon any additional facts, because he would have been in a difficult position if, not having done so, he felt obliged to come to the view that there was no other construction open than that one. He was assuredly not the first judge to take such a step.”[18]
[17][1999] 2 VR 353
[18]at 368 [37]
47 A number of other authorities have reached a similar conclusion.[19]
[19]Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666 at 668; Donis vDonis (2007) 19 VR 577; State of New South Wales v Thomas [2004] NSWSCA 52 and Strong WiseLtd v Esso Australia Resources Pty Ltd (No. 2) (2010) 185 FCR 237
48 The Court’s power to allow an amendment, even after judgment has been reserved, is contained in Rule 36 of the County Civil Procedure Rules 2008. The power is to be exercised for the purpose of determining the real question in controversy between the parties to any proceeding.
49 In Aon Risk Services Australia Ltd v Australian National University,[20] Gummow, Hayne, Crennan, Kiefel and Bell JJ stated:
“What needs to be shown for leave to amend to be given, as the cases referred to above illustrate, is that the controversy or issue was in existence prior to the application for amendment being made. It is only then that it is necessary for the court to allow it properly to be raised to enable a determination upon it.
The existence of a controversy may be seen in the way in which the matter had already been pleaded, albeit inferentially, in Tildesley v Harper and Dwyer v O’Mullen; or where the issue is raised by another party in the same proceedings but in respect of which the party applying was inextricably involved, as in Cropper v Smith. It may be present in the nature of the bargain struck, as in O’Keefe v Williams. A consideration of these cases does not suggest that an unduly narrow approach should be taken to what are the real issues in controversy, although they are not, or are not sufficiently, expressed in the pleading.”
[20](2009) 239 CLR 175 at 208-209 [82]-[83]
50 French CJ stated:[21]
“The real issues in the proceeding were to be determined in this case by reference to the limited way in which ANU had deliberately chosen to frame its original claim against Aon, and its persistence in that limited approach up to the trial date itself.”
[21]at 192 [31]
51 In this case, counsel for Mr Underwood stated that the real controversy in the case included the matters that were sought to be the subject of the amended statement of claim, and referred to the authority of O’Keefe v Williams [22] and Etna v Arif.[23] He referred to references in the transcript where the terms and conditions of employment were discussed. He rejected the submission by CGP, which is referred to below, that there was no evidence that Mr Underwood had been requested to commence employment. He submitted that the overall justice of the matter required the amendment. CGP’s position that the letter of 25 May 2005 was not true, had only been stated late in the case. The grant of the amendment would prevent the need for further proceedings to be commenced.
[22](1910) 11 CLR 171
[23]op cit
52 Counsel for CGP argued that the amendment was futile, and that the implied contract could not be made out. As I understood this argument, it was based on the proposition that there was no evidence of the conversation particularised in paragraph 3 of the amended pleading, and of a request by Mr Parkes to Mr Underwood to commence employment. This submission is without substance as some such a request must have been made before Mr Underwood commenced work. In any event, the remaining parts of the proposed pleading seek to raise an implied contract based on various indicia. The fact that there are other parts of the relationship on which CGP relied which might displace the significance of those indicia of employment, does not make the amended contract claim hopeless: see Meates v Attorney General.[24]
[24][1983] NZLR 308
53 CGP’s other significant point was reliance on the way in which the case had been conducted, particularly the clear indication that the case was being argued only on the basis that the contract of employment was contained in the letter of 25 May 2005. CGP submitted that there was no possibility of a further proceeding being commenced, because any further claim based on a contract pleaded in the form of the proposed amendment would be prevented by an Anshun estoppel.
54 CGP also pointed to the general delay in the litigation as a factor against allowing the amendment.
55 Mr Underwood indicated that if the amendment were allowed he would call no further evidence. CGP stated that in those circumstances it would adopt the same position. Nevertheless, it is clear that, if the amendment is granted, time, perhaps shorter than the normal period fixed by the Rules for the delivery of pleadings, would be given to CGP to file an amended defence. A hearing day would be required for further submissions, and there would be some consequential delay in the delivery of the judgment. It is likely that if the amendment were granted, that Mr Underwood would be ordered to pay the costs of the amendment application and the further hearing day. Mr Underwood in his affidavit offered to pay such costs if the Court so ordered.
56 The question is whether the real controversy between the parties includes the implied employment contract upon which Mr Underwood seeks to rely. The identification of the real controversy in a proceeding can be difficult. That difficulty was referred to by Hasluck J in Custom Credit Corp Ltd v Dallas Development Corp Pty Ltd,[25] in the following terms:
“Ultimately, it appears to be a matter of degree as to whether amendments of the kind proposed in the circumstances of the present case should be allowed in the exercise of the discretion afforded to the trial Judge. If the amendments will give rise to a significant transformation of the case being advanced, either as to causes of action or as to evidence, then they should not be allowed, bearing in mind that for the reasons given by counsel for Custom Credit further time and expense will be involved in reviewing the evidence in the light of the amendments. If, however, the proposed amendments can be characterised as an adjustment to what was to a certain extent inherent in the nature of the case reflected in the Dallas counterclaim, then, in my view, it is appropriate to adopt the approach reflected in the reasoning of the High Court in Leotta and Queensland v JL Holdings which allows for the pleadings to be brought into conformity to the evidence so that the Court will be able to make a determination of the matters truly in controversy. However, this approach, in the circumstances of the case in hand, must be examined closely with a view to ensuring that the effect of allowing the amendments is not to impose a specific injustice upon Custom Credit as the opposing party.”
[25][2003] WASC 98 at para [115]
57 In Etna v Arif, the Court of Appeal upheld the trial Judge’s decision to allow a reformulation of a contractual term as implied that a developer would use reasonable endeavours to obtain certification and registration of a plan of subdivision, when the case had been originally pleaded based on an express term. Batt JA stated:
“It is true that the application for leave to amend was made on the last day of hearing, after the close of evidence and the filing of written submissions. But the question raised by the amendment was simply a legal question of implication in or construction of a written contract. In that regard the observations of Isaacs J. in O’Keefe v Williams are particularly apposite. Indeed, the facts concerning amendment in that case are very close to those here. For the appellants there had throughout the action rested their case on an express contract in a wide sense and not on implication, and then in the end sought leave to add a count based on implication, which Isaacs J described as consisting simply of a better and fuller legal statement of uncontroverted facts, with the same results dependent on the same circumstances and upon almost the same formal allegations of fact. This, he held, led to a just determination of the matters ‘really in issue’.”[26]
[26]op.cit at 367 [35]. I do not consider that the force of this authority is affected by the High Court’s decision in Aon Risk Services Australia Ltd v Australian National University (op. cit).
58 The question to decide is whether the controversy in this litigation is properly described as one as to the entitlements of Mr Underwood as an employee of CGP or, rather whether it concerns his entitlement to receive the benefits set out in the letter of 25 May 2005. In my opinion the latter is the case. The only fair assessment of the trial is that it proceeded on that basis. The specific transcript references that are referred to in paragraph 38 above confirms that assessment of the case. This is not a case where the proposed amendment would be a restatement of a case actually advanced at trial. It would make a substantial change in the way the case was pleaded and argued.
59 I have reached that conclusion after careful consideration of where the real justice of the case lies. It has some unusual features, in that Mr Underwood sues on, and continues to maintain, the bona fides of the letter of 25 May 2005, whereas Mr Parkes, the principal of CGP, maintained that that letter was not true and to his knowledge did not contain the details of the contract. Mr Underwood’s proposed amended pleading, indeed, still seeks to press his claim for the sum of $125,000, which can only be referable to that letter, although his reliance on it has been deleted by amendment.
60 CGP ultimately conceded in final submissions that Mr Underwood was an employee pursuant to the Shareholders’ Agreement. However, it has been clear from the time that CGP delivered its defence, that it maintained that the letter of 25 May 2005 did not contain an enforceable legal agreement. Mr Underwood based his case solely on that letter.
Conclusion on Issue 2
61 In those circumstances, I consider the appropriate exercise of the discretion is to refuse the application for an amendment. I do so principally because of the way in which the controversy was framed during the trial.
62 I would add the following. Even if I had permitted the amendment, it is likely, as Mr Underwood was not proposing to adduce further evidence, that I would not have accepted a case that he was entitled to a remuneration package of $125,000 per annum. The amended pleading relied on a remuneration package of $125,000 as the basis for the sums and damages that he claimed. The principal basis for that contention would have been the letter of 25 May 2005, which I have found did not have contractual force.
63 Despite the effect of my conclusions on issues 1 and 2, I propose to state my findings on the other issues that were argued before me as part of the plaintiff’s case. I do this in order to deal with all of the issues raised in the proceeding.[27]
Issue 3: Was Mr Underwood an employee of CGP?
[27]State Securities Pty Ltd v Dromi [2010] VSCA 264 [53]
64 In November 2006, Mr Underwood met with Mr Parkes and Mr Moleta, and handed to them his resignation as a director of CGP. According to his evidence, he could not continue working in the practice and not be paid. The practice was acquiring another accountancy practice, and he was unable to sign a guarantee of the borrowings required for that acquisition.[28]
[28]T 53
65 Mr Parkes accepted Mr Underwood’s resignation as a director. He drafted a document to explain the resignation by reference to health issues within his family. They met again a few days later. According to Mr Underwood, Mr Parkes told him that in return for staying at the practice he would be paid additional amounts to catch up with his remuneration that was outstanding. He accepted this arrangement and over a period of thirty four days he was paid about $26,000.[29] However, the irregularity of his payments continued.
[29]T 61
66 Mr Underwood stated that in January 2007 he accepted, for the interim, that he would be paid a fortnightly amount until CGP’s cash flow improved to rectify the actual short fall in monthly payments.[30]
[30]T 63
The Parties’ submissions about the existence of an employer-employee relationship
67 Mr Underwood relied on the letter of 25 May 2005 and contended that he was an employee of CGP. The fact that he was a director for a time does not mean that he cannot also have been an employee. A person may at the one time be an employee while also having some other status.[31]
[31]Bearings Incorporated (Australia) Pty Ltd v J Treloar (1999) 95 IR 169
68 CGP submitted that Mr Underwood was a partner and a director, as were Mr Parkes and Mr Moleta. CGP referred to statements by Mr Underwood made in emails in 2007 that he had the option of returning to employment and submitted that they were not consistent with an employment relationship. CGP was a professional practice operated through family trusts. Mr Underwood was a partner and not an employee, but not a partner in the sense regulated by the Partnership Act. He referred to himself as a partner regularly in documents.[32] For instance in one email he wrote “as partners, our individual earnings would be below the scale of averages for professional practices”.[33] He received director’s fees. Mr Underwood stated that he regarded himself as a salaried partner.[34]
[32]T 162
[33]Defendant’s Court Book ( “DCB”) 243
[34]T 177
69 CGP relied on Mr Underwood’s email to Mr Parkes of 4 May 2007,[35] in which he referred to the nearly four months of “no partner salaries” and that he was close to walking away and getting a job. He added:
“We discussed this in December and I restate there is no blame here other than myself. I am a realist and if the business cannot pay a nominal salary to the owners, it is pretty much time to look at closing or a serious change of direction for the owners. Valuation is cashflow based (not accrual) and if a business can’t pay, it must reflect somewhat its value.”
[35]DCB 195
70 He stated that his options were either to stay in the accounting practice or to leave and rejoin the workforce, which he described as the employment option.
71 On 21 and 30 December 2008,[36] Mr Parkes and Mr Underwood exchanged long emails about Mr Underwood’s place in the practice. Mr Parkes stated that:
“As you know the original agreement was for you to become a full equity partner. CGP reasons remain the same today as they did then so we need an equity, new generation partner in the new year.
With your personal situation, now going back nearly five years, at the time that was understandably too difficult to complete this deal. (However we went on to complete the agreement but now (sic) funds were paid over but all costs and insurances were done.)”[37]
[36]DCB 240 and 242
[37]DCB 242
72 Counsel for CGP referred to the fact that Mr Underwood was involved in the preparation in documents that depicted the structure of Burton & Parkes, and which suggested that he intended to be a stakeholder in CGP and hold some interest in it. For instance, CGP relied on Mr Underwood’s email to the insurance broker, Mr Harbrow,[38] on 25 May 2005 concerning the proposed changes to Burton & Parkes’ business structure and the insurance cover that Mr Underwood might require. The email stated that the business of Burton & Parkes was to be transferred to a new entity, CGP. Mr Underwood also stated that after Mr Parkes and Mr Moleta rolled over their equitable interest in Burton & Parkes to CGP, Mr Parkes proposed to sell shares in CGP to his discretionary trust. The post practice restructure would result in Mr Parkes holding 60 percent of the shareholding in CGP, Mr Moleta 20 percent, and Mr Underwood 20 percent.
[38]DCB 75
73 However, these events did not transpire and Mr Underwood never became a shareholder.
74 Mr Underwood’s legal status is determined by applying the multi-indicia test set out by the High Court in Hollis v Vabu.[39] It is the “totality of the relationship”[40] between Mr Underwood and CGP that must be considered.
[39](2001) 207 CLR 21
[40]Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16, 29, per Mason J
75 Professional partnerships are often no longer structured by reference to the model regulated by the Partnership Act 1958. Many professional practices are incorporated and operated on behalf of family trusts. Professionals are often described as partners, although they hold no equity in the practice. They are called salaried partners and are often employees of the practice. However, the legal relationships between persons working in professional practices still have to be analysed by reference to accepted indicia objectively considered.
76 A number of features of the relationship between Mr Underwood and CGP suggest that he was an employee. This was particularly the case from November 2006 after he had resigned as a director. His precise status following his resignation as a director was not discussed and surfaced as a critical issue in January 2009. The correspondence between Mr Underwood and Mr Parkes in December 2008 and January 2009 demonstrates the uncertainty regarding Mr Underwood’s status in the practice after his resignation as a director.
77 The features suggesting that Mr Underwood was an employee of CGP were:
· Payment of wages on a regular basis, without reference to directors’ fees or completion of tasks;
· Use of PAYG taxation;
· Payment of superannuation;
· Provision of leave entitlements;[41] and
· The fact that Mr Underwood’s occupation is stated as “Accountant” in his annual tax returns (which, when completed, were certified by Mr Moleta, on behalf of CGP).[42]
[41]See in respect of the above matters, for example, pay advices for the months of January and February 2006 at DCB 152, 153
[42]see taxation returns for Mr Underwood at DCB 157, 203, 400
78 Mr Underwood’s group certificates describe him as an employee. They were signed by Mr Moleta.
79 CGP relied on the conversation between Mr Underwood and Mr Parkes on 18 February 2005 in a meeting in which Mr Parkes told Mr Underwood that the basis of his remuneration would be a profit draw or share.[43] Mr Underwood’s email of 19 January 2005 suggested a base level of remuneration of $58,000 and that is approximately what Mr Underwood received.
[43]T 531
80 The use of PAYG taxation arrangements by CGP when paying Mr Underwood’s salary was explained by Mr Moleta as merely an easy way of paying Mr Underwood’s taxes. He stated that profit share was taken in the form of a taxed wage because the partners wished to pay tax on a regular basis.
81 While taxation arrangements are generally not decisive in deciding if employment exists,[44] they can assist in combination with other circumstances in characterising the relationship as one of employment.
[44]see Abdalla v ViewdazePty Ltd (2003) 53 ATR 30;122 IR 215, [42]
82 Payments made to Mr Underwood were “not dependant on the level of skill, difficulty or time required for completion of a task” [45] but rather, paid on a monthly basis (for the most part) without any reference to any completion of tasks. The pay summaries describe the payment as “base salary”.[46] The fact that Mr Underwood may have been paid on the basis of a division of profits, does not decide the issue. The absence or presence of employment entitlements, such as annual leave and sick leave, are also to be taken into account in combination with other circumstances.[47]
[45]C Sappideen, et al. ‘Macken’s Law of Employment’ (6th ed. 2009), 63, [2.145].
[46]see, for example, pay advices for the months of January and February 2006 at DCB 152, 153
[47]C Sappideen, et al., ‘Macken’s Law of Employment’ (6th ed. 2009), 63 [2.155]
83 Holding out Mr Underwood to the Bank of Melbourne and the Australian Taxation Office as a “salaried partner”[48] and “accountant”[49] assist in concluding that Mr Underwood was an employee.
[48]PCB 64; DCB 74
[49]see taxation returns for Mr Underwood at DCB 157, 202, 399
84 At least from the time when Mr Underwood resigned as a director, Mr Parkes on behalf of CGP had the capacity to direct or control the performance of his work. As would be expected in the case of a professional person, that right to control or direct was not often exercised. The right to exercise control of the manner in which work is performed, place of work, hours of work or the like[50] point towards an employment relationship.
[50]Abdalla v Viewdaze (2003) 122 IR 215, 229
Conclusion on Issue 3
85 The relationship between Mr Underwood and CGP commenced with the intention that he would become a part owner of the practice. That did not occur and in November 2006 he ceased to be a director. The parties did not consider what this meant for Mr Underwood’s role in the practice. An objective consideration of all the circumstances is required. The considerations discussed above support the conclusion that on 22 January 2009, the relationship between CGP and Mr Underwood was that of employer and employee.
Issue 4: Did Mr Underwood resign his employment on 22 January 2009 or did CGP terminate his contract?
86 On 21 December 2008 Mr Parkes sent Mr Underwood an email raising a number of queries about his place in the practice and about the operation of Business Finance Solutions. Mr Underwood replied on 30 December 2008 by adding his response to the text of Mr Parkes’ email. Mr Parkes noted that Mr Underwood had stated that he did not wish to take equity in the practice, but was happy to continue in some role. Mr Underwood responded that he had “reinforced” that position, when he resigned as director and that Mr Parkes had mentioned plans to bring in a new partner, and that he could not see where he fitted in and that he would “start plans to transition out”. He stated that the original plan for him to become part of CGP was based on a client value estimate, but that the fee base had been declining. He stated that he had rejected job offers because he wanted to return gratitude for the support that he received and that he accepted the wages/return to him was low, but would improve if a successful acquisition was consummated. He stated that it suited him to stay around on the basis of an agreed work for rate arrangement, however assuming that Mr Parkes wanted to “sell down fees in the practice”, it was likely that this would not be suitable for any period of time.
87 On 19 January 2009, Mr Underwood emailed Mr Parkes about a particular client issue and suggesting a meeting to sort the matter out. On 20 January 2009 Mr Parkes emailed Mr Underwood proposing a meeting and requesting a review of the past billings of Mr Underwood and the income of Business Finance Solutions. He stated that:
“We could look at a sub contract arrangement with billings shared and factors such as office overheads, staff, phone, IT etc taken into the split moving forward.”
88 Mr Underwood replied stating that he preferred to meet and sort out Mr Parkes’ plans. Later that day he sent an email to Mr Parkes commenting on the income that he had received and stating:
“You let me know how you want to work going forward. At this point I want to know:
1 What about wages, entitlements up to 19 January 2009. There is quite an Annual Leave accumulation.
2 You mention a contractual arrangement of 60/40 on billings. Let’s set some realistic targets for billings based on the clients we have. I will seek new clients for the practice given time to get out and network.”
89 On 21 January 2009, Mr Parkes sent Mr Underwood a long email which:
§ queried the income he had received from Business Finance Solutions and its client Career People, and expressed concern about Mr Underwood’s lack of disclosure;
· referred to the support that he and Mr Moleta had given Mr Underwood;
· stated that Mr Underwood thought that he was entitled to run another business, i.e. Business Finance Solutions within CGP’s business and pay nothing for the privilege and had avoided any risks and asserting that he had spent far less time in the business than anyone else;
· stated that there was an issue about what Mr Underwood thought he had contributed to CGP and what Mr Parkes knew he had contributed.
90 The email concluded:
“Until we resolve this matter there’s no more work to be done at CGP nor any CGP files or premises etc so best make a time with me and fix this up.
So to move things along I propose you work as a subcontractor with your invoicing through any CGP be split, 40 per cent to you and 60 per cent to CGP. You get paid when we get paid. We cover normal office overheads but no extras like car, super, entertainment etc. You need to write business to an agreed minimum of $120,000 per year. We will need an agreement to cover this.
Also to balance the books we want 40% of the income from BFS, this is net of direct expenses only, so we need to agree these expenses. Bottom line here we should have shared this income, no matter how big or small, no question about this as ‘partners’. I want this to happen in recognition for the costs we have spent on you over the past five years and to make us all share and work together. Simply put CGP has paid for diners club which comes to $6,000 per year, your life insurance (which you got the benefit from) say $5,000 per year, all your entertainment costs paid for over five years easily comes to around the same each year. So you are left with no misunderstanding to move this forward this is what we need. Now you’re not here and I’ve rung but no answer so I’ve got to go and see clients but will be back tomorrow lunchtime so happy to have a bit and finalise this then.”
91 Mr Parkes stated that he sent that email because he was extremely upset with Mr Underwood because he was suggesting that Business Finance Solutions was his and he was being paid although he was “wasn’t at work hardly at all”.[51]
[51]T 353
92 Mr Underwood became aware of that email when he attended work on the morning of 22 January 2009. He stated that it was a total change in the arrangements between him and CGP.
93 The previous evening he had drafted a letter of resignation bearing the date of 22 January 2009, in which he resigned his employment on three weeks’ notice. He gave evidence that he prepared it in anticipation of resigning. He said he did not deliver it to anyone, but left it on his desk. When he read Mr Parkes’ email he considered himself to have been dismissed.
94 Mr Parkes gave evidence that upon Mr Underwood cleaning out his personal belongings from his desk at about 10.30 or 11.00 am on the morning of 22 January 2009, he asked, “What are you doing?” In response, Mr Underwood became abusive and, ‘I’m out of here, I’ve had a gutful, I’m going”.[52]
[52]T 354
95 Mr Moleta, who was also at the office, said that he saw Mr Underwood at about 9.00 am and then, next, there was a meeting between Mr Underwood and Mr Parkes, that he did not attend. When the meeting concluded, Mr Underwood came into his room and informed him that he was leaving.
96 Mr Parkes said that he first saw the letter of resignation when an office employee gave it to him a day or two after Mr Underwood departure on 22 January.
Submissions of the Parties
97 CGP argued that Mr Underwood had admitted that he prepared the letter of resignation the night before, but that he had not seen Mr Parkes email dated 21 January 2009. He came into the office to collect his belongings and had in fact resigned.
98 Mr Underwood submitted that the letter was of no consequence to the proceedings, because before it was received, he had been dismissed.
Conclusion on Issue 4
99 Mr Parkes’ email of 21 January 2009 was a repudiation of the employment contract between CGP and Mr Underwood. By requesting that Mr Underwood cease working on CGP files and then instead proposing that he work as a subcontractor, Mr Parkes, on behalf of CGP, demonstrated the intention to no longer be bound by the contract of employment.[53] This conduct was substantially inconsistent with CGP’s obligations under the contract and was therefore a repudiation of it. The email was unequivocal that there was no more work for Mr Underwood to perform at CGP.
[53]Visscher v Giudice (2009) 83 ALJR 1068 and C Sappideen, et al, “Macken’s Law of Employment” (6th ed. 2009), 319-322 [7.215]
100 The correspondence between Mr Parkes and Mr Underwood identify the issues between them that needed attention. Preliminary discussions had commenced which might have led to Mr Underwood’s resignation, or agreement on some other arrangement. However CGP, through Mr Parkes, was not entitled to suspend Mr Underwood from work while these discussions were taking place. To do so was to repudiate the contract. That Mr Underwood had decided to resign on 22 January 2009 does not alter that conclusion. The letter of resignation was not delivered before Mr Parkes’ email was sent and received by Mr Underwood.
101 Mr Underwood accepted the repudiation of his contract by leaving CGP’s premises after meeting with Mr Parkes. The fact that he left the letter of resignation did not change the outcome. Whilst, Mr Underwood had initially intended to give three weeks’ notice of resignation, he did not proceed down that path. Rather, he reacted to and accepted the repudiation of his contract.
Issue 5: If CGP terminated Mr Underwood’s contract of employment what remedies does he have?
102 CGP argued that any entitlement to reasonable notice was to no more than three weeks. That was the period of notice Mr Underwood had been proposing to give to CGP in his letter of resignation. CGP pointed to Mr Underwood’s skills, length of service, which was not long term and the evidence that his job mobility was good and his involvement in Business Finance Solutions.
103 Mr Underwood’s counsel argued for a longer period of notice amounting to nine months.[54]
[54]The plaintiff relied on the judgment of his Honour Judge Ostrowski in Marshall v Diamond (unreported 4 April 2001) and Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567
104 If I had been deciding the matter and had decided that the letter of 25 May 2005 did have contractual force, I would have considered six months’ notice as the period required to determine the employment contract between Mr Underwood and CGP. I would have reached that conclusion having taken into account the nature of Mr Underwood’s skills, his age, his experience, the fact that he had been running his own business and the difficulties faced in obtaining comparable employment.[55]
[55]See Rankin v Marine Power International Pty Ltd (2001) 107 IR 117, [2001] VSC 150
105 I am not satisfied that the amount of the underpayment of wages claimed by Mr Underwood has been proved. These claims were based on an annual salary package of $120,000 and that has not been established.
Mitigation of Mr Underwood’s Loss and Damage
106 CGP has not established that Mr Underwood has failed to mitigate his loss and damage. There was evidence that he had sent job applications. He stated that he applied for jobs from April 2009 onwards and that a number were online applications that he could no longer produce. Some were for part-time employment. A number of job applications were tendered and Mr Underwood gave evidence of many more made through internet recruitment agencies.
107 Between 1 July 2009 and trial, Mr Underwood has earned net income of about $10,000 net. [56] His counsel submitted that the global economic crisis had depleted employment prospects. I accept Mr Underwood’s evidence and that he did genuinely attempt to mitigate his loss by diligently seeking alternative employment.
[56]T 93-94
CGP’s Counterclaim
Issue 6: Was Mr Underwood paid by CGP for days on which he did not work?
108 CGP claims that it had paid Mr Underwood for 305 days between 1 July 2005 and 22 January 2009 on which he did not perform work for CGP. This claim was also pleaded as a set-off. CGP submitted that for 495 days of the three and a half years that he was at CGP that he did not record any time at all in the time sheets of CGP. However, CGP accepted that if there was an entry in Mr Underwood’s time sheets for a particular day, that he had worked for that day.
109 In order for CGP to establish an entitlement to reclaim any sum paid to Mr Underwood, it would need, at least, to establish on the balance of probabilities, that on particular days, or during particular parts of days as the case may be, that Mr Underwood did not perform work for CGP.
110 In the CGP practice, work for clients was recorded in timesheets using modules located in the accountant’s computer office program. Non-client related work was spasmodically recorded with no real direction governing the matter. A unit approach using an hourly rate was applied and the work was allocated to a non- billable entity.
111 There was considerable cross- examination of Mr Underwood and Mr Parkes about the extent to which they recorded work on their time sheets.
112 Mr Parkes did emphasise to Mr Underwood the necessity of completing his time sheets. An example of this occurring was at a meeting on 19 June 2005. Mr Parkes stated that it was an automatic understanding that Mr Underwood would put down his billable hours and also non-chargeable items, on an hourly basis.[57]
[57]T 334
113 Mr Parkes gave evidence that Mr Underwood would leave work during the day, but he was unable to specify any particular day. On the other hand, Mr Moleta’s evidence was that he saw Mr Underwood come to work most days.
114 Mr Underwood gave evidence that he had worked on each of the days in issue as required in order to earn the salary that was paid to him. He stated that he would arrive at the practice each day just after 8am. In the early stages he also worked at the office of Business Finance Solutions.
115 Mr Underwood agreed that in early September 2005 he had discussions with Mr Parkes about recording times on his time sheets.[58] He had not previously used the MYOB Accountants Office Computer Program and he gave evidence that that recording work times on that program was very complex.[59] He stated that there were many times that he did not record work on the time sheets because he did not know how.[60]
[58]T 203
[59]T 205
[60]T 224
116 Mr Underwood’s time sheets were tendered in evidence and there were many days on which no work was recorded. However Mr Underwood disputed that the time sheets accurately recorded all the work that he had performed. [61] He said that he was present every day.[62] Sometimes his work was recorded without attribution to him.[63] A lot of the work that he did could not be recorded, such as work involving the affairs of MEBC, Bsta and Somersault, and administration work.[64]
[61]T 261
[62]T 274
[63]T 227
[64]T228-229
117 Mr Parkes’ timesheets also included a number of days when either no work was recorded, or work was recorded for less than the expected ten hours.[65] Mr Parkes stated that he was not required to record work performed for MEBC because there was a standard monthly billing charge to clients of MEBC.[66]
[65]T 392 - 405
[66]T383
118 CGP submitted that I should infer from the volume and frequency of days for which work was not recorded that its claim for repayment of moneys paid to Mr Underwood should succeed. Reference was made to Mr Underwood’s answers in cross-examination that he would record billable time for clients, but would not consistently record work that was not billable. CGP pointed to the fact that Mr Underwood had IT expertise and performed that work for CGP.
119 CGP argued that Mr Underwood only performed the work for CGP that was recorded in his time sheets. If this were the case, it would mean that Mr Underwood performed no work for an aggregate of four months in each of the years that he worked at CGP. This is unlikely.
120 Mr Underwood submitted that the time sheets were a mess and were not time sheets to record attendances, but to record particular types of work during the day. He relied on Mr Moleta’s evidence as to his attendances at work.
Conclusion on Issue 6
121 The evidence of the completion of time sheets suggests that there was no standard practice applied at CGP for the recording of work. Mr Underwood gave evidence that he did perform work for, or on behalf of, GCP on each day for which he was paid. Mr Parkes did urge Mr Underwood to record his work in the time sheets. However his requests were not accompanied by any suggestions that Mr Underwood was not performing work on days when time sheets were not completed.
122 I formed the impression that Mr Underwood, although able to record work via computer time sheets, was unable to develop the habit of doing so, in part because he had not previously worked in circumstances that required that practice.
123 I consider that it is improbable that Mr Underwood was absent from work on every day on which he did not record work on the time sheets. There may have been days when that occurred, but CGP’s evidence does not identify them. Mr Moleta’s evidence supports the conclusion that Mr Underwood regularly attended the practice.
124 CGP has not proved on the balance of probabilities that on any particular day when he was an employee, Mr Underwood did not carry out work during periods when he was paid. This part of the counterclaim does not succeed.
Issue 7: Did Mr Underwood agree to retransfer to Mr Parkes twenty shares in MEBC?
125 On 14 July 2005 Mr Parkes transferred twenty shares in MEBC to Mr Underwood. As previously stated, MEBC was created to provide a business conference facility at the East Malvern premises of CGP and thereby generate income. Mr Parkes gave evidence that he transferred the shares in MEBC to Mr Underwood on the basis that he was becoming a partner.[67]
[67]T 332
126 Mr Parkes pleads that in consideration of Mr Underwood performing his obligations under the Shareholders’ Agreement, he transferred to him twenty ordinary fully paid shares in MEBC. In submissions the transfer was argued to be contained in a collateral contract made during negotiations occurring prior to the execution of the Shareholders’ Agreement. Mr Underwood agreed to pay $200,000 for the issue of shares in CGP. That sum was not paid. Mr Parkes contends that as a result of that non-payment and the resignation of Mr Underwood, there has been a total failure of consideration. Mr Underwood had received the benefit of the shares for which he had not paid and Mr Parkes is entitled to their return.
127 Mr Parkes seeks a mandatory injunction requiring Mr Underwood to retransfer the twenty MEBC shares to him.
128 Mr Underwood’s case was that he was given the shares for the work that he had completed for MEBC from time to time. It was part of the inducement to him to stay. He stated:
“I did considerable work in relation to MEBC in relation to assisting with improvement in the business processes of MEBC, assisted in relation to the general day to day operations of MEBC in establishing that entity in that business, and so – no, it did no accounting work but it relied on some expertise from me.”[68]
[68]T147
129 Mr Underwood relied on the fact that he did not receive any income for the work that he did for MEBC and argued that the twenty shares represented payment for this work.
130 Mr Underwood prepared a document on about 15 March 2006 entitled “CGP Shares Purchase, MEBC Stake and Somersault Network Share” that set out details of his version of the agreement between the parties, and also stated that the consideration for a 20 percent of share capital of CGP was to be $200,000 “structured at $60,000 up front and balance over an agreed term”.
Submissions of the Parties about Issue 7
131 As stated above CGP contended that the consideration for the transfer of the shares failed. Mr Underwood argued that they were provided to him in exchange for work performed.
Conclusion on Issue 7
132 I do not accept Mr Underwood’s submission that the MEBC shares were transferred to him for work that he had performed. The transfer of the MEBC shares occurred on 14 July 2005, a few days after the execution of the Shareholders’ Agreement and at a time when the working relationship between the parties was in its early days. This makes it unlikely that the twenty shares were to be consideration for work already performed for MEBC.
133 The tenor of the negotiations between the parties was that the transfer of the MEBC shares was part of the transactions leading to Mr Underwood becoming a shareholder in CGP and paying the sum of $200,000 for that shareholding. The MEBC shares were transferred in anticipation of that occurring. It did not occur and the transaction failed. A state of affairs contemplates as the basis or reason for the transfer of the shares has failed to materialise.[69] The consideration for the transfer of the shares failed. Mr Parkes is entitled to restitutionary remedies. [70]
[69]David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 382
[70]See the authorities discussed in Haxton v Equuscorp Pty Ltd [2010] VSCA 1 especially at [127] – [195] per Dodds-Streeton JA. Counsel for CGP referred to McDonald v Dennys Lascelles Pty Ltd (1933) 48 CLR 457
134 The appropriate remedy in the circumstances of this case is that an injunction issue requiring Mr Underwood to retransfer the twenty shares in MEBC to Mr Parkes.
Issue 8: Did Mr Underwood and Business Finance Solutions agree to transfer fifty per cent of the shares in Business Finance Services to CGP?
135 CGP argues that in consideration of Mr Underwood entering into the Shareholders’ Agreement, Business Finance Solutions and/or Mr Underwood agreed to issue or transfer to CGP, 50 percent of the share capital in Business Finance Solutions. CGP’s case was that this agreement reflected a profit sharing arrangement between CGP and Business Finance Solutions, just as Mr Underwood received shares in MEBC.
136 It might be thought that this claim was inconsistent with the argument that the consideration for the transfer of the twenty shares in MEBC had failed. Nevertheless I will consider the argument based on the submissions that were put.
137 CGP claimed the sum of $48,218, which is two-thirds of the profit of $72,327 earned by Business Finance Solutions. Business Finance Solutions earned income from loan broking.
138 The context of this alleged agreement is as follows. On 1 March 2005, Mr Underwood wrote to Mr Parkes about the value of Business Finance Solutions. He stated that it was reasonable to expect that the business would earn $100,000 of income for the year and suggested that they be active, jointly, in it.
139 On 17 May 2005, Mr Underwood emailed Mr Parkes following a discussion the previous day, stating:
“We overlooked putting any kind of value on BFS which I think should apply.”
The email then set out details of the income of the practice of 2004 of $73,000 and for the 2005 year to date of $54,000, and expenses of the business and continued:
“I want BFS to become a cash cow for us to build income through and then draw down our requirements as the need arises. Would you agree the business has a value of the average of the past 2 years earnings, say $60k? I think this is reasonable as I really only worked 50% in the business last 12 months and 2004 year was effectively 8 months of trade following departure from Mullins at Hub.
The business should realistically be doing $150-200K of income per year with one solid full time fee writer or 2 part time fee writers.
We will discuss this further tomorrow morning to finalise and move on.”
140 On 19 June 2005, Mr Parkes emailed Mr Underwood about a group revenue forecast for 2005/2006 and referred to the income of Business Finance Solutions. He also stated:
“Your estimate on BFS income was 200K so this is the target that needs to be hit.”
141 The email included a projected total revenue for CGP of $1,275,000, including $150,000 from Business Finance Solutions and stated:
“These figures are more than achievable given what we know. Let me know your thoughts. We need to confirm these with each other, do more micro analysis on them, agree the splits are fare (sic) enough to start off and then lay them down as our goals for the next year. All in the firm will be aware of the targets and that they have to be met. Performance assessments can apply after a three month settling in. You and I need to agree on who’s responsible for what, I agree Joe needs to take responsibility for parts of CGP (to be decided).”
142 The email also stated that:
“When you’re ready I want to go over every line item to sign off with you.”
143 On 29 June 2005, Mr Underwood emailed Mr Parkes requesting a meeting with an agenda (to get final go ahead on) for a meeting, including:
“. . .
(3) BFS shareholding -CP;
. . .
(6) Roles identification – BFS, CGP – Somersault – Bstar.”
144 There were discussions about the shareholding in Business Finance Solutions long after Mr Underwood had commenced working with CGP. On 27 April 2007 Mr Parkes sent an email to Mr Underwood regarding a particular file and about cash flow issues, in which he stated:
“Time we sorted out all to do with BFS and your shareholding. Please send me the accounts on BFS in regard to ongoing trials, financials and what we may need to spend on the business in going in the next year.”
145 On 4 May 2007, Mr Underwood replied:
“BFS is open book for you, Joe and pretty much all staff at CGP. The folders are on the server here along with the MYOB file for the accounts and you have always had access. I have stated before. Feel free to look at the accounts or I can run you off what you want. The trails are all accounted for. The accounts are up to date to March 2007 albeit the bookkeeping is loose on the Bank Rec side because I haven’t the time to bookkeep them to this level up to this point. Will worry about the costs for next year when we have some idea of the plan going forward.”
146 In the year ending 30 June 2007, BFS paid a commission of $10,000 to Somersault which was on-paid to CGP.
147 Mr Underwood said that he discussed the business of Business Finance Solutions with Mr Parkes and how it would grow considerably on the back of cross-referral arrangements between Business Finance Solutions and CGP. Business Finance Solutions would become a good recurring business, in which all parties could eventually participate. He stated that if Business Finance Solutions grew and was successful, there was an understanding that at some stage in the future, Mr Parkes would take a shareholding in it. BFS’ clients, who needed tax or accounting work, were, or would be, transferred to CGP which would retain fees earned. However, Business Finance Solutions would keep the fees earned from those clients from loan broking.
148 Mr Parkes said that Mr Underwood was bringing the Business Finance Solutions:
“… under our umbrella and we were looking at an ownership between him and myself for BFS.”
Q: “Why were you looking for an ownership between Mr Underwood and yourself for Business Finance Solutions?---
A:So we could share the income because we were referring business to them and we had to bring everything under the same banner and Darren was keen to do it.”[71]
[71]T 310
149 In the email that Mr Parkes sent to Mr Underwood on 21 January 2009, part of which has been previously set out, Mr Parkes stated a desire to obtain 40 per cent of the income from Business Finance Solutions.
The Parties’ Submissions
150 CGP argued that negotiations occurred between Mr Parkes and Mr Underwood as to Business Finance Solutions, including the potential earnings of the company. Business Finance Solutions paid a commission for the year ended 30 June 2007 through Somersault to CGP. CGP paid operating expenses of Business Finance Solutions, e.g. petrol. These matters were proof of a profit sharing agreement. CGP was entitled to a split of profit.
151 Mr Underwood submitted that no agreement was ever reached, although lengthy discussions had occurred.
Conclusion on Issue 8
152 I am not persuaded that an agreement to transfer any part of Mr Underwood’s interests in Business Finance Solutions to Mr Parkes or CGP was ever completed. It was certainly a matter that the parties were discussing at some length, particularly up to the execution of the Shareholders’ Agreement of 1 July 2005. However, considering the evidence objectively, an agreement was never reached.[72] The evidence rather supports the conclusion that right up to January 2009 Mr Parkes and Mr Underwood were discussing issues relating to the control of the income of Business Finance Solutions, but did not reach an agreement.
[72]See Toll (FCGT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Other Matters
153 CGP also initially alleged that Mr Underwood used his work Diners Club card for non- work purposes. The evidence did not support this allegation and it was not really pressed in final submissions.[73]
[73]T 566
154 Counsel for Mr Underwood submitted that matters which were relied on as part of CGP’s case had not been put to Mr Underwood in cross-examination in breach of the rule in Browne v Dunn.[74] None of the items of evidence referred to has played any part in my reasons for not accepting Mr Underwood’s claim.
[74](1893) 6 R 67
Conclusion
155 I order that the proceeding brought by Mr Underwood and the application to amend his Statement of Claim be dismissed.
156 I order that the counterclaim brought by CGP against Mr Underwood and Business Finance Solutions Pty Ltd be dismissed.
157 I will grant an injunction requiring Mr Underwood:
(a) to sign a transfer of the twenty shares that he holds in MEBC Pty Ltd to Mr Parkes within seven (7) days of the sending of the transfer to him by Mr Parkes or his solicitors;
(b) having signed the transfer, to return it to Mr Parkes or his solicitors forthwith.
158 I will hear the parties about costs and any further matters that may arise.
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