FEDERAL COURT OF AUSTRALIA

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154

FEDERAL COURT OF AUSTRALIA

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154

CORRIGENDUM

1.    In paragraph 179 of the Reasons for Judgment, in the first and third lines, the word “Variflow” should read “Holyoake”.

2.    In paragraph 199 of the Reasons for Judgment, in the first line, the word “Variflow” should read “Holyoake”.

Associate:

Dated:    14 February 2012

THE COURT ORDERS THAT:

1.     The parties file and serve minutes of any orders which they contend should be made to give effect to the reasons for judgment delivered today on or before 25 October 2011.

2.    The parties file and serve minutes of any directions which they contend should be made in advance of the hearing of the remaining issues in the proceeding on or before 25 October 2011.

3.    The proceeding be listed for mention at 9:30 am on 27 October 2011.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1        The Holyoake group of companies is based in New Zealand. The holding company is the second applicant, Holyoake Industries Limited (“Holyoake Industries”). The directors of Holyoake Industries include Mr Noel Holyoake, Mr Grant Holyoake and Mr Scott Holyoake. The first applicant (“Holyoake Victoria”) is a wholly owned subsidiary of Holyoake Industries. Its directors at relevant times were Grant Holyoake, Scott Holyoake, Noel Holyoake, Steve Coombe, Mike Maude and Jamie Brown. Of these the second respondent was the only director resident in Victoria.

2        Holyoake Victoria conducted what was described in evidence as an “air distribution business”. It supplied equipment to mechanical contracting service companies and others engaged in the installation of air conditioning systems in office and other buildings. Many of the component parts of its products are sourced from New Zealand.

3        Variflow Melbourne Pty Ltd was a long standing competitor of Holyoake Victoria which traded under the business name “Variflow Melbourne”. The company was controlled by Kelvin and Margaret Payne.

4        Mr Jamie Brown was the general managing director of Holyoake Victoria (and its predecessor) from 1998 until 26 March 2009.

5        Mr Chris Matkovic was a production manager and factory manager employed by Holyoake Victoria from 9 August 1999 to 27 March 2009.

6        Mr Anthony Aloe was employed by various Holyoake Group Companies in Australia from 2000. Between 1 December 2008 and 13 March 2009 he was employed by Holyoake Victoria as its business development and engineering manager.

7        The first respondent (V-Flow) was incorporated on 25 February 2009. Its directors are Messrs Matkovic and Aloe. V-Flow purchased the business name Variflow Melbourne from Variflow Melbourne Pty Ltd and entered into competition with Holyoake Victoria.

8        The commercial negotiations and dealings which led to the incorporation of V-Flow and its purchase of the Variflow business commenced in the latter part of 2008. The negotiations involved Messrs Brown, Matkovic and Aloe.

9        The applicants contend that, in the course of pursuing their interest in purchasing the Variflow business, Messrs Brown, Matkovic and Aloe breached the fiduciary and contractual obligations which they owed to Holyoake Victoria and contravened ss 182(1) and 183(1) of the Corporations Act 2001 (Cth). Mr Brown is further alleged to have contravened s 181(1) of that Act.

10        The respondents deny that any such contraventions occurred.

11        The activities of the individual respondents, although directed to a common purpose, were not identical. It will, therefore, be necessary to explore the background in greater detail before turning to the parties’ competing contentions.

BACKGROUND FACTS

12        The interest of the individual respondents in the Variflow business can be traced back to 2001. In that year Mr Payne considered selling the business. He engaged a broker. The broker advised Mr Brown that the Variflow business was on the market and asked whether Holyoake Victoria might be interested in purchasing it. Mr Brown’s response was sufficiently positive for him to be invited to enter into a non-disclosure agreement in order to obtain a memorandum containing confidential business information relating to Variflow. The memorandum was subsequently provided. Mr Brown certainly received it and retained it in Holyoake Victoria’s records. There is a dispute as to whether a copy was provided to Mr Grant Holyoake. He claims not to have seen it.

13        After the non-disclosure agreement was signed by Mr Brown, Mr Noel Holyoake came to Melbourne from New Zealand and he and Mr Brown visited the Variflow premises. Their purposes in doing so may have varied. Mr Brown’s interest was in obtaining information which might assist him in forming a judgment as to whether or not it would be in Holyoake’s interests to purchase the Variflow business. Mr Holyoake, on the other hand, did not express any enthusiasm for such a purchase but made the visit, in part at least, for the purpose of garnering some intelligence about the operations of a business rival which was a manufacturer of some parts which Holyoake purchased.

14        Neither Holyoake Victoria nor any of the other Holyoake group companies made an offer for Variflow. The Variflow business remained in the hands of the Payne interests.

15        Shortly afterwards Mr Brown was appointed as a director of Holyoake Industries.

16        In May 2006 Mr Aloe became managing director of Holyoake’s Queensland subsidiary.

17        In August 2006 he was appointed as managing director of Holyoake’s New South Wales subsidiary.

18        Towards the end of 2007 Mr Payne renewed his interest in selling the Variflow business. He engaged business brokers to appraise the market worth of Variflow and to advise on a marketing strategy.

19        In or about August/September 2008 Messrs Brown, Matkovic and Aloe discussed the possibility of jointly pursuing a business opportunity. That opportunity was the purchase of a business which traded as High Fire Heating. They sought advice from management advisers, Lanteri Partners.

20        At about this time Mr Aloe expressed a wish to retire from his position with Holyoake New South Wales. On 14 October 2008 Mr Brown wrote to Mr Aloe offering him the position of business development and engineering manager of Holyoake Victoria. Mr Aloe formally accepted the offer on 22 November 2008 and commenced duties on 1 December 2008.

21        The Holyoake group of companies had collected a set of contractual clauses which dealt with matters such as protection of confidential information, restraints on competition, non-solicitation and proscription of conflicts of interest which could be drawn on when drafting its managerial contracts. These clauses were used selectively and inconsistently. Mr Aloe’s earlier contract contained the following clauses:

“I undertake not to act or work in conflict with the company during my employment.

..

I agree during the period of my employment, or at any time thereafter, not to disclose to any person or entity confidential company information, or to make use of any information process, papers or documents to which I may have access except on behalf of the company.

I agree not to keep or store records concerning personnel or of a commercially sensitive nature away from company premises.

I agree that in the event of my leaving the company I will not solicit or approach the companys (sic) clients, employees or agents for a period of not less than six months. I also agree not to disclose to any third party, particularly those in the same industry sector, any information, process, pricing, costs, or products that the company has and regards as confidential or of a competitive advantage.

I agree in the event of my leaving the company for any reason to return any Company property, and repay or have deducted from my final pay, any personal debt to the company.”

22        Some of these clauses were missing, in whole or in part, from the contract which Mr Aloe negotiated with Mr Brown. Insofar as the subject matter was dealt with in the new contract, that contract provided:

“The employee agrees that all equipment, records, documents and other papers or material and/or information of any kind and in any form, properly the property of the employer shall remain the property of the employer. The employee further agrees not to copy any such material in his or her possession at any time, except for appropriate internal company use, and under no circumstances to distribute such material outside the company without specific authorisation.

The employee agrees to return all such material in his or her possession to the employer on termination of employment.

..

I [Mr Aloe] undertake to use my best endeavours to support the continued profitable development of the company in all respects.

I undertake not to act or work in conflict with the company during my employment.

…

I agree in the event of my leaving the company for any reason to return any Company property, and repay, or have deducted from my final pay, any personal debt to the company.”

23        The contract which Mr Matkovic signed in 2007 contained detailed provisions under the headings “Conflicts of Interest”, “Restraint”, “Obligations on Termination” and “Confidential Information”. They read:

“Conflicts of Interest

You are required to arrange, and continuously monitor, your affairs so that there is no conflict of interest between your interests and those of the Company.

You must not, without the written consent of the Company, hold any direct or indirect interest (other than an immaterial shareholding in a company listed on the stock exchange) in, or work in any capacity for, any entity which is a customer or competitor of the Company or which supplies goods or services to the Company.

You must not, during the course of your employment with the Company, engage, whether directly or indirectly, in any employment, business or activity that could impair your ability to act in the best interests of the Company at all times.

…

Restraint

(a)    In this clause “engage in” means to carry on, participate in, provide finance or services or otherwise be directly or indirectly involved as a shareholder, unit holder, director, consultant, adviser, contractor, principal, agent, manager, employee, manufacturer, beneficiary, partner, associate, trustee or financier.

(b)    You must not

(i)    engage in any business or activity which is the same as or similar to the Company’s business or is in competition with the Company or Group or any material part of the Company or Group;

(ii)    solicit, canvass, approach or accept any approach from any person who was at any time, during the 12 month period prior to the date of termination of your employment, a customer, supplier, or client of the Company or Group, with a view to obtaining the custom or involvement of that person in a business that is the same as or similar to the business of the Company or the Group and is in competition with the Company or Group;

(iii)    interfere with the relationship between the Company or the Group and their customers, employees or suppliers; and/or

(iv)    induce or assist in the inducement of any employee of the Company or another company in the Group to leave that employment.

(c)    The obligations set out in sub-clause (b) above apply for a period commencing on the date of termination of your employment, and ending:

    12 months after the termination of your employment.

(d)    The obligations set out in sub-clause (b) above apply only if the activity prohibited occurs within:

    Australia and New Zealand;

(e)    Sub-clauses (b), (c) and (d) have effect together as if they consist of separate provisions, each resulting from combining each undertaking in sub-clause (b) with each period in sub-clause (c) and combining each of those combinations with each separate area in sub-clause (d). If any of those separate provisions is invalid or otherwise unenforceable for any reason, the invalidity or unenforceability shall not affect the validity or enforceability of any of the other separate provisions or other combinations of those separate provisions of sub-clauses (b), (c) and (d).

(f)    You acknowledge each of the following:

    the restrictions in this restraint clause are reasonable in their extent and duration;

    they are no more than are necessary to protect the interests of the employer; and

    they do not unreasonably restrict your right to work.

Obligations on Termination

You must, by the date of termination, return to the Company all and any documents and other property belonging to the Company (including, as applicable and without limitation, mobile telephone, computer, credit cards, keys and vehicle), in good order and condition.

Your obligations regarding Confidential Information, Intellectual Property and Restraint of Trade, continue after termination.

…

Confidential Information

“Confidential Information” means information of the Company and the Group of a confidential nature (whether or not marked as ‘confidential’) and specifically includes information in relation to the Company’s or the Group’s:

    business, operations or strategies (including, for example, financial and accounting records, information pertaining to sales, marketing plans, credit histories, contacts, price lists and computer software);

    intellectual or other property; or

    actual or prospective customers, manufacturers, suppliers or competitors.

Information is not confidential if:

    it is in the public domain, unless it came into the public domain by a breach of confidentiality;

    it is already known to you at the time this agreement is entered into; or

    it is obtained lawfully from a third party without any breach of confidentiality.

You must not disclose confidential information except in any of the following circumstances:

    The disclosure is required by law;

    The disclosure is necessary in connection with performing obligations under this agreement;

    The disclosure is to an officer or employee of the Company, to the extent that he or she needs to know the confidential information;

    The disclosure is reasonably made to a professional legal advisor; or

The Company consents in writing to the disclosure.

You must use confidential information solely for the purpose of performing your duties and not for the benefit of yourself or any third party.

You must not make any note or other record containing confidential information, unless it is reasonable to do so in the interests of the Company. Any notes or records that you do make are the property of the Company and must not be used except for the benefit of the Company.

You must return all confidential information to the Company upon termination of your employment.”

24        The clauses relating to conflict of interest, restraint and confidential information were omitted from the contract which he negotiated with Mr Brown in September 2008. The last paragraph of the section on obligations on termination was also omitted.

25        Mr Brown had neither sought nor obtained approval from any of the senior Holyoake group managers in New Zealand before agreeing to omit these terms from the contracts.

26        In the meantime, Mr Brown had made a visit to Variflow to discuss a number of business matters with Mr Payne. This visit took place on 17 October 2008. In the course of their discussions Mr Brown asked Mr Payne whether Variflow was for sale. Mr Payne indicated that the matter was in the hands of his business brokers, Blount Marlow Walsh (“BMW”).

27        On 27 October 2008 Mr Brown arranged a meeting with Lanteri Partners. Lanteri Partners’ internal task status report recorded that the meeting was to involve various officers of Lanteri Partners, including Mr Michael Lanteri, Mr Frank Taddeo and Mr Tony Boscia and Messrs Brown, Aloe and Matkovic. The subject of the meeting was identified as “re business opportunity – High Fire Heating.”

28        On 12 November 2008 an internal Lanteri Partners e-mail recorded that Mr Lanteri spoke with Mr Brown that morning. It went on: “Jamie is still waiting for documentation. He is also looking at another company where the CEO is 68 years and wants out.” A “follow-up” was listed to occur by 2 December 2008.

29        On 1 December 2008 Mr Aloe signed a confidentiality agreement with BMW. The agreement covered information which was to be provided by BMW to assist Mr Aloe in assessing the activities and market worth of the Variflow business with a view to acquisition of that business. The confidential information, including Variflow’s profit and loss statements, were provided to Mr Aloe shortly after he signed the agreement.

30        It is clear that, by this time, Messrs Brown, Aloe and Matkovic’s interest in High Fire Heating had cooled. They had determined actively to pursue the purchase of the Variflow business. On 2 December 2008 Mr Brown wrote to Mr Lanteri a letter which dealt with “Purchase of Business – Variflow.” The letter (with formal parts omitted) read:

“Further to our discussions yesterday we are now in receipt of Profit & Loss Statements (see copy attached) for Variflow Melbourne Pty Ltd. (ABN 33 004 400 104).

Variflow’s owner Kelvin Payne wants to retire and is offering the business for sale through a broker being: Blount Marlow Walsh (contact is Gordon Sutherland).

The business has not been taken to the open market for sale and is being offered in the first instance to ourselves following our initial enquiry. The owner insisted on using a broker.

Anthony has met with the broker and we can advise the following:

    The asking price is $480,000 plus stock ($190,000 approx)

    Is seeking offers for a total of between $600,000 to $700,000

    Once offer is accepted then a fully refundable 10% deposit is payable in order for the broker to release full disclosure (memorandum of sale documentation)

    Variflow is aiming for an agreement in place by Christmas.

    Lease on existing building expires in March

    Debtors $390,000 to $400,000

    Creditors $75,000 to $80,000

Kelvin Payne wishes to keep all negotiations at arms length and has requested that all correspondence be through his broker – Gordon Sutherland. Prior to any offers we have requested of the broker, further information including a break down of wages, budgets for next year, lease agreements, product agency agreements, depreciation schedule & asset register. This has been agreed to and we await delivery of same.

Attached is a copy of a Memorandum of Sale from a previous attempt to sell the business in 2000-2001. Please note that this has been acquired independently and is for the information of Lanteri Partners only.

Could we please ask that you check the attached documentation with a view to arranging a meeting together prior to an offer being made.” (Emphasis in original).

31        The 2000-1 Memorandum of Sale, to which reference is made in the letter, is the confidential information relating to Variflow’s business which had been provided to Mr Brown through brokers in 2001. The document had been retained in Holyoake Victoria’s records and had been recovered by Mr Brown from those files and sent to Lanteri Partners.

32        On 14 December 2008 Mr Lanteri and two of his colleagues met Messrs Brown, Aloe and Matkovic. In the course of the meeting Mr Lanteri gave Mr Brown contact details for Ms Suzanne Harmer, a solicitor employed by Rigby Cooke.

33        On 17 December 2008 Mr Lanteri caused an e-mail to be sent to Ms Harmer in which he advised that she would be receiving a call from Mr Aloe “regarding purchase of a company.” Attached to the e-mail was the sale of business information memorandum which had been prepared in 2000-1 and the more recent material which had been supplied to Mr Aloe earlier in the month. Also attached were heads of agreement which were said by Mr Lanteri to have been “drafted by the client.” Ms Harmer was asked to review the heads of agreement.

34        On 19 December 2008 Mr Aloe signed heads of agreement which contained an offer to purchase the Variflow business. The offer was forwarded to the brokers. It was accepted by Mr Payne on behalf of Variflow on 22 December 2008.

35        On the same day Mr Payne sent a hand written memorandum to BMW in which he noted that Variflow had committed to the purchase of an egg crate core cutter costing $16,800 plus GST. The machine was due for delivery in early January 2009. He foreshadowed that the machine would provide Variflow with “a great contribution to operating efficiency.”

36        On 30 December 2008 Mr Aloe, acting on behalf of himself, Mr Brown and Mr Matkovic paid a deposit of $50,000 towards the purchase of the Variflow business. Mr Matkovic provided the funds.

37        On 6 January 2009 Mr Lanteri and Mr Brown spoke on the telephone. In the course of that discussion Mr Brown told Mr Lanteri that 1 April 2009 had been proposed as the date for settlement of the purchase of the Variflow business; that Mr Brown proposed to resign from Holyoake Victoria in the course of the month of January; and that he had “tapped networks and have got a lot [of] new work.”

38        On the following day Mr Brown and Mr Lanteri exchanged e-mails. In the first, Mr Brown (using his home e-mail address) wrote:

“As discussed the offer to purchase Variflow has been accepted and the signed Heads of Agreement is attached for your perusal. The agreed purchase price is $425,000 + Stock @ approximately $190,000. (Note that there is an additional piece of plant being purchased in January with a value of $16,800 that is included in the purchase price and is not shown on the current asset register). The deposit of $50,000 was paid in December.

Due Diligence is to commence officially on the 20th January with settlement on the 1st April 2009. As a result we need to act quickly and accordingly we will require your support to establish a suitable strategy and plan to enact a swift and smooth takeover, including funding and structure, both personally and business.

We are currently working on a suitable business plan for funding and operating purposes. In the interim there is obviously further information required from the Broker – Blount Marlow Wash and we would appreciate your direction on specific requirements.

While too large a file to email we have in possession a copy of the lease agreement for the premises of the business. I have however attached a copy of the YTD P & L and Balance Sheet.

Following careful consideration we have decided to reassess our exit strategy from our current employer which sees myself resigning this month providing two months notice, followed by Anthony & Chris in February / March.

We would appreciate the opportunity to meet with you this week if at all possible. As of next week we are all back to work. Please call once you have had a chance to read the attached in conjunction with the information already in your possession.”

39        Mr Lanteri responded:

“TB/FT – ML had a teleconference with JB yesterday. Brief summary as per below:

-    offer put forward at Xmas was accepted. Stock & barrel based on independent valuation @ $180K

-    settlement 1st April 2009

-    JB will resign January 2009

-    Have top end networks and have got a lot of new work

-    JB is placing house on market and have informed Directors of his financial position

-    Will be meeting with ML in due course”

40        On 9 January 2009 Messrs Brown, Aloe and Matkovic met with Mr Michael Lanteri and other advisers in the Lanteri Partners’ boardroom. The discussion ranged over a number of issues. They included the legal structure under which the Variflow business would be operated following settlement, the undertaking of a due diligence audit, accounting and taxation matters and the provision of finance for the purchase of the business.

41        The minutes of the meeting record that Messrs Brown, Aloe and Matkovic were to be “partners” in the operation of the Variflow business.

42        Under the heading “finance” the minutes record that Mr Brown “can be involved in the business purchase process starting from next week when he resigns.” Under a separate heading “Jamie Brown” it was noted that Mr Brown’s family home was currently on the market. The minutes then record that:

“b)    Jamie will reimburse any capital injection shortfall to Anthony and Chris by repaying them through his reduction in dividend entitlements. This is subject to any dividends being issued, and if not, as a result of debt reduction plans for business profits, then appropriate measures meaning Jamie’s shortfall in capital injection obtained from Anthony and Chris will be calculated every year and this reduction of debt will take place first before any other.

c)    Untested law in relation to Jamie’s current situation as a MD with Holyoake.

d)    Michael [Lanteri] advised Jamie to be discrete in his business dealing after the Settlement Date and not to solicit clients from his current employer.”

43        The minutes concluded with a heading “correspondence” in which Messrs Brown, Aloe and Matkovic’s personal mobile telephone numbers and e-mail addresses were listed. The handwritten notes on which the minutes are based indicate that Messrs Brown, Aloe and Matkovic had instructed Lanteri Partners to contact them only on these numbers or at these e-mail addresses.

44        On 14 January 2009 Mr Aloe sent an e-mail to Lanteri Partners which included the following passages:

“The business broker called yesterday in regards to commencing Due dilligiance (sic), has the check list been prepared so that we can forward it to him?

…

The business plan will be completed within the next few days ….

In terms of financing we would like to have this arranged fairly soon so that we can all be clear in the direction we are heading, if possible a meeting or clarification this week would be ideal, as 1 of the partners will be overseas early next week.”

45        As foreshadowed, the “partners” completed a business plan which could be presented to potential financiers. The principal author of the plan was Mr Brown. The full plan was not discovered by the respondents. Parts of it were obtained on subpoena from Lanteri Partners.

46        It is convenient, at this point, to interpose some observations about the inadequate discovery provided by the respondents. Mention has already been made of various e-mail exchanges which took place between the individual respondents and between them and third parties such as Lanteri Partners. Further exchanges, such as the ones just mentioned, occurred during 2009. None of this e-mail traffic was discovered by the respondents. Nor were important documents such as the letter written by Mr Brown dated 2 December 2008 and the business plan. When questioned each of the individual respondents said that they had deleted this material from their personal accounts despite being advised, by their solicitors, about their discovery obligations. They claimed that, since this material was no longer on their computers, they did not have it and it could not be discovered. Having failed to discover the material and assuming that the applicants would not become aware of it, they felt able to give evidence which was inconsistent with the documentary record. The individual respondents, for example, in their affidavits suggested that Messrs Aloe and Matkovic had not sought to involve Mr Brown in the Variflow purchase until after Christmas 2008. This was not true. As Mr Brown himself agreed, having been confronted with the letter, he had been involved at least since late November 2008. Where the evidence of Messrs Brown, Aloe and Matkovic was inconsistent with the contemporaneous records my findings have been based on the documentary evidence.

47        The part of the plan which was in evidence is dated 19 January 2009. It contains an organisation plan for the new business. The directors were to be Messrs Aloe, Matkovic and Brown. Mr Brown was to be the managing director. Mr Aloe was to be the manager responsible for engineering and administration. Mr Matkovic was to be responsible for the management of the factory and production processes. All directors were to be involved in sales.

48        The business plan also contained passages dealing with anticipated sales. They read:

“With Variflow as the vehicle the three new owners have absolute confidence in customers changing their existing buying habits, given that the three competitors are somewhat arrogant in their dealings with customers. This can be put down to the fact that this is a somewhat unique and specialised industry with only three large suppliers of Air Distribution Product and there have been no viable threats to their market share until now.

Variflow will have a competitive advantage which is founded strongly on long term existing relationships between the new owners and a wide range of Mechanical Contractors (Melbourne based as well as Nationally). Further to this Variflow with its inherent low overheads will remain competitive in the market.

Along with customer relationships the new owners bring to Variflow a very good network of supplier relationships. It is estimated that this will enable cost savings on raw materials and componentry in the order of 10%.

Variflow’s customer base is presently made up of small to medium size Mechanical contractors where average sales are of a small to medium nature. The new owners of Variflow will bring to Variflow the necessary experience, skills, exposure and contacts with which to secure larger orders for larger and longer term commercial HVAC projects. Of particular importance is the wealth of experience in Project Management of large commercial projects that is being brought to Variflow.”

49        On 20 January 2009 Mr Aloe conducted a due diligence inspection of the Variflow premises. He said that he was on sick or carer’s leave from Holyoake Victoria on that day and had attended the Variflow premises for a few hours. Mr Matkovic was also present at the inspection.

50        On 28 January 2009 Lanteri Partners provided Messrs Brown, Aloe and Matkovic with the results of the firm’s review of the financial data of Variflow. The review disclosed that Variflow had made healthy profits in each of the 2006, 2007 and 2008 financial years.

51        On 30 January 2009 Finance National Pty Ltd, a company associated with Lanteri Partners, prepared a finance proposal to assist Messrs Brown, Aloe and Matkovic in obtaining funds to purchase the Variflow business. The borrower was identified as Variflow Australia Pty Ltd in its own capacity and in its capacity as trustee for the Variflow Australia Unit Trust. There were to be three unit holders in the unit trust. They were to be family trusts established by each of the three partners. Messrs Brown, Aloe and Matkovic were identified as the guarantors for any loan funds. Attached to the proposal was a business plan and the personal financial details of Messrs Brown, Aloe and Matkovic and their wives.

52        The proposal was forwarded to the Westpac Banking Corporation (“the bank”). In an e-mail, dated 16 February 2009, a senior relations manager employed by the bank, Mr Joseph Calafati, confirmed details of the application. The borrowers were identified as Messrs Brown, Aloe and Matkovic. The money was required to purchase Variflow which was described as “a well established local manufacturer/supplier of distribution equipment to mechanical services industry for over 55 yrs.” The three borrowers were said to be “currently employed with Holyoake Industries Pty Ltd. Holyoake Industries is a manufacturer of Air distribution systems and peripherals in the mechanical services industry. It is a competitor to Variflow. Holyoake Industries P/L is a public company based in NZ.” Reference was then made to the industry experience of each of the borrowers. Under the heading “Forecast assumptions” the following passages appear:

“Sales to grow by 30 % based on expanding market to interstate distributors and industry groups. The intended buyers have extensive knowledge/experience of the WA, QLD & NSW market. New distributors & end users will be targeted. Intended buyers have already begun negotiating with potential new customers. Opportunity to establish wholesale/distributor base interstate given their expansive relationships with Holyoake’s customer base.

…

Intended buyers have approached the current owners of Variflow to negotiate acquisition. Client have researched & conducted due diligence on the Industry products, competitor analysis (SWAT) as evidenced in clients (sic) business plan. SRM believe that clients have conducted the necessary research and analysis of this acquisition accompanied with a due diligence report by lanteri Partners (sic) accountants. In essence, clients have conducted a quasi risk analysis on the Industry and Variflow itself.

The intended buyers see the acquisition of Variflow as an opportunity to grow the company into a more dominant [player] in the market.”

53        On 20 February 2009 Mr Calafati wrote to Mr Aloe advising that the bank had granted approval in principle to provide funding for the purchase of Variflow. The approval was subject to certain conditions. In the weeks that followed these conditions were satisfied. They included the provision of security by way of personal guarantees.

54        Late in the trial a document was produced under subpoena by the solicitors who had acted for Messrs Brown, Aloe and Matkovic in connection with their purchase of the Variflow business. The document was entitled “Variflow Melbourne (V-flow) Overview of Company and (new) Owners (sic) Experience.” It is undated. There are, however, a number of indications in the evidence which point to it having been created in February or early March 2009. The solicitors were, at that time, engaged in setting up the business structures and preparing for settlement. The tenor of the document, which speaks, for example, of Variflow as being “a tremendous and very exciting opportunity”, suggests that it was prepared whilst Messrs Brown, Aloe and Matkovic were still employed by Holyoake Victoria, but after they had obtained the finance necessary to complete the purchase. It speaks glowingly of their industry experience and the prospects for the Variflow business. I infer that it was written by one of the three individual respondents and, most likely, by Mr Brown. It contained these passages:

“Through experience and existing customer relationships the new owners of Variflow will have immediate access to a further 300 or so customer (sic) made up of predominantly Mechanical Services Contractors.

Further to this it is planned that a National Distributor base will be established within the first 2 years. Both Anthony and Jamie have worked in Queensland, Sydney, Adelaide and Perth and there will be wide industry support in these states based on strong relationships developed over previous years. There is already a pre-commitment from customers in Perth, Brisbane and Sydney.” (Emphasis added).

55        On 25 February 2009 the first respondent V-Flow Pty Ltd (“V-Flow”) was incorporated. The two inaugural directors were Messrs Aloe and Matkovic.

56        On the same day the deed of trust of the V-Flow Unit Trust was made. It was executed on 4 March 2009 by Messrs Brown, Aloe and Matkovic on behalf of their respective family trusts.

57        At about this time Mr Payne sent a letter to all Variflow’s suppliers in which he advised that the Variflow business was being sold to V-Flow Pty Ltd, trading as Variflow Melbourne, with effect from 6 April 2009. He further advised that Variflow Melbourne would maintain all existing staff and that he would remain on site for four weeks after settlement to ensure a smooth change-over.

58        By mid-March Mr Brown had decided that he no longer wished to be a part owner of the Variflow business. He determined not to provide funds to purchase the business but, because of his previous involvement, considered that he had an obligation to support Messrs Aloe and Matkovic to obtain additional finance so that they could proceed with the purchase. Mr Brown arranged for units held by his trust to be transferred to Mr Matkovic’s trustee company. Mr Brown also continued to deal with Lanteri Partners on behalf of Messrs Aloe and Matkovic.

59        Settlement of the purchase of the Variflow business by V-Flow was effected on 9 April 2009.

60        It is also necessary to record the involvement of some of the individual respondents in aspects of Holyoake Victoria’s business in the period prior to their departure.

61        In October 2008 Mr Payne placed an order with one of the Holyoake Group Companies in New Zealand to purchase the egg crate core cutter which was referred to in Mr Payne’s memorandum to BMW on 19 December 2008: see above at [35]. This order was placed through Mr Brown. The machine had the potential to improve the productivity of the Variflow business. Mr Brown continued to be the person with whom Mr Payne dealt in relation to the acquisition of the machine into the early part of 2009.

62        During the second half of 2008 Holyoake Victoria was supplying parts to an installer of air conditioning systems called Allstaff. This contractor was engaged on some large projects at the Chadstone Shopping Centre, the Hilton Hotel, Westfield Doncaster and Cabrini Hospital. The Holyoake Victoria sales representative who dealt with Allstaff was Mr Len Sapwell. Another sales representative employed by Holyoake Victoria, Ms Roxanne Bawdon, received complaints from Allstaff managers relating to what were said to be problems created by Mr Sapwell. It was suggested, for example, that projects on which he quoted often overran because he under estimated costs and that he wasn’t contactable when needed. Ms Bawdon said that she passed these complaints on to Mr Brown who accepted that Mr Sapwell was not good at project management. Mr Brown told her that Mr Aloe would assist with project management on jobs with which Mr Sapwell was associated. Despite these assurances, the problems were not rectified after Mr Aloe’s arrival in December 2008 and Holyoake Victoria lost part of Allstaff’s business. Mr Brown understood that Allstaff was Variflow’s largest customer.

63        Allstaff was also involved in a project known as the RMIT Building 13 Project. In December 2008 Ms Bawdon provided Allstaff with a quote in relation to that project. The list price for the job was $79,648 plus GST. Because of the strong relationship between Holyoake Victoria and Allstaff a 45 per cent discount was applied to the quote. Despite this Holyoake Victoria was undercut by another supplier who quoted $28,000 plus GST for the job. In order to match this price Holyoake Victoria would have had to reduce its list price by 53 per cent. In late January or early February 2009 Ms Bawdon asked Mr Aloe to authorise the lodging of a more competitive quote. According to Ms Bawdon Mr Aloe instructed her not to discount the quote any more and to do no more work on the project. Variflow was the successful tenderer.

64        While the financial arrangements were being put in place Messrs Brown, Aloe and Matkovic set about terminating their employment with Holyoake Victoria.

65        Mr Brown acted first. On 2 February 2009 he wrote to Mr Grant Holyoake and other Holyoake family members giving notice of his resignation as managing director of Holyoake Victoria. He nominated his last working day as being 31 March 2009. He also purported forthwith to resign as a director of a number of companies within the Holyoake Group including Holyoake Victoria. Mr Brown, in fact, remained a director of Holyoake Victoria until 31 March 2009.

66        Attempts were subsequently made by members of the Holyoake family to persuade Mr Brown to reconsider his position. Mr Brown said that the demands of the managing director’s position and serious health issues confronting his wife required that he spend more time with his family. Mr Brown rejected an offer which would have enabled him to take a lengthy period of leave during which he could rest and care for his wife before returning to work at Holyoake Victoria. During these discussions he made no mention of his involvement in the purchase of the Variflow business.

67        Mr Aloe was offered the position of managing director of Holyoake Victoria to replace Mr Brown. He declined this offer and, on 16 February 2009, tendered his resignation which took effect on 13 March 2009. Even though he did not think that “it was appropriate for me to even stay any longer” he did not tell the applicants’ directors at the time he resigned (or at any other time) that he had this reservation (as was the fact) because he was negotiating the purchase of the Variflow business.

68        Mr Matkovic tendered his resignation on 24 February 2009. His resignation was to take effect on 27 March 2009. He told Holyoake Victoria managers that he was leaving to go overseas for at least a month and that, on his return, he was interested in buying a shop closer to where he lived. He acknowledged that this explanation was a lie. When asked why he lied, he responded: “It’s obvious, isn’t it. I’m trying to protect myself.”

69        At no time prior to tendering their resignations and leaving the service of Holyoake Victoria did Messrs Brown, Aloe or Matkovic advise anyone at the managerial level in the Holyoake group of companies that they were proposing to purchase the Variflow business and to use it as a vehicle to enter into competition with Holyoake Victoria. They said nothing about their dealings with BMW, the Westpac bank and others who were assisting them make the arrangements. Indeed they went to great lengths to conceal their activities from other managers including Mr Grant Holyoake. Mention has already been made of the direction given to Lanteri Partners concerning methods of communication with them and of the failure of any of them to advise the applicants of the true reasons for their resignations. There was further evidence of extensive mobile phone traffic passing between them over the period from October 2008 until April 2009. The evidence also disclosed extensive e-mail communication between the three of them during this period and that this material had been deleted from their servers. They used their personal telephone and e-mail accounts. These exchanges intensified at the time that important steps in the purchase process such as conduct of the due diligence exercise, applications being made for finance and the settlement process occurred. I readily infer that many of these telephone and e-mail exchanges related to the Variflow purchase. None of this material was discovered as it should have been in the course of the proceeding.

70        Confronted with the defections, directors of Holyoake Industries decided to appoint an interim general manager pending Mr Grant Holyoake taking up the position of managing director at the end of May 2009.

71        Messrs Brown, Aloe and Matkovic had, upon termination of their employment with Holyoake Victoria, each lost their regular incomes. In anticipation that this would occur they sought to ensure that they would be in a position to undertake productive and remunerative work with Variflow immediately after they left their former employment. This they did. Messrs Aloe and Matkovic commenced full time employment with Variflow within days of ending their employment with Holyoake Victoria. There was some dispute about the extent of Mr Brown’s involvement in the Variflow business but he was actively involved, at least on a part time basis, from the outset.

72        On 7 April 2009 Mr Grant Holyoake had a telephone conversation with Mr Brown. In the course of that conversation Mr Brown told Mr Holyoake that he (Mr Brown) was helping Messrs Aloe and Matkovic on a part time basis in a new business venture which they had established.

73        Later in the month Mr Brown and Mr Grant Holyoake met for coffee. At that meeting Mr Brown told Mr Holyoake that he (Mr Brown) was not involved in the ownership of the V-Flow business but was working for a few days a week for Messrs Aloe and Matkovic.

74        During the latter part of April and early May 2009 Mr Brown made contact with a number of Holyoake Victoria’s customers with a view to securing business for V-Flow.

75        After Messrs Brown, Aloe and Matkovic had left the employment of Holyoake Victoria managers of that company became aware of the association of the former managers with their competitor Variflow. As a result letters were sent, by Holyoake Victoria’s solicitor, to Messrs Brown and Aloe on 30 April 2009. Mr Matkovic saw the letter sent to Mr Aloe about the time it was received by Mr Aloe. The letter to Mr Brown read, in part:

“As you have recently resigned as a key member of the management team and as Managing Director for the Australian business and the wider Holyoake Industries Limited group, I am aware that you were employed under terms and conditions whereby you acknowledged that you were party to privileged information on staffing, products, new developments and the management/governance structure of Holyoake and the group.

As you have advised the directors of Holyoake that you are assisting a competitor, I take this opportunity to remind you of the terms of your employment contract (as is customary with senior resignations).

While I believe the directors of Holyoake wish you well in your new endeavours, and will work towards a businesslike trading relationship with your new ventures, they would not look favourably if Holyoake’s staff, suppliers or clients were to be approached by you or copyright/intellectual property copied.

In the event that you require any clarification of the matters raised in this letter, please do not hesitate to contact the writer.”

76        The letter to Mr Aloe was in similar terms.

77        At the time at which these letters were written the applicants’ directors were not aware of many of the events which I have just recounted or that, whilst Mr Brown was still employed by Holyoake Victoria he had had e-mail communication with a number of Holyoake Victoria’s customers and suppliers using his private e-mail address. These companies included Western Australian Mechanical Services and Quadrant. This material was deleted from his personal e-mail records at about the time he left Variflow Victoria. These e-mails were also not discovered as they should have been. The terms of the e-mails were not, therefore, in evidence.

CAUSES OF ACTION

78        The applicants rely on the following causes of action:

    Breaches of fiduciary duty, both equitable and statutory, by Messrs Brown, Aloe and Matkovic;

    The knowing involvement in these breaches of fiduciary duty by Messrs Aloe, Matkovic and V-Flow and also knowing receipt by V-Flow of the benefit of these breaches of fiduciary duty;

    Breach of confidence, both in equity and in contract; and

    Breach of contract, in respect of both express and implied terms.

THE VARIFLOW BUSINESS OPPORTUNITY AND RELATED MATTERS

79        The applicants’ central claim relates to what they complain constituted the misappropriation, by the respondents, of a business opportunity. That business opportunity was the possible purchase, by the Holyoake interests, of the Variflow business.

80        The applicants invited the Court to make the following findings:

“(a)    in identifying, arranging and diverting the Variflow business opportunity to be owned and exploited for the benefit of the respondents, each of Brown, Matkovic and Aloe breached:

(i)    their fiduciary and contractual duty to serve Holyoake Vic with loyalty and fidelity;

(ii)    their fiduciary and contractual duty not to retain or use any information or corporate opportunities from which Holyoake Vic could benefit, acquired in the course of their employment, for the benefit of third parties other than Holyoake Vic;

(iii)    in the case of Brown, contravened the statutory duty under section 181 of the Corporations Act to exercise his powers and discharge his duties in good faith in the best interests of Holyoake and for a proper purpose;

(iv)    in the case of each of Brown, Matkovic and Aloe, contravened section 182 of the Corporations Act in that they improperly used their positions to gain advantage for themselves or someone else or cause detriment to Holyoake Vic;

(v)    in the case of each of Brown, Matkovic and Aloe, contravened section 183 of the Corporations Act in that they improperly used information obtained as a director, employee or officer of Holyoake Vic to gain an advantage for themselves or someone else or cause detriment to Holyoake Vic;

(b)    for the purpose of identifying, arranging and diverting the Variflow business opportunity from Holyoake:

(i)    Brown, Matkovic and Aloe each used confidential information, know-how and/or property of Holyoake Vic for the purpose of pursuing that business opportunity;

(ii)    Aloe diverted or attempted to divert the RMIT Building 13 project to Variflow;

(iii)    Brown took no or no adequate steps in late 2008 to salvage Holyoake’s worsening and “chaotic” relationship with Allstaff in the hope that the work would flow subsequently to Variflow.”

81        Messrs Brown, Aloe and Matkovic accepted that they were under a duty to serve Holyoake Victoria with loyalty and fidelity, to return property upon leaving their employment and not to divulge or use Holyoake Victoria’s confidential information or trade secrets after leaving its employ. They denied that they breached any of these duties.

82        Messrs Brown, Aloe and Matkovic each admitted that he owed fiduciary duties to Holyoake Victoria but denied being under any fiduciary duty not to use any information or corporate opportunities, acquired in the course of his employment with Holyoake Victoria, other than for the benefit of Holyoake Victoria if that information or corporate opportunity could benefit Holyoake Victoria.

83        Messrs Brown, Aloe and Matkovic all denied any contraventions of ss 181, 182 or 183 of the Corporations Act.

84        The respondents each raised equitable defences of waiver or estoppel, and laches.

The duties owed by Messrs Brown, Aloe and Matkovic to Variflow Victoria

85        It will be convenient to deal with the causes of action founded on contract and equitable obligation together. They are closely related, the latter having informed the development of the former: see Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 700-1 (per Gleeson CJ, Gaudron and Gummow JJ).

86        Messrs Brown, Aloe and Matkovic were each employees of Holyoake Victoria. It was common ground that, as employees, they had an implied (if not express) contractual obligation to serve Holyoake Victoria with loyalty and fidelity.

87        The scope of this duty was outlined by Palmer J in Digital Pulse Pty Ltd v Harris (2002) 40 ACSR 487 at 491. His Honour there said:

“[20]    An employee has a duty to act in the interests of the employer with good faith and fidelity. That duty is implied in every contract of employment if it is not otherwise imposed by an express term. In addition, the duty is imposed upon every employee by the law of fiduciaries, the relationship of employer and employee being recognised as a paradigmatic fiduciary relationship.

[21]    The obligations imposed by the duty are not coterminous with the employee’s normal working hours: they govern all the activities of the employee, whenever undertaken, which are within the sphere of the employer’s business operations and which could materially affect the employer’s business interests. Whether a particular activity could materially affect the employer’s business interests is a question of fact and degree.

[22]    The duty of loyalty requires that an employee not place himself or herself in a position in which the employee’s own interest in a transaction within the sphere of the employer’s business operations conflicts with the employee’s duty to act solely in the employer’s interest in relation to that transaction. A fortiori, an employee may not take for himself or herself an opportunity within the sphere of the employee’s business operations without the employer’s fully informed consent.

88        It will be necessary, later in these reasons, to deal in greater detail with the applicants’ cause of action under s 182 of the Corporations Act. It is convenient to note, at this point, that s 182 codifies aspects of this contractual obligation to serve with loyalty and fidelity and that, as a result, much of what I am about to say about the implied contractual obligations will also be relevant to the applicants’ claim so far as it is based on s 182.

89        The parties accepted that the relevant equitable principles were those expounded by the High Court in Chan v Zacharia (1984) 154 CLR 178 and Warman International Limited v Dwyer (1995) 182 CLR 544.

90        In Chan (at 199) Deane J (with whom Brennan and Dawson JJ agreed) said that:

“Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use of or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee …”

91        This statement of principle was adopted and applied by the Court in Warman International. The Court there said (at 557-8) that:

“… the authorities in Australia and England deny that the liability of a fiduciary to account depends upon detriment to the plaintiff or the dishonesty and lack of bona fides of the fiduciary. Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd stated:

‘Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss.’

A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves ‘at a level higher than that trodden by the crowd’. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.

Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably. So, in Regal (Hastings) Ltd. v Gulliver, although the directors acted in good faith and in the interests of the company of which they were directors in taking up shares in a subsidiary which the company could not afford to take up, they were held accountable for the profit made on the sale of the shares. And, in Phipps v Boardman, the solicitor was held accountable for the profit he made, notwithstanding that he acted bona fides in the interests of the trust and that the opportunity would not have been availed of but for his skill and knowledge.”

92        Consistently with these principles a duty falls on a fiduciary not to place him or herself in a position of conflict. If he or she does so the duty is breached. As Besanko J (with whom Finkelstein and Jacobson JJ agreed) observed in Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 at 22, “fiduciary duties are proscriptive and not prescriptive.” A breach may be avoided if the fiduciary makes a full and frank disclosure of the facts to the person to whom the duty is owed and that person consents to the fiduciary acting in a way which would otherwise place him or her in a position of conflict. Disclosure and consent may also retrospectively excuse a breach which has already occurred. There is, therefore, no separate duty of disclosure. Disclosure and consent provide a defence: see Blackmagic at 22-23.

93        There was a dispute as to whether the individual respondents owed Holyoake Victoria any relevant fiduciary obligation in relation to the possible acquisition of the Variflow business.

94        Whilst accepting that they owed contractual and fiduciary obligations to Holyoake Victoria Messrs Brown, Aloe and Matkovic contended that they did not breach those obligations by pursuing the purchase of the Variflow business themselves whilst employed by Holyoake Victoria.

95        The respondents sought to place themselves outside the operation of the relevant principles on a number of bases. They were:

    The opportunity to purchase Variflow came to them independently of their employment by Holyoake Victoria.

    Holyoake Victoria was generally aware that the Variflow business was for sale but chose not to purchase it. One reason for this was that Holyoake regarded Variflow as an unprofitable business.

    Messrs Brown, Aloe and Matkovic were entitled to pursue alternative employment whilst they were employed by Holyoake Victoria without advising their employer.

    They pursued the purchase of the Variflow business, in the main at least, outside normal business hours at Holyoake Victoria using only their private resources and information which they had obtained independently of Holyoake Victoria.

The Opportunity to Purchase the Variflow Business

96        The individual respondents each gave evidence that they had heard that Variflow was “on sale” from other people within the air conditioning industry. Seized of this knowledge both Mr Brown and Mr Aloe were moved to ask Mr Payne, in the latter part of 2008, whether the business was on the market.

97        Knowledge that a business is on the market cannot be equated with the opportunity to purchase the business. The vendor of the business may, for example, agree to sell to a limited number of potential purchasers or, as was the present case, to sell to an entity which was prepared to deal with a broker through whom relevant information would exclusively be provided.

98        Mr Brown obtained detailed information about the Variflow business in 2001. He did so in his capacity as an employee of Holyoake Victoria and pursuant to a confidentiality agreement into which he entered with the broker then acting for Mr Payne. The confidential material then supplied included financial information relating to Variflow’s business and how it was positioned in the industry. The information memorandum was retained in Holyoake Victoria’s records.

99        On 17 October 2008 Mr Brown took advantage of a business visit to Variflow’s premises, which he undertook on behalf of Holyoake Victoria, to confirm with Mr Payne that the Variflow business was for sale. Mr Payne advised that the business was for sale and that the sale was in the hands of BMW.

100        It may readily be inferred that this information was passed on by Mr Brown to Messrs Aloe and Matkovic.

101        Messrs Brown, Aloe and Matkovic then set about obtaining the information which they needed for them to make an informed decision about whether or not to purchase the Variflow business. To this end, on his first day of employment with Holyoake Victoria, and, I infer, with the knowledge of Messrs Brown and Matkovic, Mr Aloe approached BMW and obtained detailed financial and other information relating to the Variflow business. This material disclosed, among other things, that, in the preceding three years, the business had been operating at a healthy profit.

102        Mr Aloe shared this confidential information with Messrs Brown and Matkovic. So much is clear from the terms of Mr Brown’s letter to Mr Lanteri on 2 December 2008. They provided it to Lanteri Partners with a view to obtaining advice on the commercial viability of the proposal.

103        Once the point had been reached when Messrs Brown, Aloe and Matkovic had determined that they would purchase the Variflow business they needed to obtain finance. In order to do this they arranged for First National Pty Ltd to prepare a financial proposal. When that proposal was submitted to the Westpac Banking Corporation it had attached to it a business plan which had been prepared by Mr Brown. In that business plan Messrs Brown, Aloe and Matkovic were at pains to stress their industry experience including the respective competitive positions of Holyoake Victoria and Variflow and their association with Holyoake Victoria’s customers. This was because they wished to persuade any potential provider of financial support that they would be able to conduct the Variflow business successfully and give comfort to the lender.

104        In these circumstances it cannot credibly be claimed that the opportunity for Messrs Brown, Aloe and Matkovic to purchase the Variflow business came to them entirely independently of their employment by Holyoake Victoria.

Holyoake Victoria’s Lack of Interest in the Purchase of the Variflow Business

105        Mr Noel Holyoake knew, in 2001, that the Variflow business was on the market. At that time he had no interest in purchasing it. In the years that followed neither Holyoake Industries nor Holyoake Victoria purchased any other businesses. Instead, they concentrated on expanding the Holyoake Victoria business: they purchased a series of new and larger premises in Victoria and commenced operations in New South Wales, South Australia and Western Australia. The respondents contended that, in these circumstances, it should be inferred that the applicants would have had no interest in purchasing the Variflow business in 2008 even had they been aware of the fact (which they were not) that it was on the market and of the details contained in the confidential information memorandum obtained by Mr Aloe from BMW.

106        This contention must be rejected. It is necessarily speculative given that the directors of the applicants were not aware of the commercial information relating to the Variflow business that had been obtained by Messrs Brown, Aloe and Matkovic. In particular, they were unaware of the fact that Variflow had made healthy profits in the immediately preceding financial years. By the time the trial took place Mr Grant Holyoake was familiar with the confidential information which had influenced Messrs Brown, Aloe and Matkovic to purchase the Variflow business. So advised he did not say that the applicants would not have been interested in purchasing the business. Indeed he described it as a “good fit” with Holyoake Industries.

107        More importantly, however, the respondents are not able to rely on the applicants’ unwillingness to purchase the Variflow business (were that the case) as a defence to the applicants’ equitable claims. As the High Court held in Warman International “it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken …” (at 558). The strict rule that a fiduciary must account for a profit or benefit obtained in breach of fiduciary obligations is enforced in order to preclude a fiduciary from placing personal interests above those of the principal and reaping the benefit of so doing.

Respondents’ Entitlement to Pursue Alternative Employment

108        In the absence of any express contractual provision to the contrary it is true, as the respondents submit, that employees are free to make enquiries about and apply for alternative employment without telling their present employer that they are doing so. Messrs Brown, Aloe and Matkovic did not, however, apply for employment with Variflow. Rather they negotiated the purchase of the Variflow business and then set up corporate and trust structures through which to conduct the purchased business. They became, indirectly, the shareholders in the new business and occupied the principal managerial roles within it. Whilst, in one sense, they thereby obtained alternative employment, they did so in a manner inconsistent with their contractual and fiduciary obligations to Holyoake Victoria.

The “Outside Business Hours” Defence

109        Although workers at Holyoake Victoria generally performed their duties during prescribed business hours, Messrs Brown, Aloe and Matkovic, as senior managerial employees, worked, where necessary outside this span of hours. A good deal of the work involved in assessing the business opportunity provided by Variflow including the obtaining of relevant advice, applying for finance and putting in place corporate structures took place outside normal business hours or during periods when Messrs Brown, Aloe and Matkovic were on leave. Much of the internet communication which passed between them occurred in the evenings. Mr Brown drafted the 2 December 2008 letter to Mr Lanteri the previous night. He prepared the business plan in what he considered to be his own time.

110        Other activities such as site inspections and attendance at some meetings with Lanteri Partners took place during Holyoake Victoria’s normal business hours. Messrs Brown, Aloe and Matkovic each considered he was entitled, because of irregular hours which he worked, to treat periods of his own choosing within normal business hours as his “own time”. Their pursuit of the Variflow project during these times did not, so they contended, trespass on the duties which they owed to Variflow Victoria.

111        This element of the respondents’ defence is over simplistic. The burden of fiduciary obligations is not borne solely during normal business hours and then cast aside at the factory or office door. As Palmer J observed in Digital Pulse, the “obligations imposed by the duty are not coterminous with the employee’s normal working hours.” The issue to be determined is whether particular activities, undertaken by the respondents in relation to the purchase of the Variflow business, could materially affect Holyoake Victoria’s business interests. As his Honour said, the answer to this question involves matters of fact and degree.

112        There can be no doubt, in my view, that the activities of Messrs Brown, Aloe and Matkovic in relation to their purchase of the Variflow business had the potential materially to affect Holyoake Victoria’s business interests. They became aware, in the course of their employment with Holyoake Victoria, that the Variflow business was on the market. They investigated the feasibility of purchasing it. Having made enquiries and obtained advice they determined to do so. Variflow, as they well knew, was a competitor of Holyoake Victoria. They were senior managers of the company. Mr Brown was a director. Their intention, to which they gave effect, was to take over the Variflow business and operate it in competition with Holyoake Victoria. This involved them withdrawing their services from their existing employer. Such conduct by such senior employees could not fail to have a significant impact on the operation of Holyoake Victoria’s business regardless of when it occurred.

Other Issues

113        There are further aspects of the conduct of Messrs Brown, Aloe and Matkovic which support the applicants’ claim that they breached their contractual and fiduciary obligations to their employer.

114        The first is their use of the 2001 memorandum about the Variflow business. Mr Brown obtained the memorandum upon signing a confidentiality agreement with the broker engaged by Variflow. Mr Brown acted in his capacity as an employee of Holyoake Victoria in giving the confidentiality undertaking and receiving the information. That information was placed on Holyoake Victoria’s files. It was extracted from those files by Mr Brown in December 2008 and given to Lanteri Partners to assist Lanteri Partners to advise Messrs Brown, Aloe and Matkovic about the purchase of the Variflow business. This was clearly a breach of the confidentiality agreement. More importantly, however, for present purposes, was the individual respondents’ use of confidential business information in the possession of Holyoake Victoria to pursue their personal business interests.

115        Secondly, the contractual arrangements for the purchase of the Variflow business were made in December 2008. The offer was made on 19 December 2008 and accepted three days later. A deposit of $50,000 was paid on 30 December 2008. Holyoake Victoria was thereby deprived of the opportunity of being the purchaser of the Variflow business. Messrs Brown, Aloe and Matkovic then embarked on the due diligence process and set about obtaining finance for the purchase of Variflow. They put in place what they described as “an exit strategy” from Holyoake Victoria. They did not advise directors of either applicant that they were engaging in these activities. Indeed they deliberately sought to ensure that their employer did not come to know of their conduct in pursuit of the Variflow purchase. Lanteri Partners were, for example, directed to communicate with Messrs Brown, Aloe and Matkovic only on their private mobile telephone numbers and at their private e-mail addresses. The respondents were not unconscious of the legal implications of what they were doing. Reference was made at their meeting with Mr Lanteri on 9 January 2009 to what was said to be “untested law” in relation to Mr Brown’s “current situation as a MD with Holyoake.” Mr Matkovic’s explanation for lying about the reasons for his decision to resign (that he was “trying to protect myself”) is another telling illustration of the justified reservations held by the respondents about the efficacy of their conduct.

116        Thirdly, Messrs Brown, Aloe and Matkovic, whilst still employed by Holyoake Victoria and, unbeknown to the company, set about obtaining customers for their new business which was to compete with Holyoake Victoria. The finance proposal which they put to the Westpac Bank advised that by mid-February 2009 they had “already begun negotiating with potential new customers”. The overview document said that some customers in Perth, Brisbane and Sydney had given pre-commitments to make purchases from Variflow. The truthfulness of these statements is a matter to which I will return. It is sufficient, at the moment, to observe that they were statements designed to enhance the respondents’ case for financial support and that they were assertions made during the currency of their employment by Holyoake Victoria.

117        Fourthly, there are the matters relating to Allstaff and the egg crate core cutter. Ms Bawdon claimed that Mr Aloe had instructed her not to lower Holyoake Victoria’s quotation to Allstaff in relation to the RMIT building. Mr Aloe denied having given such an instruction. Mr Bawdon also gave evidence that she had drawn Mr Brown’s attention to deficiencies in the way in which Holyoake Victoria dealt with Allstaff, that Mr Brown had acknowledged the shortcomings and said that Mr Aloe would ensure that remedial action was taken but that no such remedial action was taken. Messrs Brown and Aloe denied that any such action or inaction on their part was designed to advantage Variflow in anticipation of them becoming owners of that business. Mr Brown was actively involved in settling the terms and conditions under which Variflow was to purchase from Holyoake a machine which would enhance Variflow’s productive capacity. It is not necessary that I resolve the conflicting evidence in relation to these matters. It is sufficient, for present purposes, to note that these events occurred at a time in which Messrs Brown and Aloe were actively engaged in pursuing the purchase of the Variflow business. The potential for a conflict of interest between them and their employer was obvious and should have been, but was not, disclosed to Holyoake Victoria.

118        It was also during their employment with Holyoake Victoria that Messrs Brown, Aloe and Matkovic set up the corporate and trust structures which they proposed to use to conduct the Variflow business.

119        By acting in these ways Messrs Brown, Aloe and Matkovic placed themselves in a position in which their interests conflicted materially with those of Holyoake Victoria. They thereby breached their fiduciary obligations to that company.

Conclusions Relating to Breach of Contract and Fiduciary Obligations

120        Messrs Brown, Aloe and Matkovic each owed Holyoake Victoria an obligation to serve the company with loyalty and fidelity. From at least mid-November 2008 until the termination of their respective contracts of employment, they each breached this duty on the multiple occasions to which reference has been made.

121        They were also in breach of their fiduciary obligations to their employer and were, therefore, liable to account to Holyoake Victoria for any benefit or gain which they obtained by reason of that breach. This is a clear case in which the individual respondents had a conflict of interest with that of their employer and placed their personal interests ahead of those of the employer.

122        I have, thus far, concentrated on the impugned conduct of the individual respondents. Their conduct does, however, also have implications for the liability of V-Flow. As Palmer J said in Digital Pulse at [25]:

“Where the employee who is in breach of the fiduciary duty of loyalty incorporates a company in order to take the benefits of the breach, then the company itself will be held to have participated in the breach so that it will be liable to the employer to the same extent as the employee.”

123        Such liability arises for a number of reasons. The first is that the individual respondents are the directing minds of V-Flow. Secondly the rule in Barnes v Addy (1874) LR 9 Ch App 244 at 251-2 renders a third party who participates knowingly in the dishonest conduct of a defaulting fiduciary itself accountable as a constructive trustee. Thirdly, it was V-Flow which received the benefit of the corporate opportunity which the individual respondents’ conduct denied to the applicants.

124        V-Flow, is, therefore, liable for the same breaches which I have found to have been committed by the individual respondents.

Equitable Defences

125        The respondents pleaded defences of waiver/estoppel and laches.

Waiver/estoppel

126        This defence is founded on the terms of the solicitor’s letter which was sent to Messrs Brown and Aloe on 30 April 2009.

127        Before dealing with the respondents’ submissions relating to this defence something must be said about the terminology adopted by them. The use of the term “waiver” has given rise to a great deal of uncertainty and difficulty in legal analysis: see Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 587-8 (per Gummow, Hayne and Kiefel JJ). It is regularly used in different senses.

128        It appears that the respondents do not seek to distinguish between “waiver” and “estoppel” in defending their conduct. Such an approach is consistent with authority which holds that no independent doctrine of waiver operates apart from estoppel or election: see, for example, Freshmark Limited v Mercantile Mutual Insurance (Australia) Limited [1994] 2 Qd R 390 at 403-4 (per Dowsett J).

129        As I understood the argument this defence was relied on by the respondents in a number of ways: as excusing their past breaches of fiduciary obligations; because of the alleged abandonment by the applicants of their rights to seek remedies for these breaches; and in the sense that the applicants were estopped from pursuing the relief sought against the respondents once they had condoned the individual respondents’ breaches of their fiduciary obligations.

130        The respondents contended that, in wishing them well “in [their] new endeavours” and warning them against approaching Holyoake’s staff, suppliers or clients or copying Holyoake’s intellectual property, the directors of Holyoake had waived any of the breaches or misconduct on which the applicants’ case was based. They submitted that, by writing in these terms, the applicants had waived “any breaches or misconduct as are now sued upon.” The respondents further claimed that these statements induced them to continue with their business and to build it up in the period between the end of April 2009 and November 2009 when the proceeding was commenced. Such conduct, it was contended, gave rise to an estoppel.

131        As I have already noted, a breach of fiduciary duty may be excused after the event if the fiduciary makes a full and frank disclosure of the facts to the person to whom the duty is owed and that person retrospectively acquiesces in what has been done.

132        It was common ground that, at the time at which the solicitor’s letter was written, the applicants were aware that Messrs Aloe and Matkovic had become the beneficial owners of Variflow; that Variflow was a competitor of Holyoake Victoria, that Messrs Brown, Aloe and Matkovic had identified and exploited, for their own benefit, the acquisition of the Variflow business without advising Holyoake Victoria that the business was on the market and had done so whilst they were employed by Holyoake Victoria and for their own purposes; that Messrs Brown, Aloe and Matkovic had been working for Variflow since early April 2009; and that the applicants believed that Messrs Brown, Aloe and Matkovic had contravened their contractual and fiduciary obligations to Holyoake Victoria.

133        In order to make good this defence the respondents were required to show that Holyoake Victoria had given its informed consent to them acting in the manner which gave rise to the breach of their fiduciary obligations: see Maguire v Makaronis (1997) 188 CLR 449 at 466. The extent of disclosure required in order to ensure that any consent is fully informed will be a matter of fact which falls to be determined in the circumstances of each case.

134        In the present case the respondents have failed to show that the applicants consented to their activities and, in any event, any consent could not have been fully informed.

135        There is nothing in the solicitor’s letter that can be understood as the retrospective granting of consent to Messrs Brown, Aloe and Matkovic to engage in the conduct which gave rise to the breach of their fiduciary obligations. The applicants’ solicitors went no further than expressing the belief that the directors of Holyoake wished them well in their new business endeavours while, at the same time, reminding them of their ongoing obligations to Holyoake Victoria. In no sense can these statements be understood as condoning the misconduct which had earlier occurred.

136        At the end of April 2009 (and, indeed, for a considerable time thereafter) the directors of the applicants had a very imperfect knowledge of the activities of Messrs Brown, Aloe and Matkovic between mid November 2008 and the dates on which their employment with Holyoake Victoria terminated. Among the matters of which they were then unaware were the confidential information concerning the Variflow business which was provided by BMW at the beginning of December 2008, the details of the due diligence exercise which was undertaken by Messrs Brown, Aloe and Matkovic and their accountants and legal advisors, the contents of the business plan prepared by Mr Brown and the information contained in the application for finance which was provided to the Westpac Bank. In the absence of such information Holyoake Victoria could not have given any informed consent to the conduct of Messrs Brown, Aloe and Matkovic such as to excuse their earlier breaches of fiduciary obligations.

137        The respondents’ contention may also be understood as raising a defence that the applicants had waived their rights to bring the present proceeding. Having done so the applicants were estopped from pursuing the equitable remedies which they had sought to invoke. “Waiver” is here used in the sense of abandonment or renunciation by the applicants of a right to seek redress for the individual respondents’ breaches of their fiduciary obligations to Holyoake Victoria.

138        The respondents have failed to make good such a defence. The applicants did not, by their solicitor’s letter on 30 April 2009, represent to the respondents that they were abandoning any legal rights they had to seek equitable relief for breaches by the individual respondents of their fiduciary obligations. This is hardly surprising given that, at that time, they were largely ignorant of the respondents’ earlier conduct whilst in the employ of Holyoake Victoria.

Laches

139        The respondents’ defence of laches is related to their defence of waiver. Laches provides an equitable defence to an equitable claim. The defence will be made good if the respondent can establish that the applicant has, by delaying the commencement of a proceeding either acquiesced in the respondents’ impugned conduct or caused the respondents to alter their position in reasonable reliance on the applicants’ perceived acceptance of the status quo: see Lindsay Petroleum Company v Hurd (1874) LR 5 PC 221. It can, therefore, be understood to involve waiver by conduct. The defence of laches may be pleaded to resist a claim for account of profits: see Warman International at 559.

140        The respondents complained that, despite the applicants being aware of the matters referred to above at [132] in April 2009, they delayed instituting the proceeding for seven months.

141        I have already found that, in April 2009, the applicants had but a rudimentary knowledge of the activities of Messrs Brown, Aloe and Matkovic during the preceding six months. Such knowledge as they did have was insufficient to justify the immediate commencement of the proceeding. They received legal advice and set about making enquiries about matters which the individual respondents had deliberately concealed from them. In no sense can it be said that they acquiesced in the respondents’ conduct. Nor did the respondents seek to establish that they had altered their position in reliance on a perception that the applicants accepted the post April 2009 status quo. They simply continued to operate the Variflow business which they had acquired earlier in the year.

142        An applicant’s claim will not be barred by laches unless the applicant is aware of both the facts on which his or her equitable rights depend and what those rights are: see Re Howlett [1949] 2 All ER 490. For reasons which I have already given I do not consider that the applicants had the necessary knowledge in April 2009.

143        In any event I would not, as a discretionary matter, withhold relief on the ground of laches in the circumstances of this case. The individual respondents were based in Melbourne. The applicants’ directors were based in New Zealand. Not surprisingly it took time for them to commence and pursue the necessary enquiries in Melbourne. Many of the documents on which they ultimately relied at trial had either been destroyed or otherwise placed beyond their ready reach. The delay in commencing the proceeding is explicable and was hardly spectacular. No third party interests were affected by it.

144        This defence must fail.

Sections 181, 182 and 183 of the Corporations Act

145        Sections 181, 182 and 183 of the Corporations Act relevantly provide:

“181(1)    A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

…

182(1)    A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

…

183(1)    A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

…”

146        By s 9 of the Act an “officer” is defined to include a director of a corporation and a person “who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation.” Section 179(2) of the Act provides that “[o]fficer includes, as well as directors and secretaries, some other people who manage the corporation …”

147        The statutory duties imposed on directors and others by ss 181, 182 and 183 of the Corporations Act mirror and co-exist with their equivalent equitable duties: see Southern Real Estate v Dellow (2003) 87 SASR 1 at 7-8; Parker v Tucker (2010) 77 ACSR 525 at 543.

Section 181 – Mr Brown

148        One of the findings sought by the applicants is that Mr Brown contravened s 181(1) in his capacity as managing director of Holyoake Victoria.

149        Section 181(1) is designed to prevent abuses of directors’ powers for their own or collateral purposes: see Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 at [106] (per Brereton J). In Chew v The Queen (1991) 4 WAR 21 at 49 Malcolm CJ, speaking of a forerunner of s 181(1), observed that:

“It follows that the duty of honesty or good faith has a number of aspects under the general law. First, the directors must exercise their powers in the interests of the company, they must not misuse or abuse their powers. Secondly, they must avoid conflict between their personal interests and those of the company. Thirdly, they should not take advantage of their position to make secret profits. Fourthly, they should not misappropriate the company’s assets for themselves.”

150        There is an unresolved debate as to whether it is necessary to establish subjective dishonesty on the part of a director before a contravention of s 181(1) can be proved: see, for example, Marchesi v Barnes [1970] VR 434 at 438 (per Gowans J); Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261 at 272 (per King CJ). The weight of authority favours the stricter view that it must be shown that a director engaged deliberately in conduct which he or she knows is not in the best interests of the company or for a proper purpose: see the authorities collected by McColl JA in Forge v Australian Securities and Investments Commission (2004) 213 ALR 574 at 632-3.

151        For the purpose of determining the applicants’ claim against Mr Brown under s 181 I will adopt the stricter approach which is the one most favourable to directors.

152        As managing director of Holyoake Victoria Mr Brown occupied a singular position of trust. He had control of the business in Victoria and was relied on by the directors of the New Zealand holding company who were infrequent visitors to Victoria. Their trust in him was abused.

153        The various steps which he took in conjunction with Messrs Aloe and Matkovic to purchase the Variflow business whilst he was the managing director of Holyoake Victoria and which gave rise to the conflicts, already identified, between his interests and those of Holyoake Victoria, were not taken in the best interests of Holyoake Victoria or for proper purposes. They were steps which he took deliberately well knowing that he was advancing his own interests at the expense of Holyoake Victoria’s. As a result, he contravened s 181(1).

Section 182(1) – Messrs Brown, Aloe and Matkovic

154        The applicants seek findings that Messrs Brown, Aloe and Matkovic each contravened s 182 by improperly using their positions to gain advantage for themselves or someone else or to cause detriment to Holyoake Victoria.

155        In determining whether a director, officer or employee has contravened s 182(1) by ‘improperly’ using his or her position, an objective test is to be applied. In dealing with the predecessor of s 182(1) in R v Byrnes (1995) 183 CLR 501 Brennan, Deane, Toohey and Gaudron JJ said (at 514-5) that:

“Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case.”

156        Section 182(1) focusses attention on the director, officer or employee’s purpose in engaging in the impugned conduct. They do not have to succeed in gaining an advantage for themselves or causing detriment to their employer. They may contravene the sub-section even if they do not achieve their object: see Chew v R (1992) 173 CLR 626 at 633.

157        Mr Brown was subject to s 182(1) as a director of Holyoake Victoria, at least until his resignation was tendered on 2 February 2009, and, thereafter, until the termination of his employment, as an officer of the company.

158        Messrs Aloe (after 1 December 2008) and Matkovic were, at relevant times, senior managers of Holyoake Victoria and were officers and/or employees bound by s 182(1).

159        In jointly pursuing their interest in procuring the Variflow business Messrs Brown, Aloe and Matkovic each acted improperly in order to gain advantage for themselves and their families.

160        Mr Brown confirmed that the Variflow business was for sale by questioning Mr Payne in the course of a visit which Mr Brown made to the Variflow premises on behalf of Holyoake Victoria. They used their positions to obtain confidential information relating to the Variflow business which was in the possession of Holyoake Victoria. In the business plan which was presented to the Westpac Bank as part of Messrs Brown, Aloe and Matkovic’s application for finance to purchase Variflow, they relied on their “long term existing relationships” with “a wide range of Mechanical Contractors.” These relationships had, in varying degrees, been developed and nurtured during their employment with Holyoake Victoria. They also asserted that they enjoyed “a very good network of supply relationships” again, at least in part, developed during their employment with Holyoake Victoria. They further stressed their possession of the “necessary experience, skills, exposure and contacts with which to secure larger orders for larger and longer term commercial … projects.”

161        Messrs Brown, Aloe and Matkovic also told the Westpac Bank that the Variflow business, under their stewardship, would have the opportunity to establish a wholesale/distributor base outside Victoria “given their expansive relationships with Holyoake’s customer base.”

162        The overview document which was produced by the respondents’ former solicitors asserted that, even before they had left Variflow Victoria, they already had “a pre-commitment from customers in Perth, Brisbane and Sydney.”

163        The statements made by the individual respondents to the bank and in the overview document which, I infer, was given by one of them to their then solicitors, were intended to convey that they had taken and would continue to take advantage of their contacts with Holyoake Victoria’s suppliers and customers to advance the interests of the Variflow business. The use by Mr Brown of his private e-mail account to contact Holyoake Victoria customers and suppliers and his attempts to conceal these communications allows the inference to be drawn (which I draw) that he was seeking to assist the development of Variflow’s business whilst still in the employ of Holyoake Victoria. He continued to take advantage of these contacts in an attempt to benefit Variflow after he had become employed by V-Flow Pty Ltd.

164        Such conduct, in my view, constituted an impermissible departure from standards of conduct that would reasonably be expected of persons holding the positions which they did in Holyoake Victoria. Their use of confidential information held by Holyoake Victoria and the making of representations to the bank in order to obtain finance to purchase a competitor of Holyoake Victoria whilst they were senior officers of that company was improper and was undertaken in pursuit of a proscribed purpose. In failing to alert Holyoake Victoria to the business opportunity posed by the placing of Variflow on the market and in acting to ensure that this knowledge did not come to the Holyoake interests, Messrs Brown, Aloe and Matkovic also acted improperly in pursuit of their own interests and to the detriment of Holyoake Victoria.

165        Messrs Brown, Aloe and Matkovic each contravened s 182(1) of the Act.

Section 183(1) – Messrs Brown, Aloe and Matkovic

166        The applicants seek findings that Messrs Brown, Aloe and Matkovic each contravened s 183 by improperly using information obtained by them in their respective capacities in order to gain an advantage for themselves or someone else or cause detriment to Holyoake Victoria.

167        For the reasons already given Mr Brown, acting on his own behalf and that of Messrs Aloe and Matkovic improperly used his position for the purpose of advancing his interests and the interests of Messrs Aloe and Matkovic by disclosing the confidential business information relating to Variflow to Lanteri Partners. This was done in order to advance their own interests by adding to the pool of information which would enable Lanteri Partners to advise them about commercial aspects of the proposed purchase. Impropriety also arose by reason of the fact that Variflow’s confidentiality was breached without its authority.

168        Each of the individual respondents also, to the extent already identified, relied on Holyoake Victoria’s confidential information to assist them in obtaining the Variflow business.

169        In these ways each of Messrs Brown, Aloe and Matkovic contravened s 183 of the Act.

THE EMPLOYMENT CONTRACTS

170        The applicants alleged that Mr Brown had also breached his fiduciary obligations to Holyoake Victoria in the course of his dealing with Messrs Aloe and Matkovic over the terms of the new employment contracts into which they entered in the latter part of 2008. Specifically, the applicants sought findings that:

“Brown breached his fiduciary duties to Holyoake in purporting to agree to the omissions and acted without any authority from Holyoake and each of Matkovic and Aloe also breached their respective fiduciary duties to Holyoake or alternatively were knowingly concerned in Brown’s breaches as they related to their contracts. The 2008 employment contracts were therefore void and Holyoake Vic ought to be able to claim damages for breaches of the omitted clauses.”

171        The contract negotiated between Mr Brown and Mr Aloe in October/November 2008 omitted certain clauses which appeared in its predecessor. The new contract did not contain a provision that Mr Aloe should not act or work in conflict with his employer, a requirement that he not disclose any confidential information of his employer during or after his employment or a restraint on him soliciting or approaching the company’s clients or employees for six months after the termination of his employment.

172        Messrs Aloe and Brown sought to explain these omissions. Mr Brown said that Mr Aloe would not sign a contract containing the omitted provisions. He (Mr Brown) was desperate to get Mr Aloe to come and work for him. He therefore acceded to Mr Aloe’s demands. No plausible explanation for Mr Aloe’s demands was forthcoming.

173        I do not accept this evidence. In the period between the terms being provided to Mr Aloe on 14 October 2008 and his signing the contract on 22 November 2008 he had joined Messrs Brown and Matkovic in meeting Lanteri Partners with a view to pursuing a business opportunity – the acquisition of High Fire Heating. It was a little more than a week later, on 1 December 2008, that Mr Aloe commenced employment with Holyoake Victoria and signed the confidentiality agreement with BMW so as to obtain access to confidential business information relating to Variflow. Negotiations for the purchase of Variflow commenced shortly thereafter. The conflict of interest clause would have constrained such conduct. The restraint clause would have prevented Mr Aloe from conducting part of the Variflow business for six months after he left Holyoake Victoria. The more likely explanation (which I accept) is that the clauses were deliberately omitted as a result of an agreement between Mr Brown and Mr Aloe in order to facilitate their pursuit of the business opportunity presented by Variflow.

174        The contract negotiated between Mr Brown and Mr Matkovic in September 2008 also omitted certain clauses which had appeared in its predecessor. The new contract did not contain the former clauses relating to conflict of interest, the 12 month restraint on him soliciting or approaching the company’s customers and suppliers and restrictions on the disclosure of confidential information and intellectual property. Also omitted was a provision that Mr Matkovic’s obligations relating to confidential information, intellectual property and restraint of trade continued after termination of his employment.

175        Messrs Brown and Matkovic sought to explain these omissions. Mr Matkovic said that he had told Mr Brown that he would not sign a contract which contained the omitted provisions. He did not want the job and felt that he was free to negotiate terms which would enable him, should he wish to do so, quickly to obtain alternative employment. He regarded these provisions as impediments to him being able to move on quickly. When asked to explain how the confidentiality clause would have impeded him obtaining alternative employment he was unable to offer any explanation. Mr Brown had been prepared to accede to his demands in order to retain his services.

176        I do not accept this evidence. The contract was signed on the eve of the individual respondents’ first approach to Lanteri Partners about the possibility of them purchasing another business in the industry. The omitted clauses would only have been an impediment had Mr Matkovic been contemplating employment with a competitor of Holyoake Victoria. Otherwise they would not have prevented him from obtaining alternative employment. The confidentiality clause would not even have interfered with him accepting employment with a competitor provided, of course, that he had no intention of breaching his obligation to maintain the applicants’ confidences.

177        I have already held that each of Messrs Brown, Aloe and Matkovic owed a contractual obligation to Holyoake Victoria to serve it with loyalty and fidelity. Similar obligations were imposed on them by ss 181(1) and 182(1) of the Corporations Act. As fiduciaries they were not permitted to place themselves in a position of conflict with their employer.

178        In agreeing, without the knowledge and consent of the other directors of Holyoake Victoria, to omit the various restrictive terms from Messrs Aloe and Matkovic’s employment contracts, Mr Brown contravened his contractual, equitable and statutory duties. So too did each of Messrs Aloe and Matkovic insofar as they were parties to the omission of the terms.

179        Messrs Aloe and Matkovic were both senior employees who had access to Variflow Victoria’s confidential information. Their extensive knowledge and experience in the industry made them attractive to competitors. It was, therefore, in Variflow Victoria’s interests to place the various omitted restrictions on them. The removal of those terms operated to their advantage and to the potential (and, it transpired, actual) detriment of Holyoake Victoria. It was Mr Brown who brought this about.

180        What, if any, loss has been sustained by the applicants as a result of these breaches remains to be determined.

HOLYOAKE’S CONFIDENTIAL INFORMATION AND PROPERTY

181        The applicants contend that the respondents (or some of them) have taken and retained confidential information and property belonging to them. The relevant material was identified as being:

    A contact list maintained by Mr Brown;

    Board papers and other documents;

    Holyoake’s grids;

    Documents relating to Holyoake’s dealings with China Grandaire Company Limited;

    A comfort criteria power point presentation; and

    Holyoake’s CD and component manual and IMP Klima data.

182        The respondents reject these allegations for a variety of reasons. As those reasons differ from item to item, it will be convenient to deal with the defences raised under each head.

The law relating to confidential information and property

183        One aspect of the contractual obligation to serve with loyalty and fidelity and the equitable obligations which fall on fiduciaries applies to post-employment conduct. The general position was summarised by Palmer J in Digital Pulse as follows:

“[23]    When the employment ceases, the employee is free to compete with the employer unless subject to a valid contractual restraint on competition. The employee may take away and utilise the benefit of personal relationships built up with particular customers of the former employer and may solicit any customer whom the employee can recall without the aid of a list taken from the former employer and without deliberate memorisation of a customer list. The employee may not, however, use for his or her own benefit confidential information of the former employer, whether to solicit business from the former employer’s customers or to carry out work for such customers even if unsolicited.

[24]    The remedy for breach of the contractual duty of loyalty is damages. The remedy for breach of the fiduciary duty of loyalty is either an account of the profits derived by the employee from the breach or equitable compensation. The employer need not elect between these remedies until the time at which judgment is to be entered.”

184        As these passages make clear the courts seek to balance two competing public interest considerations. In the absence of an express restraint, an employer is not entitled to impede a former employee from using the skill, experience and know-how, acquired during his or her service, to enter into competition with the former employer. On the other hand the law will protect an employer from the misuse of confidential information taken away by the former employee: see Robb v Green [1895] 2 QB 315; Wright v Gasweld Ptd Ltd (1991) 22 NSWLR 317 at 329. As a general proposition the “more that information can be identified as part of the general stock of knowledge which the former employee must use in carrying on his occupation, the less likely it is that the alleged confidentiality of the information will be protected”: see Freedom Motors Australia Pty Ltd v Vaupotic [2003] NSWSC 506 at [13].

185        These principles fall to be applied to a range of confidential information. Such information potentially includes information of the kind which the applicants seek to protect in this proceeding.

186        One such category which is significant in this case is customer lists. In N P  Generations Pty Ltd v Feneley (2001) 80 SASR 151 at 157 Debelle J (with whom Williams and Wicks JJ agreed) said that:

“Thus, it is a breach of good faith and a breach of the equitable obligation to preserve the confidence of an employer if an employee, without the consent of her employer, discloses to persons outside the business information on the list of customers: Faccenda Chicken (at 135-136). Similarly, it is also a breach of good faith and a breach of the equitable obligation to preserve the confidence of an employer if an employee makes a copy of a list of customers of the employer for use after her employment ends (Robb v Green; Wessex Dairies Ltd v Smith; Faccenda Chicken (at 136), or deliberately memorises such a list for that purpose: Faccenda Chicken (at 136); Westminster Chemical NZ Ltd v McKinley [1973] 1 NZLR 659 at 665 per Speight J.

I think that the same principles must apply with equal force to a list of the employer’s customers made by an employee legitimately for the purpose of performing the duties for which she has been engaged in those instances where the employee seeks to retain the list upon the termination of her employment. There is no sound reason why those principles should not apply. Be it a list of some or all of the customers, it is, nevertheless, a list of customers which is capable of being used by the former employee in a way which is unauthorised and which may cause loss or damage to the former employer. The obligation of conscience already mentioned has the necessary consequence that, if a departing employee takes with her copies of a list of customers which were initially prepared for legitimate purposes, the departing employee has an obligation to return the copies to her former employer. To hold otherwise would be to make it quite impossible for an employer to uphold the integrity of the customer list or of any other kind of confidential information. Applying those principles to the names and addresses on this rent roll, those names and addresses could be copied by the respondent into an address book for the purpose of assisting her in the management of the appellant’s business but could not be used for any other purpose. It follows that, on ceasing her employment, she could no longer use her list of names and addresses. In other words, the list of names and addresses was confided to the respondent for a specific and limited use, namely, to enable her to manage the appellant’s rental property business. Once her employment by the appellant ended, she could no longer use that list or any copy of it.”

187        There is conflicting authority in Australia as to whether or not an applicant who seeks to rely on the equitable obligation of confidence must establish unauthorised use of the information to its detriment: see Smith Kline and French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73 at 111-2 (per Gummow J); Dais Studio Pty Ltd v Bullet Creative Pty Ltd (2007) 165 FCR 92 at 113 (per Jessup J); Krueger Transport Equipment Pty Ltd v Glen Cameron Storage & Distribution Pty Ltd (2008) 78 IPR 262 at 287 (per Gordon J). This issue need not be resolved at this stage of this proceeding.

188        Not all commercial information is impressed with the hallmark of confidentiality. In Smith Kline Gummow J identified four elements which rendered information confidential in the necessary sense. His Honour said (at 87) that:

“A general formulation apt for the present case of an equitable obligation of confidence has four elements: (i) the plaintiff must be able to identify with specificity, and not merely in global terms, that which is said to be the information in question, and must be able to show that; (ii) the information has the necessary quality of confidentiality (and is not, for example, common or public knowledge); (iii) the information was received by the defendant in such circumstances as to import an obligation of confidence, and (iv) there is actual or threatened misuse of that information, without the consent of the plaintiff.”

189        Liability to account for a breach of the equitable duty of confidence can also fall on a third party who has knowingly participated in the breach of confidence: see Attorney-General v Guardian Newspapers Limited [1987] 3 All ER 316 at 328.

190        Other remedies available to an applicant include an order for delivery up of the confidential information and orders restraining those responsible for the breach from using that information.

The contact list obtained by Mr Brown

191        One of the documents found at Variflow’s premises when a search order was executed by the applicants was a list containing the contact details of numerous clients, contractors, suppliers and contacts of Holyoake Victoria. Mr Brown’s name appeared at the head of each page. The hard copy had been printed out using software which was used by Holyoake Victoria.

192        For each person there were 20 fields covering headings such as full name, company, title, home address, business address, business phone number, home phone number, business fax number, mobile phone number, e-mail address, nickname, spouse and birthday. In most cases only some of these fields were completed.

193        Mr Brown acknowledged that he kept a list of personal contacts on his computer. These contacts included family members, personal friends and business acquaintances and had been added to progressively “over many years”. Mr Brown insisted, however, that this list had been left on his Holyoake Victoria computer when he left its employ. When he moved to Variflow Mr Payne had provided him with a list of the contact details of Variflow’s customers and suppliers. To this Mr Brown had added his own entries relating to family, friends and business contacts. It was this list that had been found during the search.

194        I do not accept Mr Brown’s evidence in relation to the contact list. Variflow and Holyoake Victoria were two of a very small number of firms that competed for business in the same industry. It could, therefore, reasonably be expected that there would be some commonality in any business contact lists maintained by Mr Brown and Mr Payne. It could not be concluded that, because the names of customers of both firms appeared on the disputed list, Mr Brown’s account should be rejected. There were, however, a number of factors, in addition to the apparent use of Holyoake Victoria’s software to produce the document, which supported the applicants’ claim that the document had been produced by Mr Brown at Holyoake Victoria and taken with him when he left. The list contains contact details for many Holyoake staff members and, in some cases, their spouses. They are not identified by reference to their Holyoake association whereas others are identified as employees of other named companies. The list also contains the names of Holyoake’s insurance agent in Brisbane, its real estate agent and its Melbourne based solicitor. None of these people acted for Variflow. The list contains a very large number of contact details for persons working for Holyoake Victoria’s customers and suppliers. It occupies some 105 pages and is far too extensive to have been memorised by Mr Brown.

195        Mr Payne gave evidence that he gave his business contact list to his accountant with a view to it being handed on to the respondents. He was not able to say whether it had been handed on. The respondents did not produce any such list. Mr Payne was shown the disputed list and gave evidence that there were a number of entries on it referring to people with whom he had never dealt. These names could have been added to the list by Mr Brown after he had commenced work at Variflow. Mr Payne’s evidence is, however, also consistent with the applicants’ contention that their list was created by Mr Brown while he was still at Holyoake Victoria.

196        I consider that it is more likely than not that the list was prepared by Mr Brown while he was in the employ of Holyoake Victoria and it was taken with him when he moved to Variflow.

197        Not all of the material contained in the list is Holyoake Victoria’s confidential information. The contact details of his family members and personal friends is not confidential material. The contact details of Holyoake Victoria’s customers, suppliers and professional advisers are in a different category.

198        These contact details came to Mr Brown’s knowledge in his capacity as the managing director of Holyoake Victoria. He recorded them on Holyoake’s computer system. They had a specific and limited use, namely, to assist him in conducting Holyoake Victoria’s business. He was not, consistently with the principles expounded by Debelle J in N P Generations, entitled to take the list with him when he became employed by Variflow. To do so constituted a contravention of his contractual and equitable obligations to Holyoake Victoria.

199        The contact list, to the extent that it contains the details of Variflow Victoria’s business and professional contacts, should be delivered up to the applicants and not further used by Mr Brown or others involved in the Variflow business.

Board papers and other documents

200        While Mr Brown was a director of the applicants he received agendas and papers which were prepared for board meetings. Mr Brown also received certain memoranda which were circulated to directors and senior managers between board meetings. The applicants submitted that these documents had been taken and retained by Mr Brown when he left the employ of Holyoake Victoria. They contended that he “had no justification to do this and ought to have returned them when he left, given that they contained highly confidential information and he had gone to work for a competitor.” Mr Brown acknowledged that he had retained the board papers. He denied that he had taken them: they had been provided to him. He had always ensured the contents were not disclosed to others and that he had not used them for any purpose other than in pursuit of his former directorships. The applicants had never demanded that he deliver up the documents. Nor did they lead any evidence suggesting that Mr Brown had misused any of the material in them.

201        I am not satisfied that the applicants have established Mr Brown has breached his contractual and fiduciary obligations to them simply by retaining the board papers and memoranda. Moreover they have failed to establish that the contents of the documents are confidential in the necessary sense. They have not established that the first, second and fourth elements of the Smith Kline formulation are present. The generic claim relates to all board papers and some memoranda. No attempt was made to identify the particular parts of the documents which were said to contain confidential information and those which contained information which was in the public domain. Furthermore, no evidence of actual or threatened misuse of the information was forthcoming.

Holyoake’s grids

202        The so called “grids” were price lists. Holyoake Victoria and other companies, including Variflow, under both Mr Payne’s ownership and that of the respondents, drew on these grids when quoting for work.

203        When a search order was executed at Variflow’s premises, grids, similar to those used by Holyoake Victoria, were discovered. The applicants contended that the grids used by Mr Payne when he conducted the Variflow business were different from those used by Holyoake Victoria. They invited the Court to infer that the grids found at the Variflow premises had been taken and used by the respondents.

204        The respondents acknowledged the similarities between the Holyoake grids and those which they used in the Variflow business. They attributed these similarities to the use of a common Microsoft programme. Mr Aloe gave evidence that the information which Variflow inputs into its programme is based on its own pricing of its material usage and labour costs. The resultant figures differed from those appearing on Holyoake Victoria’s data sheets.

205        The applicants did not assert any intellectual property rights in the formatting of the grids.

206        The close similarities between the grids used by Holyoake Victoria and those found at the Variflow premises give rise to some suspicion that the respondents (or some of them) may have taken copies of Holyoake Victoria’s grids with them to Variflow. Such a suspicion is not, however, sufficient to draw adverse inferences of the kind sought by the applicants in circumstances where an innocent explanation is reasonably available. Given that the formatting was based on the same software, that such grids are commonly used in the industry and that there were differences in the prices, I am not prepared to find that the grids found at the Variflow premises had come from Holyoake Victoria.

Holyoake’s dealing with China Grandaire Company Limited

207        China Grandaire Company Limited (“Grandaire”) is a company based in China. Holyoake Victoria relied on Grandaire as a supplier. V-Flow, under the management of the individual respondents, has also placed orders with Grandaire.

208        The applicants claimed that knowledge of the business connection between Holyoake Victoria and Grandaire constituted valuable confidential information which they were entitled to protect. The connection was said to encompass Holyoake Victoria’s product designs, plans, data and specifications which had been passed on to Grandaire. The applicants contended that Messrs Brown and Aloe had been able to deploy their knowledge of these matters for the benefit of Variflow. Specifically it was put that their “ability to deal with Grandaire and source reliable supply from it [was] confidential information.” As a result, so they contended, it was “impermissible for the respondents to use the information acquired at Holyoake to channel supply through Grandaire.”

209        There was no evidence that Holyoake Victoria had supplied any product designs, plans, data or specifications to Grandaire. Both Holyoake Victoria and Variflow purchased items from Grandaire’s catalogue. Those items were not fashioned specifically to meet the needs of either business. Grandaire’s catalogue was a publicly available document.

210        As I understood their argument, the applicants did not seek to suggest that confidentiality attached to Grandaire’s product range. Rather, it was suggested that Messrs Brown and Aloe had come to know, whilst working for Holyoake Victoria, that Grandaire was a reliable supplier and had established business contacts with Grandaire managers. This knowledge was drawn upon once they had moved to Variflow.

211        Knowledge of this kind may move with an employee and be utilised for the benefit of a subsequent employer: see Digital Pulse at [23]; Wright v Gasweld Pty Ltd at 329. It falls within the general stock of knowledge which employees may be expected to gain in the course of their employment and they should not be prevented from using in the course of later employment.

Comfort criteria power point presentations

212        These presentations were found on a compact disc. This compact disc had been created by Mr Aloe when he was employed by Holyoake Victoria. It was prepared for internal training purposes within Holyoake Victoria. It dealt with training with respect to particular air diffusion techniques. There was a dispute as to whether it had been prepared by Mr Aloe at home or in the Holyoake office. The presentation had been sourced from an American website but was not, according to Mr Aloe, ever used at Holyoake Victoria or Variflow because he could not make it work in the way he desired.

213        The applicants’ evidence did not establish that any of the four Smith Kline elements attached to the presentations.

214        The evidence did not, therefore, support a conclusion that the power point presentation contained confidential information which the applicants were entitled to protect. Furthermore, the evidence did not support a conclusion that any of the material appearing on the disc had been misused or was likely to be misused by Mr Aloe.

Holyoake CD and component manual and IMP Klima data

215        A second compact disc was found during the execution of the search warrant at the Variflow premises. This one contained Holyoake’s component manual, an IMP Klima catalogue, specification utility, Louver selection software, Malco tools and VAV selection software. IMP Klima is a manufacturer and supplier of air conditioning products for which Holyoake is the exclusive agent in Australia.

216        Mr Payne gave evidence that he did not have a copy of this compact disc or any information relating to IMP Klima when he conducted the Variflow business.

217        In these circumstances, the applicants invited the Court to infer that these items were improperly taken from Holyoake Victoria by the individual respondents.

218        Mr Aloe deposed that the compact disc was at Variflow when he and the other individual respondents took over the business in April 2009. The materials on the compact disc had, he further deposed, been downloaded from nominated internet sites which were publicly accessible. The material was not confidential in nature.

219        Again, the applicants’ evidence did not descend to sufficient particularity to establish that the material on the compact disc bore the characteristics of confidentiality which would attract legal protection. No order is warranted in respect of this disc.

CONCLUSION

220        The parties were agreed that issues relating to liability should be dealt with first and that issues relating to damages and other remedies should be resolved having regard to the findings made at the first stage of the trial and after further evidence and submissions were considered.

221        I will hear the parties on what, if any, orders should be made as a result of the findings which I have made. I will also hear them on what directions should be made so that the second stage of the trial can proceed.

Associate:

Dated:    12 October 2011