FEDERAL COURT OF AUSTRALIA
MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990
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IN THE FEDERAL COURT OF AUSTRALIA |
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DATE OF ORDER: |
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WHERE MADE: |
THE COURT ORDERS THAT:
1. The plaintiff to bring forward a minute of final orders to reflect the findings made.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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WESTERN AUSTRALIA DISTRICT REGISTRY |
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GENERAL DIVISION |
WAD 256 of 2010 |
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BETWEEN: |
MG CORROSION CONSULTANTS PTY LTD ACN 084 715 177 Plaintiff MALCOLM STEWART GILMOUR First Cross-Claimant MAGIL NOMINEES PTY LTD ACN 009 059 607 (IN LIQ) Second Cross-Claimant |
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AND: |
MALCOLM STEWART GILMOUR First Defendant MAGIL NOMINEES PTY LTD ACN 009 059 607 (IN LIQ) Second Defendant MG CORROSION CONSULTANTS PTY LTD ACN 084 715 177 First Cross-Respondent ALBERTO CESARIO VINCIGUERRA Second Cross-Respondent |
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JUDGE: |
BARKER J |
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DATE: |
12 SEPTEMBER 2014 |
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PLACE: |
PERTH |
REASONS FOR JUDGMENT
1 Prior to about July 2000, Mr Vinciguerra and Mr Gilmour had known each other through business for a number of years. In 2000 they decided to go into business together through a company known as MG Corrosion Consultants Pty Ltd (or MGCC). The circumstances in which the men went into business together are as follows.
2 For many years prior to 2000, Mr Gilmour had owned and managed Sola-Kleen Pty Ltd (since re-named Magil Nominees Pty Ltd), which operated a business manufacturing and supplying solar hot water systems, as well as supplying chemicals for water treatment in cooling towers and heat exchangers and descaling treatments for the mining and processing industries. The water treatment business was operated under the business name “MG Corrosion Consultants”, which was first registered in December 1981.
3 For a number of years prior to about 1998, Mr Vinciguerra had been the operations manager of the chemical cleaning division of a business known as Maxwell Chemicals and in that capacity had done business with MG Corrosion Consultants.
4 After Mr Vinciguerra ceased his employment with Maxwell Chemicals in about 1998, and following discussions with Mr Gilmour, he accepted an invitation from Mr Gilmour to advance the water treatment business of MG Corrosion Consultants.
5 On 12 October 1998, Mr Gilmour caused MG Corrosion Consultants to be incorporated.
6 It would appear that from about that time, the newly incorporated entity, MGCC, assumed the water treatment side of the business previously carried on by Sola-Kleen.
7 It also appears that when Mr Vinciguerra was first engaged by Mr Gilmour it was as an employee of MGCC.
8 In any event, in 2000, after Mr Vinciguerra had been working on the water treatment side of the business for a period, Mr Gilmour offered him the opportunity to become an equity owner in MGCC. He was offered the opportunity, without payment, of taking 30 fully paid shares in MGCC, the other 70 fully paid shares to be held by Sola-Kleen (for the Gilmour Family Trust). Mr Vinciguerra accepted the offer and became a shareholder and director of MGCC in July 2000.
9 As it transpires, Mr Gilmour’s accountant at the time, Mr Trevor John Harradine, expressed to Mr Gilmour some caution about this business development, fearing that the capital gains free status of Sola-Kleen’s business on the water treatment side, might be put at risk by the assumption by MGCC of that business. Nonetheless the business development proceeded.
10 From that point on, MGCC conducted its water treatment business at the same premises at which Sola-Kleen had been conducting its business for many years, in Bassendean Road, Bayswater.
11 Mr Vinciguerra remained a director of MGCC until 22 April 2004, when he resigned that office. He then continued, however, as an employee of MGCC until 29 July 2006, when he ceased his association with MGCC altogether.
12 Mr Gilmour was a director of MGCC together with Mr Vinciguerra at all material times until Mr Vinciguerra’s resignation from that office. Thereafter, Mr Gilmour remained the sole director of MGCC until 15 January 2008.
13 As a result of financial concerns harboured by Mr Vinciguerra following the cessation of his employment with MGCC, he successfully took proceedings in the Federal Court of Australia pursuant to the Corporations Act 2001 (Cth), for orders first to inspect MGCC’s books and later to obtain the leave of the court to pursue a derivative action in the name of MGCC against Mr Gilmour and Sola-Kleen. As to the inspection orders, see Vinciguerra v MG Corrosion Consultants Pty Ltd [2007] FCA 503; (2007) 61 ACSR 583. As to the grant of leave to pursue the derivative action, see Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763; (2010) 79 ACSR 293; and MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367. Mr Vinciguerra was also successful in obtaining a costs order in his favour in the Full Court. See MG Corrosion Consultants Pty Ltd v Vinciguerra (No 2) [2011] FCAFC 48; (2011) 276 ALR 319.
14 This proceeding is conducted pursuant to the leave granted to Mr Vinciguerra to pursue the derivative action in the name of MGCC against Mr Gilmour and Sola-Kleen.
15 MGCC – effectively Mr Vinciguerra – claims that, in breach of his duty as a director under the Corporations Act and under the general law as a fiduciary, Mr Gilmour, with Sola-Kleen’s involvement, authorised the payment of monies to Sola-Kleen that should not have been paid or were excessive, and incurred legal expenses in defending the various Federal Court proceedings commenced by Mr Vinciguerra to gain access to the records of MGCC and for leave to commence the derivative action. The sum of expenses in issue, as initially estimated in the expert report of Mr Trevor Gorey, chartered accountant, dated 3 April 2013, and filed on behalf of MGCC, was $1,653,889.
16 By the time the trial commenced, the defendants, having regard to advice they had received from Mr George Lopez, chartered accountant and by then liquidator of MGCC, conceded, without any admission as to any breach of duty by Mr Gilmour, that for the period 1 July 2002 to 30 June 2007, there were expenses of $97,166 charged by Sola-Kleen to MGCC or incurred by MGCC which may not be capable of substantiation. Otherwise they denied the claims made against them.
17 The defendants say that any claims in respect of amounts prior to 13 September 2004, that is to say six years prior to the commencement of the derivative action, are, in any event, statute-barred pursuant to s 38 of the Limitation Act 1935 (WA).
18 Sola-Kleen also claims that it is entitled to set off against any sum that it might be found liable to pay, the amount of its cross-claim against MGCC.
19 Sola-Kleen cross-claims, with the leave of the liquidator (who had been appointed prior to trial), alleging that MGCC owes it a total of $330,613, being management fees due for the period ending 30 June 2001 of $167,316.66 and for the period ending 30 June 2002 of $163,296.37, based on the calculations referred to in Annexure E of Mr Lopez’ expert report dated 13 September 2013.
20 Sola-Kleen also cross-claims a further $118,500 in respect of rent that it claims was undercharged for the years 2000 to 2004, based on opinions expressed by Mr Gorey in his 3 April 2013 report at pp 15 and 16.
21 As a result, Sola-Kleen’s cross-claim is in the total sum of $449,113.
22 In turn, MGCC denies any liability in respect of the cross-claims, denying the existence of any obligation to pay management fees for the years ending 30 June 2001 and 30 June 2002, and submitting that the claim for payment of management fees for those years was, in any event, barred by the Limitation Act 1935, s 38(1)(c)(v).
23 In relation to the claimed underpayment of rent, MGCC pleads that insofar as it arose from occupation of premises by MGCC prior to 30 March 2005, alternatively 13 September 2004, it is barred either by s 38 of the Limitation Act 1935, or s 13 of the Limitation Act 2005 (WA) respectively.
24 It also denies that Sola-Kleen is entitled to any set-off in respect of its cross-claim and observes it has not pleaded set-off as a defence in respect of the underpayment of rent claim.
25 By the end of the trial the defendants had made a number of concessions of unnecessary or excessive expenses, additional to the $97,166 referred to above, totalling $188,942. Liability in respect of those expenses, however, continued to be denied.
26 MGCC by that time had also conceded that a number of expenses referred to in Mr Gorey’s expert report, totalling $228,771 were no longer the subject of claim.
27 As a result the only expenses in issue towards the end of the trial appeared to be the following:
(1) debt factoring expenses (para 6 particular A of the amended statement of claim (or ASOC)) $ 205,922
(2) expenses related to Mr Thuy (para 6 particular C ASOC) $ 60,840
(3) the legal expenses (para 6 particular L ASOC) $ 77,810
(4) “management fees” (para 8 particular A ASOC) $ 917,065
(5) Directors’ fees (para 8 particular B ASOC) $ 198,546
(6) rates expenses (para 8 particular N ASOC) $ 13,226
28 This list of expenses in issue may be reconciled with the summary at p 30 of Mr Gorey’s April 2013 report.
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Paragraph |
Amount |
Status | |
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4 |
Management fees |
$917,065 |
Disputed |
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5 |
Expenses considered excessive (directors’ fees) |
$198,546 |
Disputed |
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6 |
Expenses not incurred by MGCC |
$80,631 |
Conceded by the Defendants: $11,000 for accounting expenses; $16,914 for motor vehicle fuel expenses ; $2,695 for postage expenses ; $16,240 for printing and stationery expenses; $4,500 for staff amenity expenses Conceded by MGCC: $16,056 for motor vehicle repair expenses Disputed : $13,226 for rates |
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7 |
Expenses not related to MGCC's business |
$304,922 |
Disputed: $205,324 for debt factoring expenses Conceded by the Defendants: $66,939- Debra Stedman Disputed - being the balance related to Mr Thuy |
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8 |
Expenses not considered MGCC's |
$27,000 |
Conceded by the Defendants |
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9 |
Excessive expenses |
$47,915 |
Conceded by MGCC |
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10 |
Legal expenses |
$77,810 |
Disputed |
29 The defendants say that the analysis in the table in the preceding paragraph confirms there is no separate head of claim supported by Mr Gorey’s report for an overpayment of Mr Gilmour’s wages in the sum of $144,064, or excessive telephone expenses of $21,000; and say the issues in relation to Mr Gilmour’s wages and the telephone expenses both relate to the calculation of the so-called management fee.
30 In that regard MGCC agrees that there is no claim concerning wages paid to Mr Gilmour, other than the “M Gilmour” component of the management fees (although there is a claim regarding the payment of directors’ fees by MGCC to Mr Gilmour in para 8 particular B ASOC).
31 MGCC also notes there are separate claims regarding telephone expenses incurred directly by MGCC (para 8 particular I ASOC) and telephone expenses incurred by Sola-Kleen and on-charged as a component of the management fees. It points out that in analysing the telephone expenses Mr Gorey aggregated the total telephone expenses paid by MGCC and expressed his opinion as to the aggregate amount that MGCC was overcharged for telephone expenses.
32 I note that following conferral between Mr Gorey and Mr Lopez, confirmed at trial, Mr Lopez agreed with Mr Gorey’s analysis of the telephone expenses.
33 In these circumstances, I accept that, given the circumstances of Sola-Kleen and MGCC and particularly the level of telephone expenses incurred by MGCC in the latter years, a 50/50 split of these expenses is reasonable, as the experts agree, and so this expense issue should be considered resolved on that basis.
34 The specific issues requiring determination in this proceeding at the end of the trial may therefore be stated as follows:
(1) whether the claimed expenses were unnecessary or excessive;
(2) whether Mr Gilmour breached his duty as a director under the Corporations Act or the fiduciary duties he owed to MGCC in relation to the those expenses found to be unnecessary or excessive; and if so, whether Sola-Kleen is also liable as an accessory;
(3) whether any of the claims made against Mr Gilmour are statute-barred;
(4) whether MGCC is liable to Sola-Kleen in respect of management fees for the financial years ending 30 June 2001 and 30 June 2002; and in respect of an underpayment of rent by MGCC for the Bayswater premises for the financial years ending 30 June 2000 to 30 June 2004; and, if so, whether Sola-Kleen may be entitled to a set-off in respect of them;
(5) whether MGCC has a limitation defence under either the Limitation Act 1935 in respect of the claim for management of fees for the years 2001 and 2002, and under the Limitation Act 1935 or the Limitations Act 2005 in respect of the cross-claim for underpayment of rent.
35 MGCC also raised an issue as to Sola-Kleen’s ability to proceed with its cross-claim as, at the time of trial, it was in voluntary liquidation and required leave of the Court to proceed with its cross-claim. The Court however gave its leave in this regard at the commencement of the trial.
Were the claimed expenses unnecessary or excessive?
36 As explained above, MGCC no longer presses its claims in respect of some expenses initially claimed to be either unnecessary to be incurred or excessive. Additionally, the defendants now concede that some expenses the subject of MGCC’s claim cannot be justified, but deny that the fact that they were incurred results in Mr Gilmour being in breach of any duty to MGCC. Some other expenses, however, remain in issue between the parties both as to their justification and whether their payment resulted in any breach of duty by Mr Gilmour.
37 In order to deal with the expenses that remain in issue, the evidence of the expert witnesses will first be considered, followed by a consideration of the evidence of the other witnesses.
The expert evidence
38 Mr Gorey and Mr Lopez were called, as expert witnesses, to give their opinion evidence concurrently.
39 Mr Gorey provided his expert report of 3 April 2013 (exhibit 11) in which he was asked to address the following issues:
(1) Whether any of the expenses set out in the particulars to paras 7 and 8 of the statement of claim were:
additional to the expenses that MGCC incurred in carrying on its business;
unnecessary to be incurred by MGCC;
not properly related to MGCC’s business;
otherwise ought not to have been incurred by MGCC; and/or
for the purposes of MGCC’s business, but were incurred in excessive amounts and exceeded the amount by which the expense related to, or was incurred for the purpose of MGCC’s business.
(2) Whether there were any other expenses of MGCC that can be so characterised.
(3) In relation to any expenses which related to and were for the purposes of MGCC’s business but were incurred in an excessive amount or exceeded the amount by which the expense related to, or was incurred for the purpose of MGCC’s business, the amount by which the expense exceeded what related to or was incurred for the purpose of MGCC’s business, or the amount by which the expense exceeded the reasonable amount of such expense.
40 In his report, Mr Gorey set out the factual assumptions he had made at the time of signing his report, which included those drawn from documents and information identified in his report as well as from previous reports he had prepared in relation to earlier proceedings and which were dated 7 September 2007 and 11 March 2008.
41 He also noted some accounting difficulties of an audit nature, and that he had earlier received information from Mr Vinciguerra by way of written answers to a list of questions provided.
42 Mr Gorey also made the point that material he saw did not include accounting and other records of Sola-Kleen that he considered were necessary to enable a full examination by him of the operations of that company in order to establish the validity of the management fees and other costs charged by that company to MGCC; and he noted the documents he would have expected to have seen in that regard including general ledgers, bank statements, payroll records, invoices of various types and financial statements for the years ended 30 June 2006 and 2007. He said that in the absence of such materials, he had had to rely on other information and in some instances had made assumptions without the ability to verify them.
43 In his report, Mr Gorey then set out background in relation to both MGCC and Sola-Kleen, in which he confirmed his understanding that MGCC at material times had two business components. The main business was the sale of chemicals used in the mining industry, with its major market being in Kalgoorlie, but also South Australia. Sales from this source in 2006 totalled $1,558,000. It also operated a division that serviced and cleaned air conditioning units, concentrated in Perth, with sales in 2006 of $445,000.
44 Mr Gorey also confirmed his understanding that the Gilmour Family Trust operated a business trading as Sola-Kleen Pty Ltd as trustee for the Gilmour Family Trust which manufactured and installed solar panel heating devices.
45 He also confirmed his understanding that that the two companies operated from the same premises in Bayswater, although as noted, the majority of MGCC’s operations, at material times, was located in Kalgoorlie.
46 He further confirmed his understanding that Sola-Kleen had subsequently changed its name to Magil Nominees Pty Ltd. However, as it operated under its former name for the whole of the period covered by his report he continued to refer to it as Sola-Kleen in his report (as indeed the parties and the Court has done).
47 Mr Gorey set out in his report MGCC’s operating results for the years 2003-2007, including all relevant expenses.
48 He also set out the financial position of MGCC as disclosed by the company’s annual financial statements which itemised the asset and liability position at 30 June in respect of the years 2003 to 2007. They disclosed small losses in the years 2003, 2004 and 2005 with a profit of $42,785 being made in 2006 and $97,375 being made in 2007.
49 Mr Gorey considered, in response to the questions put to him, that there were several categories of expense that fell within the description of expenses put to him, that were:
additional to the expenses that MGCC incurred in carrying on its business;
unnecessary to be incurred by MGCC;
not properly related to MGCC’s business;
otherwise ought not to have been incurred by MGCC; and/or
for the purposes of MGCC’s business but were incurred in excessive amounts and exceeded the amount by which the expense related to, or was incurred for the purpose of MGCC’s business.
50 Mr Gorey said the categories fell within the broad descriptions of:
Management fees charged annually from 2003 to 2007.
Directors’ fees charged by Mr Gilmour.
Expenses incurred by Sola-Kleen for the benefit of Sola-Kleen that were paid for and expensed in the books of MGCC.
51 Mr Lopez, as liquidator of MGCC, also provided a report (exhibit 12). In preparing his report he had regard to a number of materials including what he described as the Graham Ruthven work papers. In the course of the proceeding I ruled that the late Mr Ruthven’s work papers and report were not admissible in the proceeding.
52 In the result, Mr Lopez summarised his findings in respect of the claims made by MGCC in the proceeding as follows:
From the information made available to him (which it should be noted included the Ruthven report which I ruled to be inadmissible), a significant part of the claim cannot be sustained.
A number of claims, especially those in relation to what is claimed to be excessive expenditure have not been supported by any documentation and the claim appears to have largely been based on Mr Gorey’s report of 10 September 2007, which itself was based on statements made to Mr Gorey by Mr Vinciguerra, a review of the external accountant’s work papers and the use of comparative analysis to identify variances in annual expenditure. He had seen no evidence of efforts made to objectively determine the cause of that increased expenditure.
Even if the expenditure was excessive, there was no explanation as to why it should have been claimed against the defendants personally.
Further, the statement of claim has not explained why the alleged “excessive” expenditure should have been claimed against the defendants only, when Mr Vinciguerra himself may have been the beneficiary of some of that “excessive” expenditure.
53 On those significant parts of the claim related to management fees, debt factoring costs and directors’ fees, in decreasing order of significance, Mr Lopez considered:
Except for a portion relating to wages for Mr Gilmour, the management fees charged were not so much for the management of the company and more in the nature of reimbursement of expenses incurred on behalf of the company by Sola-Kleen. The main issue was the extent of mark-ups used and in that regard he was satisfied that the mark-ups were reasonable and had judicial support in the Philips case.
In respect of the mark-ups for labour, he recommended that the mark-ups be 40% instead of 50%, but the end result is of little significance overall.
Part of the management fee related to Mr Gilmour’s notional wage and, in his view, that is the only part of the management fee that truly relates to management. That portion of the fee is not based on an actual wage; only a nominal salary. The notional wage is based on what a reasonable wage would have been for a management position and he was satisfied that that is a reasonable wage, although, due to the lack of any written agreement as to salary increases, he restricted the increases to the consumer price index (CPI) rises for the period in question.
With regard to the debt factoring costs, while he acknowledged that debt factoring was an expensive finance and should be avoided if possible, to enter into such an agreement was a decision which appeared to have been made by both directors. On that basis, he failed to see why the costs of debt factoring should be claimed against either of the defendants.
The matter of directors’ fees was perhaps the most arguable issue. He accepted that given the responsibilities that directors face, a directors’ fee should be anticipated. It is the level of that fee which may be argued.
Based on the information provided to him, he was of the view that the total claim can be sustained to the extent of $97,166 based on the Court allowing directors’ fees of $28,000 indexed to CPI, $255,014 if the directors’ fees are only allowed at $10,000 indexed, or $345,712 if no directors’ fees are allowed at all.
54 Mr Lopez provided a table summarising his various calculations, noting that:
Even if the Court were to determine that no mark-ups should be allowed in respect of the management fees, then the claim would be increased by a further $79,137 which probably, in the worst case scenario, would result in a total claim of $425,849.
This claim was insufficient to eliminate the debts he considered were currently owed by MGCC to the defendants.
Taking into account the evidence that had been provided to him, to the extent that the claims made against the director could be justified, the claims are insufficient to eliminate the amounts owed to the defendants by the company. Accordingly, a successful claim would not result in an inflow of funds to the company, but is only likely to reduce the overall debts owed to the defendants.
Given that no dividend is likely to be paid to the company’s creditors, a reduction in claims against the company by reducing the debts owed to the defendants would provide no benefit to the company or its creditors by continuing the legal action and would worsen its position by incurring further, unrecoverable legal costs.
Accordingly, he was of the view, from the liquidator’s viewpoint, that continuing the action could not be justified on commercial grounds.
55 It was appreciated by Mr Lopez, and should be made explicit here, that the general comments made by Mr Lopez, as liquidator, concerning the cross-claims and the viability of MGCC’s claim are not relevant to the assessment of the legal issues raised by MGCC in its claim and by the defendants in their cross-claims and so should be disregarded. What is useful, however, are the detailed calculations, based on various assumptions, that Mr Lopez puts forward in his report.
56 It will be appreciated from this brief background that Mr Gorey and Mr Lopez came to the primary accounting questions in issue from different vantage points. Mr Gorey had been brought into the dispute between the parties at a much earlier stage, and had conducted earlier financial investigations, although, as he said, on the basis of limited information. There was a time at which Mr Ruthven, before he passed away, had also been involved from the defendants’ side. At trial, I was not prepared for his report effectively to be put in evidence and assumed to be correct. Mr Lopez’ vantage point, as noted, was primarily as a liquidator of MGCC, having earlier been appointed an administrator. His expert report reflected that perspective, as he acknowledged. Nonetheless, the two witnesses qualified as experts and did address a range of common accounting issues. Their different perspectives or the different bases upon which they expressed opinions were clear, and, to some extent, were resolved both through the process of a conference before trial and in the course of giving concurrent evidence at trial.
57 The record of the conference that they held before trial became exhibit 13. They noted in it the different approaches they had taken. For example, it was noted that the approaches to the report prepared by Mr Gorey of 3 April 2013 and the report prepared by Mr Lopez of 13 September 2013 were different. Mr Gorey prepared his report in response to specific instructions whereas Mr Lopez prepared his as liquidator considering the possible recovery of funds. Further, Mr Lopez’ report was prepared without access to Mr Gorey’s report of 3 April 2013, which Mr Gorey indicated had changed since his 2007 report. A further basic difference was that the Gorey report was confined to the years 2003-2007, whereas the Lopez report covered 2001-2010.
58 Mr Lopez commented in his report that he found Mr Gorey’s attitude, in not assisting with his investigation, surprising given that the action was being taken by the company and that Mr Gorey conducted his review on behalf of the company. Mr Gorey explained that he was engaged by a shareholder, not by the company itself and therefore was constricted by professional requirements from disclosing confidential information.
59 The experts noted that prior to discussing the matters raised by Mr Lopez in detail in para 5 of his report, the solicitors for MGCC had informed Mr Gorey that the solicitors for the defendants had accepted the claims covered in Mr Lopez’ report under paragraphs:
5.5 (contract payments to Sola-Kleen of $14,712);
5.6 (motor vehicle expenses on Mr Gilmour’s vehicle of $6,040);
5.7 (printing and stationery costs of $898);
5.12 (freight expenses of $10,000);
5.13 (insurance expenses of $6,000);
5.14 (motor vehicle registration expenses of $6,000);
5.16 (printing and stationery expenses of $9,000); and
5.17 (staff amenity expenses of $3,500).
60 What, therefore, apparently remained in issue were the following paragraphs and matters in Mr Lopez’ report:
5.1 - debt factoring;
5.2 and 5.3 – Ms Stedman and Mr Thuy’s salary on-charge;
5.4 - consultant’s fee for Phil Reed;
5.8 - rent charges;
5.9 - reduction in stock value;
5.10 - management fees;
5.11 - directors’ fees;
5.15 - motor vehicle repair expenses;
5.18 - telephone expenses; and
5.19 - travel expenses.
61 Mr Lopez did not address rates expenses which were addressed in Mr Gorey’s report and apparently remained in issue.
62 In their conference the experts noted: the claims not covered by Mr Lopez’ report; that Mr Lopez did not have access to Mr Gorey’s report of 3 April 2013 including the accounting fees set out at p 21 of Mr Gorey’s report of 3 April 2013; rates discussed at p 24 of Mr Gorey’s earlier report; and legal expenses discussed at p 29 of Mr Gorey’s earlier report.
63 Following the concessions of the parties referred to above, only those matters in 5.1, 5.2, 5.3, 5.8, 5.10 and 5.11 remained in issue between the experts so far as the expenses being unnecessary or excessive.
64 In relation to debt factoring the experts noted that the Lopez report had taken into account comments by Mr Ruthven that in 2001 the company had suffered operating losses even without the management fees being taken into account and external funding was required. Mr Gorey commented that as far as he could determine from the reported results that was not the case and that the company would not have required funding had Mr Gilmour not taken a substantial loan from the company.
65 Mr Lopez also commented that Mr Vinciguerra had signed the factoring agreement and therefore they were jointly responsible for the borrowing. From a subsequent review, Mr Lopez also noted that while Mr Gilmour had borrowed funds, a substantial portion of his debt had been repaid by 30 June 2003. In addition, Mr Vinciguerra was also indebted to the company from 2003 onwards, and in 2006 his debt exceeded that of Mr Gilmour.
66 Mr Lopez also commented that traditional funding was not possible because Mr Vinciguerra refused to provide security for a bank loan. Mr Gorey indicated that he had no knowledge of that refusal. No agreement was reached on the matter.
67 In concurrent oral evidence, Mr Gorey said that the difference between him and Mr Lopez, in his view, was that the need for the debt factoring was caused by a loan taken up by Mr Gilmour from the company, which then required cash funding. If it had not been for that, there would have been no need for debt factoring. It was as simple as that. Mr Gorey identified the loan as the $136,229 loan made to the Gilmour Family Trust in 2002, referred to at p 27 of his report.
68 Mr Lopez considered that this transaction was significant, but thought there were other issues that had to be considered as well.
69 He accepted, however, he was not addressing Mr Gorey’s primary point but addressing another issue concerning the appropriateness of refinancing by the debt factoring agreement.
70 He accepted that the terms of the loan account in the balance sheet showed an amount outstanding by Mr Gilmour and his related entities and that there was a significant loan at that point in time.
71 He said, however, that the history of the company showed that loans had been taken out by both directors at various times and the balance sheets only show loan accounts outstanding at a point in time when there will also be changes right throughout the history of the company, and they will show that Mr Vinciguerra’s debt was actually higher than Mr Gilmour’s debt at other times. He said that was one issue.
72 The other point he wished to make was that the company had not drawn management fees in the first years of 2001 and 2002. He said that, had a proper management fee been drawn up, it would have been seen that it was not really a management fee but more a reimbursement of costs and so the situation may have been quite different.
73 His final point was that, something he understood Mr Gorey did not agree with, the company records showed that it had made a loss in the year 2001 and had a management fee been properly charged then it would have made losses in 2001 and 2002 and would have had a working capital deficiency in those circumstances.
74 Mr Gorey responded first by reference to Mr Lopez’ point about the loans by Mr Vinciguerra. He referred to p 6 of his report which set out the financial position of MGCC from 2003 to 2007. He noted that, under the heading of current assets, there was a loan of $11,000 to Mr Vinciguerra and then $16,000 and so on. At the same time there were loans to the Gilmour Family Trust of $16,000 and $14,000 and so on.
75 Mr Gorey emphasised that the loan figure on Mr Gilmour’s side reached the point of $257,000 before a management fee was eventually charged. His point was that Mr Gilmour had taken a significant amount of money out of the company in the earlier stages, requiring the funding through debt factoring.
76 In response to Mr Lopez’ broader point that assuming there was some understanding in 2001 especially 2002 that there might have been management fees charged, and if they had been then there would have been a significant draw in the same way on the expenses and the capacity of the company to operate, Mr Gorey said he had not examined the potential for those management fees in 2001 and 2002 and there were certainly no charges made for those years. He said he had no ability to make any assumptions on that.
77 Mr Lopez, in response to the proposition that, taking the figures as they appeared, which were on the basis that management fees were not being charged, the factoring only came about because of the loan position, responded by going back to Mr Gorey’s point about the growth of the loan account to $257,000 in 2003. He made the point that all of the entries supporting that were journal entries and there was no supporting documentation. The debits and credits were all dated the same day, so if those entries had been reversed and the credits had gone through first before the debits, you would not have had that overdraft. So he thought, because there was a whole series of entries created or posted on the same day, that one could not read anything into the progressive balance. He said one can only look at the balance at the end of that day.
78 Mr Gorey responded by pointing to the position at the end of 30 June 2004, where he considered the same kind of scene developed and where the balance grew to $250,000. He said the significant thing was that it was not just year-end adjustments, there were entries in March. In his view, it was not just an end of year adjustment.
79 Mr Lopez, when asked, agreed that those points made by Mr Gorey affected the points that he had been making.
80 Mr Gorey concluded his comments by saying that he had no knowledge in expressing his opinion about there having been some other negotiations about borrowings. The Court noted that it did not have such knowledge (from the evidence) either.
81 In relation to Ms Stedman and Mr Thuy’s salary, the experts agreed that they had no means of verifying a reasonable allocation of the times spent on MGCC business by either of these employees of Sola-Kleen, Ms Debra Stedman or Mr Thuy Xuan Huynh.
82 Their comments (obviously prior to and without the benefit of the evidence that the Court received) included:
No one really knows how much time was spent by Ms Stedman and Mr Thuy on MGCC’s affairs. As far as is known, no timesheets were kept.
Mr Gorey indicated that his calculations were based on instructions received from Mr Vinciguerra in the questionnaire.
There were no means of determining what a reasonable wage for either person was.
A complicating issue was that both were paid by both companies in each year.
Even Ms Stedman’s affidavit (which the Court should note did not go into evidence) did not assist them.
The issue of wages on-costs was yet to be resolved.
83 Upon subsequent review, Mr Lopez contended that Ms Stedman’s wages for 2001 and 2002 had not been charged to MGCC and that Mr Thuy’s wages for 2002 had not been charged either. He considered when those and other on-costs are taken into account, it would have a significant effect on the claim.
84 Both experts agreed that they could not allocate those on-costs and the matter is for the Court to decide.
85 As to Mr Lopez’ contentions upon subsequent review, in the concurrent evidence session, Mr Gorey said he saw no evidence of those matters and they were not available to him.
86 Mr Lopez said that he was basing his observations on information in the (inadmissible) Ruthven report - not his own analysis. He said he had been unable to pick up any primary records himself.
87 In relation to management fees, in conference the experts agreed that the nature of the management fees, being effectively a form of reimbursement of costs incurred by Sola-Kleen rather than a fee for managing MGCC, was noted. From their perspective as accountants, the question came down to whether or not the charges were reasonable.
88 Mr Gorey drew attention to p 12 of his 3 April 2013 report which records a summary of the operating costs of Sola-Kleen and the total management fees on-charged to MGCC which indicated that, in some years, the management fees exceeded the total Sola-Kleen expenses for those years.
89 Mr Lopez commented that the fees appeared to be arbitrarily determined based on how much money was available.
90 In summary, Mr Gorey considered that the following were excessive management fee charges:
Printing and stationery: $ 11,693
Salaries: $607,003
Wages Gilmour: $256,564
Staff amenities: $ 6,042
Telephone: $ 35,763
Total $917,065
91 For the cost items making up the management fees, Mr Gorey’s 2013 report concluded that there was no issue with the charges regarding electricity, postage, rates and taxes and rental charges.
92 Further, on the advice of MGCC’s solicitors, the defendants’ solicitors had conceded that the claims for staff amenities and telephone had been accepted.
93 As to telephone charges, a 50/50 offset, as discussed above, should be applied and so the overcharge of $35,763 assessed by Mr Gorey above should be accepted.
94 The items to be considered, therefore, were printing and stationery, salaries, Mr Gilmour’s wages and staff amenities.
95 As to Mr Gilmour’s wages, Mr Lopez considered that when an allowance was made for managing the business, the overall on-charge was reasonable.
96 Mr Gorey, at p 18 of his 2013 report, considered that Mr Gilmour was entitled to a wage equivalent to Mr Vinciguerra and calculated a salary of $49,500 inclusive of employee on-costs.
97 Mr Lopez suggested there should be an allowance to recognise the management of the business of, say, $45,000 a year.
98 Mr Gorey initially accepted that concept and conceded that, in that event, the Gilmour wage charge was reasonable.
99 However, on further thought, he considered that the $45,000 allowance should be spread between MGCC and Sola-Kleen. On that basis, the annual salary would be $49,500 as stated in his 3 April 2013 report plus a management component of $22,500 giving a total of $72,000 a year. That would equate to $360,000 for the period and so represented a $144,064 overpayment.
100 In the concurrent evidence session Mr Gorey agreed that the issue of “management fees” was a misnomer and it was particularly about recovery of costs and to do with Mr Gilmour’s and staff wages.
101 Mr Gorey said it was difficult to make assessments as he had no idea of the duties performed by Mr Gilmour in either company. From information he had been provided with, Mr Gilmour, in MGCC, fundamentally managed a section of the business, the other to do with sale of chemicals into the mining industry being managed by Mr Vinciguerra. He initially thought that it might be reasonable to allow similar amounts to be paid to the two men but in discussions with Mr Lopez, as noted above, he recognised that that did not recognise that Mr Gilmour was also managing the company and allowance should be made for that level of responsibility.
102 He initially agreed and then had second thoughts that there should be a $45,000 a year allowance on top of the $49,500 that he considered appropriate for the wage on-cost. He said that on second thoughts, he thought $45,000 for that segment was a little too much and concluded that half of that should be allowed, giving a total salary to Mr Gilmour of $72,000 a year. Mr Gorey said that he considered that if $72,000 a year was received by Mr Gilmour in both companies, he would be getting about $140,000 to $150,000 a year, which would be a reasonably good salary, given the nature of the businesses involved. Mr Gorey made it clear that the question of directors’ fees (considered below) was approached as an entirely separate topic.
103 Mr Lopez considered that he and Mr Gorey agreed in principle on the approach to the wages question. He said that he had a problem with an arbitrary assignment of 50% of the $45,000 to MGCC and Sola-Kleen and that was the crux of their disagreement. He, too, did not know what time Mr Gilmour had spent in MGCC as opposed to Sola-Kleen. He noted Mr Ruthven had determined 90% but he had no idea where that information came from. Mr Lopez said, in principle, the question was how much time or how much effort was expended in relation to the two companies by Mr Gilmour and the experts had no records about that. Mr Gorey agreed.
104 Mr Lopez said that if the Court were to take the view that half of Mr Gilmour’s time was spent in each company, then Mr Gorey’s calculations would be correct for the years 2003 to 2007, but it would still be necessary to take into account 2000 to 2002 and an allocation would also need to be made to that. He noted that if you presume that 50% allocation is correct and Mr Gilmour’s salary should have been $72,000 over the seven years, it works out almost exactly to what has, in fact, been charged in management fees.
105 In relation to staff wages, the experts in their conference notes recorded that Mr Gorey’s approach was that MGCC had its own employees which appeared to be sufficient to operate the business and therefore there should be no charge for staff wages.
106 Mr Lopez considered the matter further. He had considered the staff wages on-charge as somewhat related to the salary matter, which was still unresolved at that point. Mr Gorey said it was difficult to assume that Ms Stedman spent 10% of her time in MGCC but it would not affect his analysis and he worked on the basis that she looked after the accounting and he allowed a $10,000 a year fee for that as reasonable. So he was focusing in his report on other people. He did not know exactly who they were. Mr Lopez agreed with Mr Gorey that there were difficulties in determining the issue of staff wages.
107 In relation to directors’ fees, the experts recorded, as a result of their conference before trial, that Mr Lopez considered a directors’ fee of $10,000 per year, as suggested in Mr Gorey’s report of 3 April 2013, would be reasonable, but that the fee should be payable from 2001 for Mr Gilmour. Similarly, he contended that Mr Vinciguerra should be entitled to directors’ fees of $40,000 for the four years he was a director.
108 In the concurrent evidence session, Mr Lopez said, when asked whether what was recorded in the conference notes indicated a common approach, that that was perhaps a little misleading because he considers directors’ fees is one of those “nebulous things” and it could be anything or nothing. He said that in most proprietary limited companies, where all the shareholders are also the directors, directors’ fees are really a non-issue, because what you take out in directors’ fees you do not get as a dividend. But where you have a situation where the directors are not shareholders and where you have got directors and shareholders in different proportions, it becomes more critical. You then need to try and identify the remuneration for the effort made. And neither of the experts knows about the amount of participation that Mr Vinciguerra or Mr Gilmour made as directors, as opposed to employees or managers.
109 Mr Lopez said that based on his own experience where he has been a non-working director of a company of MGCC’s size, his fee has been in the region of $35,000. He also agrees to the $10,000 as reasonable. But he agreed that the issue becomes one of the commercial relationship of the directors.
110 Mr Gorey said that his view was that a directors’ fee of $10,000 would be reasonable and an issue that perhaps had influenced him, but not greatly, was that there was some suggestion (not mentioned in his report) that the directors did not do a lot in terms of corporate management. They did not hold an annual general meeting and the like. There was little evidence of corporate governance from his reading of the materials.
111 Mr Gorey also accepted that if one director was to receive a directors’ fee, then it would follow that the other should receive a similar amount.
112 In relation to rates expenses, as noted above, Mr Lopez did not address Mr Gorey’s expression of opinion. This issue is dealt with below.
113 The experts’ evidence is considered below, together with the lay evidence in relation to the questions of breach of duty.
Evidence of other witnesses
114 Mr Vinciguerra’s evidence: Mr Vinciguerra was the first witness called by MGCC. He explained that he held 30 of the 100 ordinary shares in MGCC.
115 He explained how it came about that he acquired those shares. He said he had worked in the chemical industry for over 30 years. In about 1998, he was working as the operations manager and manager of the chemical cleaning division of a business known as Maxwell Chemicals. In the course of that work he came to know Mr Gilmour and the business MG Corrosion Consultants.
116 In 1998, he resigned from Maxwell Chemicals and then began discussing with Mr Gilmour, whom he had known for about 15 years, the prospects of joining MG Corrosion Consultants.
117 Mr Vinciguerra said that, at that time, the only operation of the MG Corrosion Consultants business he was aware of was the supply of labour for chemical cleaning. From his discussions with Mr Gilmour he understood that if he joined MG Corrosion Consultants, he would start up a water treatment side of the business.
118 Mr Vinciguerra said that at that time he did not know the structure of Mr Gilmour’s business but when he joined, the business name was changed from MG Corrosion Consultants to MGCC.
119 Then in July 2000, he was issued with 30 of 100 shares in MGCC. He said that Sola-Kleen was issued the remaining 70 shares. He was then also appointed a director of MGCC along with Mr Gilmour.
120 Mr Vinciguerra said that he also knew that Mr Gilmour was involved with a business known as Sola-Kleen, which manufactured and sold hot water systems. Although he did not know the precise arrangements at the time, he now knows that the Sola-Kleen business was carried on by Sola-Kleen, the second defendant controlled by Mr Gilmour.
121 Nonetheless, he said that when he started at MGCC, the MGCC business and the Sola-Kleen business were both operated from the premises at 24 Bassendean Road, Bayswater, which were owned by Mr Gilmour.
122 Mr Vinciguerra gave evidence about how those premises were set up, including about a workshop, an external shed and external car parking and storage areas.
123 Mr Vinciguerra said that when he started working for MGCC he was the only person working full-time and that Mr Gilmour primarily worked for Sola-Kleen. Ms Stedman undertook administrative work for both Sola-Kleen and MGCC and there were some other people who worked for Sola-Kleen – David Stannard, Ross Gilmour (brother of Mr Gilmour) and Mr Thuy, who apparently worked in the workshop. Other than these workshop staff doing some unloading of deliveries of chemicals for MGCC, he considered they worked exclusively for Sola-Kleen.
124 Mr Vinciguerra said that only a small part of the premises was used by MGCC and that the reception area was shared between MGCC and Sola-Kleen. He said some of the office space was used by MGCC and the storage area was used for storage of chemicals used by MGCC. Also the lunchroom, toilet, computer area and stationery cupboard facilities were used by both businesses. The balance of the office space (areas 3, 4 and 6 on a rough plan of the layout of the premises that he produced) was used by Sola-Kleen as was the workshop (areas 8, 9 and 10 on that rough plan). Mr Vinciguerra said that, over time, MGCC’s business expanded so that in about 2000 it employed Mr James Anthony McCarthy to work full-time. Mr McCarthy focussed on commercial water treatment and Mr Vinciguerra dealt with all aspects of the business, but he (Mr Vinciguerra) was the only person who focussed on industrial chemical cleaning.
125 He said that from 2000, Mr Gilmour continued to work primarily for Sola-Kleen, although he did do some work for MGCC on an ad hoc basis when required (for example, on one occasion on a cleaning job in Kalgoorlie that required three men for a week). But Mr Gilmour’s day to day activities were for Sola-Kleen. MGCC’s day to day operations, he said, were undertaken by him and Mr McCarthy (in relation to commercial water treatment).
126 Mr Vinciguerra said that in about 2003, MGCC employed Ms Michelle Dalton to perform administrative work for the MGCC business, being that previously done by Ms Stedman. He said that prior to Ms Dalton’s employment, the extent to which Ms Stedman’s time was spent undertaking work for MGCC, as opposed to undertaking work for Sola-Kleen, had gradually increased. He estimated that when he was working from the premises, at the time Ms Dalton was engaged, Ms Stedman was spending less than half of her time doing work for MGCC.
127 Once Ms Dalton was employed he estimates that Ms Stedman did MGCC’s banking and made payments on behalf of the company and prepared financial and other reports and budgets for MGCC, but otherwise Ms Dalton undertook the administrative work such as preparing and sending out quotations and invoices and filing.
128 Mr Vinciguerra said MGCC provided vehicles to him, Mr McCarthy and sales people. Mr Gilmour also had a vehicle for personal and/or Sola-Kleen purposes.
129 He said that a couple of years after he was initially employed, MGCC established an operation in Adelaide which was staffed by one full-time employee, John Mitchelmore. Any chemicals used or sold in South Australia were sent direct to customers from Western Australia.
130 He said that as MGCC’s business expanded it started utilising more of the premises and by 2000 it used all of the office space in the area marked “2” on the rough plan and came to use much of the area marked “12” for storage of its products.
131 He said MGCC and Sola-Kleen had separate telephone numbers but stationery and other sundry items were used by both.
132 MGCC also had operations in Kalgoorlie involving both chemical sales and industrial chemical cleaning. Mr Vinciguerra said that in the early 2000s he was on average spending every second week in Kalgoorlie and regularly drove there from Perth on a Sunday night and drove home on a Friday night.
133 He also said that although he became a director of MGCC in July 2000, Mr Gilmour routinely made decisions for MGCC without any reference to him. For example, he said Mr Gilmour made decisions about procurement of supplies without discussing the issues with him, and Ms Stedman would report to Mr Gilmour and not to him. He said he had no input or involvement in MGCC’s finances (supplier payments and customer receipts) which was undertaken by Ms Stedman at Mr Gilmour’s direction.
134 He said he never had the opportunity to inspect MGCC’s books during his time as a director and was only ever provided with a few financial statements, balance sheets, tax returns, management reports and customer summaries – which he identified.
135 He further said that he did not fully understand how the figures in the management reports had been derived and recalls one particular matter he was concerned about, being the inclusion of “Management Fees’’ as an expense recorded in management reports.
136 In that regard he said he tried to discuss his concerns with Mr Gilmour during the period of around 2004 – 2006. He said that on several occasions he said to Mr Gilmour words to the effect that the numbers in the reports did not make sense and needed to be justified and at least on one occasion said to Mr Gilmour that the books were being “cooked”. He said that on each occasion, Mr Gilmour got angry with him and said words to the effect that he was “accusing” him.
137 Mr Vinciguerra said that after a few such occasions, he considered the exercise of receiving reports and discussing their content with Mr Gilmour to be futile and did not continue raising his concerns.
138 He also said that he often asked to look at Sola-Kleen’s books but Mr Gilmour said that they had nothing to do with Mr Vinciguerra. In September 2003, Mr Vinciguerra said Mr Gilmour offered to sell his shares in MGCC to him for $2 million, but he did not accept Mr Gilmour’s offer.
139 Mr Vinciguerra said that by about 2004, MGCC had enough business in Kalgoorlie to warrant him dealing with that business full-time and he then relocated to Kalgoorlie on a full-time basis and rented a unit there and resided in and worked from the unit.
140 Mr Vinciguerra said he remained in Kalgoorlie until he resigned as a director of MGCC on 22 April 2004. He said he resigned because of the way that Mr Gilmour and Ms Stedman, under Mr Gilmour’s direction, made decisions about MGCC’s affairs without involving him. He said he was concerned about the potential for him as a director to incur personal liability for decisions he was not party to.
141 Mr Vinciguerra said he ultimately resigned his employment with MGCC on 29 July 2006.
142 After that, he took legal proceedings in this Court to obtain access to MGCC’s books.
143 He referred to a report that Mr Gorey prepared for him, which he considered identified expenses which were unnecessarily or not genuinely incurred for the purpose of MGCC’s business, and which included but were not limited to management fees which it appeared Mr Gilmour had caused MGCC to pay to Sola-Kleen.
144 He said he never agreed to the payment of such management fees or to otherwise incurring expenses which were not necessary for, and genuinely for the purposes of MGCC’s business.
145 He also referred to a notice of Extraordinary General Meeting of members of MGCC dated 20 March 2008 that he had received, which gave notice of resolutions for a rights issue under which 200,000 ordinary shares at a price of $1 per share were to be issued on a pro rata basis to members of MGCC.
146 Mr Vinciguerra was cross-examined about his knowledge of the financial arrangements between MGCC and Sola-Kleen and Mr Gilmour.
147 He said he did not ask Mr Gilmour what the rental arrangements were for the premises when he became a shareholder and director of MGCC in July 2000. He said he did not make any assumptions about the financial records of the two companies and the question of whether MGCC would be using the premises at no cost to it was something that “never entered into the consciousness”.
148 When asked why he accepted the 30 shares in MGCC, he said that it was 18 months or two years into establishing the water treatment division and he considered that was a fair thing for the effort that he had put in.
149 He said he would have expected a dividend from the profits of MGCC.
150 He was then asked whether it would not have been important for him to know what the funding of the MGCC business was, how it was paying its rent, how it was paying its employees and so on. He said that at that point in time he did not think of that.
151 From his point of view he was there “to give them [the] water treatment business”.
152 He continued to insist that at that point in time he did not consider what made up the costs for MGCC.
153 He said that for 18 months to two years the costs were negligible in the sense that he was providing labour free of charge and was providing a vehicle free of charge and there was “basically myself there for the business to be established”. So there were not any costs of significance.
154 He also said he did not receive any wages in the first 12 months between July 2000 to July 2001.
155 Mr Vinciguerra was also cross-examined about the roles that Ms Stedman and Ms Dalton played. He said that Ms Dalton started off working part-time and that he may have told Mr Gorey that when he was preparing his initial report.
156 As to who paid for any stock that the business required in the early period, Mr Vinciguerra said that he assumed, because Mr Gilmour held 70% of the shareholding, that Mr Gilmour covered any costs, but added that they were talking about “low numbers”.
157 When pressed about his knowledge of costs incurred in the period 1 July 2000 to 30 June 2001 and between 1 July 2001 and 30 June 2002, Mr Vinciguerra evinced little knowledge of how they were met.
158 Mr Vinciguerra was then asked questions about Mr Harradine, who, on 23 November 2010, had made an affidavit (that was shown to Mr Vinciguerra), stating that he was during the period 1 July 2000 to January 2003, the accountant for Sola-Kleen.
159 Mr Vinciguerra said he was not aware of that and said he had not, not that he recalled, met Mr Harradine before July 2000. Indeed, he considered there was only one occasion on which he had met him, either him or another accountant, Mr Tony Armenti, and that was to talk about the arrangement for his living-away-from-home allowance when he was living and working in Kalgoorlie. He thought this meeting must have been about that time, in 2004 or 2005, at an office in Victoria Park. He recalls meeting in an office but not the person or exactly the time of the year it was.
160 He specifically said he did not recall having the meeting with Mr Harradine referred to in [5] of Mr Harradine’s affidavit, in or about November 2002, in the company of Mr Gilmour at the offices of Sola-Kleen.
161 When asked whether the meeting could have happened, he said that it may have happened, but also said, before that, that he did not recall having the meeting.
162 It was then put to Mr Vinciguerra that, in accordance with what was said in [6] of Mr Harradine’s affidavit, at such a meeting there was discussion about the fact that Sola-Kleen had paid expenses on behalf of MGCC and had provided management services for which it was entitled to be reimbursed and paid by MGCC, but at that point in time MGCC was not in a financial position to do so. Mr Vinciguerra said he did not recall that discussion or a discussion about that between himself, Mr Gilmour and Mr Harradine.
163 When further asked whether he did not recall it, Mr Vinciguerra said:
It was never had. About management fees, was never had.
164 When counsel said he was not asking that question and was asking was it a meeting in relation to expenses paid by Sola-Kleen for the benefit of MGCC in November 2002, Mr Vinciguerra said he did not recall it “because I wasn’t present at that meeting”, if it in fact took place.
165 When it was put to him that he had previously indicated that the meeting in November 2002 “may have happened”, he answered that he was never involved in discussions with the finances. He added that the recovery of expenses “was never discussed with me”. He added that his focus was on getting business.
166 He was further asked whether he recalled Mr Harradine saying words to the effect that since MGCC conducted its accounts on a cash basis, not accruals, management fees should be paid and expenses recouped at such time as MGCC had sufficient funds, and that when paid, they would be entered into the accounts. He said that he could not recall that.
167 He clarified that his position was that he was never present at any such meeting where such a discussion was had. He added that he did not recall being in a meeting with the three of them being there and added that it “didn’t happen”.
168 Counsel made clear that Mr Harradine and Mr Gilmour would give evidence that there was such a meeting and such a discussion. To that Mr Vinciguerra responded, “That’s fine”.
169 Mr Vinciguerra was then asked whether at about that time in 2001, 2002, the situation was such that if Mr Gilmour had caused Sola-Kleen to demand immediate repayment of all costs that it had incurred on behalf of MGCC, it was likely the company would have folded. Mr Vinciguerra said that he would have assumed that MGCC had funds to pay its own way.
170 When Mr Gorey’s report was put to him that MGCC had a working capital deficiency from 2003 to 2006 and that MGCC did not have funds to pay, he again said he was not sure and did not know and did not recall exactly what things were like and assumed that “It was still reasonably amicable”.
171 When counsel further pressed Mr Vinciguerra to, in effect, agree that MGCC did not have the funds to cover expenses being incurred by Sola-Kleen on its behalf, and that it would, in effect, be appropriate for MGCC to agree to make payment of those expenses at a later date when it was in a position to do so, Mr Vinciguerra said that he was always under the belief that the sales that MGCC had made, once it established itself, were covering the costs.
172 He said it was never made clear to him that at some point it would be required to pay costs to Sola-Kleen. He added that he had worked there for two years running his own vehicle and there was never any mention made of covering those costs.
173 He further added that he never thought of the proposition that Sola-Kleen and Mr Gilmour were providing support and would have to be compensated at some point.
174 He said he had never had a discussion with Mr Gilmour about it and never had a discussion with Mr Harradine about it, nor anyone else.
175 Thus, Mr Vinciguerra expressly denied having had a discussion with Mr Harradine and Mr Gilmour regarding the preparation of the MGCC accounts to the effect that, with Mr Gilmour, he directed Mr Harradine to finalise the accounts on such a basis.
176 When he was continually pressed about whether it would be fair and reasonable in a start-up situation to receive financial support of the type suggested but then to repay it later, Mr Vinciguerra said it was never discussed and never thought of.
177 Mr Vinciguerra confirmed, by reference to the financial statements for the years ending 30 June 2001 and 30 June 2002, that no rent was paid by MGCC in respect of the premises. He said he never thought about when rent was going to be paid. He said his brief was to get business in.
178 Mr Vinciguerra was then asked about expenses covered by Sola-Kleen including Ms Stedman and computers being used by MGCC. He accepted when a second computer was introduced that that was so but said the first computer was in fact his. He accepted that Ms Stedman used a Sola-Kleen computer but said he did not recall how much time it would have been used for MGCC’s work. He also accepted that there may have been some “basic software programs” that came with the computer but nothing special. He also accepted some small amount of furniture would fit into that category. He was also pressed about telephone handsets; he said the handset was shared.
179 When asked about the financial position of the company in July 2006, and whether by then it had the extra funds to pay for the expenses earlier incurred, Mr Vinciguerra said that the financial position then should have been very good, although he said in July 2006 he had left.
180 When asked when he considered the company commenced making profits, he said that he looked after KCGM at Kalgoorlie from about 2004 and the sales were quite extraordinary, they were very good. So he considered 2005/2006 was an extremely good year and he assumed it was trading profitably for two years or three years before that. In his view it should have been trading quite profitably.
181 Mr Vinciguerra was also asked about the work that Ms Dalton did for MGCC and whether she did any work at all for Sola-Kleen; which he did not recall her doing.
182 There were also questions about the extent to which Ms Dalton was part-time or full-time and he said that she eventually went full-time.
183 He was also questioned about the extent of Ms Stedman’s role.
184 There was also some questioning about whether Mr Thuy did any work for MGCC. Mr Vinciguerra said he was in the fabrication area for Sola-Kleen and whatever he (Mr Vinciguerra) told Mr Gorey for the purposes of preparing his initial report was meant to communicate that fact. Mr Thuy was not involved in MGCC in terms of administration or servicing although he conceded Mr Thuy may, on a rare occasion in the early days, have helped unload some chemicals at the premises.
185 He also accepted that Ms Stedman before Ms Dalton arrived may have been involved in ordering chemicals, but not later on.
186 There was also questioning about the extent to which Ms Stedman, and later Ms Dalton, organised travel plans. He conceded that they possibly could have.
187 All this questioning was to try and establish that persons who were on the Sola-Kleen payroll actually performed significant roles for MGCC.
188 Mr Vinciguerra accepted that Ms Stedman was the person who dealt with payment of wages. Similarly, she dealt with reimbursement of expenses.
189 Mr Vinciguerra had earlier told Mr Gorey that he estimated that over the period 2001 to 2007, Ms Stedman would have spent 30% of her time on MGCC business. He was asked whether in light of the evidence he had just given he maintained that view, which he said he did. He confirmed that she did not do everything in the administrative area but she did do the accounts. That is to say the financial side of accounts, but not the reports, checking reports, or quotes.
190 He then said that once Ms Dalton started, Ms Stedman’s contributions would have been less than 30%.
191 Mr Vinciguerra was also challenged about his statement that he had never had an opportunity to inspect MGCC’s books in his time as a director and was only ever provided with a few financial statements. He was then shown a management report from May 2003 which showed the profit and loss at a glance and budget forecast. He assumed that he had received the document. He was then shown a document headed “Expenses” which included an item for “management fees”. This showed estimated management fees in February of $5,000, in March of $625, $625 in April, $625 in May and $625 in June, showing a total of $7,500. When asked if he raised those with Mr Gilmour, he said he did not recall if he mentioned those specifically but did recall mentioning management fees to him, but not the time when he did so.
192 When pressed, he thought that was when he was in Kalgoorlie and came down to Perth and mentioned it, but could not say precisely when, did not take notes and did not write down the date.
193 He insisted that he asked Mr Gilmour, “What are management fees?”. He said that that is when the whole relationship soured and he was told that he did not understand business and so from that point it did not really get anywhere.
194 As to the 2003 financial statements which included management fees, Mr Vinciguerra said he had no idea what management fees were about. They just appeared in the reports. He did not have an opportunity to question any of the dollars in there. The couple of times that he did, he said, “The reaction wasn’t particularly good”.
195 He was asked why the management report of May 2003 was provided to him. He said it was as a summary of how the business was going, which he asked for. He said he asked for the directors to meet but that never eventuated. He said that when he kept getting the management reports he did not go through any of them in detail.
196 He confirmed this was in the period he was busily working in Kalgoorlie.
197 While he said he did not understand what management fees were at that time, he now believes that MGCC was being charged for services provided by Sola-Kleen and for a management fee on top of that.
198 When pressed about what the particular management fees shown in the 2003 report were for, such as the $5,000, he was not able to say how it was calculated.
199 Questions were also asked of Mr Vinciguerra about the extent to which Mr Gilmour did work for MGCC. He indicated, very little. While he was working in Kalgoorlie, Mr McCarthy managed the water treatment in Perth and reported to Mr Gilmour.
200 He accepted there was one occasion when Mr Gilmour and two others attended in Kalgoorlie for about two weeks to do a chemical cleaning job. He was pressed about the extent of his knowledge concerning administration on behalf of MGCC while he was based in Kalgoorlie. He accepted that Mr Gilmour had “top end responsibility” for MGCC’s operations but he did not, so far as day to day involvement was concerned.
201 Mr Vinciguerra was then asked questions about a factoring agreement dated 16 August 2001 between Benchmark Debtor Finance and MGCC.
202 He said he was not in total agreement with it and thought there were other options. He considered Ms Stedman, who was handling debt recovery, was not doing a good job and believed that it could be done better and, if it had been, the factoring agreement would not have been required.
203 He said he was not particularly convinced that “the person doing the job” was doing it effectively and efficiently and that was an option that he put forward.
204 He indicated that this was one occasion when he did become involved with the finances of the company. He had a discussion with Mr Gilmour about it.
205 He was then asked whether he was happy for the company to enter into the debt factoring facility and he said that he signed it although he was not happy with it. He considered it was one option though not necessarily the best option, but he accepted that it was an option “he had to take” even though it was not the best option in his view. When asked whether it was in the best interests of the company or not to do it, he said that in terms of managing cashflow it was an option, although he did not think it was the best option.
206 It was pointed out to him that he not only signed the facility as a director of the company but also as a guarantor and must have given some serious thought to it before he signed it. He finished up responding by saying:
I will say it’s in the best interests of the company as long as it’s accepted that I didn’t think that it was the only option, but it was the option that I was given, so I had to take it. As a minority shareholder, I had no say in it. Ultimately, what happened, I had to go – I had to go with it.
207 After further questioning regarding the debt factoring arrangement, he accepted that it provided cashflow benefits at a time when the company had a capital deficiency. Nonetheless he considered that he had to fall in line with the proposal. But he also said that he was not convinced it was in the best interests of the company as the inefficiencies in the existing debt collection system remained. Only one big client did not fall into the category of not being a prompt payer.
208 Ultimately, Mr Vinciguerra accepted that the debt factoring facility was “an option which worked for the business” and he essentially agreed that because it did work for the business he agreed to sign as a director and a guarantor.
209 In re-examination Mr Vinciguerra again indicated he had a limited knowledge of financial matters in MGCC and did not know what money came in from the factoring arrangement.
210 Similarly, he said he did not know that the loan apparently made to the Gilmour Family Trust had increased from $30,429 to $89,783 in the financial year ending 30 June 2002; that is to say, after the factoring agreement was made.
211 He also said he did not know about the overdraft indicated of $79,838.
212 As to the relevance of Mr Vinciguerra’s evidence, and the weight it should be given in the light of competing evidence, I will deal with key aspects of it below.
213 Mr McCarthy’s evidence: Mr McCarthy then gave evidence called by MGCC. He confirmed he was employed by MGCC from about 1 March 2000 to work in commercial water treatment.
214 He then understood that Mr Gilmour and Mr Vinciguerra owned MGCC with Mr Gilmour as the majority owner, and that Sola-Kleen also operated from the same premises.
215 He gave evidence about the layout of the premises and the areas used by MGCC and Sola-Kleen, which generally corroborated the evidence that Mr Vinciguerra had given.
216 He confirmed that Mr Gilmour was the person who gave directions to Ms Stedman and the person to whom Ms Stedman reported and that she worked as Mr Gilmour’s secretary and undertook MGCC’s banking and administrative work such as issuing quotations and invoices and doing filing when he was first there.
217 He also confirmed that Mr Stannard worked in the workshop and that on occasions Mr Gilmour and other employees of Sola-Kleen, apart from Ms Stedman, would assist unloading deliveries for MGCC.
218 He said that when Ms Dalton commenced she took over the administrative work of MGCC issuing quotations and invoices and doing filing, but Ms Stedman continued to do the banking.
219 He gave evidence of Mr Gilmour in conversations with Mr Vinciguerra, which, involved Mr Gilmour telling Mr Vinciguerra about the direction the company would take.
220 He also said that when Mr Vinciguerra was located in Kalgoorlie, he visited the premises occasionally. He heard Mr Gilmour telling Mr Vinciguerra that he would make a particular decision notwithstanding Mr Vinciguerra was opposed to it.
221 He observed their relationship deteriorate over time.
222 After Mr Vinciguerra left in about 2006, his relationship with Mr Gilmour also deteriorated and then he resigned and obtained alternative employment.
223 In cross-examination Mr McCarthy indicated that he and Mr Vinciguerra set up a diary to administer the service work and service reports were given on a laptop. He explained the way that system worked.
224 When pressed for information about the extent to which Ms Stedman was involved in all of this, he indicated that she helped out at times, or followed up in areas but that they had the diary and ran the system. He said she also helped out a lot with the invoicing. He did not have a clear recollection of what happened after Ms Dalton arrived but “imagined” that Ms Stedman did a lot of handling of the invoicing.
225 Job cards and other parts of the administration, however, were handled by Ms Dalton. He confirmed that Ms Dalton started off part-time. He confirmed that Ms Stedman filled the gap on occasions when Ms Dalton was not at work but he also had people ring him direct.
226 He confirmed that earlier on Ms Stedman would order chemicals.
227 He confirmed that Ms Stedman would have arranged airfares and travel arrangements when he travelled to places such as Kalgoorlie or Darwin.
228 He thought that Ms Stedman may have been involved in getting trucking companies to take chemicals from Perth to Kalgoorlie, because he did not have any direct involvement in that area.
229 He was less clear about chemical signage responsibilities.
230 He confirmed that Ms Dalton took over on the administration side when she arrived.
231 He confirmed that if there was a question of him having expenses reimbursed, he would deal with Ms Stedman about that.
232 He was asked a number of other questions by which counsel sought to elucidate the sharing of responsibilities between Ms Stedman and Ms Dalton.
233 He was also asked about the extent to which Mr Gilmour was involved in MGCC work.
234 Mr McCarthy’s evidence about most of these matters was quite general, reflective of the fact that: prior to Ms Dalton’s arrival, Ms Stedman had much to do by way of assisting in administration and the like with MGCC, but that largely changed after Ms Dalton arrived, although Ms Stedman remained in charge of financial matters such as banking; that Mr Gilmour was involved in some matters but not a lot of hands-on matters in the MGCC operation; that other employees in the storage area may have assisted MGCC but only in a minimal way. His evidence was useful to that extent.
235 Mr Thuy’s evidence: Mr Thuy said he worked for MGCC and Magil Nominees, which was previously known as Sola-Kleen, from 2002 to 2011 and still works a day a week for the new owner of Sola-Kleen.
236 He said he undertook work for MGCC that involved cleaning chemical drums and as a forklift driver unloading trucks. He said he was storeman for both MGCC and Sola-Kleen.
237 He considered that he worked an average of three to four hours each day for MGCC throughout his employment in the period 2002 to 2007.
238 In cross-examination he said he was paid by both companies, but agreed he did not know how much each company paid him.
239 At Sola-Kleen he said he made a tank and a panel and did chemical work as his main work which involved washing containers, especially when they came down from Kalgoorlie.
240 He was pressed about the extent to which he dealt with small containers but insisted that he did. As to how much unloading of chemicals he did, he said that it was “sometimes one week, sometimes second week, sometimes there was none”.
241 When pressed about whether or not he worked through the four hours every day on MGCC work, he said that “three, four hours, sometime more, sometimes from 8 o’clock to 6 o’clock. Some day two or three hours. Some day one hour. Next day none”.
242 He said it would probably depend on whether the chemicals came in from Kalgoorlie and the number of containers of about 15 or 20 and then you had to work hard from the start until the finish.
243 Mr Thuy’s evidence, like Mr McCarthy’s, was not in any great detail, but confirmed the view that he worked, as he said, for both MGCC and Sola-Kleen. It was difficult to make any clear assessment just what the division of labour was between the two companies. Based on his evidence, he did more work for MGCC than Mr Vinciguerra and Mr McCarthy had suggested.
244 Mr Gilmour’s evidence: Mr Gilmour’s evidence in chief was contained in a witness statement that became exhibit 5, a responsive witness statement that became exhibit 6 and also in an affidavit filed in proceeding WAD256/2010, made 17 November 2011. Objections were taken to portions of exhibit 5 and exhibit 6 as set out in a letter from the solicitors for MGCC to the defendants’ solicitors, dated 11 October 2013. It was agreed the Court would later rule on these objections, which primarily raised questions of relevance, proper form and statements not responsive to any particular evidence.
245 In his primary witness statement, exhibit 5, Mr Gilmour, after providing background to the Sola-Kleen business confirmed that in 2000 Mr Vinciguerra commenced working as an employee of MGCC. He said MGCC had been incorporated on 12 October 1998. He said that he had known Mr Vinciguerra for 30 years and “treated him as a member of my family”. He said to provide him with an incentive to remain with MGCC long term, he caused MGCC to issue 30 fully paid shares to him, as a result of which they became 70/30% shareholders in the company.
246 While the evidence about gifting the shares to Mr Vinciguerra because he was like family to Mr Gilmour is objected to, in all the circumstances I consider it relevant to the relationship between the parties and of marginal relevance and therefore do not exclude it.
247 However, there is an objection to [11(a)] of the exhibit 5 tender on the basis that it is hearsay as well as irrelevant, which objection I uphold.
248 Mr Gilmour goes on to say that he became concerned about Mr Vinciguerra because he was conducting himself in an arrogant and overbearing manner and verbally abusing staff and did not apply himself diligently to his duties.
249 He said Mr Vinciguerra ceased to be a director in April 2004 because he asked him to resign because of these issues.
250 He further asserted that at the time they were directors he always consulted Mr Vinciguerra before making any management decisions. He said that although Mr Vinciguerra was based in Kalgoorlie and he was in Perth for much of that time, they conferred over the telephone at least every other day and he would also travel up to Kalgoorlie once a month and spend a couple of days there overseeing the business with Mr Vinciguerra and would also visit customers in Kalgoorlie.
251 He said Mr Vinciguerra also made frequent trips to Perth. He said he would never make a major purchase or incur a major expense without consulting Mr Vinciguerra and kept him informed on a monthly basis as to the financial position of MGCC through the provision of monthly management reports.
252 Paragraphs [15]-[20] of the witness statement, exhibit 5, are also objected to on the basis of relevance. These concern the entitlement to a motor vehicle of Mr Vinciguerra. I consider they are irrelevant. None of those issues were raised for example in cross-examination of Mr Vinciguerra, which is probably a good indication of their irrelevance, so those paragraphs are not admitted into evidence.
253 Mr Gilmour said that Mr Vinciguerra also received annual financial statements and had access to all financial matters concerning MGCC.
254 Objection is additionally taken to [23]-[51] of the witness statement, exhibit 5. I have considered those paragraphs and consider them to be irrelevant. None of the matters were the subject of any attempt at cross-examination and, as I indicated above, that is probably a good indication of their irrelevancy. I do not admit them into evidence.
255 Mr Gilmour said that at all times since 2000 there was an agreement that management fees would be paid to Sola-Kleen and expenses recouped when MGCC had the funds to do so and it was not until July 2006 that it did have extra funds to pay them, although even then only in part. There is an objection to this paragraph on the basis that it is conclusory, but I do not uphold that objection. The cross-examination on this issue and the further examination and cross-examination of Mr Gilmour on the topic of such an agreement covers the evidence in any event.
256 Mr Gilmour supports his view as to why there was such an agreement by reference to the fact that in 2000 MGCC did not have any significant debts to third parties, but at the same time was not profitable, and Sola-Kleen and he provided funds to MGCC. He said the financial statements for MGCC for the year ended 30 June 2001 show the company suffered a pre-tax loss of $64,359 and had net liabilities totalling $64,259. He said Mr Vinciguerra did not ever discuss with him or direct any queries to him in relation to any of MGCC’s debts.
257 Mr Gilmour said the consultancy fees were paid by MGCC to various external consultants, such as chemistry consultants and said that none of the consultancy fees were paid to any party related to him personally.
258 He said Sola-Kleen charged MGCC for services rendered by it to MGCC, for the use of the premises and services of management and administration personnel of Sola-Kleen (including himself). He said these were always disclosed to Mr Vinciguerra through the management reports and were calculated according to the rates that MGCC was advised by its accountants, Mr Harradine and later Mr Armenti.
259 Mr Gilmour said that he never caused Sola-Kleen to charge management fees based on duplicated expenses or false accounting and that direct expense items such as rent, plant and equipment hire, postage, telephone and printing and stationery related solely to expenses incurred through the use of MGCC’s staff, facilities and equipment including at the Kalgoorlie office. He said that where similar categories of expense were incurred by the two companies, Sola-Kleen charged MGCC management fees comprising those expenses, plus a profit mark-up.
260 I uphold the objections to [62]-[64] of the witness statement, exhibit 5, on the grounds of relevance.
261 As to the debt factoring agreement, Mr Gilmour said that at the time it was made, MGCC did not have sufficient working capital to operate and required external funding and he and Mr Vinciguerra agreed that the debt factoring agreement should be entered into.
262 Mr Gilmour also said that Mr Harradine advised that a service agreement should be put in place between Sola-Kleen and MGCC and that was done and he signed the relevant document on behalf of MGCC and Sola-Kleen which appears at trial bundle 21.
263 He also said that in November 2002, he and Mr Vinciguerra met with Mr Harradine at the company’s offices during which there was a discussion led by Mr Harradine about the fact that Sola-Kleen had paid expenses on behalf of MGCC and had provided management services for which it was entitled to be reimbursed and paid by MGCC, at a time when MGCC was not in a financial position to meet those expenses. He said Mr Harradine suggested that the management fees be recouped at such time as MGCC had sufficient funds and that when they were paid they would be entered in the accounts.
264 Mr Gilmour said that he and Mr Vinciguerra both said words to the effect that they accepted that advice, that the management fees and expenses would only be paid and recouped from MGCC by Sola-Kleen when MGCC had sufficient funds; that they would not put MGCC under financial pressure to pay such expenses when it could not do so. He said that he and Mr Vinciguerra then directed Mr Harradine to finalise the accounts on that basis.
265 Mr Gilmour in the witness statement, exhibit 5, also addressed the report by Mr Lopez. I uphold the objections to the extent that Mr Gilmour thereby attempts to express an opinion, but receive the evidence to the extent that Mr Gilmour is simply noting and is apparently accepting expressions of opinion made by Mr Lopez that, for example, an amount of $97,166 may be recoverable.
266 In his responsive witness statement, exhibit 6, Mr Gilmour sought to respond to Mr McCarthy’s evidence, including about the layout of the premises.
267 I uphold the objection to [5] in which Mr Gilmour endeavours to rely on an appraisal report to support a claim that Sola-Kleen undercharged the rental to MGCC of the premises.
268 Mr Gilmour further said in this statement that he oversaw the entire MGCC operation and was actively involved and would spend at least 80% of his time on MGCC operations, dealing with customer complaints, overseeing quotes, sorting equipment, mixing chemicals, repairs and maintenance, working with suppliers, visiting customers, getting staff trained, buying equipment, making sure accounts were paid, dealing with chemists and training staff in chemical cleaning and many other duties.
269 He also said that Mr Stannard reported to him on a daily basis.
270 He also made comments concerning the extent of Ms Stedman and Ms Dalton’s responsibilities in relation to MGCC.
271 In oral evidence, Mr Gilmour adopted the evidence that he had previously set out in an affidavit made 23 November 2010 in proceeding WAD256/2010, concerning the agreement he said was made about management fees in the presence of Mr Vinciguerra with Mr Harradine.
272 In cross-examination, Mr Gilmour was taken to annexure ACV10 of Mr Vinciguerra’s affidavit of 9 November 2006 at p 81. Pages 81-85 are identical to pp 452-455A of the trial bundle.
273 Mr Gilmour struggled with the question whether the document at pp 452-455A was given to Mr Vinciguerra not earlier than 8 June 2005.
274 In the event, Mr Gilmour accepted that the document he gave Mr Vinciguerra was not the tax return that was eventually lodged.
275 Counsel took Mr Gilmour through the document that had been given to Mr Vinciguerra concerning management fees as at 30 June 2004 of $236,494. He then put to Mr Gilmour that a copy of the tax return that he gave Mr Vinciguerra showing payment of tax with a cheque number and a date payment of 8 June 2005, in fact concealed from him that payment of management fees to Sola-Kleen for that year. Mr Gilmour disagreed.
276 He accepted, however, that the document Mr Vinciguerra was given did not include management fees. Mr Gilmour said that Mr Vinciguerra separately knew of the management fees because of internal discussion. He insisted that he had disclosed those fees to Mr Vinciguerra.
277 He disputed totally that he gave the document that he did to Mr Vinciguerra, which did not disclose management fees, because he knew Mr Vinciguerra would not accept payment of them to Sola-Kleen.
278 He denied concealment.
279 Counsel then put it to Mr Gilmour that there was no agreement ever made between MGCC and Sola-Kleen prior to the end of the 2004 year about payment of management fees and the preparation of the accounts for it in 2005, to which Mr Vinciguerra was ever a party.
280 Mr Gilmour responded as follows when asked what he had to say to that: “I say you’re on drugs … this is ridiculous … Alberto was aware of everything”. Mr Gilmour added that he had “tucked him under my wing since he was 17 years old”.
281 Counsel then took Mr Gilmour to the financial statements for the year ending 30 June 2005. Mr Gilmour agreed that he gave a copy of them to Mr Vinciguerra.
282 Counsel noted that there was no item for management fees for either 2004 or 2005. Mr Gilmour said that if that was what had been given to Mr Vinciguerra then “there must have been a discussion or something” about the management fees and he was not in a position to explain why they were not in the document at this stage.
283 Counsel then asked him to explain why if management fees had been charged in the previous year 2004, even if they were not going to be charged in 2005, they did not appear in the historical 2004 year column.
284 Mr Gilmour said he could not understand why they were not there because they should have been.
285 When it was put to Mr Gilmour that they did not appear there because he was concealing from Mr Vinciguerra the fact that management fees were being paid, he said he could not agree with that.
286 Counsel then took Mr Gilmour to his affidavit of 13 February 2007 at [13], where Mr Gilmour had said he had received from Mr Armenti copies of the final versions of the financial statements and corresponding tax returns for 2004 and 2005 about the time of lodgement with the Australian Taxation Office and that the final versions included management fees charged by Sola-Kleen. Counsel then noted the affidavit of Mr Armenti of 21 January 2007 which referred to copies of the financial statements for the various years. He pointed out to Mr Gilmour that the financial statements for the year ended 30 June 2005 (at about trial bundle 849) included management fees for the years 2004 and 2005.
287 He then noted by reference to trial bundle 580E, which is part of the document that Mr Gilmour had given Mr Vinciguerra, the total expenses shown there were $301,279 less than the total expenses of $948,291 shown in the document produced by Mr Armenti. It was put by counsel that the difference comprised the full amount of the management fee of $278,460 and some other smaller amounts. Those other amounts would seem to include hire and rent of plant and equipment of $3,663, motor vehicle commercial fuel and oil of $21,957, printing and stationery at $12,739 and rent on land and buildings and repairs and maintenance.
288 It was put to Mr Gilmour that in 2005 he had given Mr Vinciguerrra a set of financial statements which concealed from him the payment of management fees. Mr Gilmour rejected that “one million percent”.
289 Mr Gilmour accepted that his salary was used in calculating the management fee at various times. Mr Gilmour sought to justify that on the basis that he was working 100 hours per week for MGCC as well as working for Sola-Kleen too. He gave evidence along the lines set out in his primary evidence above.
290 He accepted that in 2006 and 2007, he was also paid directors’ fees by MGCC.
291 In the course of that evidence, Mr Gilmour indicated that Mr Armenti would not be called to give evidence because he was “not available”; it appeared that he could not be located.
292 The financial records showed that Mr Gilmour received directors’ fees in 2007 of $129,633 and in the previous year $118,913.
293 Counsel then sought to ascertain just what directors’ fees Mr Gilmour had disclosed in his personal income tax returns at material times. Mr Gilmour indicated that he did not disclose receiving $118,913 in 2006 because “I didn’t receive that money”.
294 Mr Gilmour indicated that at that point Mr Armenti was responsible for preparing financial statements including his personal income tax return, Mr Armenti having acquired the accounting business from Mr Harradine in 2003.
295 He further said that the $129,633 listed in the financial statements as a directors’ fee paid by MGCC in the 2007 year was not paid and thus did not appear in his personal income tax returns.
296 Counsel then took Mr Gilmour to his evidence of a meeting in November 2002 attended by himself, Mr Vinciguerra and Mr Harradine concerning the payment or delayed payment of management fees by MGCC to Sola-Kleen.
297 In evidence in chief counsel for Mr Gilmour had referred him to what Mr Harradine said in his affidavit. Counsel for MGCC asked whether Mr Harradine had actually said the words specified in the affidavit. He responded by saying that if it was in Mr Harradine’s affidavit then he was sure he said it. He would not dispute what Mr Harradine said.
298 Counsel noted that Mr Harradine said that he had made the suggestion about recouping management fees when MGCC was in a position to pay them “since the plaintiff conducted its accounts on a cash basis (not accruals)”. Counsel asked Mr Gilmour whether MGCC ever had accounts prepared on a cash basis, rather than accruals basis. Mr Gilmour did not know and said Mr Harradine would have to deal with that. He said that he just accepted what Mr Harradine advised.
299 Counsel took Mr Gilmour to the financial statements for MGCC for the year ending 30 June 2001 in order to ascertain on what basis the accounts had been prepared. He noted at p 8 of the document, it was stated the financial report “has been prepared on an accruals basis and is based on historic costs”. He noted that that appeared to contradict what Mr Harradine was recorded as saying in his earlier affidavit. However, Mr Gilmour would not admit that the accounts were prepared on an accruals basis and not on a cash basis, saying that he would have to defer to Mr Harradine because he did those reports.
300 Counsel put it to Mr Gilmour that Mr Harradine never made a statement to the effect that the plaintiff conducted its accounts on a cash basis because in fact it did not. Mr Gilmour, however, would not accept that. He said he took Mr Harradine’s word of what he stated.
301 Mr Gilmour also insisted that Mr Vinciguerra was there at the meeting and there was an agreement made and Mr Vinciguerra “was with us every step of the way”.
302 Mr Gilmour said that the accountants were responsible for calculating the management fees, either Mr Harradine or Mr Armenti, and he did not calculate any of them.
303 Mr Gilmour was then cross-examined about an invoice for a management fee dated 31 July 2002. It disclosed management fees in the year 2002 to 2003, charged by the Gilmour Family Trust (for Sola-Kleen) to MGCC. Mr Gilmour explained that Ms Stedman and Mr Harradine would have been responsible for their preparation. He would have looked at them after they were prepared. As to the materials at p 199 and following of the trial bundle he identified a budget forecast for 2002/2003, apparently prepared in May 2003.
304 Mr Gilmour was asked why he was preparing budget estimates to pay management fees if there was an agreement to defer them. He said that one would put them in there so that they can be logged.
305 It was then noted then that the management fees ending 30 June 2003 were $240,142. That, however, compared with a revised budget forecast circulated in late May 2003 (p 202 of the trial bundle) of $10,625. Mr Gilmour said he could not explain how that came to pass. Mr Gilmour said he would be reliant upon the accountant at that point, Mr Harradine, to explain it, or Mr Armenti if he had then taken over.
306 Counsel then took Mr Gilmour to loans shown in the financial statements for MGCC for the year ending 2002, which suggested a loan to the Gilmour Family Trust in 2002 of $89,783, which in 2001 was $30,429. Mr Gilmour said there would have been monies paid back, monies that he had put in, they would have been paid back to him.
307 Counsel then identified a number of amounts dated 30 June with a “J” next to them, all being journal entries, showing an amount drawn down of $136,229.40, which took the loan balance to $166,658.31. Some amounts were then credited back later. Mr Gilmour was asked whether the money to enable the drawdown of $136,229.40 came from the proceeds of entering into the factoring agreement. Mr Gilmour indicated this all happened 11 years ago and he could not answer that question. He said they were “accounting figures”.
308 He also said he could not comment on the proposition that the $136,229.40 was advanced to Sola-Kleen because MGCC could afford to advance the money. He said he could not answer because he was not an accountant and he could not recall. He said if the money has been drawn down it had also been paid back.
309 In relation to the factoring agreement, counsel took Mr Gilmour to the 2001/2002 financial year entries noting that the first entry in the loan account where monies had been advanced by MGCC to the Gilmour Family Trust is an increase of the $136,229.40. Mr Gilmour acknowledged that. Again, counsel put it to him that it was as a result of entering into the factoring agreement that the funds were obtained which enabled that loan to be made. Again, Mr Gilmour said he could not comment on that.
310 He said he could also not comment on the proposition that the loan was made at a time when MGCC could afford to advance the money and did not become insolvent in doing so.
311 When counsel pressed Mr Gilmour to say why MGCC made a loan of about $136,000 at that time, Mr Gilmour said he honestly could not recall.
312 He also agreed with counsel’s proposition that the amount could also have been paid over as management fees to Sola-Kleen. Again, he could not answer but said he would have taken advice on the transactions.
313 Some of the journal entries earlier referred to appeared to be in respect of legal fees incurred by MGCC.
314 In relation to the opposition by MGCC to the provision of access by Mr Vinciguerra to documents under the Corporations Act, Mr Gilmour denied that he was acting solely in his own interests and not on behalf of the company.
315 Mr Gilmour was further cross-examined as to the relative contributions of Ms Stedman, Mr Thuy, his brother and other persons from time to time and also whether he spent much of his time on a property development at Bakers Hill.
316 In re-examination Mr Gilmour dealt with some of the work he had done with his brother, Ross Gilmour.
317 Mr Gilmour also clarified an entry on Mr Lopez’ report at p 1156 of the trial bundle. He was asked by the Court, in the end, whether the passage that had been drawn to his attention suggested that between 1 July 2008 and 30 June 2009 he deposited $168,000 in the company’s account and withdrew $17,640 resulting in a net inflow of $150,360 and did he know why that money was deposited. He said that would have been monies that he would have pumped into the business.
318 It was left for submissions to be made, counsel for MGCC noting these entries were about a loan account and counsel for the defendants saying that it was money owed to Mr Gilmour by the company.
319 Mr Gilmour also said that the signature on the document at trial bundle 873, dated 15 May 2005, contained handwriting with figures. The figures were not his but the signature was.
320 He also said that financial statements he was shown for the year ending 30 June 2006 at trial bundle 748 were prepared by a group called TKNP International, which had been called in because Mr Vinciguerra wanted an audited report done on the company and he agreed for that to be done.
321 As in the case of Mr Vinciguerra’s evidence, I will weigh Mr Gilmour’s evidence below.
322 Ms Dalton’s evidence: The defendants then called Ms Dalton. She confirmed that she was employed by MGCC from early 2000 until early December 2006 and that her duties were as a receptionist and providing support to Mr McCarthy. She said she rarely did any work for Sola-Kleen, other than occasionally answering the telephone and taking messages if Ms Stedman was not around.
323 When she gave evidence she could not be sure that she commenced in 2000. She said she was initially permanent part-time and then became full-time after one or two years.
324 In cross-examination she said she had young children at the time she commenced.
325 She said Mr McCarthy was the service manager and he was the main technician and had a person helping him out.
326 She confirmed that all her work was for MGCC.
327 She confirmed that she issued quotations and service reports and “might have” ordered chemicals. She said she did a lot of preparation work for the invoicing and a lot of scheduling, following up on things.
328 She said that Mr Vinciguerra and Mr McCarthy trained her when she arrived.
329 She said that Ms Stedman mostly did invoicing with the accounting package which she did not know how to use and did the banking, paid wages and the like. When asked as a general question what percentage of Ms Stedman’s time was spent on MGCC and what percentage was spent on Sola-Kleen, Ms Dalton said that if one was talking about the invoicing part of it, about 10% on MGCC.
330 She also considered that Mr Gilmour did a substantial amount of work on MGCC business.
331 As to Mr Thuy, she did not really recall him doing work for MGCC. She thought he may have assisted with loading but that was about all.
332 In re-examination she confirmed that the 10% that she allocated to Ms Stedman for invoicing, included use of the MYOB package. While she did other things, she said that the 10% she estimated related to “everything” that Ms Stedman did.
333 Mr Harradine’s evidence: Mr Harradine was then called by the defendants. His witness statement went into evidence as exhibit 10. There were objections to paragraphs or parts of paras 5, 6-9, 10-13, 17, 21 and 23-25.
334 Mr Harradine indicated he was a chartered accountant who was also a director of MGCC from 15 January 2008 until he resigned on 30 September 2011.
335 He said he did MGCC’s external accounting from 1983 to January 2003. He ceased as a director of Magil Nominees (formerly Sola-Kleen) in 1996 and ceased to be a member of Sola-Kleen prior to the incorporation of MGCC. He said he was only a member of Sola-Kleen because of the statutory requirement for two shareholders at the time and held his share on trust for Mr Gilmour.
336 He said MGCC’s main business involved the manufacture and supply of chemical cleaning products to the mining industry which were widely used to remove the scale deposits that accumulate on some of the plant and equipment used in the processing of mineral ores.
337 He said in about 2000 he arranged for a service agreement to be prepared between MGCC and Sola-Kleen and purported to deal with the question of mark-ups and the like. There was objection to much of that evidence because it constituted opinion evidence.
338 Mr Harradine said that in about November 2002, he met with Mr Gilmour and Mr Vinciguerra at the offices of Sola-Kleen, which were also used by MGCC, and at the meeting there was discussion that Sola-Kleen had paid expenses on behalf of MGCC and had provided management services for which it was entitled to be reimbursed and paid by MGCC (at that point in time), which was not then in the financial position to do so.
339 He said he suggested that since MGCC conducted its accounts on a cash basis (not accruals) the management fees be paid and expenses recouped at such time as MGCC had sufficient funds and that when paid they would be entered in the accounts.
340 He said Mr Gilmour and Mr Vinciguerra both said words to the effect that they accepted that advice, that the management fees and expenses would only be paid and recouped by MGCC to Sola-Kleen when MGCC had sufficient funds.
341 He said he was then directed by them to finalise the accounts on that basis, and so did not include fees and expenses in MGCC’s account, which is the normal manner when accounts are prepared on a cash basis.
342 He said that in about January 2003 he informed Mr Armenti, when Mr Armenti purchased his practice, that the management fees and expenses should be brought to account in due course when MGCC could pay and they discussed the calculation of the management fee at that time. His recollection was that he provided a sample of the Phillips case management fee calculation to Mr Armenti.
343 He said that during the period 1 July 2001 to January 2003, he had calculated the management fees (including expenses) that should be charged by Sola-Kleen to MGCC during that period. He provided that information to Mr Armenti so he could calculate the management fees and expenses for the financial year ending 30 June 2003 and for future years in the same manner “as had previously been agreed between Malcolm Gilmour and Alberto Vinciguerra, as stated above”.
344 Mr Harradine also made some comments about the functioning of MGCC without the assistance of Sola-Kleen and the use of facilities, which were objected to.
345 Generally speaking, the objections are well taken.
346 Mr Harradine was cross-examined.
347 Mr Harradine was first challenged about his statement that the accounts were prepared on a cash basis, not accruals.
348 He said it was normal to prepare accounts on a cash basis, when turnover is less than $1 million at the time.
349 Mr Harradine was taken to the financial statements for MGCC for the year ending 30 June 2001 and the note made at p 8 to the effect that the financial report “has been prepared on an accruals basis”.
350 Mr Harradine said that that was incorrect and said it occurred because of a computer software error, where the wrong button had been pressed; “That’s all”.
351 He was then asked why, if the accounts had been prepared on a cash basis, the assets were split into current assets and non-current assets on p 7 of that report and the liabilities were split into current liabilities and non-current liabilities. Mr Harradine said they were called non-current assets but they were actually fixed assets and as to the liabilities, he assumed that the directors or shareholders had loaned the company money and they were not currently payable.
352 He accepted that at that time similarly the management fees were not known.
353 Mr Harradine was asked whether, before he got into the witness box that day, he knew that he was going to be asked questions about whether the accounts were on a cash basis or accruals. He said “Not really”, he said that he understood from the legal action that the argument was between 2003 and 2007, which was not the period that he included financial statements for.
354 He indicated that he had not spoken to Mr Gilmour but only to the late Mr Ruthven, who had prepared financial reports in years earlier.
355 He was then taken to financial statements for the year ended 30 June 2002 at trial book p 128. He said was amazed at those documents because they had Mr Armenti’s name at the bottom of them, when that was the period he was the accountant.
356 When asked why there was no reference to management fees, he said he did not prepare those documents and so did not know.
357 He said he was in the process of handing over his practice at the time in the year ended 30 June 2002 and Mr Armenti could well have gone back and changed figures or adjusted figures after he had prepared his. He was insistent that he did not prepare the papers with Mr Armenti’s name on them.
358 He also said that to his knowledge he did not prepare a set of accounts in that form.
359 He said that he did prepare financial statements for the year ended 30 June 2002, and they were the ones where he had the meeting in November with Mr Vinciguerra and Mr Gilmour and where the company basically did not have any funds and was not able to pay day to day operations and was still being funded by Mr Gilmour at the time.
360 Mr Harradine was then taken to the accounts for the year ended 30 June 2003. Those documents at trial bundle p 234 had the Harradine logo on them, but he said they were not prepared by him either. He said that Mr Armenti had bought the right to use the name. He also noted that on the logo, it mentioned “financial planner” and he was never a financial planner.
361 He indicated that he had about a seven or eight month handover with Mr Armenti, which would have covered much of the calendar year 2003. When asked to explain the reference to financial planners at the foot of p 28 of the 2001 accounts, Mr Harradine said it seemed to him that Mr Armenti had gone back and amended the returns or changed the returns that he originally prepared. He thought that the document had been prepared again with a different form of coversheet and said he was never consulted about the accounts being redone like that and did not approve that being done by Mr Armenti. He said he was as mystified about the document as counsel.
362 The Court observed at that point that p 28 seemed also to carry the words “Registered migration agent” on it. Mr Harradine suggested that Mr Armenti may have put that on the document and that was part of the arrangement they had.
363 Mr Harradine added that he never had the description “Financial planner” on his documents and nor did he do superannuation funds, which was mentioned.
364 It was then noted that at p 234 of the trial bundle, materials clearly prepared by Mr Armenti, there was no reference to migration agent.
365 Mr Harradine accepted, however, that the statement in the earlier reports that he was responsible for, that they had been prepared on an accruals basis was not something done by Mr Armenti, but rather was a “standard printout from the software”.
366 Mr Harradine was then taken to a service agreement at trial bundle p 21. He did not immediately recognise the document as he thought the document he recalled had been prepared by the lawyers he instructed. He said he had asked his staff to consult a lawyer to get a service agreement drafted between the two companies, MGCC and Sola-Kleen.
367 He accepted that that was done in February 2000 before Mr Vinciguerra became a shareholder and director of MGCC. When asked why that was done then, he said it was because he was against Mr Vinciguerra being given shares and he wanted to be able to sell them at a capital gain after the business was built up. The alternative was for Mr Vinciguerra to agree to pay 30% of the profit when the business was sold. As things stood, Mr Gilmour was free of capital gains as he had been running the business from the early 1980s. By changing the business over and putting shares to Mr Vinciguerra, the shares owned by Mr Vinciguerra would have been subject to capital gains tax, post 1995.
368 Mr Harradine said that the idea of the service agreement was just to protect Mr Gilmour to ensure that he got the money back that he put into the company, or was about to invest in the company.
369 Mr Harradine was then taken to the 2001 and 2002 accounts showing a loan made by MGCC to the Gilmour Family Trust that went from $30,429 to $89,783.
370 Mr Harradine thought that the documents he was looking at were different accounts and again reflected on the fact that Mr Armenti seems to have prepared them.
371 Counsel then took him to the debit transaction of $136,229.40 as at 30 June 2002 and the journal entries disclosed. Mr Harradine said that the journal entries, if they existed, should provide the explanation.
372 When asked why there were advances by MGCC to the Gilmour Family Trust, Mr Harradine considered they were repayments of expenses paid. When told it was recorded as a loan account, he responded by saying he assumed Mr Gilmour had reclaimed expenses from the company.
373 In the end, he was unable to shed any light on the loan balance of $89,783 at the end of the 2002 year.
374 Counsel then pointed out to Mr Harradine that in his affidavit he said as of November 2002, MGCC was not in a financial position to make any repayment of expenses.
375 He confirmed the view that what he was saying was that the loan account had been substantially increased in the 2002 year on the basis that it would be adjusted and would ultimately be cancelled out by the payment of expenses. Thus, some of the money had already been provided in fact.
376 When it was then put to Mr Harradine that there actually was not any expense at the time because the money had already been set aside by way of a loan advanced to the Gilmour Family Trust, and ultimately the loan would be cancelled and expense reimbursement would satisfy the loan, Mr Harradine said that some of it would be but there was always a shortfall and there was a loss in the financial statements.
377 When pressed as to why he was able to say that in November 2002, MGCC was not in a financial position to make payment, if he did not even know in the 2002 year about the loan transactions recorded at p 127 of the trial bundle, Mr Harradine said that as he was previously advised there would have been draft accounts at the time and there was a deficiency. There were insufficient funds in the bank account to make a payment and the Australian Securities and Investments Commission was chasing people on solvency issues. He said he went to see Mr Gilmour and Mr Vinciguerra primarily to advise them to get a guarantee that they would pay the debts as and when they fell due for the company, because the company was technically insolvent at that time. It had not paid all its expenses. He said that after speaking to them they were quite bullish.
378 When pressed, he could not say exactly what expenses it had not paid, given this was 10 or 12 years ago.
379 As to the mark-up of 10% on outgoings by way of management fees, Mr Harradine confirmed that he calculated these figures later and took into account the Phillips case.
380 He confirmed there was no agreement reached about what the particular mark-ups were to be when he said the meeting took place in November 2002.
381 He was asked whether he was purporting to give evidence of an agreement made in his presence or to his knowledge or just expressing an opinion about something agreed at some other time by other people. He said “Well, I think I say there that’s my – my opinion at that time”.
382 Mr Harradine then indicated that when he became a director of Sola-Kleen in about 2008-2009, he went through various papers of Mr Armenti and gained some information about the mark-ups in relation to such things as salary. Thus, the knowledge he had was gained after the event.
383 Mr Harradine confirmed that his evidence about what would seem appropriate under Phillips case was all after the event and that he was not a party to any agreements to those ends.
384 Counsel then went directly to Mr Harradine’s evidence that there was an agreement about a management agreement and delayed payments reached between Mr Gilmour and Mr Vinciguerra in his presence in November 2002. He was in particular asked about para 25 of his witness statement, exhibit 10, and whether he recalled an express agreement about the use of all the things mentioned there, even postage stamps, for which MGCC was to pay Sola-Kleen when it was able to do so.
385 Mr Harradine asked how it was he came to make that statement with such detail and whether it was just a guess on his part or what he thought might have been discussed in November 2002. He eventually explained that he did not go through and itemise everything. When asked whether he had an independent recollection of the meeting he responded:
Recollection. Albert mumbled ‘Yes’ – or mumbled most of the time. He didn’t actually say much, he never does. That was the first time I had met Albert, so.
386 When asked what happened in his recollection, he said the meeting was short, probably about ten minutes at the Bassendean Road premises in Mr Vinciguerra’s office. He sat down, he had paperwork with him to explain a couple of things. He got them to sign the financial return for 2001. He said he could not actually remember the full detail. When asked whether that was as much as he remembered, he murmured assent.
387 When shown accounts signed at Burswood on 17 October 2002, not in November, Mr Harradine said that maybe the meeting was in October not November, but he was insistent that it did happen at their office, not his and remembered driving out for the meeting.
388 To the extent that the 17 October 2002 signed documents falsely indicated they were signed at Burswood, he agreed.
389 Counsel again pressed Mr Harradine and the following exchange took place:
Counsel: … It was actually in November and it was somewhere else and that was the meeting that took place, you got these things signed and you say that’s actually when the agreement was made to pay the management fees at some time in the future?---
Mr Harradine: No, that was around the explanations, the management fees were made, not the agreement.
Counsel: Just an – you gave an explanation?---
Mr Harradine: A brief explanation - - -
Counsel: I see. Thank you?
Mr Harradine: … that – the fees or other expenses were being occurred (sic), they’re not being recovered.
Counsel: All right?
Mr Harradine: That’s all.
Counsel: All right, and there was no agreement made at that time?
Mr Harradine: No.
390 When Mr Harradine was taken to a tax invoice from the Gilmour Family Trust to MGCC dated 31 July 2002 for charges for a management fee and rent, he indicated they were not documents he had seen before and would be internal documentation by their staff in which he did not become involved.
391 He agreed that when he had later calculated management fees for the period 1 July 2001 to January 2003, he had merely done these as a “notional calculation”. He never prepared and issued tax invoices.
392 Mr Harradine noted that the document did not charge GST which is something he would have raised if they had been run by him.
393 It was those notes that he passed to Mr Armenti without keeping a copy.
394 Other documents and management reports and the budget forecasts were all shown to Mr Harradine but he did not have any knowledge of those.
395 Re-examination sought to clarify some figures in the financial statements to little effect.
396 Some further cross-examination was allowed, however, to elucidate some calculations.
397 Mr Harradine, in the end, accepted there was no inconsistency between row Q in the tax return and the financial statements for the 2002 financial year.
398 Mr Harradine’s evidence was not reliable in a number of key respects, as explained below.
Were the debt factoring costs unnecessarily incurred?
399 The first of the expenses that remain in issue as to their justification may now be considered.
400 MGCC claims that MGCC incurred debt factoring costs of $205,922.
401 MGCC pleads that the costs were unnecessary to be incurred by MGCC, were not properly related to MGCC’s business and otherwise ought not to have been incurred by MGCC and were paid in breach of duty.
402 MGCC says that the debt factoring costs were incurred because of loans made by MGCC to Mr Gilmour of $30,428 in 2001 and $136,229 in 2002, and the payment by MGCC of the management fees and directors’ fees of, respectively, $917,065 and $198,546. MGCC says that without the making of or payment of these amounts, MGCC would have had sufficient working capital to not require the provision of debt factoring services.
403 The defendants plead that the debt factoring expenses were paid pursuant to the debt factoring agreement made by MGCC which Mr Vinciguerra and Mr Gilmour signed as directors.
404 As to the management fees of $917,065, the defendants say that these fees (which do not include payment for the years 2001 and 2002) were not excessive and were paid for the provision of personnel and associated amenities by Sola-Kleen to MGCC for the period 2003 to 2007. They also say that the directors’ fees paid to Mr Gilmour of $198,546 were paid pursuant to the resolution of the plaintiff recorded by the minute dated 18 June 1999 and that Mr Gilmour received a reasonable amount of remuneration as director which was modest and not unreasonable.
405 The question of management fees and directors’ fees is raised on more than one occasion in relation to the claims of MGCC. In this particular context, they are mentioned as reasons why the debt factoring costs came to be incurred, when they should not have been, and, in effect, to suggest that the debt factoring agreement was brought about in order to take funds out of MGCC and pay them directly to the defendants, contrary to the relevant directors’ duties referred to below and/or with the connivance of Sola-Kleen.
406 In the course of the trial, the primary proposition pursued by counsel on behalf of MGCC in the course of cross-examination of Mr Gilmour in relation to this expense, was that the debt factoring arrangements were put in place to provide the means to pay out the loan to the Gilmour Family Trust that appeared in the financial statements of MGCC. In this context, the question of management fees and directors’ fees received less emphasis.
407 In relation to the debt factoring agreement, having regard to the evidence of Mr Harradine, Mr Gilmour and Mr Vinciguerra, as set out above, a number of observations might be made. First that, as Mr Gilmour said in his evidence and in relation to which Mr Vinciguerra did not contradict him, there had been a long relationship between Mr Gilmour and Mr Vinciguerra and that in 2000 Mr Gilmour was pleased to offer Mr Vinciguerra, without consideration, the opportunity of becoming a 30% equity owner in MGCC and to become a director of the company. At that point, however, I accept Mr Vinciguerra had been working for MGCC for a period and Mr Gilmour obviously made the business decision (over Mr Harradine’s expressed concerns) to offer Mr Vinciguerra equity in MGCC and so guarantee his commitment to the business. That notwithstanding, Mr Gilmour remained very much involved in the general management of MGCC, albeit that Mr Vinciguerra and people like Mr McCarthy were the people who exercised hands-on skills in the operation of MGCC thereafter. Indeed Mr Gilmour was in charge of the financial side of the business and Mr Vinciguerra accepted that arrangement and relied on Mr Gilmour’s experience to carry it out appropriately.
408 I should record, however, MGCC, with the understanding and approval of both Mr Gilmour and Mr Vinciguerra received support from Sola-Kleen in the operation of its business in the early period (principally through Ms Stedman and Mr Gilmour) – and, indeed, in various ways by other Sola-Kleen staff throughout its operations at material times.
409 As I say, it was understood and accepted, including by Mr Vinciguerra, that the financial side of MGCC’s operation was principally to be handled by Mr Gilmour with the assistance of Ms Stedman, who was responsible for the invoicing and banking and the like. Ms Stedman also, as the evidence has shown, prepared some draft financial materials and operated the MYOB computer software.
410 What the debt factoring agreement brought into sharp relief was whether or not at the time it was entered into, MGCC was not operating at a profit. Mr Gorey was not prepared to concede that it was not, having regard to the materials that he saw. The evidence in this regard was anything but clear. Mr Vinciguerra, however, accepted at least that MGCC was not operating at an optimal level at material times when the debt factoring proposal was put. His view was that MGCC would not have needed the cashflow boost of the debt factoring agreement if someone other than Ms Stedman was responsible for chasing up debtors. He thought greater efficiency in debt recovery would have seen the company in a much better financial position and not in need of refinancing arrangements of an expensive nature like debt factoring. Nonetheless, it is clear and I find that Mr Vinciguerra voluntarily entered into the debt factoring arrangements, albeit on the basis of what he knew. In this regard, unhappy as he was, he appears to have accepted the company’s cash position could have been better.
411 What is put in issue by MGCC, however, is that the debt factoring was only needed because Mr Gilmour, in effect, had taken loans out of the company to the extent of $136,229 as of the end of 2002. It was that “unauthorised” loan, it is suggested, that put the company in the financial circumstances where it needed to undertake debt factoring.
412 In essence, what is said on behalf of MGCC, is that Mr Gilmour used the company as his own to ensure interests associated with him received money out of MGCC.
413 Mr Lopez suggested that rather than the debt factoring and the loan being seen as they appear as accounting entries, the reality was that Mr Gilmour had put money into the company earlier and was entitled, one way or the other, to have it repaid. He referred to an understanding that there was some agreement between the parties or “negotiations about borrowings”.
414 There was, however, no evidence about negotiations about borrowings in the proceeding. Rather, the question – which is dealt with below in relation to the cross-claim –was whether there was some understanding between Mr Gilmour and Mr Vinciguerra that management fees could be charged and would be charged in relation to the early period, but not recovered until such time as MGCC was in a position to pay them. However, the evidence going to the delayed management fee expense given by Mr Harradine and Mr Gilmour, does not arise until November 2002, in the middle of the 2003 financial year. The debt factoring question arose in the financial year ending 30 June 2002.
415 I find that there were no negotiations about borrowings in the 2002 financial year as suggested by Mr Lopez.
416 In the result it seems to me that, while Mr Lopez, as set out in the above account of the expert discussion of the debt factoring costs, suggested that each of Mr Gilmour and Mr Vinciguerra had taken out funding, the fact is that the significant loan taken out was that by Mr Gilmour in the sum of $136,229 referred to at p 27 of Mr Gorey’s report.
417 I accept the evidence and analysis provided by Mr Gorey that it was this loan that created the impetus for the debt factoring costs. Mr Lopez did not dispute that this was a significant transaction.
418 It may well be, and indeed having regard to Mr Lopez’ evidence, and the evidence of Mr Gilmour and Mr Harradine, it would seem that most probably it was the case that Mr Gilmour held the view that the Gilmour Family Trust was entitled to have some monies paid to it. There was, however, no agreement between shareholders as to that outcome.
419 In all the circumstances, I accept Mr Gorey’s assessment, on the balance of probabilities, that the debt factoring agreement was put in place in order to deal with a cashflow circumstance created by the loan by the company to the Gilmour Family Trust.
420 In my view, that financial transaction concerning the loan was to benefit Sola-Kleen/Gilmour Family Trust and Mr Gilmour’s interests at the expense of the company as a whole and without any concurrence with the other shareholder, Mr Vinciguerra.
421 I find, in these circumstances, that the costs associated with the debt factoring agreement of $205,922 were unnecessary as pleaded by MGCC.
Were the salaries paid to Ms Stedman and Mr Thuy unnecessarily incurred?
422 MGCC also claims that a salary paid to Ms Stedman of $66,939 and a salary paid to Mr Thuy of $60,840 were unnecessary to be incurred by MGCC, were not properly related to MGCC’s business and otherwise ought not to have been incurred and were paid in breach of duty.
423 MGCC says that Ms Stedman was Mr Gilmour’s private secretary and did not exclusively perform services for MGCC and that Mr Thuy was employed by Sola-Kleen and did not exclusively perform services for MGCC.
424 The defendants denied those allegations and pleaded that the salary paid to Ms Stedman was $96,939 for the period 2001 to 2007 (not $111,444 as alleged in MGCC’s initial statement of claim) and was for services rendered to both MGCC and Sola-Kleen and was necessary and furthermore the utilisation of her time by MGCC (90% of her time) results in Sola-Kleen owing MGCC at most only $9,694.
425 As to the salary paid to Mr Thuy, the defendants say it was $67,161 for the period 2002 to 2007 (not $60,840 as alleged) and was for services necessary to both MGCC and Sola-Kleen.
426 In the circumstances, the position is, as the experts both claimed, that the Court is required to regard the evidence and determine whether or not there were inappropriate on-cost charges in respect of Ms Stedman and Mr Thuy’s wages.
427 In MGCC’s notes for closing submissions, it is noted that Ms Stedman and Mr Thuy were paid salaries by both companies and that was confirmed by Mr Thuy in cross-examination and by Mr Gilmour in cross-examination.
428 They say the break-up of Mr Thuy’s salary varied over the years as Mr Gorey’s report at p 26 shows, but in aggregate for the period 2004 to 2007, approximately one-third of his salary was borne by MGCC. In light of Mr Thuy’s evidence, MGCC accepts that this represents a fair distribution of the burden of paying his salary. I accept that is so.
429 However, MGCC submits the allocation of Ms Stedman’s salary varied dramatically as shown by p 25 of Mr Gorey’s report. In 2004, Sola-Kleen bore the overwhelming majority of her salary but, in 2005, MGCC carried a little more than half of it. In 2006 and 2007, MGCC carried the overwhelming majority of it.
430 MGCC submits that Ms Dalton’s evidence was that Ms Stedman spent 10% of her time doing MGCC work in total (not just invoicing). MGCC observes that Ms Dalton had no interest in the matter and was called by the defendants and presented as a credible witness; and so her evidence ought be accepted.
431 On that basis, MGCC submits the proper allocation should be that of the 2004 year, in which MGCC bore 5.97%. If that break-up were applied across the years 2004 to 2007, in which Ms Stedman was paid an aggregate salary of $162,549, the portion which ought to have been borne by MGCC was $16,255. That represents an overcharge to MGCC of $70,979.
432 The defendants in their written closing submissions acknowledged (not having called Ms Stedman) that $66,939, as calculated by them, should be conceded in respect of Ms Stedman’s salary.
433 In the circumstances, I accept there was an overcharge to MGCC in the sum of $66,939 in respect of Ms Stedman’s wages and find that such payment was unnecessary as pleaded by MGCC.
434 As to the overcharge claim in respect of Mr Thuy, MGCC accepts, as noted above, that the approximately one-third apportionment borne by MGCC was appropriate and so is no longer in issue.
Were the legal expenses unnecessarily incurred?
435 MGCC also alleges that legal expenses incurred during the year ended 30 June 2007 in the amount of $77,810 were unnecessary to be incurred by MGCC, were not properly related to MGCC’s business and otherwise ought not to have been incurred by MGCC and were paid in breach of duty.
436 The question of the legal expenses is purely a question for the Court, not for the experts, who did not express any opinions about them.
437 The defendants say these relate to payments made to a law firm acting for MGCC in September and October 2006 and February, May and June 2007, in relation to Mr Vinciguerra’s application to inspect MGCC’s books and records, which resulted in an order being made to allow inspection with no determination as to the costs of those proceedings.
438 However, while there was an order for costs made by consent, the defendants say that has no bearing as to whether or not the solicitors’ costs involved in those proceedings should now be borne by MGCC.
439 The proceedings to which the legal fees were concerned, it is submitted, are different to the proceedings in the Full Court in which an appeal against the decision of the primary judge to allow the derivative action now before me, was dismissed, with costs to be paid by MGCC. The defendants make the point that pursuant to that finding, MGCC had the primary obligation to pay the costs of Mr Vinciguerra. Such an order that Mr Gilmour indemnify MGCC for the party/party costs for Mr Vinciguerra does not lead to the conclusion that the costs paid to the solicitors by MGCC in other proceedings (where no determination by the Court on costs occurred) were not proper and reasonable costs incurred by MGCC. Thus, the defendants submit that the claim for legal costs should not be allowed.
440 MGCC contends, however, that Mr Gilmour’s purpose in causing MGCC to resist the application for orders permitting Mr Vinciguerra to inspect the company’s records under the Corporations Act was (as was Mr Gilmour’s purpose in causing MGCC to resist the derivative action proceeding) to protect himself and Sola-Kleen from facing the claims now advanced in this proceeding. In those circumstances, Mr Gilmour’s causing MGCC to resist the access application and incur legal expenses constituted a breach of duties under the Corporations Act and fiduciary duties.
441 MGCC said that Mr Gilmour’s purpose in this regard can be inferred from:
(1) his causing MGCC to be overcharged significant amounts repeatedly over a period of some years;
(2) his efforts to conceal this from Mr Vinciguerra;
(3) causing MGCC to resist the access application and the derivative proceedings application; and
(4) Mr Gilmour’s consent to personally pay Mr Vinciguerra’s costs of the access application.
442 The submission is made that had Mr Gilmour caused MGCC to resist the application for proper purposes there would be no reason why MGCC ought not to have borne the burden of the adverse costs order.
443 MGCC submitted that whilst the precise issues raised in the access application differed from the precise issues raised in the derivative action application, the underlying circumstances were the same, many issues were common and the reasoning of the Full Court concerning the basis upon which the Court ordered Mr Gilmour to indemnify MGCC for the party/party costs payable to Mr Vinciguerra of the unsuccessful appeal, and the grant of leave to pursue the derivation action, applies equally to the question of whether it was proper of Mr Gilmour to cause MGCC to bear the legal costs incurred resisting the access application.
444 MGCC says the defendants did not adduce any evidence to the effect that Mr Gilmour considered that it was in MGCC’s interests, as opposed to his and Sola-Kleen’s, for Mr Vinciguerra not to be permitted to inspect MGCC’s books and records.
445 The question, in relation to legal expenses, is not whether they were excessive or the like, but whether by causing MGCC to take the litigious position that it did, Mr Gilmour, as a director, breached his relevant directors’ and fiduciary duties to the company by incurring an expense which was unnecessary for the company.
446 While it may be said, as the defendants do, that the particular proceedings are different in nature from the proceeding now in this Court, in my view the submissions made on behalf of the company should be accepted. The whole of the evidence shows that Mr Gilmour caused MGCC to take the position that it did in relation to those earlier proceedings in order to protect his interests, through the Gilmour Family Trust. He took the position that he did in relation to inspection to frustrate Mr Vinciguerra in order to protect his own interests. In so doing, in my view, the expense was not an expense that was necessary for the company to incur.
Were management fees paid to Sola-Kleen excessive?
447 MGCC claims that in addition to the unnecessary expenses incurred by MGCC, during the period 1 July 2002 to 30 June 2007 MGCC incurred other expenses that related to and were for the purposes of MGCC’s business but were incurred in excessive amounts and exceeded the amounts by which the expenses related to or were incurred for the purpose of MGCC’s business and in breach of duty. The first of the particularised excessive expenses that remain in issue is “management fees”.
448 As noted above, the defendants deny management fees were excessive and say they were paid for the provision of personnel and associated amenities by Sola-Kleen to MGCC for the period 2003 to 2007.
449 MGCC notes that for the period 2003 to 2007, Sola-Kleen charged MGCC a total of $607,003 for salaries (inclusive of a 50% mark-up) and that for the years 2003 to 2005, as Mr Gorey pointed out, the salaries charged were equal to or greater than Sola-Kleen’s entire salaries expense (excluding direct labour and external labour, including quotes to manufacture).
450 It points out that Mr Gilmour accepted in cross-examination that the only Sola-Kleen personnel who worked for MGCC were him, Ms Stedman and Mr Thuy and he accepted that other persons (such as Ross Gilmour and Mr Rowe) have been paid separately for their work.
451 MGCC submits that given that Mr Gilmour’s time undertaking work for MGCC is the subject of separate charges (being the “M Gilmour” component of the management fees and the separate directors’ fees), and MGCC directly paid a portion of Ms Stedman’s and Mr Thuy’s salaries, there can be no justification for any further salary on-charges from Sola-Kleen to MGCC. Thus, MGCC submits the entire $607,003 on-charged for salaries represents an overcharge to MGCC.
452 It also submits as to the “M Gilmour” component of the management fees, that Mr Gorey accepted, and MGCC accepts, that it was appropriate for MGCC to have made a reasonable payment for the work Mr Gilmour undertook for MGCC.
453 MGCC notes that Mr Gorey opined that a reasonable salary was $45,000 per year plus on-costs of 10%, being a total of $49,500, giving a total figure of $247,500 for the 2003 to 2007 years, as Mr Gorey stated at p 18 of his 3 April 2013 report. In reaching that opinion, Mr Gorey noted that whilst the “M Gilmour” component started being charged in 2005, the salary component of the management fees in 2004 included a $78,247 salary paid by Sola-Kleen to Mr Gilmour. Mr Gorey approached the matter by calculating what he considered to be a reasonable payment from MGCC to Sola-Kleen for the provision of Mr Gilmour’s services and adjusting the “M Gilmour” component accordingly, rather than partially adjusting the salary component and partially adjusting the “M Gilmour” component. MGCC submits that either way the aggregate effect on the management fees is the same – there was an overcharge of $256,564 in relation to Mr Gilmour, as Mr Gorey explains at p 18 of his 3 April 2013 report.
454 MGCC accepts, however, that in conferral with Mr Lopez, Mr Gorey conceded that Mr Gilmour should also be entitled to remuneration for the work he undertook in generally managing the business of MGCC and in that regard he considered it was reasonable for $22,500 per year to be paid. Consequently instead of the $256,564 overcharge, Mr Gorey concluded there was a $144,064 overcharge in respect of the “M Gilmour” component of the management fees. This position is adopted by MGCC.
455 MGCC submits that Mr Gorey’s opinion should be accepted. It says Mr Gilmour’s evidence as to the extent of time that he spent working for MGCC – 100 hours per week, out of a possible 168 on top of the work he did for Sola-Kleen – is plainly exaggerated and inconsistent with the evidence of Mr Vinciguerra, Mr McCarthy and Ms Dalton, whose evidence should be preferred.
456 MGCC submits that Mr Lopez’ report and calculations at Annexure E were based solely on the Ruthven report, which has not been accepted into evidence. On the Gilmour time component of 90%, the Ruthven report, and therefore the Lopez report based on it, with some adjustments to mark-ups, is very inaccurate and unreliable. The Lopez report, MGCC submits, cannot be used to prove the existence of facts on which the opinion was expressed. In any event, Mr Lopez in oral evidence said he could not verify the facts. Further, the effect of Mr Gilmour’s evidence was that there were separate charges for the occasions when he performed substantial work.
457 The defendants submit the approach suggested by Mr Lopez should be accepted. As for Mr Gilmour’s wage, they submit Mr Lopez suggested there should be an allowance to recognise his management of the business at $45,000 per year and this should be accepted. They note that Mr Vinciguerra ceased as a director on 22 April 2004, leaving Mr Gilmour solely to control and direct the business of MGCC, even though he remained an employee until July 2006 based in Kalgoorlie.
458 As to the mark-ups applicable to the management fees, the defendants note Mr Lopez applied a mark-up of 40% and explained the basis for this, which the defendants say is reasonable and should be accepted. Mr Gorey, in his calculation of the base salary of $49,500, as noted above, only included a 10% mark-up.
459 The defendants submit there has been no overcharge of Mr Gilmour’s salary in the component of the management fees on two grounds: (1) first, the management component allocated by Mr Gorey was not appropriate and Mr Lopez’ allocation of $45,000 should be adopted; and (2) Mr Gorey (10%) failed to include a reasonable mark-up as proposed by Mr Lopez (40%) in calculating the total salary of $49,500.
460 The defendants say as to telephone costs, that Mr Gorey said that a 50/50 split would be equitable and that Mr Lopez considered the Kalgoorlie operations would have increased MGCC’s proportion. They say Mr Gorey made no reference to the Kalgoorlie operations. His assumptions were not correct.
461 Further, the defendants submit that the telephone expenses included in the management fees were reasonable because MGCC operated in Perth, Kalgoorlie, and South Australia.
462 The defendants submit that the calculation for the management fee for the financial period 2003 to 2007, taking into consideration (1) the concessions made by the defendants, (2) the consensus between the experts as to the other expense items in the management fees calculations, should be adjusted as follows:
|
Expense item |
Mark ups initially used by MGCC and described as % applied in Annexure E to the Lopez Report |
Excess mark up | |
|
Debra Stedman’s wages |
$66,939 |
50% |
$33,470 |
|
Postage |
$2,695 |
55% |
$1,482 |
|
Staff amenities |
$4,500 |
55% |
$2,475 |
|
Printing and stationery |
$16,240 |
55% |
$8,932 |
|
Total |
$90,374 |
$46,359 |
463 As to mark-ups, MGCC submits the real issue related to the on-charging of staff salaries and wages. It said that if there is no basis for the on-charging of any staff salaries or wages, as it submits, then the issue falls away.
464 MGCC submits Mr Gorey explained why the costs of employment were probably in the order of 15%, whereas Mr Lopez calculated additional costs being 18 to 20%. Both calculations were based upon the additional costs including matters such as annual leave, sick leave, etc. In circumstances where Sola-Kleen was on-charging its entire wages expense, MGCC would only get the benefit of the work by Sola-Kleen staff for the weeks they worked during the year. So consequently this is not truly an additional cost that can be justified by a mark-up.
465 MGCC notes that even Mr Lopez conceded that only a 40% mark-up was appropriate. This is why he said in his report that management fees involved an overcharge of $94,836. In light of the experts’ evidence, MGCC submits a mark-up of no more than 10% would have been appropriate, if a management fee on staff wages on-cost is appropriate.
466 Thus, MGCC does not accept the accuracy of the defendants’ above table showing an excessive mark-up totalling $46,359.
467 In my view, so far as the management fee calculated in respect of a salary for Mr Gilmour is concerned, the fact that there was also a wage component for “M Gilmour” included in the management fees, it stands to reason, as Mr Gorey in effect said, that some adjustment was required.
468 In the result, Mr Gorey conceded that Mr Gilmour was entitled to remuneration for the work he undertook in generally managing MGCC’s business.
469 As set out above in the account of the experts evidence, both Mr Gorey and Mr Lopez were not in a position to make assessments about the duties performed by Mr Gilmour in either company.
470 In my view, taking into account the submissions made on behalf of the defendants as to the amount of time that Mr Gilmour spent on managing MGCC, but also taking into account the reasonable submission made by MGCC as to the exaggeration involved in Mr Gilmour’s estimate of how much time he spent, it is appropriate to conclude that Mr Gilmour spent about half of his time in each company.
471 In those circumstances, as Mr Lopez conceded, Mr Gorey’s calculations would be correct for the years 2003 to 2007.
472 In that regard, Mr Gorey said, as noted above, that if $72,000 a year was received by Mr Gilmour in both companies, he would be getting about $140,000 to $150,000 a year, which would be a reasonably good salary.
473 Mr Gorey considered that the $72,000 per year salary would thus be represented by an annual salary of around $49,500 plus a management component of $22,500. That would equate to $360,000 for the relevant period of 2003 to 2007 and would represent a $144,064 overpayment.
474 In those circumstances I accept Mr Gorey’s approach and calculations and find that there was an overpayment of $144,064 in respect of Mr Gilmour’s salary.
475 In other respects, printing and stationery, staff amenities and telephone have otherwise been agreed, including as to telephone as discussed above, by the experts whose opinion I accept.
476 As to mark-ups for salaries and wages, I accept Mr Gorey’s assessment, and the reasons for it, that in the circumstances of those two companies a mark-up of 10% is appropriate. A mark up of any higher amount in the present circumstances would be entirely artificial and not reflective of the close arrangements in place between the two companies, and would involve an excessive payment for the on-costs involved in respect of the salaries and wages.
477 In the result, the parties should produce a minute which reflects these findings and calculate the appropriate management fees found to be excessive, allowing a mark-up of only 10% on the salaries and wages.
Were the directors’ fees paid to Mr Gilmour excessive?
478 MGCC also claims that directors’ fees in the sum of $198,546 paid by MGCC to Mr Gilmour exceeded the amount by which those expenses related to or were incurred for the purpose of the business of MGCC, or further or alternatively exceeded the reasonable amount of such expenses and were paid in breach of duty.
479 The defendants say the directors’ fees so paid were paid pursuant to the resolution of MGCC recorded by the minute dated 18 June 1999, that Mr Gilmour received a reasonable amount of remuneration as a director and the fees paid were modest and not unreasonable.
480 MGCC said the fact is that directors’ fees were not paid during the years in which Mr Vinciguerra was a director. This was consistent with resolutions passed by Mr Gilmour and Mr Vinciguerra that directors’ fees not be paid. It said a reading of the resolutions, as permitting the retrospective payment of directors’ fees for those years at some later time, is not open. In any event, it submitted it would constitute a breach of duties for Mr Gilmour to cause MGCC, retrospectively, to pay directors’ fees whilst failing to pay Mr Vinciguerra equivalent fees for those years.
481 MGCC said that the experts in the end appear to have settled on $10,000 a year as appropriate.
482 It also said there is no issue with the mathematics of Mr Gorey’s calculations. The total directors’ fees paid to Mr Gilmour were $248,546. Mr Gorey subtracted from this $50,000 ($10,000 per year for five years) leaving a $198,546 overcharge. Mr Lopez’s calculation of the overcharge is $157,848 and was based on a base fee of $10,000 plus 3.5% per annum indexing, for which indexing MGCC says there is no justification. Mr Gorey calculated an appropriate fee by ascertaining a reasonable average yearly payment for the five year period and so no indexing should be provided.
483 The defendants say that, at the outset, counsel for MGCC conceded directors’ fees.
484 The defendants say on 18 June 1999 there was a resolution of the sole director that a directors’ fee be paid to Mr Gilmour when the company was in a position to pay the fee and it would be fair and reasonable. On 31 December 2000 and 31 December 2001, there were deemed members’ resolutions as to directors’ fees and on a proper reading, by the use of the word “nil”, only confirms that no fees had been paid for the prior years ending 30 June 2000 and 30 June 2001. The defendants submit that those resolutions did not prevent directors’ fees being paid retrospectively in respect of those financial years.
485 As to the reasonable amount for the directors’ fees in each year, Mr Lopez said he was willing to accept $28,000 as a reasonable figure.
486 However, on the basis of a $10,000 per annum fee, Mr Lopez had calculated an overcharge of $157,848.
487 The defendants stated Mr Gorey was not able to explain what may be encompassed in a role of “executive director”.
488 The defendants submitted that the fee of $28,000 for Mr Gilmour was reasonable, taking into account the time spent by Mr Gilmour on MGCC’s affairs and the risks and responsibilities of the director of a small proprietary company such as MGCC. Also, Mr Vinciguerra resigned as director on 22 April 2004.
489 I accept the submissions made on behalf of MGCC concerning directors’ fees.
490 In my view the issue remained in consideration and it is not appropriate, as contended by the defendants, to construe the resolutions of 2000 and 2001 as leaving open the possibility that retrospective directors’ fees could then be charged for those years.
491 I consider the reasonable directors’ fees, in the circumstances, would have been $10,000. This is in circumstances where the relevant directors never agreed any particular figure.
492 I also accept that there is no need, in the circumstances, to assume a 3.5% CPI increase in the directors’ fees for each year.
493 I therefore accept that there was an overcharge in respect of directors’ fees as calculated by Mr Gorey in the sum of $198,546 which was excessive as pleaded by MGCC.
Were rates expenses excessive?
494 MGCC also alleges that rates expenses incurred by MGCC exceeded the amount by which those expenses related to or were incurred for the purpose of MGCC’s business, further or alternatively, exceeded the reasonable amount of such expenses, in the sum of $13,226 and were incurred in breach of duty.
495 The defendants say in their written closing submissions that in his report Mr Gorey at p 15 states that the average charge per year was reasonable and then proceeds at p 24 to conclude that MGCC has incurred an expense of $13,226 on behalf of Sola-Kleen. However, on the basis that Mr Gorey at p 16 concludes that the overall average charge for rental is reasonable, they submit there seems no basis to then conclude that the costs incurred by MGCC in respect of rates are excessive for the entire period of 2003 to 2007.
496 The defendants thus submit there is insufficient evidence in Mr Gorey’s report to allow this claim particularly in light of MGCC conceding that the rent charges were reasonable. They further submit that in any third party commercial rental arrangement the costs of rates in respect of shared properties is a reasonable expense to pass on to the occupier who shares the space.
497 MGCC submits that the defendants have produced no evidence whatsoever concerning the reasonableness of rates and expenses incurred by MGCC.
498 It says the reasonableness of the rent charged is quite separate and distinct from the reasonableness of the rates expenses borne by the company. It says that, hypothetically, a company could lease half of the commercial property, reasonably pay half of the reasonable market rent, but be unreasonably charged 95% of the rates expense.
499 It submits Mr Gorey’s analysis is sound in light of the evidence of the extent to which MGCC utilised the premises and ought to be accepted.
500 It should be noted that this is not a matter in relation to which Mr Lopez expressed any opinion.
501 In his 3 April 2013 report, Mr Gorey calculated the rates on-charges to MGCC over the period 2003 to 2007. He commented that, following the refund passed through in 2007, the average charge per year for the five years was $1,184 which, in his view, was reasonable in relation to the space occupied and the rental charge made by Sola-Kleen. However, he considered the expense incurred in 2007 to be disproportionate to its operations, and it appeared that MGCC had made payments on behalf of Sola-Kleen.
502 At p 24 of his report, Mr Gorey made a calculation of the rates from 2003 to 2007 which stated that in 2003 to 2005 there was no on-charging and that in 2006 MGCC paid $3,110 and in 2007 paid $14,410.
503 He noted that for 2003 to 2006, Sola-Kleen on-charged rates to MGCC at approximately 50% over the four years. He said that he had been unable to obtain details of the rates paid by MGCC in 2007. However, he considered that given MGCC had no property and taking into account the on-charge in previous years was $1,184, MGCC had incurred an expense of $13,226 on behalf of Sola-Kleen.
504 While the defendants submit there is insufficient evidence in Mr Gorey’s report to allow the claim, I have come to a different conclusion. The point Mr Gorey has made, as I understand it, is that the $14,410 rate burden borne by MGCC in 2007 was disproportionate to its operations and as a result it appears to have made payments on behalf of Sola-Kleen.
505 I consider, on the balance of probabilities, having regard to the figures involved, that that is so and I accept the opinion and the basis for it as expressed by Mr Gorey at p 24 of his report that MGCC, in fact, incurred an excessive expense of $13,226 on behalf of Sola-Kleen as pleaded by MGCC, being the difference between $14,410 and the previous annual on-charge of $1,184 in previous years.
Summary
506 As a result of the concessions made (as I have calculated them, but subject to hearing from the parties), the following costs could not be justified and so were either not necessary or excessive as pleaded.
Contract payments (para 6, particular E of ASOC) – conceded $14,716
Motor vehicle expenses (para 6, particular F of ASOC) – conceded $6,040
Printing and stationery charges (para 6, particular G of ASOC)
– conceded $898
Labour charges chemical clean Alcoa (para 6, particular I of ASOC)
– conceded $10,000
Purchases Sola-Kleen (para 6, particular J of ASOC) – conceded $10,000
Consulting fees (para 6, particular K of ASOC) – conceded $7,000
Freight expenses (para 8, particular C of ASOC) – conceded $10,000
Insurance expenses (para 8, particular D of ASOC) – conceded $6,000
Motor vehicle registration expenses (para 8, particular E of ASOC)
– conceded $6,000
Printing and stationery expenses (para 8, particular G of ASOC)
– conceded $16,240
Staff amenity expenses (para 8, particular H of ASOC) – conceded $4,500
Debra Stedman (para 6, particular B of ASOC) conceded $66,939
Accounting expenses (para 8, particular K of ASOC) – conceded $11,000
Motor vehicle fuel expenses (para 8, particular L of ASOC) – conceded $16,914
Postage expenses (para 8, particular M of ASOC) – conceded $2,695
Total $188,942
507 In relation to the various other expenses the justification for which remained in issue, the outcome, having regard to my findings above, is as follows:
The claim for the debt factoring costs claimed in para 6 particular A ASOC of $205,922 was unnecessary.
The claim of $60,840 in respect of Mr Thuy under para 6, particular C ASOC is not maintained by MGCC.
The claim for $77,810 in respect of legal expenses under para 6, particular L ASOC was unnecessary.
Management fees under para 8, particular A of the ASOC, were unnecessary, not as claimed but in a sum to be calculated.
The claim for $198,546 in respect of directors’ fees under para 8, particular B ASOC was excessive.
The claim for $13,226 in respect of rates expenses under para 8, particular N ASOC was excessive.
508 The defendants say, which appears to be correct, that MGCC has separately conceded by its closing submissions that the amount of $228,771 is no longer in issue, as follows:
Consultant fees – Phil Read (para 6, particular D of ASOC) $124,800
Rent charges (para 6, particular H of ASOC) $40,000
Motor vehicle repair expenses (para 8, particular F of ASOC) $16,056
Travel expenses (para 8, particular J of ASOC) $47,915
Total $228,771
Were the various expenses incurred?
509 The defendants question the authenticity of the financial statements of MGCC relied upon by MGCC. In my view, while some questions were raised concerning the provenance of some of the financial statements during the course of Mr Harradine’s evidence, I am satisfied that the relevant financial statements, so far as their text was concerned, were authentic and that the confusion that arose, arose only because the earlier prepared statements had been printed on later occasions in Mr Armenti’s time.
510 I otherwise accept the submissions made on behalf of MGCC concerning the financial statements. First, that the financial statements are books kept by the company under s 1305 of the Corporations Act which has the effect that the financial statements are prima facie evidence of the matters stated within them.
511 I am not satisfied that any relevant evidence has been led, and certainly no sufficient evidence has been led, to convince me otherwise on the balance of probabilities.
512 I also accept there is no quality or characteristic of the financial accounts that causes me to doubt any of the matters stated within them. They are not, for example, described as drafts and there is nothing internally inconsistent about them.
513 To the extent that it is suggested by the defendants, particularly Mr Gilmour, that he was not paid any sum that the financial statements indicated that he was paid, I do not accept that the prima facie position described by the financial statements should be doubted in that regard.
514 In respect of many matters, the evidence of Mr Gilmour lacked certainty, cogency and was vague and sometimes evasive.
515 To the extent that Mr Gilmour said he relied upon his accountants and advisers in respect of financial matters and preparation of financial records, I do not accept that provides any basis for either doubting the authenticity of the financial records that MGCC has tendered in evidence and relies upon or that the prima facie financial position indicated by them, including that the various expenses of the company the subject of this proceeding were in fact incurred.
516 There was also a question whether or not the accounts had been prepared on an accruals basis. This was a matter discussed with Mr Harradine, who suggested that they were not. Against that the financial statements indicated that they were prepared on an accruals basis. While the explanation from Mr Harradine, to the effect that was simply an error produced by the computer software, is an error which is repeated, I consider that the explanation provided by Mr Harradine is reasonably glib.
517 In all the circumstances, I accept the submission made on behalf of MGCC that the financial statements prove that all of the expenses which it complains about were incurred and paid by MGCC during the relevant years and that the accounts were prepared on an accruals basis.
Did Mr Gilmour breach the duties he owed to MGCC and, if so, is sola-kleen liable as an accessory?
518 The Corporations Act imposes a number of general duties on a director. MGCC claims Mr Gilmour, in authorising a number of expenses, has breached three of them – those imposed by ss 181, 182 and 183.
519 Section 181 is headed “Good faith – civil obligations” and by subs (1) requires a director to exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
520 Section 182 is headed “Use of position – civil obligations” and by subs (1) provides that a director must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
521 Section 183 is headed “Use of information – civil obligations” and by subs (1) provides that a person who obtains information because they are, or have been, a director 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.
522 It may be seen that each of these three provisions is capable of applying to a given set of facts, and that ss 182 and 183 may well overlap in any given situation.
523 It is provided by subs (2) of each of ss 181, 182 and 183 that a person involved in a contravention of the provision also contravenes the provision.
524 MGCC relies on subs (2) in each case in its claims against Sola-Kleen.
525 In that regard, s 79(c) of the Corporations Act provides that a person has been involved in a contravention if the person has been in any way knowingly concerned in, or party to, the contravention – whether by act or omission or directly or indirectly.
526 Given that Mr Gilmour was the sole director and shareholder of Sola-Kleen at material times, MGCC submits that his knowledge was the knowledge of Sola-Kleen and is to be imputed to Sola-Kleen, and so Sola-Kleen should be found to have been involved in any contravention proved against Mr Gilmour. I accept that particular submission.
527 So far as remedies for breaches of the Corporations Act are concerned, MGCC notes that by s 1317E, each of ss 181, 182 and 183 are civil penalty provisions and so the Court has the power, under s 1317H, to order the defendants to compensate MGCC for damage suffered as a result of breach, which it contends includes any profits made by the defendants as provided for by s 1317H(2). I also accept that submission.
528 MGCC also submits that any misappropriation by a director of a company’s funds to benefit the director or another company of which the director is the sole director and shareholder is a clear example of a breach by a director of the fiduciary duty they owe the company more generally, not to put themselves in a position where there was a real, sensible possibility of conflict between their own interests and those of MGCC; and not to make any benefit or gain by reason of or use of their position as director of MGCC.
529 So far as Sola-Kleen is concerned, MGCC says that Sola-Kleen participated in Mr Gilmour’s breach of fiduciary duties as it knew the director was acting in breach of duty and/or knowingly assisted the director in transactions that were a breach of duty, and so any property it received should be found to be held on trust for MGCC by them or they should otherwise be held liable.
530 The defendants say Mr Gilmour has not contravened ss 181, 182 or 183 or breached his fiduciary duty to MGCC and, in any event, that MGCC has not suffered any loss.
531 Any consideration of the nature of the duties imposed by ss 181-183 and assessment as to whether or not they have been complied with should perhaps commence with some regard for the civil obligation of care and diligence imposed by s 180. By s 180(1) it is provided that:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
532 The business judgment rule, if met, has the result that the requirements of s 180(1) will be met. In this regard, subss 180(2) and (3) provide:
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Note This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under any other laws.
(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
533 In many respects the defendants contend that all of the expenses the subject of the claim by MGCC have a valid business explanation such that s 180(1) is not contravened, nor any of the duties imposed by ss 181-183.
534 In that regard, the defendants submit that in assessing whether there has been a breach of ss 180-183 one must consider:
(1) The surrounding circumstances. See Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; Maronis Holdings Limited v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404.
(2) Whether the director deliberately engaged in conduct knowing that it was not in the company’s best interests or for a proper purpose. See Marchesi v Barnes [1970] VR 434 at 438.
(3) Whether the conduct of the director was a deliberate act or combination of acts with the knowledge of what was being done was not for the purpose of furthering the interest of the company but to achieve a collateral purpose. See R v Byrnes [1995] HCA 1; (1995) 183 CLR 501.
535 So far as s 180(1) is concerned, I accept that consideration should also be given to the type of company involved, the size and nature of its business, the provisions of its constitution, the composition of the board and the distribution of the work between the board and other officers. See Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1 at [7201] (Austin J); Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 at [75] (Black J).
536 In Ledir, Black J at [77] observed in respect of the statutory duty under s 181 that it reflects directors’ duties under the general law to act in good faith in the interests of and for the benefit of the company as a whole, noting that in Chew v R (1991) 4 WAR 21, Malcolm CJ summarised the requirements of that duty as including that directors must exercise their powers in the interests of the company, and must not misuse or abuse their power and must not misappropriate the company’s assets for themselves.
537 Black J also considered that in Westpac Banking Corporation v Bell Group Limited (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1, the Court of Appeal of the Supreme Court of Western Australia unanimously held that the first element of that duty, the duty to act in good faith in the company’s best interests, was subjective and would be complied with if directors honestly believed they acted in the company’s best interests. See Lee AJA at [923], Drummond AJA at [1988], [2027] and Carr AJA at [2772], [2795].
538 His Honour further noted that the authors of Austin, Ford and Ramsay, Company Directors: Principles of Law and Corporate Governance (2005) observe at [7.4] that a failure to comply with that duty can tend to arise relevantly when circumstances induce directors to believe that the company’s interests correspond with their own interests and making that unreflective assumption, they act in the company’s affairs without considering its interests as a separate entity with its own shareholders and creditors.
539 His Honour further noted, at [79], that the second limb of s 181(1) requires that directors’ powers may be exercised only for the purpose for which they were conferred and not for any improper purpose. His Honour noted that there is authority that whether a director acted for a proper purpose is to be determined objectively, referring to Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [738]-[739].
540 His Honour also noted that in Westpac Banking Corporation v Bell Group Limited (in liq) (No 3), the majority held that whether a director acts for an improper purpose is determined objectively, including an assessment by the Court of what was reasonable in the circumstances. See Lee AJA at [933] and Drummond AJA at [1988], [2027] and [2073]. His Honour noted that Carr AJA held that the test whether directors had acted for an improper purpose was primarily subjective.
541 I am satisfied, following Westpac Banking Corporation v Bell Group Limited (in liq) (No 3), that the question whether or not a director acts for a proper purpose (s 181) or for an improper purpose (ss 182 and 183) is primarily determined objectively involving an assessment by the Court of the relevant circumstances.
542 In any event, that approach is, or is likely to be, not materially different from making an assessment about the circumstances in which directors unreflectively assume that the company’s interests correspond with their own without making any closer analysis of that assumption.
543 In this particular case, I am satisfied that whether one applies an objective test or not in respect of the proper purpose, Mr Gilmour did not relevantly distinguish between what was in his interests (and Sola-Kleen’s interests) and what was in the interests of MGCC when the various conceded unnecessary or excessive payments listed above were authorised by him.
544 I am satisfied that, at all material times, Mr Vinciguerra was not aware of the management fee arrangement and when he did question Mr Gilmour he was put off by Mr Gilmour in the way he described in his evidence above.
545 The simple fact of the matters is undisputed that Mr Gilmour ran the financial side of the company, albeit with the assistance of the bookkeeper, Mr Stedman, as to those administrative or clerical duties.
546 It is quite clear from the evidence of Mr Harradine, that from early on Mr Harradine advised Mr Gilmour that there should be some management fee arrangement put in place between Sola-Kleen and MGCC.
547 I reject below the cross-claims and the claims made in respect of management fees that there was an understanding as a result of a meeting in November 2002 that management fees would be charged and paid when the company could afford to pay them. I do not consider that the evidence of Mr Harradine and Mr Gilmour goes anywhere near establishing that fact.
548 In short, I consider that, Mr Gilmour effectively ran the financial side of MGCC as if the company was his own and as if Mr Vinciguerra was effectively an employee without any say on the financial side.
549 The evidence of the expert witnesses shows how, one way or the other, Mr Gilmour considered he was entitled to be refunded for expenses that he through Sola-Kleen considered they had borne in respect of the operations of MGCC.
550 In my view, in so acting, Mr Gilmour breached the good faith obligation created by s 181 of the Corporations Act, and also breached s 182 of the Corporations Act in gaining an advantage for himself or someone else and caused detriment to the corporation. He also breached his fiduciary duty owed to the company not to put his interests and those interests associated with him in conflict with the interests of the company.
551 Given that Mr Gilmour effectively controlled Sola-Kleen, his knowledge and his actions can be treated as the knowledge and actions of Sola-Kleen and Sola-Kleen may relevantly be seen to have been involved in the contravention of the Corporations Act provisions and complicit in the breach of the fiduciary duty owed by Mr Gilmour to the company.
Are any of the claims made against Mr Gilmour statute-barred?
552 The defendants plead that the claims in respect of any amounts prior to 13 September 2004 are statute-barred, pursuant to s 38 of the Limitation Act 1935 (WA).
553 MGCC submits that s 38 provides no defence as:
1. Section 38 could only apply to the claims advanced by MGCC under the Corporations Act if picked up by s 79 of the Judiciary Act 1903 (Cth): see Ardeshirian v Robe River Iron Associates (1993) 43 FCR 475 at 487 (French J).
2. As s 1317K of the Corporations Act imposes a limitation period for claims for compensation, under s 1317H of the Act, s 79 of the Judiciary Act does not apply as the applicable limitation period is “otherwise provided … by the laws of the Commonwealth”; and
3. Section 38 has no application to the equitable claims for breach of fiduciary duties and Barnes v Addy liability.
554 I accept the submissions made on behalf of MGCC. Even if the s 1317K six year limitation period applies (which is not contended for by the defendants), MGCC would be entitled to compensation for breaches post 13 September 2004 and for all breaches of fiduciary duty.
555 The defendants’ limitation plea as made therefore fails and there is no bar to MGCC’s right to recovery.
Is MGCC liable to Sola-Kleen for management fees and rent on the cross-claim and, if so, is Sola-Kleen entitled to a set-off in respect of the sum for which it is liable to MGCC?
556 The defendants claim that there was an agreement between MGCC, Sola-Kleen, Mr Gilmour and Mr Vinciguerra that the expenses paid by Sola-Kleen on behalf of MGCC (including fees for management services) would be repaid to Sola-Kleen when MGCC had sufficient funds to pay such amounts.
557 Based on Annexure E to Mr Lopez’ report, the defendants cross-claim a management fee for the period ending 30 June 2001 of $167,316.66 and management fees for the period ending 30 June 2002 of $163,296.37, making a total of $330,613.
558 The defendants submit no limitation period applies as the sum concerned is not loan funds payable on demand, but expenses incurred and to be recouped in accordance with the agreement, which provided for a contingent event and MGCC has only been able to meet that contingency from and after 2006.
559 Sola-Kleen also submits it is entitled to set off the amounts for which it may be found liable to MGCC.
560 The defendants refer to a service agreement, dated 28 February 2000 entered into between Sola-Kleen and MGCC which was signed by Mr Gilmour on behalf of both companies. Mr Harradine gave evidence that he arranged for this to be prepared by solicitors he instructed.
561 The defendants also say Mr Vinciguerra gave evidence that upon receiving shares in MGCC, he accepted those shares on the basis that he would have received a dividend on those shares and that costs incurred by the company were important to him. He also confirmed that someone had to initially meet the costs and fund those initial requirements. He also confirmed that any loss incurred by MGCC had to be funded and that he had never thought about whether the funding provided by Mr Gilmour or Sola-Kleen would be compensated in the future, notwithstanding he knew the company was not paying rent for the premises.
562 The defendants also say that notwithstanding this evidence and Mr Vinciguerra agreeing that the meeting in November 2002 that Mr Gilmour and Mr Harradine said occurred, may have happened, he nonetheless did not accept what is said to have occurred at that meeting.
563 Mr Gilmour confirmed the agreement set out in his witness statement and affidavit of 23 November 2010 and Mr Harradine also confirmed the meeting as deposed to in his affidavit of 23 November 2010. In cross-examination he further confirmed the background to the meeting and indicated he had an independent recollection of it. He also confirmed he had prepared 2001 and 2002 accounts on a cash basis.
564 The defendants submit Mr Vinciguerra’s evidence should be rejected and the evidence of Mr Gilmour and Mr Harradine accepted in respect of the meeting in November 2002.
565 The defendants say that Mr Gorey in his expert report at pp 15 and 16 confirms that the overall charge for rental was reasonable, noting that the rental charge for 2005, 2006 and 2007 was $26,500 per year. Therefore it is submitted that a similar amount each year should have been charged for the years 2000 to 2004, being a total of $132,500 (being 5 x $26,500), where only $14,000 was charged as set out at p 15 of Mr Gorey’s report, resulting in an undercharge of rent to MGCC of $118,500. Sola-Kleen also seeks to set that amount off against any sum for which it is found liable to MGCC.
566 In relation to the alleged agreement for payment or deferred payment of management fees, MGCC submits that the only agreement asserted by the defendants is that pleaded in para 8 of the amended defence, particularised as having been reached in the meeting in November 2002 attended by Mr Gilmour, Mr Harradine and Mr Vinciguerra. MGCC notes that both Mr Gilmour and Mr Harradine gave evidence in chief about a meeting held in November 2002 attended by all three but Mr Gilmour and Mr Harradine said that the meeting took place at Sola-Kleen’s/MGCC’s premises.
567 It further notes that in cross-examination Mr Harradine said that the meeting was a 10 minute meeting at which he had Mr Gilmour and Mr Vinciguerra sign the 2001 accounts. However, upon being referred to the resolution approving the 2001 accounts, Mr Harradine stated that the meeting could have been held in October 2002, and despite the resolution stating that it was made at his office, insisted that it was at Sola-Kleen’s/MGCC’s premises in Bayswater. MGCC submits that, critically, Mr Harradine then said during cross-examination that at the meeting, there was no agreement reached concerning management fees – instead he had simply provided an explanation.
568 MGCC submits that the evidence of Mr Harradine in cross-examination is fatal to the defendants’ contention that an agreement was reached at a meeting in about November 2002 in the terms alleged.
569 It also notes that Mr Gilmour’s evidence of an agreement should be rejected, given Mr Vinciguerra’s denial of any such agreement, Mr Harradine’s evidence in cross-examination that there was no such agreement, the absence of accounts prepared on a cash basis as both Mr Gilmour and Mr Harradine asserted was discussed at the meeting and the fact that MGCC’s accounts that were prepared on an accrual basis, did not include a liability for accrued, but unpaid, management fees, as would be the case if such an agreement had been reached.
570 Further, MGCC submits, the defendants’ closing submissions ignore Mr Vinciguerra’s evidence that in the early years of MGCC’s operations, he worked without remuneration and so it is not implausible that both he and Mr Gilmour would make contributions without being remunerated for doing so.
571 There is some force in the submissions made on behalf of the defendants as to the nature of the evidence given by the parties, and Mr Vinciguerra, about the basis upon which MGCC was conducted, so far as its expenses were concerned, in the early days.
572 While the evidence shows that Mr Vinciguerra took no active interest or had no active involvement in the financial side of MGCC’s operations, at the same time, as MGCC points out, he also said – and I accept – that he did a lot of work without payment in the early period; it would seem up to the time the shares were allotted in 2000 and probably for a period thereafter.
573 Notwithstanding that evidence, the pleading made by the defendants is that there was an agreement concerning the payment and deferral of management fees in November 2002, by Mr Vinciguerra and Mr Gilmour in the presence of Mr Harradine.
574 For all the reasons advanced above on behalf of MGCC, I am not satisfied there was any such agreement.
575 Mr Gilmour’s evidence concerning the agreement was unreliable, to say the least. When pressed about what was actually said, he, in effect, relied upon the fact that Mr Harradine had made an affidavit saying that was the agreement made. I place little weight on Mr Gilmour’s evidence in this regard.
576 Mr Harradine’s evidence in the end was not much better. While an affidavit had been made in the past, setting out what he had to say about the agreement, what was said and where it was made, when pressed in Court in cross-examination, Mr Harradine’s evidence became quite unclear. I have set out above, a passage from the transcript. When asked about the meeting whether “that’s actually when the agreement was made to pay the management fees at some time in the future”, Mr Harradine said that “No, that was around the explanations, the management fees were made, not the agreement”. When pressed whether no agreement was made at that time, Mr Harradine answered “No”, indicating that there was no agreement made at that time.
577 The evidence of Mr Harradine in cross-examination about an agreement in the terms specified in his affidavit is entirely unreliable and I do not rely on it.
578 In my view, while there may have been some general discussion about expenses, I am not satisfied that there was any agreement about management fees and the like and their deferral.
579 While it may well be that the accountant, Mr Harradine, had certain matters in mind, and indeed probably did because he also explained how he was initially concerned about the business development that involved shares in MGCC being allocated, I am not satisfied that any such agreement as that pleaded was made.
580 In these circumstances, I do not consider there is any basis to the claim in respect of management fees for those lost years.
581 As to the cross-claim in respect of rental, MGCC submits that Mr Gorey did not conclude that it was reasonable for MGCC to pay rent of $26,500 per year, as the submissions of the defendants suggest. Rather what he concluded was that he considered “that the overall average charge for rental to be reasonable”, which he set out on p 16 of his report. Thus, it is submitted that conclusion relates to the total rent charged for the period of 2003 to 2007. Mr Gorey’s report does not provide any evidence of what would have been a reasonable rental for the years 2000 to 2002.
582 MGCC further submits that there is no pleading or evidence of any agreement for MGCC to pay a reasonable rental, in the absence of which identifying the quantum of a reasonable rental is irrelevant.
583 I accept the submissions made on behalf of MGCC. While an accountant may think that in the ordinary course of business rental would be paid, at least for accounting and tax purposes, there is simply no evidence of any such agreement having been made.
584 I do not consider in the circumstances that the cross-claim in respect of rental has been made out.
585 Accordingly, the entire cross-claim should be dismissed and the issue of set-off does not arise for consideration.
Are any of the cross-claims statute-barred?
586 MGCC submits that as a starting point if the November 2002 agreement is not made out, then the limitation defence of the cross-claim must necessarily succeed as there is no reason why time would not have started running in 2001 and 2002 and the cross-claim was not commenced until more than six years after that.
587 I accept that submission.
588 In those circumstances, I need not deal with a further plea made by MGCC that the claim for payment of management fees for 2001 and 2002 is barred by s 38(1)(c)(v) of the Limitation Act 1935 on the basis that the alleged term that MGCC would pay fees when it had sufficient funds is void for uncertainty, which means that time started to run when the services were provided.
589 I would, however, if it had been required accept the further submission made on behalf of MGCC that so far as the claim for underpayment of rent is concerned, in so far as it arises from MGCC being in occupation of premises of Sola-Kleen prior to 30 March 2005, alternatively 13 September 2004, it is barred in relation to any occupation prior to 15 November 2005 under s 38 of the Limitation Act 1935 and in respect of any occupation on and after 15 November 2005 under s 13 of the Limitation Act 2005.
conclusion and orders
590 MGCC succeeds on its claim of breach of duties on the bases set out above. MGCC should bring forward a minute of final orders to reflect the findings made. I will then hear from the parties as to the final orders to be made.
591 The cross-claim of the defendants should be dismissed.
592 I will hear from the parties as to costs.
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I certify that the preceding five hundred and ninety-two (592) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker. |
Associate:
