FEDERAL COURT OF AUSTRALIA

Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd (No 2) [2012] FCA 530

THE COURT ORDERS THAT:

1.     On or before 8 June 2012 the parties file and serve minutes of orders which give effect to the reasons for judgment published today.

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

REASONS FOR JUDGMENT

1    The trial of this proceeding was divided, with issues relating to liability first being dealt with. I found that the individual respondents had been guilty of significant breaches of their fiduciary, contractual and statutory obligations to their employer. I also found that V-Flow Pty Ltd (“V-Flow”) was liable for the same breaches: see Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd [2011] FCA 1154 (“Holyoake Industries (No 1)”).

2    It is now necessary to determine what relief should be granted to the applicants.

3    They seek the following remedies:

(a)    An account of the net profits made by V-Flow for the period between 9 April 2007 and 30 June 2011, subject to agreed adjustments to those net profits;

(b)    Statutory compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) (“the Corporations Act”) in respect of the profit made by V-Flow;

(c)    Damages or equitable compensation from three individual respondents in respect of benefits received by them after they had engaged in the contravening conduct; and

(d)    In the alternative to (a) (in respect of V-Flow) equitable compensation against all respondents on the basis that one or either of the applicants lost the opportunity to acquire the Variflow business.

ACCOUNT OF PROFITS

4    V-Flow’s accounts were examined by the accounting experts engaged to act on behalf of the applicants and the respondents. They were, respectively, Mr Sincock and Mr Spence.

5    They calculated V-Flow’s net profit between 9 April 2009 and 30 June 2011 at $1,469,178. This figure was constructed as follows:

6    Whilst agreed as to the calculation Mr Spence did not consider that there should be any adding back of interest.

7    In my view the interest paid by V-Flow should be brought into account. V-Flow borrowed money from the Westpac Bank in order to finance the acquisition of the Variflow business. It granted a fixed and floating charge over its assets and undertaking to secure the borrowings. Interest was payable on the monies borrowed. It is recorded in V-Flow’s accounts. The payments were made to service the loan from the bank.

8    The Variflow business was acquired as a result of the respondents’ breaches of their fiduciary and other obligations to the applicants. The interest was paid in respect of the purchase of that business and the assets of the business were deployed as security.

9    In these circumstances the interest payments should be brought to account when an account of profits is being undertaken: see Paul A Davies (Aust) Pty Ltd v Davies [1983] 1 NSWLR 440 at 448, 450 and 457-9.

10    The respondents contended that the period over which the calculation was made was unduly long and that an allowance should be made for a proportion of the net profits having been achieved as a result of the application of the skills and energy of Messrs Aloe and Matkovic who (through their family trusts) were the owners of V-Flow and worked in the business.

11    It is the role of the Court “to determine as accurately as possible the true measure of the profit or benefit obtained by [a] fiduciary in breach of his duty”: Warman International Limited v Dwyer (1995) 182 CLR 544 at 558. In framing equitable relief it is necessary to have regard to a range of variables including the nature of the property which a fiduciary has acquired in breach of his or her obligations. Where a specific asset has been acquired the fiduciary may be required to hold that property as a constructive trustee for an indefinite period. In Warman the High Court drew a distinction between such cases and those in which a business is acquired and operated by the fiduciary. The Court said (at 561) that:

“In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal’s goodwill over an indefinite period of time. In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. That may well be the case when it appears that a significant proportion of an increase of profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal’s property has been exposed.”

The facts of the particular case will be critical in dealing with these issues. In Warman the High Court considered that the account should be taken for a two year period and that some allowance “for expenses, skill, expertise, effort and resources contributed by” the fiduciaries should be made. The Court was unable, on the material before it, to determine what that allowance should be.

12    The applicants in the present case are not claiming a constructive trust over the V-Flow business or the benefits of its capital growth and profits on an indefinite basis. Nor are they seeking an account of capital profits. As a result, if an account of V-Flow’s net profit over the period sought by the applicants is granted, Messrs Aloe and Matkovic will retain the benefits of capital growth from the time that they acquired the Variflow business and will retain the profits derived from the business from 1 July 2011.

13    There was evidence that Messrs Aloe and Matkovic had enjoyed a significant capital return during the 27 month period. They had acquired the business for $615,000 in April 2009. The expert evidence valued the business at at least $1.5 million on 30 June 2011.

14    Mr Sincock gave evidence that an account of net profits for a 12 to 15 month period would not represent the maintainable profit of the business because it needed time to develop under the new ownership. It was for this reason that he fixed on the 27 month period. Mr Spence did not give contradictory evidence.

15    The respondents bear the onus on establishing that the account should not be taken over an indefinite period. The applicants do not press for such an order. In the circumstances I consider that the period which they propose is reasonable.

16    Some of these considerations are also relevant to the respondents’ submission that an allowance should be made for the industry of Messrs Aloe and Matkovic. The limitation of the accounting period to 27 months itself provides a form of allowance. So too do the respondents’ decisions not to seek an account of capital profits or a constructive trust.

17    In any event, in the circumstances of this case I do not consider that any allowance (or any further allowance) is warranted because of the deliberate dishonesty with which Messrs Aloe and Matkovic pursued the acquisition of the Variflow business: see the findings made in Holyoake Industries (No 1) at [96]-[104], [114] and [119]. Such dishonesty has been held to justify the refusal of any allowance for the contribution made to the success of a business which has been so obtained: see, for example, Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 at [335]; Phipps v Boardman [1965] Ch 992 at 1020; and cf Davies at 448.

STATUTORY COMPENSATION

18    Although they are not entitled to double recovery, the applicants may have an entitlement to statutory compensation from the respondents under s 1317H of the Corporations Act 2001 (Cth) (“the Corporations Act”).

19    That section relevantly provides that:

“(1)    A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:

(a)    the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and

(b)    the damage resulted from the contravention.

The order must specify the amount of the compensation.

(2)    In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.”

By s 1317DA and s 1317E(1), ss 181(1), 182(1) and 183(1) are included amongst relevant civil penalty provisions.

20    In Holyoake Industries (No 1) I found that Mr Brown had contravened s 181(1) and that each of the three individual respondents had contravened ss 182(1) and 183(1). I also held that V-Flow was knowingly concerned in these contraventions and was, as a result, also liable to the applicants for the individual respondents’ breaches of their statutory duties.

21    In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 a Full Court of this Court held (at [649]) that equitable and statutory remedies, in cases such as the present, are not mutually exclusive. Applicants are not, however, able to obtain double recovery.

22    As I have already found, V-Flow, in the 27 month period to 30 June 2011 was able to make a net profit of $1,469,178 as a result of the contraventions of the Corporations Act by Messrs Brown, Aloe and Matkovic. Such profits constitute ‘damage’ for the purposes of s 1317(2) of the Corporations Act. The Court is, therefore, empowered by the section to award compensation for profits made as a result of a contravention and may do so without proof of any corresponding loss on the part of an applicant: see Grimaldi at [630]-[631].

23    For the same reasons which I have already given in relation to relief by way of an account of profits, no allowances are appropriate when calculating statutory damages.

24    The applicants are entitled to an order against each respondent for statutory damages in the sum of $1,469,178 subject to the requirement that no double recovery occur.

INDIVIDUAL BENEFITS

25    The applicants also seek damages, equitable compensation and statutory compensation under s 1317H of the Corporations Act against individual respondents.

26    It will be recalled that Messrs Brown, Aloe and Matkovic went to great lengths to conceal from the applicants that they were engaged in establishment of a competitive business. The applicants alleged that, had they been aware of the respondents’ activities, they would have terminated their services and not paid them certain departing gratuities which recognised good and faithful service.

27    Mr Brown had been engaged surreptitiously in the planning and preparation for the establishment of a competitive business for at least the last six months of his employment by the first applicant. He was, during this time, a director of Holyoake Victoria. His resignation took effect on 31 March 2009. Mr Brown was paid $10,000 by way of discretionary director’s fees between 1 October 2008 and 31 March 2009.

28    As managing director of Holyoake Victoria Mr Brown was entitled to a discretionary performance related remuneration payment. During the last six months of his employment he was paid $54,315 under this arrangement. He also received an overpayment of $18,869. The applicants sought damages under this head of $73,184.

29    When he left Holyoake Victoria on what were then good terms he was given ownership of the company car to which he had access as managing director. It was an Audi valued at $89,052.

30    Mr Grant Holyoake gave undisputed evidence that the two discretionary payments and the gift of the car would not have been made had the applicants been aware of Mr Brown’s conduct prior to him being provided with these benefits.

31    The applicants are entitled to recover the payments and the value of the car.

32    When Mr Aloe left the service of Holyoake Victoria he was given a discretionary gratuity of $10,000.

33    Mr Grant Holyoake gave uncontested evidence that this discretionary payment would not have been made had the applicants been aware of Mr Aloe’s conduct.

34    The applicants are entitled to recover this payment.

35    When Mr Matkovic left the service of Holyoake Victoria he was paid a discretionary bonus of $4,952 and allowed to take with him a video camera valued at $949.

36    Mr Grant Holyoake gave uncontested evidence that neither the payment nor the gift would have been made had the applicants been aware of Mr Matkovic’s conduct.

37    The applicants are entitled to recover these amounts.

38    In October 2008 Messrs Brown and Aloe attended a conference on Vietnam at Holyoake Victoria’s expense.

39    The cost of Mr Brown’s trip was $4,508.16 and Mr Aloe’s $7,054.91.

40    Mr Grant Holyoake gave uncontested evidence that the trip would not have been authorised or paid for had the applicants been aware of the conduct of Messrs Brown and Aloe.

41    The applicants are entitled to recover $11,563 in respect of these payments.

42    The applicants also contended that, each of Messrs Brown, Aloe and Matkovic, during the final months of their respective employment with Holyoake Victoria, failed properly to carry out their duties. The applicants sought to recover from each of them part of the monies paid to them by way of salary, superannuation, costs of providing them with cars and, in the case of Mr Aloe, transferred long service leave. These amounts were quantified and partial recovery was sought.

43    In the case of Mr Brown the calculation was made from August 2008 until his departure at the end of March 2009. Recovery of 50 per cent of payments made to him was sought. The amount claimed was rounded at $60,000.

44    The applicants sought recovery of all payments made to Mr Aloe after 1 December 2008 when he commenced work for Holyoake Victoria. The rounded figure was $50,000.

45    The applicants sought 50 per cent of payments made to Mr Matkovic after August 2008. The rounded amount claimed was $50,000.

46    These claims were made on the basis that the adverse findings made against each of the individual respondents at the liability stage of the trial supported the inference that they were not properly carrying out their duties to Holyoake Victoria at relevant times.

47    There can be no doubt that, during late 2008 and early 2009 Messrs Brown, Aloe and Matkovic each devoted a good deal of time to the purchase of the Variflow business. This involved them spending time on activities such as the obtaining of advice, contractual negotiations, undertaking due diligence investigations and obtaining finance. Although some of this work was undertaken during Holyoake Victoria’s normal business hours, most of it was not. There was no evidence that their normal work for Holyoake Victoria was not performed to the required standard or that they had neglected any particular tasks.

48    The true position would seem to be that each performed his duties substantially in the customary manner. This is hardly surprising given that the individual respondents were striving to ensure that their employer did not become aware of their conflicting commercial activities. Had there been any marked departures from their normal standards this could have given rise to complaints by customers and suppliers which may have alerted other managerial employees of Holyoake Victoria to what was going on. This is plainly something which the individual respondents would have wished to have avoided. There was no evidence that Holyoake Victoria’s business suffered financially during the relevant period. On the contrary, it performed extremely well.

49    I do not, therefore, consider that my findings in Holyoake Industries (No 1) support the inference which the applicants would have me draw.

50    An entitlement to damages under this head has not been made out.

51    The applicants sought an award of $30,000 in damages for what they described as “Holyoake’s staff time in preparing case”. This preparation related to data retrieval and the need to pursue enquiries which would not have been necessary had the respondents complied with their discovery obligations. The applicants acknowledge that the $30,000 was, necessarily, an estimate.

52    Mr Grant Holyoake performed most of the relevant work. He acknowledged that he received his normal salary whilst so doing and that no diary notes had been taken which enabled him to identify the precise amount of time which he devoted to the preparation of the applicants’ case. His main concern was that he had been deflected from other productive work on behalf of Holyoake Victoria.

53    The need for much of Mr Holyoake’s preparatory work was, as has been mentioned, occasioned by the failure of the respondents to give proper discovery. This is a matter to which I will return in dealing with costs. I consider that the issue is better dealt with in that context.

THE LOST OPPORTUNITY

54    The applicants also sought damages and equitable or statutory compensation against the respondents for the loss of the opportunity to earn the profits which V-Flow derived from its operations between 9 April 2009 and 30 June 2011.

55    An award of damages under this head is not, as the respondents submit, dependent on a finding that one of the applicants would, had it been aware that the Variflow business was on the market, have purchased it. Although Mr Grant Holyoake did say that he regarded the Variflow business as a “good fit” with Holyoake Industries his evidence went no further. As I pointed out in Holyoake Industries (No 1) at [107], the applicants’ unwillingness or inability to purchase the Variflow business would not have provided a defence to their equitable claims.

56    Mr Sincock gave evidence (which I accept) that the value of Holyoake’s lost opportunity to acquire Variflow was $1,046,923.

57    Subject to their need to elect before final orders are made, the applicants are entitled to an order in this sum for their lost opportunity.

ALTERNATIVE CLAIMS

58    The applicants made a number of alternative claims for damages.

59    They advised the Court that, in the event that they were successful in relation to their principal claims, they would not press these alternative claims.

COSTS

60    The applicants sought costs on an indemnity basis for all parts of the trial.

61    The respondents resisted this claim but did not seek to oppose orders that costs should follow the event.

62    The Court enjoys a wide discretionary power to award costs, including indemnity costs: see ss 37P(6)(d) and (e) and 43 of the Federal Court of Australia Act 1976 (Cth).

63    The Court’s discretion is absolute and unfettered and must, of course, be exercised judicially: see Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 400. Subject to that general discretion, costs will ordinarily follow the event on a party and party basis: see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at 234-235 (per Black CJ and French J).

64    Any departure from this usual practice must be warranted having regard to the circumstances of the case. In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 Sheppard J reviewed a large number of authorities from which he distilled certain principles or guidelines about the awarding of costs. His Honour identified a number of circumstances in which it had been held that the award of indemnity costs was justified. These included:

    Where the misconduct of a party causes loss of time to the Court and to other parties;

    The proceedings had continued in wilful disregard of known facts or clearly established law; and

    The undue prolongation of a case by the making of groundless contentions.

See at 233. See also Dowling v Fairfax Media Publications Pty Ltd (No 2) [2010] FCAFC 28 at [42]-[45] (per Graham J), [139]-[140] (per Logan and Flick JJ).

65    The applicants identified four “special” reasons which, they submitted, justified the award of indemnity costs in relation to the liability stage of the proceeding. They were:

(a)    The loss of time, both to the Court and the applicants, resulting from the misconduct of the respondents in relation to their discovery obligations and the giving of their evidence;

(b)    The resultant need for the applicants to engage in time consuming and expensive steps such as issuing subpoenas to obtain documents which should have been discovered;

(c)    The respondents had sought to maintain defences which were unsustainable having regard to established law and principle; and

(d)    The serious misconduct of the respondents which led to their breach of their contractual, fiduciary and statutory obligations.

66    My findings in Holyoake Industries (No 1) support the applicants’ contentions.

67    I dealt with the inadequacy of discovery and some of its consequences in Holyoake Industries (No 1) at [46] as follows:

“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.”

68    The respondents’ failure to give proper discovery forced the applicants to issue subpoenas to third parties. The subpoenas yielded some key documents which strongly supported the applicants’ case. The individual respondents were well aware of the potential damage of this material to their defence and they took whatever steps they could in order to prevent the applicants becoming aware of this material.

69    Other similar matters are referred to in paragraphs [68]-[69], [73]-[74] and [77] of my reasons in Holyoake Industries (No 1).

70    This misconduct on the part of the individual respondents impeded the proper conduct of the proceeding and occasioned a great deal of additional expense.

71    The respondents’ attempts at concealment extended to the pursuit of many baseless and time consuming claims of business confidentiality and privilege over documents which should have been produced.

72    Furthermore, at trial the respondents sought to pursue a number of unmeritorious defences: see Holyoake Industries (No 1) at [96]-[112] and [126]-[144].

73    In these circumstances I consider that the respondents should pay the applicants’ costs of the liability stages of the trial on an indemnity basis.

74    The applicants sought a similar order in respect of the subsequent (remedies/relief) stage of the trial.

75    They did so for three principal reasons:

(a)    The respondents had attempted to reargue issues already decided in the liability stage of the trial;

(b)    The respondents’ reliance on seriously deficient “expert” evidence; and

(c)    The calling of three witnesses at a late stage of the hearing and without proper notice.

76    The first and third of these reasons may immediately be dismissed. They do not, either individually, or in conjunction with the other reasons meet the criteria identified in Colgate-Palmolive.

77    The applicants mounted a sustained attack on the qualifications of Mr Spence and the quality of his evidence. These submissions had some force. So much was evident from the decision of the respondents not to seek to rely on some of the evidence given by Mr Spence after it had been challenged in cross-examination.

78    On the other hand Mr Spence had discussed his evidence in conference with Mr Sincock and they had agreed on many of the assessment issues. Their evidence on these points was of much assistance to the Court.

79    Insofar as Mr Spence’s evidence was exposed as deficient, the respondents disavowed reliance on it and time was not wasted in unnecessary argument.

80    I do not, therefore, consider that the applicants are entitled to damages assessed on an indemnity basis in respect of the remedy/relief segment of the trial. The usual order as to costs should be made.

CONCLUSION

81    The applicants will have to make an election as to whether they will receive equitable compensation or an account of profits. Once the election has been made interest will have to be calculated in accordance with s 51A of the Federal Court of Australia Act.

82    I will, therefore, direct that the parties bring in minutes of orders which give effect to these reasons.

Associate:

Dated:    25 May 2012